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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
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Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material under Rule 14a-12
TRIMARK HOLDINGS, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the
Registrant)
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Payment of Filing Fee (Check the appropriate box):
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/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
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(2) Aggregate number of securities to which transaction
applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
----------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/X/ Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
$7,542.98
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(2) Form, Schedule or Registration Statement No.:
Registration No. 333-12406
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(3) Filing Party:
Lions Gate Entertainment Corp.
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(4) Date Filed:
August 18, 2000
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TRIMARK HOLDINGS, INC.
4553 GLENCOE AVENUE, SUITE 200
MARINA DEL REY, CALIFORNIA 90292
PROXY STATEMENT/PROSPECTUS
DATED
SEPTEMBER 8, 2000
Dear Trimark Stockholders:
You are cordially invited to attend a special meeting of stockholders of
Trimark Holdings, Inc., a Delaware corporation, to be held on October 12, 2000,
at 9:00 a.m., local time, at the Park Hyatt Los Angeles, Chateau 9, 2151 Avenue
of the Stars, Los Angeles, California 90067.
At the special meeting, you will be asked to vote to adopt an agreement and
plan of merger of Trimark with and into LGE Merger Sub, Inc., a Delaware
corporation and wholly owned subsidiary of Lions Gate Entertainment Corp., a
British Columbia corporation. If the merger is completed, Trimark will be wholly
owned by Lions Gate, and you will receive for each of your shares of Trimark
common stock U.S.$4.50 in cash and two shares of Lions Gate common stock, or, if
greater, the number of shares of common stock obtained by dividing U.S.$5.50 by
the average of the closing prices of a share of Lions Gate common stock on the
30 trading days ending October 6, 2000.
Lions Gate common stock trades on the American Stock Exchange and The
Toronto Stock Exchange under the symbol LGF.
PLEASE SEE RISK FACTORS, BEGINNING ON PAGE 18, CONCERNING THE TRANSACTION
AND OWNERSHIP OF LIONS GATE COMMON STOCK, WHICH YOU SHOULD CONSIDER BEFORE
VOTING.
Your board of directors has determined that the agreement of merger is
advisable and fair to and in the best interests of Trimark and its stockholders.
ACCORDINGLY, YOUR BOARD HAS UNANIMOUSLY APPROVED THE AGREEMENT AND PLAN OF
MERGER AND RECOMMENDS THAT YOU VOTE TO ADOPT THE AGREEMENT AND PLAN OF MERGER.
Sincerely,
[LOGO]
Mark Amin
Chairman and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THIS TRANSACTION OR THE SECURITIES TO BE
DISTRIBUTED IN THIS TRANSACTION OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This proxy statement/prospectus incorporates important business and
financial information about Lions Gate and Trimark that is not included in or
delivered with this proxy statement/prospectus. This information is available
without charge to security holders upon written or oral request, as follows:
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FOR INFORMATION ABOUT LIONS GATE: FOR INFORMATION ABOUT TRIMARK:
Gordon Keep, Senior Vice President Jeff Gonzalez, Chief Financial Officer
Lions Gate Entertainment Corp. Trimark Holdings, Inc.
Suite 3123, Three Bentall Centre 4553 Glencoe Avenue, Suite 200
595 Burrard Street Marina del Rey, California 90292
Vancouver, British Columbia V7X 1J1 Telephone: (310) 314-2000
Telephone: (604) 609-6110
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TO OBTAIN TIMELY DELIVERY, SECURITY HOLDERS MUST REQUEST THE INFORMATION NO
LATER THAN FIVE BUSINESS DAYS BEFORE THEY MAKE THEIR INVESTMENT DECISION, THAT
IS, NO LATER THAN, OCTOBER 4, 2000.
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TRIMARK HOLDINGS, INC.
4553 GLENCOE AVENUE, SUITE 200
MARINA DEL REY, CALIFORNIA 90292
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 12, 2000
To the stockholders of
TRIMARK HOLDINGS, INC.
Notice is hereby given that a special meeting of stockholders of Trimark
Holdings, Inc., a Delaware corporation, will be held on October 12, 2000, at
9:00 a.m., local time, at the Park Hyatt Los Angeles, Chateau 9, 2151 Avenue of
the Stars, Los Angeles, California 90067, for the following purposes:
1. To consider and vote upon adoption of an Agreement and Plan of Merger
("agreement of merger"), dated June 6, 2000, among Trimark, Lions Gate
Entertainment Corp., a British Columbia corporation, and LGE Merger
Sub, Inc. ("Sub"), a Delaware corporation and wholly owned subsidiary of
Lions Gate. The agreement of merger provides for Trimark to be merged with
and into Sub. Each share of Trimark common stock, other than shares held by
stockholders that have perfected their appraisal rights, will be converted
into the right to receive U.S.$4.50 in cash, without interest, and two
shares of Lions Gate common stock, or, if greater, the number of shares of
common stock obtained by dividing U.S.$5.50 by the average of the closing
prices of a share of Lions Gate common stock on the 30 trading days ending
on October 6, 2000. Cash will be paid in lieu of fractional Lions Gate
common stock. As a result of the merger, Trimark will be wholly owned by
Lions Gate. The merger and related matters are described in greater detail
in the accompanying proxy statement/prospectus.
2. To transact such other business as may properly come before the special
meeting or any adjournment of the meeting.
The board of directors has fixed the close of business on August 31, 2000 as
the record date for determining stockholders entitled to notice of and to vote
at the meeting.
The agreement of merger must be approved by the affirmative vote of the
holders of a majority of the outstanding shares of Trimark common stock.
TRIMARK'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE AGREEMENT OF MERGER
AND RECOMMENDS THAT TRIMARK STOCKHOLDERS VOTE TO ADOPT THE AGREEMENT OF MERGER.
A copy of the agreement of merger is attached as Appendix A to the accompanying
proxy statement/prospectus.
Stockholders of record who neither vote for nor consent to adoption of the
agreement of merger and otherwise perfect their appraisal rights will be
entitled to an appraisal of the fair value of their Trimark common stock under
Delaware law or to dissenters' rights under California law. A copy of the
relevant provisions of the Delaware General Corporation Law and the California
General Corporation Law are set forth as Appendix C to the accompanying proxy
statement/prospectus.
By order of the board of directors,
Jeff Gonzalez
Secretary
Marina del Rey, California
September 8, 2000
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, WE
URGE YOU TO SIGN, DATE, AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED.
IF YOU ATTEND THE SPECIAL MEETING, YOU MAY REVOKE THE PROXY AND VOTE IN PERSON.
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TRIMARK HOLDINGS, INC.
4553 GLENCOE AVENUE, SUITE 200
MARINA DEL REY, CALIFORNIA 90292
LIONS GATE ENTERTAINMENT CORP.
SUITE 3123, THREE BENTALL CENTRE
595 BURRARD STREET
VANCOUVER, BRITISH COLUMBIA V7X 1J1
PROXY STATEMENT/PROSPECTUS
This proxy statement/prospectus is being provided to you to solicit proxies
by and on behalf of the board of directors of Trimark Holdings, Inc., a Delaware
corporation, for use at a special meeting of stockholders to be held on
October 12, 2000 and at any adjournment of the meeting. September 8, 2000 is the
approximate date on which this proxy statement/prospectus and the accompanying
form of proxy are first being mailed to Trimark stockholders.
TABLE OF CONTENTS
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QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
WHO CAN HELP ANSWER YOUR QUESTIONS?......................... 3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS... 3
SUMMARY..................................................... 4
The Companies............................................. 4
Structure of the Transaction.............................. 4
The Special Meeting....................................... 5
Recommendation to Stockholders............................ 6
Fairness Opinion.......................................... 6
Interests of Certain Persons in the Merger................ 6
Lions Gate Stockholders' Meeting.......................... 7
Dissenters' Rights........................................ 7
Terms of the Agreement of Merger.......................... 8
Voting Agreements......................................... 10
Registration Rights Agreement............................. 10
Employment Agreement...................................... 10
Accounting Treatment...................................... 10
Tax Treatment............................................. 10
Regulatory Approvals...................................... 11
Canadian Legal Requirements............................... 11
Currency and Exchange Rates............................... 11
Dividend Policy........................................... 11
Selected Financial Data................................... 12
Summary Pro Forma Combined Financial Data................. 16
MARKET PRICE INFORMATION.................................... 17
RISK FACTORS................................................ 18
Risks Relating to the Merger.............................. 18
Lions Gate May Have Difficulty Integrating Recently
Acquired Businesses or
Managing Rapid Growth................................... 18
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Risks Relating To Film and Television Industry............ 18
Risks Relating to Regulatory Environment.................. 21
Risks Relating to Currency Fluctuations................... 22
Risks Relating to Liquidity and Financing Requirements.... 22
Risks Relating To Video Distribution Business............. 23
THE MERGER.................................................. 24
Structure of the Transaction.............................. 24
Background of the Merger.................................. 24
Recommendation of Trimark's Board; Fairness of the
Merger.................................................. 27
Opinion of Salem Partners................................. 28
Other Fees................................................ 34
Lions Gate's Reasons for the Merger....................... 34
Interests of Certain Persons in the Merger................ 34
Accounting Treatment...................................... 35
Regulatory Approvals...................................... 35
Canadian Legal Requirements............................... 35
THE SPECIAL MEETING......................................... 36
General................................................... 36
Record Date; Voting; Required Vote........................ 36
Proxies; Revocation....................................... 36
Expenses of Solicitation.................................. 36
Other..................................................... 36
LIONS GATE STOCKHOLDERS' MEETING............................ 37
TERMS OF THE AGREEMENT OF MERGER............................ 38
Effective Time of the Merger.............................. 38
Manner and Basis of Converting Trimark Common Stock;
Options to Buy
Trimark Common Stock.................................... 38
Conditions to the Merger.................................. 39
Representations and Warranties............................ 40
Selected Covenants Relating to Conduct of Business Prior
to the Merger........................................... 41
No Solicitation........................................... 41
Additional Covenants in the Agreement of Merger........... 42
Termination of the Agreement of Merger.................... 43
U.S. Securities Law Issues Relating to Merger
Consideration........................................... 44
OTHER AGREEMENTS RELATED TO AGREEMENT OF MERGER............. 45
Lions Gate Stockholders Voting Agreement.................. 45
Trimark Stockholders Voting Agreement..................... 45
Registration Rights Agreement............................. 46
Employment Agreement...................................... 47
U.S. AND CANADIAN FEDERAL INCOME TAX CONSEQUENCES........... 49
U.S. Federal Income Tax Consequences...................... 49
Canadian Federal Income Tax Consequences.................. 54
APPLICABILITY OF CALIFORNIA LAW TO TRIMARK.................. 56
APPRAISAL RIGHTS; DISSENTERS' RIGHTS........................ 57
Appraisal Rights Under Delaware Law....................... 57
Dissenters' Rights Under California Law................... 58
General................................................... 59
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INFORMATION ABOUT TRIMARK AND LIONS GATE.................... 59
General................................................... 59
Ownership of Trimark Voting Securities.................... 59
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION.......... 61
COMPARISON OF RIGHTS OF HOLDERS OF TRIMARK STOCK AND
LIONS GATE STOCK.......................................... 67
Quorum; Required Votes.................................... 67
Stockholder Consent in Lieu of Meeting.................... 68
Inspection of Books and Records........................... 68
Appraisal Rights.......................................... 68
Oppression Remedy......................................... 69
Board Composition......................................... 69
Fiduciary Duties of Directors............................. 70
Derivative Action......................................... 70
Indemnification of Officers and Directors................. 70
Director Liability........................................ 71
Anti-Takeover Provisions and Interested Stockholder
Transactions............................................ 72
LEGAL MATTERS............................................... 72
EXPERTS..................................................... 73
STOCKHOLDER PROPOSALS....................................... 73
ENFORCEABILITY OF CIVIL LIABILITIES UNDER U.S. FEDERAL
SECURITIES LAWS........................................... 73
WHERE YOU CAN FIND MORE INFORMATION......................... 74
Information about Trimark................................. 74
Information about Lions Gate.............................. 75
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APPENDICES
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APPENDIX A-- AGREEMENT OF MERGER
APPENDIX B-- OPINION OF SALEM PARTNERS LLC
APPENDIX C-- DELAWARE GENERAL CORPORATION LAW SECTION 262 AND CALIFORNIA
GENERAL CORPORATION LAW SECTION 1300
APPENDIX D-- TRIMARK'S FORM 10-K FOR THE YEAR ENDED JUNE 30, 1999 AND
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000
APPENDIX E-- LIONS GATE'S FORM 20-F FOR THE YEAR ENDED MARCH 31, 2000
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QUESTIONS AND ANSWERS ABOUT THE MERGER
The following questions and answers are intended to briefly address some
commonly asked questions regarding the merger. It should be read together with
the Summary that follows on page 4. These questions and answers may not address
all questions that may be important to you as a Trimark stockholder. Please
refer to the more detailed information contained elsewhere in this proxy
statement/prospectus, the appendices to this proxy statement/prospectus, and the
documents referred to or incorporated by reference in this proxy
statement/prospectus.
Q: WHAT IS THE PROPOSED TRANSACTION?
A: Trimark will merge with and into Sub, a wholly owned subsidiary of Lions
Gate, and become wholly-owned by Lions Gate. Trimark's stockholders will
receive for each of their Trimark shares U.S.$4.50 in cash, without
interest, and two shares of Lions Gate common stock, or, if greater, the
number of shares of common stock obtained by dividing U.S.$5.50 by the
average of the closing prices of a share of Lions Gate common stock on the
30 trading days ending on October 6, 2000. Cash will be paid in lieu of
fractional shares of Lions Gate common stock.
Q: WHY DID THE BOARD APPROVE THE AGREEMENT OF MERGER?
A: The board of Trimark considered a number of factors in approving the
agreement of merger, including:
- the relationship of the value of the merger consideration to be received
by Trimark stockholders to Trimark common stock's current market price and
its market prices during the previous three years;
- the opinion of Salem Partners LLC, dated June 6, 2000, that, as of
June 6, 2000, the merger consideration was fair to Trimark's stockholders
from a financial point of view;
- Trimark's results of operations, financial condition, assets, liabilities,
business strategy and prospects; and
- various other factors, as described in The Merger--Recommendation of
Trimark's Board; Fairness of the Merger on page 27.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: For each share of Trimark common stock you own, you will receive U.S.$4.50 in
cash, without interest, and two shares of Lions Gate common stock, or, if
greater, the number of shares of common stock obtained by dividing U.S.$5.50
by the average of the closing prices of a share of Lions Gate common stock
on the 30 trading days ending on October 6, 2000. Cash will be paid in lieu
of fractional shares of Lions Gate common stock.
Q: HOW CAN I FIND OUT IF ADDITIONAL SHARES OF LIONS GATE COMMON STOCK WILL BE
ISSUED IN THE MERGER?
A: Trimark will notify you by issuing a press release announcing the final
exchange ratio and filing that press release with the SEC. You can call our
information agent Morrow & Co., Inc., collect at (212) 754-8000 or
(800) 566-9061 (banks and brokerage firms please call (800) 662-5200) to
request information about the exchange ratio.
Q: WHEN WILL THE MERGER BE COMPLETED? WHEN CAN I EXPECT TO RECEIVE CASH AND
LIONS GATE COMMON STOCK IN EXCHANGE FOR MY TRIMARK COMMON STOCK?
A: If the Agreement and Plan of Merger ("agreement of merger") dated June 6,
2000, among Trimark, Lions Gate, and Sub is approved at the special meeting,
we expect to complete the merger by October 13, 2000, although we cannot
assure you that the actual date will not be later. As soon as the
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merger is completed, Trimark will send you detailed instructions regarding
how to surrender your Trimark shares and receive your cash payment and Lions
Gate stock. PLEASE DO NOT SEND YOUR TRIMARK STOCK CERTIFICATES NOW.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
A: Your receipt of cash in exchange for your Trimark common stock will be a
taxable transaction for U.S. federal income tax purposes and may be taxable
under applicable state, local, and other tax laws. Your receipt of Lions
Gate common stock may not be a taxable transaction for U.S. federal income
tax purposes. To review the tax consequences to you in greater detail, see
U.S. and Canadian Federal Income Tax Consequences on pages 49 through 56.
Your tax consequences will depend on your personal situation. You should
consult your tax advisors for a full understanding of the tax consequences
of the transaction to you.
Q: WHAT AM I BEING ASKED TO VOTE UPON?
A: You are being asked to vote whether to adopt the agreement of merger, which
is the legal document governing the merger and the related transactions we
describe in this proxy statement/prospectus.
Q: WHAT DOES THE BOARD OF DIRECTORS OF TRIMARK RECOMMEND?
A: Trimark's board believes that the merger is advisable, fair to, and in the
best interests of Trimark and its stockholders and unanimously recommends
that Trimark stockholders vote FOR adoption of the agreement of merger.
Q: WHAT VOTE IS REQUIRED TO APPROVE THE AGREEMENT OF MERGER?
A: The agreement of merger must be adopted by holders of a majority of the
outstanding Trimark common stock. If you fail to vote, it will have the same
effect as a vote against the agreement of merger. Therefore, it is important
that you return your signed proxy card.
Q: AM I ENTITLED TO APPRAISAL OR DISSENTERS' RIGHTS?
A: Trimark stockholders of record who neither vote for nor consent to adoption
of the agreement of merger and otherwise perfect their appraisal rights will
be entitled to an appraisal of the fair value of their Trimark common stock
under Delaware law or to dissenters' rights under California law. See
Appraisal Rights; Dissenters' Rights on pages 57 through 59. The relevant
portions of the Delaware General Corporation Law and the California General
Corporation Law are reprinted in Appendix C to the accompanying proxy
statement/prospectus.
Q: HOW DO I VOTE?
A: Just indicate on the enclosed proxy card how you want to vote, and then date,
sign, and mail it in the enclosed envelope. Please vote as soon as possible
to ensure that your shares are represented at the special meeting.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your Trimark shares only if you provide instructions to
your broker on how to vote. You should instruct your broker how to vote your
shares, following the directions your broker provides. If you do not provide
instructions to your broker, your shares will not be voted, which will have
the same effect as a vote against the agreement of merger.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY PROXY CARD?
A: Yes. You can change your vote at any time before your proxy is voted at the
special meeting. You may revoke your proxy by notifying the Secretary of
Trimark in writing or by submitting a new proxy, in each case, dated after
the date of the proxy being revoked. In addition, your proxy may be revoked
by
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attending the special meeting and voting in person. However, simply
attending the special meeting will not revoke your proxy. If you have
instructed a broker to vote your shares, you must follow the instructions to
change your vote received from your broker.
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you would like additional copies of this document, or if you would like
to ask any questions about the merger, you should contact: Morrow & Co., Inc.,
445 Park Avenue, 5th Floor, New York, New York 10022, call collect (212)
754-8000 or (800) 566-9061. Banks and brokerage firms please call (800)
662-5200. .
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The following statements are or may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995:
- certain statements, including possible or assumed future results of
operations of Trimark or Lions Gate, contained in Risk Factors, The
Merger--Background of the Merger, The Merger--Recommendation of Trimark's
Board; Fairness of the Merger, and The Merger--Opinion of Salem Partners,
including any description of possible business strategies or intended
deployment of resources, including capital expenditures, and certain
statements incorporated by reference from documents filed with the SEC by
Trimark and any statements contained in this proxy statement/ prospectus
or these other documents regarding future cash flows, future business
prospects, revenues, expenses, working capital, liquidity, capital needs,
interest costs, income or the effects of the merger;
- any statements preceded by, followed by, or that include the words
"believes," "expects," "anticipates," "intends," "estimates," "projects"
or similar expressions; and
- other statements contained or incorporated by reference in this proxy
statement/prospectus regarding matters that are not historical facts.
Because these forward-looking statements are subject to risks and
uncertainties, actual results may differ materially from those expressed or
implied by the statements. Trimark stockholders are cautioned not to place undue
reliance on these statements, which speak only as of the date of this proxy
statement/ prospectus.
Among the factors that could cause actual results to differ materially are
the risks described under Risk Factors on pages 18-23; changes in general
economic and industry conditions; fluctuation in interest rates; level of
competition; market acceptance of products; capital expenditure amounts; the
costs, effects and liabilities associated with legal, regulatory or
administrative proceedings and any required remedial action, anticipated or
unanticipated; the impact of any charges resulting from the merger or
distribution of Lions Gate common stock; and other risks detailed from time to
time in the reports filed by Trimark or Lions Gate with the SEC.
The cautionary statements contained or referred to in this proxy
statement/prospectus should be considered in connection with any subsequent
written or oral forward-looking statements that may be issued by Trimark, Lions
Gate, or persons acting on their behalf. Except for its ongoing obligations to
disclose material information as required by the federal securities laws,
neither Trimark nor Lions Gate undertakes to release publicly any revision to
any forward-looking statement to reflect events or circumstances after the date
of this proxy statement/prospectus or to reflect the occurrence of unanticipated
events.
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SUMMARY
This summary highlights material information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. It should be read together with the questions and answers
provided on the previous pages. For a more complete understanding of the merger
and the related transactions, and for a more complete description of the legal
terms of the merger, you should read this proxy statement/prospectus, including
appendices, in its entirety carefully, as well as the additional documents to
which we refer. See Where You Can Find More Information, on pages 74-75.
THE COMPANIES
Trimark Holdings, Inc.
4553 Glencoe Avenue, Suite 200
Marina del Rey, California 90292
(310) 314-2000
Trimark Holdings, Inc., through subsidiaries, is a worldwide distributor of
entertainment software, primarily engaged in the distribution of feature films
in the domestic home video and theatrical markets and in the licensing of
distribution rights to motion pictures for international markets. We refer to
Trimark Holdings, Inc. as "Trimark" throughout this proxy statement/prospectus.
References to Trimark in this proxy statement/prospectus include its
subsidiaries, unless the context clearly indicates otherwise.
Lions Gate Entertainment Corp.
Suite 3123, Three Bentall Centre
595 Burrard Street
Vancouver, British Columbia V7X 1J1
(604) 609-6110
Lions Gate Entertainment Corp. is a fully integrated entertainment company
engaged in the development, production and distribution of feature films,
television series, movies-of-the-week, mini-series, and animated programming and
the management of film and studio facilities. We refer to Lions Gate
Entertainment Corp. as "Lions Gate" throughout this proxy statement/prospectus.
LGE Merger Sub, Inc.
c/o Lions Gate Entertainment Corp.
Suite 3123, Three Bentall Centre
595 Burrard Street
Vancouver, British Columbia V7X 1J1
(604) 609-6110
LGE Merger Sub, Inc. is a wholly owned subsidiary of Lions Gate, which Lions
Gate formed solely to merge with Trimark. Since its formation, LGE Merger
Sub, Inc. has engaged in no business, except relating to the merger. We refer to
LGE Merger Sub, Inc. as "Sub" throughout this proxy statement/prospectus.
STRUCTURE OF THE TRANSACTION (PAGE 24)
If the agreement of merger is approved, Trimark will merge with and into
Sub, with Sub being the surviving corporation. As a result:
- Sub will change its name to "Trimark".
- Trimark will be wholly owned by Lions Gate.
- The current stockholders of Trimark will receive, for each share of
Trimark common stock:
- U.S.$4.50 in cash, without interest; and
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- two shares of Lions Gate common stock or, if greater, the number of shares
of common stock obtained by dividing U.S.$5.50 by the average of the
closing prices of a share of Lions Gate common stock on the 30 trading
days ending October 6, 2000. For example, if the average closing price of
the Lions Gate common stock were U.S.$3.00, the number of Lions Gate
shares to be issued per Trimark share would remain two, but, if the
average closing price were U.S.$2.50, the number of Lions Gate shares to
be issued per Trimark share would increase to 2.2. Cash will be paid in
lieu of fractional shares of Lions Gate common stock.
- Lions Gate will not assume Trimark's obligations under any employee or
director stock options, and Trimark will cause any unexercised employee or
director stock options to terminate at the effective time of the merger,
without liability to Lions Gate or Sub. Lions Gate and Trimark will
cooperate to enable persons who desire to exercise their options to effect
"cashless exercises," using the merger consideration payable respecting
the shares of Trimark common stock issuable on exercise of the options to
pay both the exercise price of the options and any required withholding
amounts. All outstanding options not otherwise vested will vest as of the
time the Trimark stockholders adopt the agreement of merger.
When the merger is completed, Trimark shares will no longer be traded in the
Nasdaq SmallCap Market, and price quotations with respect to sales of shares in
the public market will no longer be available. The registration of Trimark
shares under the Securities Exchange Act of 1934 will be terminated, and Trimark
will cease filing reports with the SEC.
THE SPECIAL MEETING (PAGE 36)
The special meeting of Trimark stockholders will be held on October 12,
2000, at 9:00 a.m., local time, at the Park Hyatt Los Angeles, Chateau 9, 2151
Avenue of the Stars, Los Angeles, California 90067. At the special meeting, you
will be asked to consider and vote upon a proposal to adopt the agreement of
merger.
RECORD DATE; VOTING POWER. Only holders of record of shares of Trimark
common stock at the close of business on the record date, August 31, 2000, are
entitled to notice of and to vote at the special meeting. As of that date, there
were 4,764,300 shares of Trimark common stock issued and outstanding. Each share
of Trimark common stock entitles its holder to one vote on any matter that may
properly come before the special meeting.
VOTE REQUIRED. The agreement of merger must be adopted by the holders of a
majority of the outstanding shares of Trimark common stock. Trimark's directors,
executive officers, and the affiliates of Trimark's directors and officers hold
a total of 45% of Trimark's outstanding common stock. If you fail to vote, it
will have the same effect as a vote against adoption of the agreement of merger.
See Information about Trimark and Lions Gate--Ownership of Trimark Voting
Securities on page 59.
CHANGING YOUR VOTE. You can change your vote at any time before your proxy
is voted at the special meeting in any of three ways.
- First, you can send a written notice to the Secretary of Trimark at the
address below stating that you would like to revoke your proxy.
- Second, you can complete a new, later-dated proxy card and send it to the
Secretary of Trimark, and the new proxy card will automatically replace
any earlier proxy card you returned. You should send any written notice or
new proxy card to the Secretary of Trimark at the following address:
Trimark Holdings, Inc., 4553 Glencoe Avenue, Suite 200, Marina del Rey,
California 90292, Attention: Corporate Secretary. If you have instructed a
broker to vote your shares, you must follow the instructions to change
your vote received from your broker. See The Special Meeting--Record Date;
Voting; Required Vote and The Special Meeting--Proxies; Revocation on page
36.
5
<PAGE>
- Third, you can attend the special meeting and vote in person. Attendance
at the meeting will not revoke your proxy, unless you vote at the meeting.
RECOMMENDATION TO STOCKHOLDERS (PAGE 27)
TRIMARK'S BOARD HAS UNANIMOUSLY APPROVED THE AGREEMENT OF MERGER, BELIEVES
IT TO BE FAIR TO AND IN THE BEST INTERESTS OF TRIMARK AND ITS STOCKHOLDERS, AND
RECOMMENDS THAT TRIMARK STOCKHOLDERS VOTE FOR ADOPTION OF THE AGREEMENT OF
MERGER. The background of the agreement of merger is described in The
Merger--Background of the Merger, beginning on page 24, and factors that
Trimark's board considered in determining to approve the agreement of merger and
recommend its adoption by Trimark stockholders appear on pages 27 through 28,
under The Merger--Recommendation of Trimark's Board; Fairness of the Merger.
FAIRNESS OPINION (PAGE 28)
Salem Partners LLC ("Salem Partners"), which served as financial advisor to
Trimark's board, has delivered a written opinion to Trimark's board that, as of
June 6, 2000, the merger consideration was fair to Trimark's stockholders from a
financial point of view. A copy of Salem Partners' opinion, which includes a
discussion of the information reviewed, assumptions made, and matters considered
by Salem Partners, appears as Appendix B. You should read this opinion in its
entirety, as well as the other information described under The Merger--Opinion
of Salem Partners.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGE 34)
When considering recommendations of Trimark's board, you should be aware
that officers and directors of Trimark have interests and arrangements that may
be different from your interests as stockholders.
- Mark Amin, who is Chairman and Chief Executive Officer of Trimark, has
entered a three-year employment agreement with Lions Gate, which becomes
effective on consummation of the merger. The agreement provides for, among
other things, an annual salary of U.S.$500,000, a forgiveness of a loan by
Trimark in the amount of approximately U.S.$795,000, a grant of stock
options to purchase up to 1,400,000 shares of Lions Gate common stock, and
Mr. Amin's election to Lions Gate's board. See Other Agreements Related to
Agreement of Merger--Employment Agreement.
- Lions Gate has agreed to register for resale under the Securities Act the
common stock issued to Mark Amin and Reza Amin in the merger. See Other
Agreements Related to Agreement of Merger--Registration Rights Agreement.
- Lions Gate has agreed for six years after the merger to indemnify the
directors and officers of Trimark respecting occurrences before the
merger. Lions Gate has agreed to maintain, for six years following the
consummation of the merger, the directors' and officers' liability
insurance currently maintained by Trimark.
- Some of the stock options held by employees of Trimark, including some of
its officers, have change in control provisions that will accelerate the
exercisability of the options upon approval of the merger by Trimark
stockholders. In addition, as permitted under the agreement of merger,
Trimark's stock option committee intends to accelerate in full all
otherwise unvested options, upon Trimark stockholder adoption of the
agreement of merger.
- Peter Block and Wayne Levin, who are officers of Trimark, were granted
stock options under Lions Gate's stock option plan on August 15, 2000 to
acquire 100,000 shares and 75,000 shares, respectively, of Lions Gate
common stock. The exercise price of the options, which have a ten-year
term, is U.S.$2.55 per share. The options are subject to completion of the
agreement of merger and
6
<PAGE>
will be subject to regulatory and stockholder approval at the Lions Gate
stockholders' meeting. If the merger is not completed, the options will be
cancelled.
- Jon Feltheimer, Vice Chairman and Chief Executive Officer of Lions Gate,
and Michael Burns, Vice Chairman of Lions Gate, each hold convertible
preferred stock and options to purchase common stock in CinemaNow, Inc., a
majority owned Trimark subsidiary, and have served on its board of
directors since February 2000.
When making the determination to approve and recommend adoption of the
agreement of merger to Trimark's stockholders, Trimark's board was aware of
these interests and considered these interests (except for the grant by Lions
Gate of options to Peter Block and Wayne Levin, which did not occur until
August 15, 2000) together with the other factors described under The
Merger--Recommendation of Trimark's Board; Fairness of the Merger on page 27.
LIONS GATE STOCKHOLDERS' MEETING (PAGE 37)
Lions Gate has given notice of an annual and extraordinary general meeting
of its stockholders to be held on Tuesday, September 26, 2000, at which Lions
Gate stockholders will be asked to consider
- adoption of the agreement of merger with Trimark;
- amendment of the Articles of Incorporation of Lions Gate to authorize the
issuance of a second series of preferred shares, the Series B Preferred
Shares, all of which will be issued to Mark Amin, and authorizing the
grant of options to purchase 1,400,000 shares of Lions Gate common stock
to Mr. Amin, each as contemplated in the employment agreement between
Lions Gate and Mr. Amin; and
- increasing the maximum number of directors constituting Lions Gate's board
from 11 to 15.
The Lions Gate stockholders' meeting will also be the annual general meeting
of Lions Gate, and will include the annual business of Lions Gate, including the
election of directors of Lions Gate, the appointment of auditors of Lions Gate,
and the presentation of financial statements of Lions Gate and the report of the
auditor thereon.
DISSENTERS' RIGHTS (PAGE 57)
Holders of record of Trimark common stock who do not vote to adopt the
agreement of merger may, under certain circumstances and by following the
procedure prescribed by Section 262 of the Delaware General Corporation Law,
exercise appraisal rights and receive cash for their shares of Trimark common
stock. Additionally, although Trimark is a Delaware corporation and is therefore
subject to the Delaware General Corporation Law, Section 2115 of the California
General Corporation Law provides that Trimark is subject to California law with
respect to dissenters' rights. Accordingly, pursuant to Chapter 13 of the
California General Corporation Law, common stockholders of Trimark who do not
vote for the adoption of the agreement of merger and who comply with the
requirements of Chapter 13 have a right to demand payment for, and appraisal of
the "fair market value" of, their shares. A dissenting stockholder must follow
the appropriate procedures under either the Delaware General Corporation Law or
the California General Corporation Law or suffer the termination or waiver of
such rights.
APPRAISAL RIGHTS UNDER DELAWARE LAW. If the merger is completed, record
holders of Trimark common stock who
- do not vote to adopt the agreement of merger or consent to it in writing,
and
- continuously hold their shares through the effective time of the merger,
and
- make a demand for appraisal before the vote on adoption of the agreement
of merger at the special meeting, and
7
<PAGE>
- otherwise comply with Section 262 of the Delaware General Corporation Law,
will have the right to be paid the fair value of their Trimark shares, as
determined by the Delaware Court of Chancery. "Fair value" excludes any value
arising from the accomplishment or expectation of the merger, and includes a
fair rate of interest, if any, as determined by the court.
DISSENTERS' RIGHTS UNDER CALIFORNIA LAW. If the merger is completed,
instead of accepting the merger consideration, a holder of record of Trimark
common stock outstanding on the record date for the special meeting or a
transferee of record may require Trimark to purchase the shares for cash, at its
fair market value, if the dissenting stockholder
- does not vote the shares for the adoption of agreement of merger, and
- demands that Trimark purchase the shares in accordance with the California
General Corporation Law, and
- submits the shares for endorsement in accordance with the California
General Corporation Law, and
- otherwise complies with Sections 1300 through 1312 of the California
General Corporation Law.
Fair market value is determined as of the day before the first announcement
of the terms of the proposed merger and excludes any appreciation or
depreciation in connection with the proposed merger. Trimark has determined the
fair market value of the common stock on June 5, 2000, the day before the first
announcement of the terms of the merger, to be U.S.$8.00 per share.
The full text of the dissenters' rights provisions of the Delaware General
Corporation Law and the California General Corporation Law are reprinted in
Appendix C to this proxy statement/prospectus.
Trimark will give Lions Gate prompt notice of any demands received by it for
appraisal of shares of Trimark common stock. Prior to the effective time of the
merger, Trimark will not, except with the prior written consent of Lions Gate,
make any payment with respect to, or settle or offer to settle, any appraisal
demands.
TERMS OF THE AGREEMENT OF MERGER (PAGE 38)
The agreement of merger is the legal document that governs the merger
transactions. We have attached the agreement of merger as Appendix A to this
proxy statement/prospectus, and we encourage you to read it carefully.
CONDITIONS TO THE MERGER. The completion of the merger depends on
satisfaction of a number of conditions, including the following:
- the agreement of merger must have been adopted by Trimark's and Lions
Gate's common stockholders;
- all required approvals of government authorities and stock exchanges must
have been received, and all required filings with government authorities
must have been made;
- any waiting period applicable to completion of the agreement of merger
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act")
must have expired or terminated;
- the representations and warranties made by Trimark in the agreement of
merger must be materially true as of the effective time of the merger;
- the representations and warranties made by Lions Gate and Sub in the
agreement of merger must be materially true as of the effective time of
the merger;
8
<PAGE>
- each of Trimark, Lions Gate, and Sub must have performed, in all material
respects, all obligations under the agreement of merger required to be
performed by it at or prior to the effective time of the merger;
- dissenters' rights must not have been exercised by holders of Trimark
common stock entitled to receive more than 9.5% of the Lions Gate common
stock included in the merger consideration;
- no material adverse change in Trimark's or Lions Gate's business, assets,
liabilities, financial condition or operations may have occurred;
- the issuance of the Lions Gate common stock pursuant to the merger and the
first trade of the Lions Gate common stock must be exempt from the
applicable prospectus and registration requirements of Canadian law, and,
as necessary, the discretionary rulings of the Canadian securities
commissions must have been obtained;
- the shares of Lions Gate issuable in connection with the merger must have
been approved for listing on the American Stock Exchange and The Toronto
Stock Exchange;
- after taking into account the transactions contemplated by the agreement
of merger, Lions Gate must have an aggregate credit line of
U.S.$100,000,000 under Lions Gate's credit agreement (subject to
identified exclusions); and
- for U.S. federal income tax purposes, the merger must qualify as a
reorganization under Section 368(a) of the Internal Revenue Code.
TERMINATION OF THE AGREEMENT OF MERGER. The agreement of merger may be
terminated at any time prior to the effective time of the merger,
- by mutual written agreement of Lions Gate and Trimark;
- on notice by either Trimark or Lions Gate to the other,
- at any time after November 30, 2000, if the merger has not been
consummated, and the terminating party has not breached the agreement
of merger;
- if the adoption of the agreement of merger by the common stockholders
of either Trimark or Lions Gate is not obtained;
- if the other party has materially breached any provision of the
agreement of merger, and, if the breach is curable before November 30,
2000, the breaching party does not use reasonable efforts to cure the
breach; or
- if any court or other governmental authority permanently restricts or
prohibits the merger;
- by Lions Gate or Trimark, if Trimark receives an offer from a third party
to
- acquire Trimark by merger,
- acquire at least 80% of Trimark's outstanding stock, or
- buy all or substantially all of Trimark's assets,
on terms that Trimark's board determines, in its good faith judgment, to be
more favorable to Trimark's stockholders than the merger, and Trimark's
board, in compliance with the agreement of merger, has
- notified Lions Gate of the offer,
- given Lions Gate at least five business days to make an offer, in
Trimark's board's good faith judgment, at least as favorable to
Trimark's stockholders as the third party offer, and Lions Gate has
failed to do so, and
9
<PAGE>
- concluded in good faith, after consultation with its outside counsel,
that, in light of the third party offer, Trimark's board, to properly
discharge its fiduciary obligations to Trimark's stockholders, should
withdraw or change its favorable recommendation of the agreement of
merger.
Trimark's board may not withdraw or change its favorable recommendation
of the agreement of merger, if Trimark has violated the agreement of
merger's prohibition on soliciting transactions alternative to the
merger.
- by Lions Gate, if Trimark breaches the prohibition on soliciting
transactions alternative to the merger.
No termination of the agreement of merger will relieve any party from
liability for material breach.
If Lions Gate or Trimark terminates the agreement of merger because of a
third party offer, Trimark must pay Lions Gate U.S.$3,000,000 and reimburse
Lions Gate up to U.S.$500,000 for out-of-pocket expenses incurred in connection
with the agreement of merger.
If the merger is not completed because Lions Gate has failed to increase its
credit line, Lions Gate must pay Trimark U.S.$1,000,000 and reimburse Trimark up
to U.S.$250,000 for out-of-pocket expenses incurred in connection with the
agreement of merger.
VOTING AGREEMENTS (PAGE 45)
LIONS GATE STOCKHOLDERS VOTING AGREEMENT. Frank Giustra, Lions Gate's
Chairman and beneficial owner of approximately 9.7% of Lions Gate's common
stock, has agreed to vote at the Lions Gate stockholders' meeting the Lions Gate
common stock then beneficially owned by him in favor of the agreement of merger,
and the transactions contemplated by the agreement of merger.
TRIMARK STOCKHOLDERS VOTING AGREEMENT. Mark Amin, Trimark's Chairman and
Chief Executive Officer, and Reza Amin beneficially own, in the aggregate,
approximately 45% of the outstanding Trimark common stock and have agreed to
vote the Trimark common stock beneficially owned by them in favor of adoption of
the agreement of merger, and the other transactions contemplated by the
agreement of merger, and, except as permitted by the agreement of merger,
against any competing or alternative proposal.
REGISTRATION RIGHTS AGREEMENT (PAGE 46)
Lions Gate has agreed to register for resale under the Securities Act the
common stock issued to Mark Amin and Reza Amin in the merger.
EMPLOYMENT AGREEMENT (PAGE 47)
Lions Gate has entered an employment agreement with Mark Amin that will take
effect upon completion of the merger.
ACCOUNTING TREATMENT
We expect that the merger will be treated as a "purchase" for financial
accounting purposes.
TAX TREATMENT (PAGE 49)
Your receipt of cash in exchange for your Trimark common stock will be a
taxable transaction for U.S. federal income tax purposes and may be taxable
under applicable state, local, and other tax laws. Your receipt of Lions Gate
common stock may not be a taxable transaction for U.S. federal income tax
10
<PAGE>
purposes. Your tax consequences will depend on your personal situation. You
should consult your tax advisors for a full understanding of the tax
consequences of the merger to you.
REGULATORY APPROVALS (PAGE 35)
Trimark and Lions Gate cannot complete the merger until they have furnished
certain information and materials to the Antitrust Division of the U.S.
Department of Justice and the Federal Trade Commission and a required waiting
period has expired. Trimark and Lions Gate filed this information on August 30,
2000 and the waiting period will expire on September 30, 2000. The Antitrust
Division and the FTC have the authority to challenge the proposed merger on
antitrust grounds before or after the proposed merger is completed.
The issuance of the Lions Gate common stock upon the completion of the
merger requires the approval of the American Stock Exchange and The Toronto
Stock Exchange.
CANADIAN LEGAL REQUIREMENTS (PAGE 35)
Lions Gate will apply to necessary Canadian provincial securities
authorities respecting the issuance and resale of the Lions Gate common stock to
be issued in the merger.
CURRENCY AND EXCHANGE RATES
The following table sets forth the rate of exchange for the U.S. dollar,
expressed in Canadian dollars, in effect at the end of each period indicated;
the average exchange rates for such period, based on the rate in effect on the
last day of each month during such period; and the high and low exchange rate
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.
<TABLE>
<CAPTION>
FIRST QUARTER FISCAL YEAR ENDING MARCH 31,
FISCAL YEAR ENDING ----------------------------------------------------
MARCH 31, 2001 2000 1999 1998 1997 1996
------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Rate at end of period.................. $1.4828 $1.4539 $1.5092 $1.4180 $1.3835 $1.3635
Average rate during period............. 1.4790 1.4703 1.5086 1.4060 1.3634 1.3613
High rate during period................ 1.5140 1.5171 1.5770 1.4637 1.3835 1.3998
Low rate during period................. 1.4470 1.4310 1.4175 1.3705 1.3310 1.3312
</TABLE>
On August 31, 2000, 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 $1.4720 = U.S.$1.00.
DIVIDEND POLICY
Lions Gate has not paid any dividends on its outstanding common stock since
its inception and does not anticipate that it will do so in the foreseeable
future. The declaration of dividends on Lions Gate's common stock is within the
discretion of Lions Gate's board and will depend upon the assessment of, among
other things, earnings, financial requirements and the operating and financial
condition of Lions Gate. At the present time, Lions Gate's anticipated capital
requirements are such that it intends to follow a policy of retaining earnings
in order to finance further development of its business.
11
<PAGE>
SELECTED FINANCIAL DATA
The following historical financial information about Lions Gate and Trimark
is a summary only and should be read together with the historical financial
statements and related notes of Lions Gate and Trimark incorporated by reference
into this proxy statement/prospectus and the unaudited pro forma combined
financial information beginning on page 61. The summary consolidated financial
information of Lions Gate included below is prepared and presented in accordance
with generally accepted accounting principles in Canada ("Canadian GAAP"), which
differ in certain significant respects from generally accepted accounting
principles in the U.S. ("U.S. GAAP"). The material differences between Canadian
GAAP and U.S. GAAP affecting Lions Gate are described in Note 25 to the
consolidated financial statements of Lions Gate for the year ended March 31,
2000 included in Lions Gate's Form 20-F attached as Appendix E to this proxy
statement/prospectus. See Where You Can Find More Information, beginning on page
74, for more information about where to obtain Lions Gate and Trimark financial
statements and related notes. The Lions Gate financial information included
below is in thousands of Canadian Dollars, and the Trimark financial information
included below is in thousands of U.S. Dollars.
LIONS GATE FINANCIAL DATA
BALANCE SHEET DATA--(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
AS OF MARCH 31,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Accounts receivable........................... $107,344 $ 60,673 $ 47,816
Investment in films and television programs... 128,375 88,949 56,305
Investment in Mandalay Pictures, LLC.......... 64,058 72,932 71,048
TOTAL ASSETS.................................. 401,973 327,612 250,514
Accounts payable and accrued liabilities...... 74,965 44,668 26,441
Production and distribution loans............. 41,838 48,415 30,227
Long-term debt................................ 40,158 41,145 27,414
Stockholders' equity.......................... 206,414 166,784 143,951
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.... 401,973 327,612 250,514
</TABLE>
12
<PAGE>
STATEMENTS OF OPERATIONS DATA--
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MARCH 31,
------------------- FROM INCEPTION APRIL 28, 1997
2000 1999 TO MARCH 31, 1998
-------- -------- -----------------------------
<S> <C> <C> <C>
REVENUES........................................ $271,251 $118,297 $64,149
DIRECT OPERATING EXPENSES....................... 222,875 92,931 49,175
-------- -------- -------
GROSS PROFIT.................................... 48,376 25,366 14,974
-------- -------- -------
OTHER EXPENSES:
General and administrative.................... 31,388 23,555 10,337
Amortization.................................. 7,074 5,279 1,781
Interest...................................... 4,466 3,655 951
Non-controlling Interest...................... 1,308 612 1,019
Severance and relocation costs................ 1,698 1,647 --
-------- -------- -------
INCOME (LOSS) FROM OPERATIONS................... 2,442 (9,382) 886
Total other income (expenses)................... (7,735) (4,774) (1,439)
-------- -------- -------
NET LOSS........................................ (5,293) (14,156) (553)
-------- -------- -------
Basic Loss per share............................ $ (0.22) $ (0.58) $ (0.04)
Weighted average shares (000's)................. 30,665 24,575 14,160
-------- -------- -------
</TABLE>
------------------------
NOTE: Fully diluted loss per share has not been presented as the effect of
common stock issuance upon the exercise of options, warrants and convertible
securities would be anti-dilutive.
TRIMARK FINANCIAL DATA
BALANCE SHEET DATA--THOUSANDS OF U.S. DOLLARS
<TABLE>
<CAPTION>
AS OF JUNE 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Investment in films............................ $49,230 $65,064 $57,293 $29,853 $34,392
Other assets................................... 34,048 24,156 32,930 18,548 29,993
TOTAL ASSETS................................... 83,278 89,220 90,223 48,401 64,385
Revolving line of credit....................... 48,330 57,250 57,700 15,000 17,000
Other liabilities.............................. 18,867 16,826 12,314 9,051 14,813
(Accumulated deficit)/retained earnings........ (1,180) 3,981 9,160 12,683 20,510
Stockholders' equity........................... 16,081 15,144 20,209 24,350 32,572
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..... 83,278 89,220 90,223 48,401 64,385
</TABLE>
13
<PAGE>
STATEMENTS OF OPERATIONS DATA--THOUSANDS OF U.S. DOLLARS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues....................................... $92,143 $80,150 $63,165 $59,832 $84,994
Net Film Costs and Distribution Expenses....... 81,188 67,089 53,421 57,495 70,721
Gross Profit................................... 10,955 13,061 9,744 2,337 14,273
Operating Expenses:
Selling, general and administrative.......... 12,674 12,561 11,096 11,799 11,588
Bad debt/(recovery).......................... (288) 1,109 321 31 276
Income (loss) from operations.................. (1,431) (609) (1,673) (9,493) 2,409
Total other income (expenses).................. (3,730) (4,570) (1,850) 1,666 (1,426)
NET INCOME (LOSS).............................. (5,161) (5,179) (3,523) (7,827) 983
------- ------- ------- ------- -------
Basic Earnings (loss) per share................ (1.19) (1.24) (.84) (1.83) .22
Weighted average shares........................ 4,341 4,183 4,217 4,284 4,493
</TABLE>
------------------------
NOTE: Fully diluted loss per share has not been presented as the effect of
common stock issuance upon the exercise of options, warrants and
convertible securities would be anti-dilutive.
BALANCE SHEET DATA--THOUSANDS OF U.S. DOLLARS
<TABLE>
<CAPTION>
AS OF MARCH 31,
-------------------------
2000 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Investment in films................................... $40,579 $62,491
Other assets.......................................... 31,226 31,139
TOTAL ASSETS.......................................... 71,805 93,630
Revolving line of credit.............................. 34,000 53,330
Other liabilities..................................... 17,111 22,256
Minority interest..................................... 2,009 --
Stockholders' equity.................................. 18,685 18,044
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ 71,805 93,630
</TABLE>
14
<PAGE>
STATEMENTS OF OPERATIONS DATA--THOUSANDS OF U.S. DOLLARS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED MARCH 31,
-------------------------
2000 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
NET REVENUES................................................ $67,044 $66,270
Film Costs and Distribution Expenses........................ 53,644 56,611
Gross Profit................................................ 13,400 9,659
Operating Expenses:
Selling, general and administrative....................... 9,403 9,661
Bad debt expense (recovery)............................... 357 (162)
Income from Operations.................................... 3,640 160
Other income (expenses)..................................... 1,203 (2,726)
NET INCOME.................................................. 4,843 2,566
------- -------
Basic earnings (loss) per share............................. 1.05 (.59)
Weighted average shares..................................... 4,634 4,341
------- -------
Diluted Earnings (loss) per share........................... 1.05 (.59)
Weighted average shares..................................... 4,634 4,341
------- -------
</TABLE>
15
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined financial information combines
the historical financial statements of Lions Gate and Trimark to show the
effects of the merger on a pro forma basis, including related financing for the
acquisition. These pro forma financial statements have been prepared in
accordance with Canadian GAAP expressed in Canadian dollars. The Trimark balance
sheet has been translated from U.S. dollars into Canadian dollars using the
March 31, 2000 exchange rate of $1.4494 and the Trimark statement of operations
has been translated from U.S. dollars into Canadian dollars using an average
rate of $1.4713 for the 12 months ended March 31, 2000.
The unaudited pro forma balance sheet gives effect to the merger as if it
had occurred on March 31, 2000. The unaudited pro forma statement of operations
for the year ended March 31, 2000 gives effect to the merger as if it had
occurred on April 1, 1999.
The unaudited pro forma balance sheet is based on the audited consolidated
balance sheet of Lions Gate as at March 31, 2000 and the unaudited consolidated
balance sheet of Trimark as at March 31, 2000. The unaudited pro forma statement
of operations is based on the audited consolidated statement of operations for
Lions Gate for the year ended March 31, 2000, and the unaudited statement of
operations of Trimark for the nine months ended March 31, 2000 combined with the
unaudited statement of operations of Trimark for the three months ended
June 30, 1999. The information presented on the following pages is not
necessarily indicative of the results of operations or financial position that
might have occurred had the merger actually closed on the assumed dates. The pro
forma information does not reflect any adjustments for expected revenue
synergies and cost savings as a result of the merger of Lions Gate and Trimark,
nor is it necessarily indicative of the future results of operations or
financial position of Lions Gate after the acquisition. For more detailed pro
forma information, including the assumptions and adjustments made in calculating
the pro forma information, please see Unaudited Pro Forma Combined Financial
Information, beginning on page 61. You should read the following information
together with the historical financial statements of Lions Gate and Trimark
incorporated by reference into this proxy statement/prospectus and all related
notes.
<TABLE>
<CAPTION>
PRO FORMA AS AT AND FOR THE YEAR
ENDED MARCH 31, 2000
--------------------------------
(ALL AMOUNTS IN THOUSANDS OF
CANADIAN DOLLARS,
EXCEPT PER SHARE DATA)
<S> <C>
OPERATING RESULTS
Revenue................................................... $407,960
Net loss.................................................. 5,524
FINANCIAL POSITION
Working capital........................................... (37,585)
Total assets.............................................. 563,055
Stockholders' equity...................................... 248,194
Total debt to total capitalization........................ 24.8%
PER SHARE DATA
Net loss per share of common stock........................ $ 0.17
</TABLE>
16
<PAGE>
MARKET PRICE INFORMATION
Lions Gate common stock trades on both the American Stock Exchange and The
Toronto Stock Exchange under the symbol "LGF". Trimark common stock trades on
Nasdaq under the symbol "TMRK". The following table presents closing sale prices
reported in the consolidated transaction reporting system for the Lions Gate
common stock and on the Nasdaq SmallCap Market for the Trimark common stock as
of June 5, 2000, the last full trading day prior to the announcement of the
execution of the agreement of merger, and as of September 5, 2000.
<TABLE>
<CAPTION>
LIONS GATE TRIMARK
COMMON STOCK COMMON
PRICE STOCK PRICE
------------ -----------
<S> <C> <C>
June 5, 2000........................................ U.S.$2.69 U.S.$8.00
September 5, 2000................................... U.S.$2.81 U.S.$9.50
</TABLE>
The following tables present, for the fiscal quarters indicated, the high
and low sales prices of Lions Gate common stock and Trimark common stock in U.S.
dollars as reported on the AMEX and Nasdaq, respectively.
<TABLE>
<CAPTION>
LIONS GATE
COMMON STOCK PRICE
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
1999
Third quarter........................................... 3.25 2.63
Fourth quarter.......................................... 4.00 2.94
2000
First quarter........................................... 3.75 1.88
Second quarter.......................................... 2.06 1.50
Third quarter........................................... 2.56 1.63
Fourth quarter.......................................... 4.94 2.50
2001
First quarter........................................... 3.94 2.00
Second quarter (through August 31, 2000)................ 3.06 2.00
</TABLE>
<TABLE>
<CAPTION>
TRIMARK
COMMON STOCK PRICE
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
1999
First quarter........................................... 4.25 1.63
Second quarter.......................................... 4.63 1.63
Third quarter........................................... 11.63 2.13
Fourth quarter.......................................... 8.38 4.25
2000
First quarter........................................... 5.25 2.38
Second quarter.......................................... 6.00 2.50
Third quarter........................................... 7.50 3.25
Fourth quarter.......................................... 9.97 4.13
2001
First quarter (through August 31, 2000)................. 9.69 7.50
</TABLE>
Neither Lions Gate nor Trimark has paid cash dividends on its common stock,
and, at this time, each intends to continue this policy for the foreseeable
future. In addition, under the terms of the agreement of merger, Trimark is not
permitted to declare or pay dividends on its common stock during the term of the
agreement of merger.
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RISK FACTORS
You should carefully consider the risks described below when evaluating your
vote on the agreement of merger, in particular your resulting ownership of Lions
Gate common stock. The risks and uncertainties described below are not the only
ones Lions Gate faces. Additional risks and uncertainties of which Lions Gate is
unaware may also adversely affect Lions Gate's intended business operations.
If any of the following risks actually occurs, Lions Gate's business,
financial condition or results of operations could be materially adversely
affected.
RISKS RELATING TO THE MERGER
INTEGRATION OF THE MERGED BUSINESSES MAY NOT BE SUCCESSFUL
Lions Gate and Trimark have entered into the agreement of merger with the
expectation that the merger will be operationally and financially beneficial to
the combined company and its stockholders. The merger will require that Lions
Gate integrate Trimark's operations with those of Lions Gate. There can be no
assurance that such integration will be accomplished successfully or that the
expected benefits of the merger will be achieved. The integration also will
require the dedication of management, which will divert their attention from
day-to-day business of Lions Gate following the merger. The difficulties of
integration may be increased by coordinating geographically separated
organizations and integrating personnel. The process of integrating Trimark's
operations with those of Lions Gate may cause an interruption of, or a loss of
momentum in, the activities of either or both of the companies and may adversely
affect the operations of Lions Gate following the merger. Furthermore, the
process of integrating the operations of Trimark with the operations of Lions
Gate could have a material adverse effect on the ability of Lions Gate to retain
the key managerial personnel who are critical to its operations.
LIONS GATE MAY HAVE DIFFICULTY INTEGRATING RECENTLY ACQUIRED BUSINESSES OR
MANAGING RAPID GROWTH
INTEGRATION OF DIVERSE OPERATIONS. Lions Gate's divisions, subsidiaries,
partners and co-ventures consist of LG Films, LG Television, CineGroupe, LG
Studios and Mandalay Pictures, which Lions Gate has acquired over the last few
years. While most of these companies have previously operated in their
respective fields, Lions Gate faces the problems inherent in combining their
different operations. Lions Gate will face the same problems combining Trimark's
operations.
STRAIN ON LIONS GATE'S RESOURCES DURING RAPID GROWTH. Lions Gate is
experiencing a period of rapid growth that could place a significant strain on
its resources. If Lions Gate's management is unable to manage growth
effectively, operations could be adversely affected. Lions Gate is currently in
the process of implementing appropriate structures in place to address future
growth, including management information systems and internal and external
communication systems. However, there can be no assurance that Lions Gate will
be able to achieve its growth as planned, increase its work force or implement
new systems to manage its anticipated growth, and any failure to do so could
have a material adverse effect on Lions Gate's business, results of operation
and financial condition.
RISKS RELATING TO FILM AND TELEVISION INDUSTRY
COMMERCIAL SUCCESS OF FILMS AND TELEVISION PROGRAMS IS DIFFICULT TO
PREDICT. 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 its commercial success is determined primarily by
audience reaction, which is unpredictable. 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. Lions Gate's success will
depend on the
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experience and judgment of Lions Gate's management to select and develop new
investment and production opportunities. There can be no assurance that Lions
Gate's television programs and feature films will obtain favorable ratings or
reviews or that broadcasters will license the rights to broadcast any of Lions
Gate's television programs in development or renew licenses to broadcast
programs currently produced by predecessors of Lions Gate. Even if licenses to
broadcast Lions Gate's television programming are renewed, the popularity of a
particular program and its ratings may diminish over time.
CAPITAL REQUIREMENTS PRESENT FINANCIAL RISKS. The production, completion
and distribution of television programs and feature films require a significant
amount of capital. Although Lions Gate intends to continue to reduce the risks
of its financial involvement in the production costs of its productions through
financial assistance from broadcasters, distributors, government and industry
programs and studios, there can be no assurance that Lions Gate will
successfully implement such arrangements or that Lions Gate would not be subject
to substantial financial risks relating to the production, completion and
release of future television programs and feature films. In addition, a
significant amount of time may elapse between the expenditure of funds by Lions
Gate and the receipt of revenues from its television programs or feature films.
BUDGET OVERRUNS AND OTHER PRODUCTION RISKS CAN IMPAIR PROFITABILITY. 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, Lions Gate 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 Lions Gate. 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 Lions
Gate's business, results of operations or financial conditions.
LACK OF CONTROL OVER DISTRIBUTION MAKES COMMERCIAL SUCCESS OF FILMS AND
TELEVISION PROGRAMS UNCERTAIN. Decisions regarding the timing of release of
television programs, feature films and related products and as to which of Lions
Gate's television programs, feature films and related products, if any, will
receive promotional support from a distributor are important in determining the
success of a particular television program, feature film and related product. As
with most production companies, Lions Gate does not expect to control the manner
in which its distributors distribute Lions Gate's television programs or feature
films, including the number of broadcasters to which its distributors distribute
its television programs, the number of theatres to which its distributors may
distribute a feature film, or the timing of release of the television programs
or feature films. Although its distributors have a financial interest in the
success of any such television programs or feature films, any decision by its
distributors not to distribute or promote one of Lions Gate's television
programs, feature films or related products or to promote competitors' programs,
feature films or related products to a greater extent than it promotes those of
Lions Gate could have a material adverse affect on Lions Gate's business,
operating results or financial condition.
LIONS GATE FACES SUBSTANTIAL COMPETITION. Motion picture and television
production and distribution are highly competitive businesses. Lions Gate faces
competition from companies within the motion picture and television industry and
alternative forms of leisure activities. Lions Gate will compete with a variety
of companies for access to time slots for broadcast of its television programs,
access to theatrical outlets for feature films, acquisition of characters,
storylines, ideas and treatments with which to build its library, the
recruitment and retention of talented personnel, and the licensing and
distribution of its proprietary products. Almost all of Lions Gate's potential
competitors, particularly the major U.S. studios, have longer operating
histories, greater name recognition, larger installed customer bases and
significantly greater
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financial, technical, marketing and other resources, while the independent
production companies may have less overhead than Lions Gate.
LIONS GATE'S FINANCIAL PERFORMANCE MAY FLUCTUATE BECAUSE OF ITS LACK OF
DIVERSIFICATION IN RELATION TO ITS COMPETITORS. 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 Lions Gate's 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 Lions Gate's share of
gross box-office admissions and make it more difficult for Lions Gate's films to
succeed.
LIMITED NUMBER OF PRIME TIME SLOTS CAN LIMIT POTENTIAL SUCCESS OF LIONS
GATE'S TELEVISION PROGRAMMING. Lions Gate competes 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 Lions Gate will be able to compete successfully
against current or future competitors.
TECHNOLOGICAL ADVANCES MAKE FUTURE DEMAND FOR FILM AND TELEVISION
PROGRAMMING UNCERTAIN. The entertainment industry in general, and the motion
picture industry in particular, are continuing to undergo significant changes,
primarily due to technological developments. Due to 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.
EXPECTED FLUCTUATION IN OPERATING RESULTS. Lions Gate expects that its
future operating results will fluctuate significantly as a result of, among
other things: the timing of domestic and international releases of current and
future television programs or feature films produced by Lions Gate; the success
of these television programs or feature films; the timing of the release of
related products into their respective markets; the costs to distribute and
promote the television programs and feature films; the success of Lions Gate's
distributors in marketing its television programs and feature films; the timing
of receipt of proceeds generated by the television programs and feature films
from distributors; the introduction of new television programs and feature films
by Lions Gate's current and future competitors; the timing and magnitude of
operating expenses and capital expenditures; the level of unreimbursed
production costs in excess of budgeted maximum amounts; and general economic
conditions. As a result, Lions Gate believes that its results of operations may
fluctuate significantly, and it is possible that Lions Gate's operating results
could be below the expectations of equity research analysts and investors.
ENTERTAINMENT ACCOUNTING POLICIES. Lions Gate follows generally accepted
accounting principles for accounting practices related to revenue recognition
and amortization of production costs, including Statement of Financial
Accounting Standards No. 53 "Financial Reporting by Producers and Distributors
of Motion Picture Films" ("SFAS 53"). Revenues from production and license
agreements, which may provide for Lions Gate's receipt of non-refundable minimum
guaranteed amounts, are recognized when the license period begins and the
programming is available for showing pursuant to the terms of the agreement,
typically when the finished product has been delivered to, and accepted by, the
licensee. Revenues in excess of minimum guarantees under such agreements are
recognized when such amounts have become due and payable and Lions Gate is
reasonably assured of their collection. As a result, Lions Gate's expected cash
flows may not necessarily be related to revenue recognition and amortization of
production costs. Costs of producing television episodes and other productions
will be capitalized and charged against revenues generated by the delivery of
those episodes or productions. Costs will be assessed quarterly for
recoverability and will be written down to their estimated realizable value.
Costs incurred to
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produce or acquire exploitation rights to television episodes produced by Lions
Gate will be capitalized and amortized using the ratio of current revenue to
estimated total revenue for a particular episode or production. As a result,
Lions Gate's estimates of total revenues and costs may be overstated or
understated at any point in time. The inherent uncertainties of such estimates
could materially adversely change Lions Gate's results of operations and
financial condition.
The Financial Accounting Standards Board recently approved certain changes
that will alter reporting by motion picture companies. SFAS 53, which previously
allowed wider latitude for estimating lifetime film revenues and amortization,
has been rescinded. The new standard will impose numerous changes to reporting,
and many motion picture companies will take a one-time, non-cash charge of
significant proportions to conform to the new rules. Lions Gate and Trimark are
currently determining the financial impact of these new standards.
DEPENDENCE ON KEY PERSONNEL. Lions Gate's success will depend to a
significant extent on the performance of a number of senior management personnel
and other key employees of Lions Gate and its affiliates. In particular, Lions
Gate will be dependent upon the services of such personnel as Frank Giustra, Jon
Feltheimer, Michael Burns, Jeffrey Sackman, Jacques Pettigrew and Peter Guber.
The loss of the services of key persons could have a material adverse effect on
Lions Gate's business, operating results and financial condition.
NEED TO ATTRACT AND RETAIN QUALIFIED PERSONNEL. Lions Gate's success
depends to a significant extent on its ability to identify, attract, hire, train
and retain qualified professional, creative, technical and managerial personnel.
Competition for such personnel is intense, and there can be no assurance that
Lions Gate will be successful in identifying, attracting, hiring, training and
retaining such personnel in the future. The competition for quality creative and
technical personnel is especially intense due to significant expansion in the
entertainment market over the past several years. If Lions Gate is unable to
identify, attract, hire, train and retain qualified personnel in the future,
particularly creative and technical personnel, such inability could have a
material adverse effect on Lions Gate's business, operating results and
financial condition.
RISKS RELATING TO REGULATORY ENVIRONMENT
CANADIAN CONTENT RESTRICTIONS. Canadian broadcasters and cable, pay
television and pay-per-view television services are typically required, as a
condition of their license, to devote a certain amount of their programming
schedules, including prime time, to Canadian programs. Compliance with these
requirements is enforced by the Canadian Radio-Television and Telecommunication
Commission ("CRTC"), and failure to comply can result in fines or the loss of
license. The CRTC has issued detailed criteria which must be met for a
television production to qualify as a "Canadian program," which require among
other things, that financial and creative control of the production be held by
Canadians and that some creative functions be performed by Canadians. If Lions
Gate's productions cease to qualify as Canadian programs under the regulations
and policies of the CRTC, Lions Gate may find it more difficult to secure time
slots in Canada for its productions. In addition, in the event Lions Gate's
productions cease to meet minimum Canadian content requirements, Lions Gate may
be unable to access various federal and provincial film and television incentive
programs, including refundable tax credits, as discussed below.
GOVERNMENT INCENTIVE PROGRAMS. Lions Gate may benefit from a number of
Canadian incentive and regulatory programs designed to enhance and strengthen
the Canadian film and television program production, distribution and
broadcasting industries. For example, as noted above, Lions Gate may benefit
from certain regulations of the CRTC obliging Canadian broadcasters to telecast
certain minimum levels of Canadian content programming. Such Canadian content
programming requires certification by the CRTC as certified Canadian programming
and Lions Gate may be contractually bound to obtain such certification in
respect of certain programs Lions Gate expects to produce. If a program does not
qualify
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for such certification, Lions Gate could be in default of its obligations to
Canadian broadcasters, distributors or other licensees.
In addition, Lions Gate expects to receive investments from federal and
provincial government agencies established to foster the development of all
aspects of the Canadian film and television industry. These government agencies,
including, among others, Telefilm Canada, the Ontario Film Development
Corporation, Societe de Developpement des Enterprises Culturelles (SODEC) and
British Columbia Film, administer a variety of programs providing incentives to
qualifying entities in the form of equity investment, non-interest bearing
advances and loans.
The Canadian government and a number of its provincial counterparts have
established refundable tax credit programs based on eligible labor expenditures
of qualifying production entities. Lions Gate expects that certain film and
television productions it will produce will incorporate such refundable tax
credits as elements of production financing. In the event that such productions
do not ultimately qualify for anticipated refundable tax credits, the relevant
production may require additional funds for completion.
For Lions Gate's film and television productions to continue to qualify for
several such refundable tax credits, among other statutory requirements, Lions
Gate must remain Canadian-controlled pursuant to the Investment Canada Act. If
Lions Gate ceases to be Canadian-controlled under the Investment Canada Act, it
would no longer 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 access to Canada's official
co-production treaties with other countries. Such a change in status would also
affect the eligibility of Lions Gate to retain the benefit of refundable tax
credits and other incentives arising prior to the change of control of Lions
Gate. There are currently no transfer restrictions on Lions Gate's common stock
as a class and, accordingly, Lions Gate may not be able to prevent such a change
of control. In addition, certain provincial refundable tax credits require that
the applicable applicant be provincially-controlled. If any Lions Gate affiliate
which accesses or intends to access such credits ceases to be provincially
controlled, it would no longer be entitled to access the applicable provincial
refundable tax credit.
RISKS RELATING TO CURRENCY FLUCTUATIONS
Lions Gate anticipates that an increasing portion of its revenues and
expenses may be denominated in U.S. dollars or currencies other than Canadian
dollars (the currency in which Lions Gate's financial statements are reported).
Lions Gate does not presently engage in currency hedging activities to limit the
risks of exchange rate fluctuations. As a result, changes in relative value of
the Canadian dollar to the U.S. dollar and other foreign currencies will affect
Lions Gate's revenues and operating margins. 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 cannot be accurately predicted and
could have a material adverse effect on Lions Gate's business, financial
condition and results of operations. In addition, the ability of Lions Gate to
repatriate to Canada, funds arising in connection with its foreign operations
may also be adversely affected by currency and exchange control regulations
imposed by the country in which a production is exploited.
RISKS RELATING TO LIQUIDITY AND FINANCING REQUIREMENTS
Lions Gate's theatrical motion picture and television production activities
require the initial expenditure of significant funds, while revenues relating to
such films and programs are typically not generated for some period after such
expenditure and may be received over an extended period of time. Since Lions
Gate's cash requirements generally have exceeded cash flow from operations,
Lions Gate has been required to utilize borrowings under its principal credit
facilities to fund operations. Lions Gate will continue to be dependent upon the
availability of its principal credit facilities to fund its production and
distribution activities for the foreseeable future. Borrowings under such
principal credit facilities are
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subject to Lions Gate's continuing satisfaction of loan conditions. Lions Gate's
inability to make such borrowings, or to borrow funds on satisfactory terms,
could have a material adverse effect on its business.
RISKS RELATING TO VIDEO DISTRIBUTION BUSINESS
ACQUISITION OF NEW PRODUCT. A significant portion of Trimark's success
depends on public interest in the new product it acquires, and there are a
limited number of quality titles and existing libraries available for
acquisition. Competition for these titles may be great and prices may be high.
There can be no assurance that Trimark will be successful in acquiring new
product, or that Trimark will be able to acquire rights to popular titles on
terms that are satisfactory to it.
LIMITED NUMBER OF MAJOR SELL THROUGH VIDEO RETAILERS. Trimark's revenues
from sell through video distribution activities are heavily concentrated among a
few customers. Trimark generated approximately 20% of its revenues in its sell
through video distribution business during the nine month period ending
March 31, 2000. There can be no assurance that Trimark will continue to maintain
the relationships with these customers or that these customers will continue to
carry current levels of such product. Additionally, if economic or other
conditions were to adversely affect one or more of these customers, it could
adversely affect Trimark's business and results of operations.
CONSOLIDATION OF VIDEO RENTAL MARKET. Approximately 35% of Trimark's annual
revenues for the nine months ended March 31, 2000 were generated by traditional
home video rental distribution along with revenue sharing activities. Trimark's
home video rental product competes for limited shelf space in the video rental
retail market. In recent years, the home video rental retail market has become
highly consolidated, which means fewer businesses control the majority of
available shelf space. For the nine months ended March 31, 2000, Blockbuster and
Hollywood Video accounted for approximately 40% of Trimark's home video rental
distribution revenues. If economic or other conditions were to adversely affect
one of these customers, it could have a material adverse effect on its home
video rental sales.
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THE MERGER
STRUCTURE OF THE TRANSACTION
If the agreement of merger is adopted by Trimark's stockholders and Lions
Gate's stockholders, Trimark will merge with and into Sub and become a wholly
owned subsidiary of Lions Gate. As a result:
- The current stockholders of Trimark will receive, for each share of
Trimark common stock:
- U.S.$4.50 in cash, without interest, and
- two shares of Lions Gate common stock or, if greater, the number of
shares of Lions Gate common stock obtained by dividing U.S.$5.50 by the
average of the closing prices of a share of Lions Gate common stock on
the 30 trading days ending October 6, 2000.
- Lions Gate will not assume Trimark's obligations under any employee or
director stock options, and Trimark will cause any unexercised employee or
director stock options to terminate, without liability to Lions Gate or
Sub, as of the effective time of the merger. Lions Gate and Trimark will
cooperate to enable those persons desiring to exercise their options to
effect a complete or partial "cashless exercise," using the merger
consideration payable respecting the shares issuable on exercise of the
options to pay both the exercise price of the options and any required
withholding amounts. All outstanding Trimark stock options not otherwise
vested will vest in full as of the time Trimark stockholders adopt the
agreement of merger.
- No certificates or scrip evidencing fractional shares of Lions Gate common
stock will be issued in the merger. In lieu of any fractional share, a
holder of Trimark common stock will be paid an amount in cash (without
interest), rounded upward to the nearest cent, determined by multiplying
the market price of the Lions Gate common stock on the American Stock
Exchange on the date of completion of the merger by the fractional share
of Lions Gate common stock to which the holder would otherwise be entitled
(taking into account all shares held of record by the holder at the
effective time of the merger).
When the merger is completed, Trimark shares will no longer be traded on the
Nasdaq SmallCap Market, and price quotations with respect to sales of Trimark
shares in the public market will no longer be available. The registration of
Trimark shares under the Securities Exchange Act of 1934 will be terminated, and
Trimark will cease filing reports with the SEC.
BACKGROUND OF THE MERGER
Lions Gate is committed to expanding its business and operations through
both internal development and acquisitions, and had previously disclosed that it
intended to make strategic acquisitions of companies whose business and/or
assets complemented Lions Gate's entertainment assets. During January 2000,
Lions Gate contacted senior management of Trimark to determine whether Trimark
would be interested in a possible transaction with Lions Gate. As a result,
Lions Gate furnished Trimark certain public information regarding Lions Gate,
and, during early February, senior management of Lions Gate and senior
management of Trimark held separate preliminary discussions regarding a
potential transaction.
On February 3, 2000, Lions Gate and Trimark signed a confidentiality
agreement which provided for, among other things, the parties' confidential
exchange of non-public information regarding their businesses.
During February and March 2000, Lions Gate and Trimark executives reviewed
the non-public information, which included business plans for the upcoming
fiscal year.
On March 22, 2000, senior management of Lions Gate made an oral offer to
merge Trimark with a subsidiary of Lions Gate, with holders of Trimark common
stock to receive two shares of common stock of Lions Gate as consideration. In
response to discussions of a possible transaction with Lions Gate, Trimark,
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on March 30, 2000, engaged Salem Partners to render mergers and acquisitions
advisory services to Trimark in connection with the potential sale to or merger
with Lions Gate. In addition, on April 7, 2000, Trimark engaged Media
Finance, Inc. ("Media Finance") to render financial advisory services in
connection with a possible sale, merger, consolidation or other business
combination involving all or a substantial portion of Trimark's business,
securities or assets.
On April 17, 2000, senior management of Trimark and representatives of Salem
Partners and Media Finance met with senior management of Lions Gate at Trimark's
offices to discuss the potential merger. Salem Partners made a presentation
regarding the relative value of the two companies and the need for holders of
Trimark common stock to receive more consideration in a potential transaction.
On April 18, 2000, representatives of Salem Partners and Media Finance met with
senior executives at Lions Gate to discuss further the merger consideration. On
April 26, 2000, the Trimark and Lions Gate management teams agreed to present a
summary of terms of a merger to their respective boards of directors, which
terms included, for each share of Trimark common stock, the issuance of 2 1/2
shares of common stock of Lions Gate, the payment of U.S.$3.00 cash and the
issuance of one warrant to purchase 1/2 of a share of Lions Gate common stock at
a purchase price of U.S.$2.50 at any time prior to January 1, 2004.
On April 28, 2000, the boards of Trimark and Lions Gate each held separate
meetings at which they discussed the terms and proposed transaction structure,
the potential benefits and risks of the proposed transaction, and the mechanics
and timing of the proposed transaction. They each also discussed the other's
business operations, markets and strategies. Each board authorized the
continuation of discussions and the undertaking of due diligence.
On May 1, 2000, Trimark and Lions Gate exchanged due diligence request
lists. On May 3, 2000, Lions Gate's counsel delivered to Trimark's counsel a
request for information in connection with Lions Gate's due diligence of
Trimark's business, assets and operations. On May 4, 2000, Trimark's counsel
delivered Trimark's due diligence request to Lions Gate's counsel. Commencing on
May 5, 2000 and continuing through June 5, 2000, each company performed due
diligence on the financial, operational and legal matters of the other company.
During this time, numerous interviews and related due diligence discussions took
place among senior level management personnel of both companies, and among their
U.S. and Canadian counsel, investment bankers and accounting advisors.
As a result of the discussions between the companies and the commencement of
due diligence, Lions Gate instructed its counsel to commence drafting and
negotiating the necessary documentation for the merger. On May 5, 2000, Trimark
and its counsel received the initial draft of the agreement of merger and
related agreements from Lions Gate's counsel. A series of telephonic
conversations were held beginning May 6, 2000 between representatives of Lions
Gate and Trimark to negotiate a definitive agreement of merger and related
agreements.
On May 8, 2000, Trimark's board held a meeting to discuss the draft
agreement of merger and the related agreements. Trimark's board reviewed the
terms of the drafts with its legal counsel. Trimark's senior management reported
to Trimark's board the results to date of its due diligence review of Lions
Gate, including Lions Gate's future plans, the status of its film projects, its
investment in Mandalay Pictures, LLC and its liquidity. At this meeting, a
representative of Salem Partners presented to Trimark's board preliminary
material based on information provided to Salem Partners by Trimark and Lions
Gate. Such preliminary material included a financial overview of the proposed
transaction, an analysis of Lions Gate's business, and various preliminary
valuation analyses (including a comparable company analysis, comparable
transaction analysis, discounted cash flow analysis and Black-Scholes warrant
valuation). Salem Partners reviewed Trimark's historical and projected income
statements and its stock price performance and current market capitalization as
well as Lions Gate's historical stock price performance and current market
capitalization. A combined pro forma analysis was also reviewed and discussed.
Trimark's board engaged in an extensive discussion of recent transactions of
Lions Gate and Lions Gate's international distribution, video distribution,
theatrical distribution, and studio operations as well as its historical
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and projected income statements. Trimark's board authorized its senior
management to continue negotiating the agreement of merger and related
agreements.
At the Cannes Film Festival in France on May 18, 2000, a representative of
Media Finance had a series of separate meetings with senior management of Lions
Gate and Trimark regarding the consideration in the merger, in light of the fact
that the stock price of Lions Gate common stock had fallen in recent weeks on
the American Stock Exchange from U.S.$3.00 a share to approximately U.S.$2.20
per share. Trimark requested an increase in the cash consideration to U.S.$4.50
per share or additional Lions Gate common stock to be issued in the merger, and
a floor on the total value of the consideration at U.S.$11.00 per share. Lions
Gate's representatives rejected as too high the cash consideration of U.S.$4.50
per share as well as the concept of a floor on the total consideration.
Thereafter during the month of May, representatives of Trimark and Lions
Gate and their respective counsel met in person several times as well as
telephonically to negotiate the various terms of the merger. As of the end of
May, the companies were still negotiating a number of material terms of the
merger, including pricing, price protection, closing conditions, including
financing matters, indemnification issues, treatment of employee stock options
and registration issues with respect to Lions Gate's common stock to be issued
in connection with the merger.
From June 1 through June 5, 2000, senior executives of Lions Gate, Trimark,
Salem Partners, Media Finance and their respective counsel met to discuss and
resolve the open terms of the transaction.
On June 5, 2000, Trimark's board held a meeting at Trimark's offices. At
that meeting, Trimark's board discussed the proposed transaction and its
advantages and disadvantages. See Recommendation of Trimark's Board; Fairness of
the Merger, on page 27. Trimark's senior management reported that recent
negotiations had involved certain price protection issues to establish a floor
for the purchase price such that the proceeds to Trimark stockholders would not
fall below U.S.$10.00 per share of Trimark common stock. Trimark's board also
noted that the consideration to be received by the Trimark stockholders
represented a significant premium over Trimark's historical stock prices. In
light of several outstanding issues under the agreement of merger and the
related agreements, Trimark's board determined that senior management and
Trimark's advisors should continue to negotiate the relevant documents and that
Trimark's board would reconvene as soon as circumstances dictated to formally
decide whether to consider the agreement of merger. During the remainder of
June 5 and through June 6, negotiations of final points continued.
On June 5 and June 6, 2000, Lions Gate's board held meetings at which the
board discussed the proposed transaction and its advantages and disadvantages.
See Lions Gate's Reasons for the Merger on page 34. Lions Gate's management
outlined the key points of the transaction, including termination fees. On
June 6, 2000 Lions Gate's board voted unanimously to approve the agreement of
merger and related agreements, as presented to the board, and to recommend that
the Lions Gate stockholders vote to approve the agreement of merger.
On June 6, 2000, Trimark's board held a telephonic meeting to discuss the
draft agreement of merger and the related documents. Trimark's board reviewed
the terms of the agreement of merger with its legal counsel. Trimark's
management reported to Trimark's board the results of its due diligence review
of Lions Gate and responded to questions from Trimark's board regarding its due
diligence review and management's view on the business and operations of Lions
Gate. At this meeting, Salem Partners rendered its oral opinion (which was later
confirmed in writing) that the consideration to be received by the holders of
the Trimark common stock in the merger is fair from a financial point of view to
such holders.
At the meeting of Trimark's board, Trimark's board voted unanimously to
approve the merger with Lions Gate, the agreement of merger and related exhibits
as presented to them, and to recommend that the Trimark stockholders vote to
adopt the agreement of merger.
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Following the approval of Lions Gate's board and Trimark's board, the
agreement of merger in its definitive form was executed and jointly announced to
the public in a press release on June 6, 2000.
RECOMMENDATION OF TRIMARK'S BOARD; FAIRNESS OF THE MERGER
Trimark's board has unanimously approved the agreement of merger and the
merger and believes that the terms of the agreement of merger are fair to, and
that the merger is in the best interests of, Trimark and its stockholders and
therefore recommends that the holders of Trimark common stock vote "for"
adoption of the agreement of merger.
TRIMARK'S REASONS FOR THE MERGER. In reaching its decision to approve the
agreement of merger and to recommend that Trimark stockholders vote for adoption
of the agreement of merger, Trimark's board consulted with its advisors and
considered the material factors described below. Based upon its independent
review of such factors, Trimark's board approved the agreement of merger.
At the board meetings described above, Trimark's board, in addition to the
points previously described, identified several potential benefits for Trimark's
stockholders that it believes would result from the merger with Lions Gate.
These potential benefits include:
- the financial strength of the combined company to be able to commit
greater resources to both current and emerging entertainment project
development efforts and to fund the future growth of the combined
company's business;
- the opportunity for Trimark, as part of the combined company, to compete
more effectively in an increasingly competitive and rapidly changing
industry; and
- the greater liquidity and diversification of risk offered to Trimark's
stockholders by an investment in Lions Gate instead of Trimark, and the
opportunity to participate in the potential for growth of the combined
company.
In the course of its deliberations, Trimark's board reviewed with Trimark's
senior management a number of additional factors relevant to the merger,
including, among others,
- information concerning Lions Gate's and Trimark's respective businesses,
prospects, financial performance and condition, operations, management and
competitive position;
- current market conditions and historical market prices, volatility and
trading information with respect to Lions Gate common stock and Trimark
common stock; the consideration that Trimark's stockholders will receive
in the merger and the fact that, at the time the parties signed the
agreement of merger, the market value of the Lions Gate common stock and
cash to be issued in exchange for the Trimark common stock represented a
significant premium over the historical price range of the Trimark common
stock;
- the experience and management expertise of Lions Gate's senior management;
- the implications for continued independent operation of Trimark in light
of market and competitive conditions, including the potential for
increased competition from other companies having significantly greater
financial resources than Trimark;
- the complementary businesses, assets, channels, partners, technology and
critical skills of Lions Gate and Trimark;
- the alternatives available to Trimark in light of the consideration
proposed to be paid to Trimark stockholders pursuant to the agreement of
merger, including continuing to maintain Trimark as an independent company
and possible combinations with companies other than Lions Gate;
- the belief that the terms of the agreement of merger, including the
parties' mutual representations, warranties and covenants, and the
conditions to their respective obligations, are reasonable;
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<PAGE>
- provisions of the agreement of merger that allow Trimark to respond to
certain unsolicited inquiries concerning an acquisition of Trimark by a
third party and additional provisions that permit Trimark to terminate the
agreement of merger upon payment to Lions Gate of a break-up fee under
certain circumstances;
- a comparison of selected recent acquisition and merger transactions in the
entertainment industry;
- the likelihood of a superior offer arising;
- the expected tax and accounting treatment of the merger;
- the opinion of Salem Partners dated June 6, 2000 annexed as Appendix B and
rendered at the June 6, 2000 meeting of Trimark's board that the
consideration to be received by the holders of Trimark common stock in the
merger is fair from a financial point of view to such holders; and
- reports from management, financial advisors and legal advisors as to the
results of their investigations of Lions Gate.
Trimark's board also considered a number of potentially negative factors in
its deliberations concerning the merger, including,
- the risk that the benefits sought to be achieved in the merger will not be
achieved;
- the effect of public announcement of the merger on Trimark's operating
results and Trimark's ability to attract and retain key management;
- the loss of control over the future operations of Trimark following the
merger;
- the risk that the merger would not be consummated; and
- the other risks described above under "Risk Factors."
The foregoing discussion of information and factors considered by Trimark's
board is not intended to be exhaustive but is believed to include all material
factors considered by Trimark's board. In view of the wide variety of factors
considered by Trimark's board, Trimark's board did not find it practicable to
quantify or otherwise assign relative weight to the specific factors considered.
In analyzing the proposed transactions and in its deliberations regarding
its recommendation of the agreement of merger, Trimark's board considered a
number of other factors in addition to the advantages and disadvantages set
forth above, including Trimark's current financial condition and prospects as a
stand-alone company and the advantages of the merger to the Trimark
stockholders, such as potentially enhanced stockholder value arising from the
combined entity due to its larger revenue base and potential for improved
earnings per share. In this process, Trimark's board reviewed information
provided by the management of Lions Gate concerning the financial performance,
condition, business operations and prospects of Lions Gate, and the future
capital requirements related to such operations. Accordingly, after taking into
account all of the factors set forth above, Trimark's board believed the
positive factors of the merger substantially outweighed the negative factors and
unanimously agreed that the agreement of merger and the consummation of the
merger were fair to, and in the best interests of, Trimark and its stockholders
and that Trimark should proceed with the merger.
OPINION OF SALEM PARTNERS
Under a letter agreement dated as of March 30, 2000, Trimark engaged Salem
Partners as its financial advisor in connection with a possible sale to or
merger with Lions Gate. Trimark engaged Salem Partners as its financial advisor
based on Salem Partners' experience and expertise in transactions similar to the
merger. Salem Partners, as part of its investment banking business, is
continuously engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, commercial banking arrangements, private
placements and valuations for corporate and other purposes.
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<PAGE>
At the June 6, 2000 meeting of Trimark's board, Salem Partners delivered its
oral opinion, which was subsequently confirmed by delivery of a written opinion
dated June 6, 2000, that, as of the date of the written opinion and subject to
the assumptions, qualifications and limitations set forth in the written
opinion, the consideration to be received by the holders of the Trimark common
stock in the merger is fair from a financial point of view to those holders.
WE HAVE ATTACHED AS APPENDIX B THE FULL TEXT OF THE SALEM PARTNERS WRITTEN
OPINION AND URGE YOU TO READ THE OPINION IN ITS ENTIRETY. THE OPINION SETS FORTH
THE ASSUMPTIONS MADE, MATTERS CONSIDERED, AND QUALIFICATIONS AND LIMITATIONS ON
THE REVIEW UNDERTAKEN BY SALEM PARTNERS AND IS INCORPORATED HEREIN BY REFERENCE.
THE SUMMARY OF THE SALEM PARTNERS OPINION SET FORTH BELOW IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.
In reading the discussion of the fairness opinion set forth below, Trimark
stockholders should be aware that Salem Partners' opinion
- was provided to Trimark's board for its benefit and use;
- relates only to the fairness, from a financial point of view, of the
consideration to be received by the holders of the Trimark common stock in
the merger;
- did not constitute a recommendation to Trimark's board in connection with
the merger;
- does not constitute a recommendation to any Trimark stockholder as to how
to vote in connection with the merger;
- did not address Trimark's underlying business decision to pursue the
merger; and
- did not express any opinion as to the price or range of prices at which
the common stock of Trimark or common stock of Lions Gate would trade
subsequent to the announcement of the merger or as to the price or range
of prices at which the shares of Lions Gate would trade subsequent to the
consummation of the merger.
Although Salem Partners evaluated the fairness, from a financial point of
view, of the consideration to be received by the holders of the Trimark common
stock in the merger, the consideration itself was determined by Trimark and
Lions Gate through arm's-length negotiations. Salem Partners provided advice to
Trimark during the course of those negotiations. Trimark did not provide
specific instructions to, nor place any limitations on, Salem Partners with
respect to the procedures to be followed or factors to be considered by it in
performing its analyses or providing its opinion.
In arriving at its opinion, Salem Partners reviewed and analyzed, among
other things, the following:
- the June 3, 2000 draft of the agreement of merger and the financial terms
of the merger set forth therein;
- Trimark's Annual Reports on Form 10-K for the fiscal years ended June 30,
1998 and June 30, 1999;
- Trimark's Quarterly Reports on Form 10-Q for the periods ended
September 30, 1999, December 31, 1999 and March 31, 2000;
- other publicly available information concerning Trimark and the trading
market for Trimark common stock;
- internal information relating to Trimark, including various financial
forecasts and projections based upon differing assumptions, provided to
Salem Partners by management of Trimark;
- publicly available information, including research reports, concerning
other companies engaged in businesses which Salem Partners believes to be
comparable to Trimark and the trading markets for certain other companies'
securities; and
- the terms of recent business combinations which Salem Partners believes to
be relevant.
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<PAGE>
Salem Partners also met with officers and employees of Trimark concerning
its business and operations, assets, present condition and future prospects and
undertook other studies, analyses and investigations as it deemed appropriate.
In addition, Salem Partners reviewed and analyzed:
- Lions Gate's Annual Reports on Form 20-F for the fiscal years ended
March 31, 1998 and March 31, 1999;
- Lions Gate's Quarterly Reports for the periods ended June 30, 1999,
September 30, 1999 and December 31, 1999;
- Lions Gate's short form prospectus dated December 20, 1999 relating to
Lions Gate's issuance of up to 13,000 units, each consisting of one 5.25%
Convertible Redeemable Preferred Share, Series A and 425 Common Stock
Purchase Warrants;
- the draft balance sheet of Lions Gate as of March 31, 2000 provided to
Salem Partners on June 2, 2000;
- other publicly available information, including research reports,
concerning Lions Gate and the trading market for the common stock of Lions
Gate;
- certain publicly available information, including research reports,
concerning certain other companies engaged in businesses which Salem
Partners believes to be comparable to Lions Gate; and
- certain internal information relating to Lions Gate, including various
financial forecasts and projections based upon differing assumptions,
provided to Salem Partners by management of Lions Gate.
Salem Partners also conducted discussions with members of senior management
of Lions Gate with respect to Lions Gate's business and operations, assets,
present condition and future prospects, and undertook other studies, analyses
and investigations as Salem Partners deemed appropriate.
In arriving at its opinion, Salem Partners did not make, obtain or assume
any responsibility for any independent evaluation or appraisal of any of the
properties and facilities or of the assets and liabilities of Trimark or Lions
Gate. Salem Partners assumed and relied upon the accuracy and completeness of
the financial and other information supplied to or otherwise used by it in
arriving at its opinion and did not attempt independently to verify, or
undertake any obligation to verify, that information. In addition, Salem
Partners assumed that Trimark's and Lions Gate's forecasts and projections
supplied to it represent the best current judgment of Trimark's and Lions Gate's
management, respectively, as to the future financial condition and results of
operations of Trimark and Lions Gate, and assumed that those forecasts and
projections were reasonably prepared based on the respective managements'
current judgment. Salem Partners assumed no responsibility for and expressed no
view as to those forecasts and projections or the assumptions on which they are
based.
Salem Partners was not asked to and did not participate in any efforts to
solicit third-party offers to acquire all or part of Trimark, nor did it
evaluate potential alternative transactions. The management of Trimark
instructed Salem Partners to provide its opinion on that basis.
In addition, upon the advice of Trimark, Salem Partners assumed that the
merger will qualify as a tax-free transaction to the holders of the Trimark
common stock, except to the extent those holders receive cash as consideration
in the merger.
In performing its analyses, Salem Partners made numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
Salem Partners, Trimark and Lions Gate. Any estimates contained in the analyses
performed by Salem Partners are not necessarily indicative of actual value or
future results, which may be significantly more or less favorable than suggested
by those analyses. Accordingly, those analyses and estimates are inherently
subject to substantial uncertainty. In addition, Salem Partners' opinion was
among several factors taken into consideration by Trimark's board in making its
determination to approve the merger and the agreement of merger.
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<PAGE>
The following is a brief summary of the material valuation, financial and
comparative analyses considered by Salem Partners in connection with the
rendering of its opinion. THE FINANCIAL ANALYSES SUMMARIZED BELOW INCLUDE
INFORMATION PRESENTED IN TABULAR FORMAT. TO FULLY UNDERSTAND SALEM PARTNERS'
FINANCIAL ANALYSES, THE TABLES MUST BE READ TOGETHER WITH THE TEXT OF EACH
SUMMARY. THE TABLES ALONE DO NOT CONSTITUTE A COMPLETE DESCRIPTION OF THE
FINANCIAL ANALYSES. CONSIDERING THE DATA SET FORTH IN THE TABLES BELOW WITHOUT
CONSIDERING THE FULL NARRATIVE DESCRIPTION OF THE FINANCIAL ANALYSES, INCLUDING
THE METHODOLOGIES AND ASSUMPTIONS UNDERLYING THE ANALYSES, COULD CREATE A
MISLEADING OR INCOMPLETE VIEW OF SALEM PARTNERS' FINANCIAL ANALYSES.
STOCK PRICE ANALYSIS. Salem Partners reviewed the historical trading of the
Trimark common stock. Salem Partners noted that Trimark common stock did not
have a daily closing price at or above $10.00 between June 2, 1996 and June 2,
2000.
SELECTED COMPARABLE COMPANIES ANALYSIS. Salem Partners compared certain
operating, financial, trading and valuation information for Trimark to certain
publicly available operating, financial, trading and valuation information for
thirteen selected companies, which, in Salem Partners' judgment, were reasonably
comparable to Trimark for the purpose of this analysis. Salem Partners divided
these companies into two groups, small to mid-capitalization comparable
companies and large-capitalization comparable companies. These companies were:
Small to Mid-Capitalization Companies:
- Alliance-Atlantis Communications Inc.
- dick clark productions, inc.
- The Kushner-Locke Company
- Overseas Film Group, Inc.
- Peace Arch Entertainment Group, Inc.
- Pixar
- Unapix Entertainment, Inc.
Large-Capitalization Companies:
- FOX Entertainment Group, Inc.
- Metro-Goldwyn-Mayer Inc.
- The Seagram Company Ltd.
- USA Networks, Inc.
- Viacom Inc.
- The Walt Disney Company
Salem Partners utilized earnings forecasts, when available, for all of these
companies from selected Wall Street equity research reports. Salem Partners'
analysis was based on closing stock prices as of June 2, 2000. Salem Partners
noted that, based on an assumed merger consideration of U.S.$10.00 per share of
Trimark common stock for Trimark stockholders, the assumed merger consideration
produced a ratio of enterprise value to sales for the latest twelve months
(ended March 31, 2000) that was within the range for the small to
mid-capitalization comparable companies. In addition, the assumed merger
consideration produced a ratio of enterprise value to estimated 2000 EBITDA
(earnings before interest, taxes, depreciation and amortization) for Trimark
that was within the range for the small to mid-capitalization comparable
companies and the large capitalization comparable companies. In addition, the
assumed merger consideration produced a ratio of enterprise value to estimated
2001 EBITDA for Trimark that was within the range for the small to
mid-capitalization comparable companies. A summary of the ratios, assuming a
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U.S.$10.00 per share merger consideration for Trimark, and comparison to the
comparable companies, ratios on the basis of enterprise value to sales and
enterprise value to EBITDA is set forth below:
<TABLE>
<CAPTION>
ENTERPRISE VALUE/
LATEST TWELVE -------------------------------
MONTHS ESTIMATED 2000 ESTIMATED 2001
SALES EBITDA EBITDA
------------- -------------- --------------
<S> <C> <C> <C>
Consideration received by Trimark.................... .82x 13.1x 6.8x
Range of multiples for small to mid-capitalization
comparable companies............................... .76x-1.20x 5.5x-18.8x 3.6x-13.7x
Range of multiples for large-capitalization
comparable companies............................... 1.27x-3.83x 12.4x-28.0x 10.8x-22.4x
</TABLE>
Salem Partners also noted that none of the comparable companies are
identical to Trimark and, accordingly, any analysis of comparable companies
necessarily involved complex considerations and judgments concerning differences
in financial and operating characteristics and other factors that would
necessarily affect the value of Trimark.
COMPARABLE TRANSACTIONS ANALYSIS. Salem Partners reviewed
publicly-available financial information related to fourteen merger and
acquisition transactions completed in the entertainment industry category since
November 1989 that it deemed generally comparable to the merger. Transactions
reviewed by Salem Partners included:
<TABLE>
<CAPTION>
Acquirer Target
-------- ------
<S> <C>
Sony USA Inc. Columbia Pictures Entertainment Company
Turner Broadcasting System, Inc. Hanna-Barbera Inc.
Investor Group (R. Howard, B. Grazer) Imagine Films Entertainment, Inc.
Turner Broadcasting System, Inc. New Line Cinema Corporation
Viacom Inc. Paramount Communications Inc.
Hallmark Cards, Inc. RHI Entertainment Incorporated
The Seagram Company Ltd. MCA Inc.
Time Warner Inc. Turner Broadcasting System, Inc.
Bain Capital, Inc. & Richland, Gordon & Co. LIVE Entertainment Inc.
Metro-Goldwyn-Mayer Inc. Orion Pictures Corporation
Pearson plc All American Communications, Inc.
Alliance Communications Corp. Atlantis Communications Inc.
CBS Corporation King World Productions, Inc.
America Online, Inc. Time Warner Inc.
</TABLE>
For each of the comparable transactions, Salem Partners reviewed certain
publicly available financial information for the acquired companies including,
to the extent available, revenue and EBITDA, as adjusted for certain
extraordinary and non-recurring items. The range of ratios of the enterprise
values of the acquired companies to their respective latest twelve months
revenues and EBITDA are listed in the table below and are compared to the ratios
of Trimark's enterprise value to its latest twelve month sales and estimated
2000 EBITDA assuming a purchase price of U.S.$10.00 per share of Trimark common
stock. Salem Partners observed that the assumed purchase price of U.S.$10.00 per
share of Trimark common
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stock produced a multiple of estimated 2000 EBITDA that is within the range of
EBITDA multiples paid in the comparable transactions. A summary of the
aforementioned multiples is set forth below.
<TABLE>
<CAPTION>
ENTERPRISE VALUE/
------------------------------
LATEST TWELVE
MONTHS ESTIMATED 2000
SALES EBITDA
------------- --------------
<S> <C> <C>
Consideration received by Trimark........................... .82x 13.1x
Range of multiples for comparable companies................. .96x-3.47x 8.2x-24.0x
</TABLE>
Salem Partners also noted that none of the precedent transactions were
identical to the merger and, accordingly, any analysis of the precedent
transactions necessarily involved complex considerations and judgments
concerning difference in industry dynamics, stock market valuation parameters,
financial and operating characteristics and various other factors that would
necessarily affect the purchase price multiples in the transaction as compared
to the purchase price multiples for the precedent transactions.
DISCOUNTED CASH FLOW ANALYSIS. Salem Partners performed a discounted cash
flow analysis for the four year period ending June 30, 2004 on Trimark's
stand-alone unlevered free cash flow, using financial projections provided by
Trimark management. Unlevered free cash flows were calculated as cash inflows
from operations, less cash outflows from operations, less taxes. Salem Partners
calculated terminal values by applying a range of estimated EBITDA multiples of
10x to 14x to projected EBITDA of Trimark for the fiscal year ending June 30,
2004. The unlevered free cash flows and terminal values were then discounted to
the present value using a range of discount rates from 10% to 14%. After
deriving the enterprise value from this analysis, Salem Partners derived the
implied equity value of Trimark. Cash and cash equivalents and marketable
securities were added and total debt outstanding was subtracted from enterprise
value. Based on this analysis, Salem Partners calculated values per share of
Trimark common stock ranging from U.S.$9.18 to U.S.$18.34.
OTHER ANALYSES. Salem Partners conducted other analyses as it deemed
necessary, including reviewing historical and projected financial and operating
data for both Trimark and Lions Gate, analyzing selected Wall Street research
reports on, and earnings and other estimates for, Lions Gate and various of its
operating segments, reviewing relative stock price performance of Trimark and
Lions Gate versus various stock market indices, reviewing and comparing certain
financial data and valuation parameters for each of Trimark and Lions Gate and
various of their operating segments, and reviewing available information
regarding the ownership of Trimark common stock and Lions Gate common stock.
The preparation of a fairness opinion is a complex process and involves
various judgments and determinations as to the most appropriate and relevant
assumptions and financial analyses and the application of these methods to the
particular circumstances involved. A fairness opinion is therefore not readily
susceptible to partial analysis or summary description, and taking portions of
the analyses set out above, without considering the analysis as a whole, would,
in the view of Salem Partners, create an incomplete and misleading picture of
the processes underlying the analyses considered in rendering the Salem Partners
opinion. Salem Partners did not form an opinion as to whether any individual
analysis or factor, positive or negative, considered in isolation, supported or
failed to support the Salem Partners opinion. In arriving at its opinion, Salem
Partners considered the results of its analyses and did not attribute particular
weight to any one analysis or factor. The analyses performed by Salem Partners,
particularly those based on estimates and forecasts, are not necessarily more or
less favorable than suggested by such analyses. The analyses performed by Salem
Partners were prepared solely as part of Salem Partners' analyses of the
fairness, from a financial point of view, of the consideration to be received by
holders of Trimark common stock.
Pursuant to the terms of its engagement letter with Salem Partners dated
March 30, 2000, as amended, Trimark has agreed to pay Salem Partners a fee for
its financial advisory services and the delivery of the Salem Partners opinion.
The fee consists of two portions. The first portion, U.S.$25,000, became payable
upon execution of the engagement letter. The second portion is a cash fee of
U.S.$900,000, which
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<PAGE>
fee will be paid upon the consummation of the merger. In addition, Trimark has
agreed to reimburse Salem Partners for all reasonable out-of-pocket expenses
incurred by Salem Partners in connection with its engagement and the
transaction, including the fees and disbursements of its legal counsel. Trimark
has also agreed to indemnify Salem Partners against certain liabilities in
connection with its engagement.
Salem Partners has not received any compensation from Trimark or Lions Gate
in connection with any prior investment banking services other than the merger.
OTHER FEES
Pursuant to the terms of its engagement letter with Media Finance dated
April 7, 2000, as amended, Trimark has agreed to pay Media Finance a fee for its
financial advisory services. The fee consists of two portions. The first
portion, U.S.$25,000, became payable upon execution of the engagement letter.
The second portion is a cash fee of U.S.$450,000. In addition, Trimark has
agreed to reimburse, immediately upon request, Media Finance for all reasonable
out-of-pocket expenses incurred by Media Finance for an amount of U.S.$25,000 in
connection with its engagement and the transaction. Trimark has also agreed to
indemnify Media Finance against certain liabilities in connection with its
engagement.
Media Finance has not received any compensation from Trimark or Lions Gate
in connection with any prior investment banking services other than the merger.
LIONS GATE'S REASONS FOR THE MERGER
Since its incorporation in April 1997, Lions Gate has pursued a strategy of
acquiring and integrating existing companies in the entertainment business. To
this end, Lions Gate has made several important acquisitions and has raised
equity capital to pursue its acquisition and development strategies.
In reaching its decision to approve the agreement of merger Lions Gate's
board considered the following potential benefits:
- an increase in both foreign and domestic distribution opportunities for
theatrical and video product;
- the combined library of the two companies will encompass more than 1,650
titles that can be exploited across multiple media platforms;
- enhancement of Lions Gate's opportunities to develop brand recognition and
corresponding equity value in the United States;
- increase in Lions Gate's public float, making it more attractive to
institutional investors;
- reduction in the combined company's cost of capital, improvement in its
operating margins, and ultimately an increase in the combined company's
value; and
- strengthened position in negotiating entertainment properties acquisitions
or distribution deals.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
When considering recommendations of the Trimark board, you should be aware
that officers and directors of Trimark have interests and arrangements that may
be different from your interests as stockholders.
- Mark Amin, who is the Chairman and Chief Executive Officer of Trimark, has
entered into a three-year employment agreement with Lions Gate, which
becomes effective on consummation of the merger. The agreement provides
for, among other things, an annual salary of U.S.$500,000, a forgiveness
of a loan by Trimark in the amount of approximately U.S.$795,000, a grant
of stock options to purchase 1,400,000 shares of Lions Gate common stock
and Mr. Amin's election to Lions Gate's board. See Other Agreements
Related to Agreement of Merger--Employment Agreement.
- Lions Gate has agreed to register for resale under the Securities Act the
common stock issued to Mark Amin and Reza Amin in the merger. See Other
Agreements Related to Agreement of Merger--Registration Rights Agreement.
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- Lions Gate has agreed for six years after the merger to indemnify the
directors and officers of Trimark respecting occurrences before the
merger. Lions Gate has agreed to maintain, for six years following the
consummation of the merger, the directors' and officers' liabilities
insurance currently maintained by Trimark.
- As of the record date, all of the directors and executive officers of
Trimark had options granted under Trimark's 1990 Stock Option and Stock
Appreciation Rights Plan or 1999 Directors Option Plan to acquire an
aggregate of 380,500 shares of Trimark common stock at a weighted average
exercise price of U.S.$4.82. All 40,000 options under the 1999 Directors
Option Plan are fully vested, and all but 3,500 options held by executive
officers under the 1990 Stock Option and Stock Appreciation Rights Plan
are already vested or, by operation of change in control provisions
applicable to such options, will vest in full upon Trimark stockholder
approval of the merger. As permitted under the agreement of merger, the
stock option committee under the 1990 Stock Option and Stock Appreciation
Rights Plan will accelerate the vesting in full of the 3,500 unvested
options held by executive officers, as well as the 28,417 unvested options
held by Trimark employees, upon Trimark stockholder approval of the
merger.
- Peter Block and Wayne Levin, who are officers of Trimark, were granted
stock options under Lions Gate's stock option plan on August 15, 2000 to
acquire 100,000 shares and 75,000 shares, respectively, of Lions Gate
common stock. The exercise price of the options, which have a ten-year
term, is U.S.$2.55 per share. The options are subject to completion of the
agreement of merger and will be subject to regulatory and stockholder
approval at the Lions Gate stockholder's meeting. If the merger is not
completed, the options will be cancelled.
- Jon Feltheimer, Vice Chairman and Chief Executive Officer of Lions Gate,
and Michael Burns, Vice Chairman of Lions Gate, each hold convertible
preferred stock and options to purchase common stock of CinemaNow, Inc., 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 three years commencing March 1, 2000,
are exercisable for less than 1% of the common stock of CinemaNow, Inc.
ACCOUNTING TREATMENT
We expect that the merger will be treated as a "purchase" for financial
accounting purposes.
REGULATORY APPROVALS
Trimark and Lions Gate cannot complete the proposed merger until they have
furnished certain information and materials to the Antitrust Division of the
U.S. Department of Justice and the Federal Trade Commission and a required
waiting period has expired. Trimark and Lions Gate filed this information on
August 30, 2000, and the waiting period will expire on September 30, 2000. The
Antitrust Division and the FTC have the authority to challenge the proposed
merger on antitrust grounds before or after the proposed merger is completed.
The issuance of the Lions Gate common stock upon the completion of the
merger requires the approval of the American Stock Exchange and The Toronto
Stock Exchange.
CANADIAN LEGAL REQUIREMENTS
Lions Gate will apply to necessary Canadian provincial securities
authorities respecting the issuance and resale of the Lions Gate stock to be
issued in the merger.
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THE SPECIAL MEETING
GENERAL
This proxy statement/prospectus is being furnished to Trimark stockholders
in connection with the solicitation of proxies by Trimark's board for use at a
special meeting to be held on October 12, 2000, starting at 9:00 a.m., local
time, at the Park Hyatt Los Angeles, Chateau 9, 2151 Avenue of the Stars, Los
Angeles, California 90067. The purpose of the special meeting is for Trimark's
stockholders to consider and vote upon a proposal to adopt the agreement of
merger, dated June 6, 2000, among Trimark, Lions Gate, and Sub. A copy of the
agreement of merger is attached to this proxy statement/prospectus as
Appendix A. September 8, 2000 is the approximate date on which this proxy
statement/prospectus and the accompanying form of proxy are first being mailed
to the Trimark stockholders.
RECORD DATE; VOTING; REQUIRED VOTE
At August 31, 2000, the record date, there were 4,764,300 shares of Trimark
common stock outstanding. Each outstanding share entitles its holder to one vote
at the special meeting. Completion of the merger requires the approval of the
holders of a majority of the outstanding shares of Trimark common stock. Any
broker holding your shares in street name and not receiving from you an
instruction how to vote your shares of Trimark common stock will not be
permitted to vote them with respect to the merger. Any abstention or failure to
vote, including any broker non-vote, is equivalent to a vote against adoption of
the agreement of merger.
PROXIES; REVOCATION
If you vote your shares of Trimark common stock by signing a proxy, your
shares will be voted at the special meeting as you indicate on your proxy card.
If you sign and return the proxy card without specifying how it should be voted,
it will be voted for the adoption of the agreement of merger. You may revoke
your proxy at any time before the proxy is voted at the special meeting. A proxy
may be revoked prior to the vote at the special meeting by submitting a written
revocation to the following address: Trimark Holdings, Inc., 4553 Glencoe
Avenue, Suite 200, Marina del Rey, California 90292, Attention: Corporate
Secretary, or by submitting a new proxy, in either case, dated after the date of
the proxy that is being revoked. In addition, a proxy may also be revoked by
voting in person at the special meeting. However, simply attending the special
meeting will not revoke a proxy.
EXPENSES OF SOLICITATION
All expenses incurred in connection with solicitation of the enclosed proxy
will be paid by Trimark. Officers and employees of Trimark may solicit proxies
by telephone or in person. However, they will not be paid for soliciting
proxies. Trimark also will request that persons and entities holding shares in
their names or in the names of their nominees that are beneficially owned by
others send proxy materials to and obtain proxies from those beneficial owners
and will reimburse those holders for their reasonable expenses in performing
those services. Trimark has retained Morrow & Co., Inc. to assist it in the
solicitation of proxies, using the means referred to above, at an anticipated
cost of U.S.$5,500, plus reimbursement of out-of-pocket expenses.
OTHER
At the date of this proxy statement/prospectus, Trimark's board does not
know of any business to be presented at the special meeting other than as set
forth in the notice of meeting. If any other matters should properly come before
the special meeting, the persons named on the form of proxy will vote in their
own discretion the shares subject to the form of proxy.
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LIONS GATE STOCKHOLDERS' MEETING
Lions Gate has given notice of an annual and extraordinary general meeting
of its stockholders to be held at 9:00 a.m. on Tuesday, September 26, 2000 at
the Hyatt Hotel, Seymour Room, 655 Burrard Street, Vancouver, British Columbia.
At the Lions Gate stockholders meeting, the Lions Gate stockholders will be
asked to consider and vote upon a resolution adopting the agreement of merger
with Trimark and authorizing the performance of the agreement of merger by Lions
Gate. This resolution will require the approval of the majority of votes cast in
person or by proxy at the meeting. As required by the British Columbia Company
Act, management of Lions Gate will solicit proxies from the stockholders of
Lions Gate, which proxies will propose to vote in favor of the resolution
approving the agreement of merger with Trimark.
In addition to adopting the agreement of merger with Trimark generally, the
Lions Gate stockholders will be asked to specifically approve, by special
resolution of not less than three-quarters of votes cast in person or by proxy,
the amendment of the Articles of Incorporation of Lions Gate to create special
rights and restrictions attached to a second series of preferred shares and to
authorize the grant of options to purchase 1,400,000 shares of common stock of
Lions Gate to Mark Amin, as contemplated in an employment agreement between
Lions Gate and Mr. Amin entered in connection with the transactions set forth in
the agreement of merger between Lions Gate and Trimark. See Other Agreements
Related to Agreement of Merger--Employment Agreement on pages 47 through 48. It
is also proposed that the stockholders of Lions Gate consider a special
resolution increasing the size of the Lions Gate board from a maximum of 11 to a
maximum of 15 directors.
The Lions Gate stockholders' meeting will also be the annual general meeting
of Lions Gate, and the Lions Gate stockholders will consider the annual business
of Lions Gate including the election of directors of Lions Gate, the appointment
of auditors of Lions Gate, and the presentation of financial statements of Lions
Gate and the report of the auditor thereon. In addition, management of Lions
Gate has proposed several other resolutions for consideration by the
stockholders including the increase in Lions Gate's incentive stock option plan
(which include approval of option grants to Peter Block and Wayne Levin,
officers of Trimark, see The Merger--Interests of Certain Persons in the Merger
on page 34), and the creation of special rights and restrictions attached to
Lions Gate's Series A Preferred Shares.
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TERMS OF THE AGREEMENT OF MERGER
The following description of the agreement of merger is qualified in its
entirety by reference to, and is subject to, the agreement of merger, which is
incorporated in this proxy statement/prospectus by reference, and a copy of
which is attached as Appendix A to this proxy statement/prospectus.
EFFECTIVE TIME OF THE MERGER
If the agreement of merger is adopted by Trimark's and Lions Gate's
respective stockholders, the merger will become effective upon the filing of the
certificate of merger with the Secretary of State of the State of Delaware.
MANNER AND BASIS OF CONVERTING TRIMARK COMMON STOCK; OPTIONS TO BUY TRIMARK
COMMON STOCK
At the effective time of the merger, by virtue of the merger and without any
action on the part of Trimark, Lions Gate or Sub or any holder of their capital
stock, each share of Trimark common stock automatically will be converted into
the right to receive U.S.$4.50 in cash, without interest, and two shares of
Lions Gate common stock, or, if greater, the number of shares of common stock
obtained by dividing U.S.$5.50 by the average of the closing prices of a share
of Lions Gate common stock on the 30 trading days ending October 6, 2000.
Each option to buy Trimark common stock will be canceled, and Lions Gate
will not assume Trimark's obligations under any such options. Lions Gate and
Trimark will cooperate to enable those wishing to exercise their options to
conduct cashless exercises as described under The Merger--Structure of the
Transaction. In addition, the board or compensation committee of Trimark and
Lions Gate will each grant all approvals and take all other actions required
pursuant to Rules 16b-3(d) and (e) under the Securities Exchange Act to cause
the disposition in the merger of Trimark common stock and stock options held by
directors and executive officers and the acquisition in the merger by them of
Lions Gate common stock to be exempt from Section 16(b) of the Securities
Exchange Act.
No certificates or scrip evidencing fractional shares of Lions Gate common
stock will be issued in exchange for shares of Trimark common stock. In lieu of
any fractional share, a holder of Trimark common stock will be paid an amount in
cash (without interest), rounded upward to the nearest cent, determined by
multiplying the market price on the closing date of the Lions Gate common stock
by the fractional share of Lions Gate common stock to which such holder would
otherwise be entitled (taking into account all shares held of record by such
holder at the effective time of the merger).
Within 5 business days before the effective time of the merger, Lions Gate
will deposit with Chase Mellon Shareholder Services, LLC the cash and shares of
Lions Gate common stock representing the merger consideration to distribute to
holders of Trimark common stock.
No Trimark common stock may be transferred after the effective time of the
merger. If any Trimark common stock certificate is presented for transfer after
the effective time of the merger, it will be canceled and exchanged for the
applicable merger consideration.
Lions Gate is entitled to withhold from the merger consideration amounts
required to be withheld under the Internal Revenue Code or any provision of
state, local or foreign tax law. Any amount withheld will be treated for all
purposes as having been paid to the holder of Trimark common stock from whom the
withholding was made.
Funds that remain undistributed 120 days after the effective time of the
merger will be returned to Lions Gate, on demand, and, after that time, any
remaining holder of a Trimark common stock certificate may look only to Lions
Gate for payment of the merger consideration. None of Lions Gate, Sub or Trimark
will be liable to any person for merger consideration delivered to a public
official under any applicable abandoned property, escheat or similar law.
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CONDITIONS TO THE MERGER
The completion of the merger is subject to the satisfaction of several
conditions, including:
- the agreement of merger must have been adopted by Trimark's common
stockholders;
- the agreement of merger must have been adopted and the merger and other
transactions contemplated by the agreement of merger and related
agreements must have been approved by Lions Gate's common stockholders;
- all required approvals of government authorities and stock exchanges must
have been received;
- all required filings with government authorities must have been made;
- any waiting period applicable to consummation of the agreement of merger
under the Hart Scott Rodino Antitrust Improvements Act of 1976 must have
expired or terminated;
- no action before any governmental authority may be pending and no law in
effect that would prohibit or restrict completion of the merger or the
other transactions contemplated by the agreement of merger or have a
material adverse effect on Lions Gate or Trimark's business or assets in
Lions Gate's hands following the merger;
- no stop order suspending the effectiveness of Lions Gate's registration
statement in connection with the merger may have been issued and remain in
effect, and no proceeding for that purpose may have been commenced by the
SEC or any state regulatory authorities, and all state securities or "Blue
Sky" permits and other authorizations must have been received;
- the issuance of the Lions Gate common stock pursuant to the merger and the
first trade of the Lions Gate common stock must be exempt from the
applicable prospectus and registration requirements of Canadian law, and,
as necessary, the discretionary rulings of the Canadian securities
commissions must have been obtained; and
- after taking into account the transactions contemplated by the agreement
of merger, Lions Gate must have an aggregate credit line of
U.S.$100,000,000 under Lions Gate's credit agreement (subject to
identified exclusions).
- for U.S. federal income tax purposes, the requirements set forth in
Treasury Regulations Section 1.367(a)-3(c)(1), relating to tax free
reorganizations, will have been satisfied.
LIONS GATE AND SUB. The obligation of each of Lions Gate and Sub to
complete the merger is subject to the satisfaction or waiver of the following
additional conditions:
- the representations and warranties made by Trimark in the agreement of
merger must be materially true as of the effective time of the merger, and
Trimark must have delivered to Lions Gate a certificate to that effect;
- Trimark must have performed, in all material respects, its obligations
under the agreement of merger required to be performed by it at or prior
to the effective time of the merger, and Trimark must have delivered to
Lions Gate a certificate to that effect;
- dissenters' rights must not have been exercised by holders of Trimark
common stock entitled to receive more than 9.5% of the Lions Gate common
stock included in the merger consideration;
- Trimark must have delivered to Lions Gate and Sub the following documents:
- certified copies of Trimark's certificate of incorporation and by-laws
and certified resolutions of the board of directors and stockholders of
Trimark authorizing the execution of the agreement of merger and the
other related documents to which it is a party and the consummation of
the transactions contemplated by the agreement of merger and the other
related documents;
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- an opinion of Bryan Cave LLP, counsel to Trimark; and
- no material adverse change in Trimark's business, assets, liabilities,
financial condition or operations may have occurred.
TRIMARK. The obligation of Trimark to complete the merger is subject to the
following additional conditions:
- the representations and warranties of Lions Gate and Sub in the agreement
of merger must be materially true as of the effective time of the merger,
and Lions Gate and Sub must have delivered to Trimark certificates to that
effect;
- Lions Gate and Sub must have performed, in all material respects, their
obligations under the agreement of merger required to be performed by them
at or prior to the effective time of the merger, and Lions Gate and Sub
must have delivered to Trimark certificates to that effect;
- Lions Gate must have delivered to Trimark the following documents:
- certified copies of Lions Gate's certificate of incorporation and
by-laws and certified resolutions of the board of directors and
stockholders of Lions Gate authorizing the execution of the agreement
of merger and the other related documents to which it is a party and
the consummation of the transactions contemplated by the agreement of
merger and the other related documents; and
- opinions of Heenan Blaikie and Loeb & Loeb LLP, counsel to Lions Gate
and Sub;
- no material adverse change in Lions Gate's, or any of its subsidiary's,
business, assets, liabilities, financial condition or operations may have
occurred; and
- the shares of Lions Gate issuable in connection with the merger must have
been approved for listing on the American Stock Exchange and The Toronto
Stock Exchange.
REPRESENTATIONS AND WARRANTIES
The agreement of merger contains various representations and warranties made
by Lions Gate, Sub and Trimark to one another, including representations and
warranties concerning the following matters:
- corporate organization;
- capitalization;
- corporate power and authorization regarding and legality of the agreement
of merger and related agreements;
- consents and approvals and other legal matters;
- title to assets;
- compliance with laws;
- financial information;
- non-contravention;
- absence of material adverse changes and undisclosed liabilities;
- litigation;
- tax matters;
- employee benefits and employee relations;
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- material contracts and insurance;
- books and records;
- environmental matters;
- film libraries and projects; and
- opinions of financial advisors.
SELECTED COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO THE MERGER
Trimark has agreed that, until the effective time of the merger, Trimark
will conduct its business only in the ordinary course consistent with past
practices and use all commercially reasonable efforts to preserve intact its
business organizations and relationships, and to keep available the services of
its officers and key employees.
Trimark has also agreed that, without the prior written consent of Lions
Gate or as otherwise scheduled, it will not:
- sell, lease, transfer, convey or assign any of its material assets other
than in the ordinary course of business;
- permit the creation of any encumbrance on any of its assets except for
specified permitted liens;
- engage in any acquisition of another company;
- amend its credit agreement;
- declare or pay any dividends or make any other distributions;
- redeem or repurchase any of its stock, other than stock of employees in
connection with termination of their employment on terms consistent with
the terms of any employment agreement;
- issue additional shares of its stock, except pursuant to stock options
outstanding on the date of the agreement of merger, or additional stock
options or any stock appreciation, phantom stock, profit participation or
similar rights;
- incur any material debt, except borrowings under Trimark's credit
agreement, to finance expenditures not prohibited by the agreement of
merger, and other obligations incurred in the ordinary course including,
without limitation, project loans for films;
- make any loans other than in the ordinary course; or
- enter into any agreement as to any of the above.
NO SOLICITATION
Trimark has agreed that neither it nor its representatives will directly or
indirectly:
- solicit any proposal for a merger, acquisition or other business
combination;
- participate in any discussions or negotiations regarding, or furnish to
any person any non-public information with respect to any proposed merger,
acquisition or other business combination;
- engage in discussions with any person with respect to any proposed merger,
acquisition or other business combination, except as to the existence of
the provisions of the agreement of merger;
- approve, endorse or recommend any proposed merger, acquisition or other
business combination; or
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- enter into any letter of intent or similar document or any contract,
agreement or commitment contemplating or otherwise relating to any
proposed merger, acquisition or business combination.
Trimark's board is permitted, however, to furnish information or enter into
discussions or negotiations with any person that makes an unsolicited proposal
that Trimark's board believes in good faith may constitute or lead to an offer
that is more favorable to Trimark stockholders than the terms of the agreement
of merger. Trimark will provide Lions Gate with a copy of any correspondence to
be delivered by Trimark in connection with such a proposal before sending the
correspondence to any third party.
ADDITIONAL COVENANTS IN THE AGREEMENT OF MERGER
The agreement of merger provides for the following additional agreements:
- Trimark will provide Lions Gate with access to information concerning
Trimark, and Lions Gate will provide Trimark with access to information
concerning Lions Gate, and each will be permitted to inspect the other's
business and properties and discuss them with the other's employees,
accountants, licensees and counsel;
- Lions Gate will consult with Trimark before entering into any film asset
acquisition agreement, film asset exploitation agreement or other film
contract with respect to a film where any of the print and advertising
costs, production costs, or acquisition costs exceed U.S.$3,000,000.
Neither Lions Gate nor any subsidiary controlled by Lions Gate will enter
any contractual obligation, acquisition or stock issuance involving Lions
Gate's financial commitment of U.S.$20,000,000 or more without the prior
approval of Trimark. Additionally, Lions Gate will consult with Trimark
before entering acquisitions outside the ordinary course totaling
U.S.$20,000,000;
- Each of Trimark and Lions Gate will obtain all necessary approvals and
make any filing required to be obtained or made by Trimark or Lions Gate
to consummate the transactions contemplated by the agreement of merger,
including, any consent required under Trimark's credit agreement;
- Trimark will make all required filings with the SEC on or before the date
they are due and shall simultaneously furnish Lions Gate with a copy of
any such filings;
- Lions Gate will provide Trimark with required information for inclusion in
Trimark's proxy statement or any other filing, notification or report made
by Trimark or any affiliate of Trimark under the Securities Act, the
Securities Exchange Act or any state securities law;
- Each party will promptly notify the other:
- of any fact, event, circumstance or action known to it that
- is reasonably likely to cause that party to be unable to perform
any of its covenants contained in the agreement of merger;
- if known on the date of the agreement of merger, would have been
required to be disclosed to the other party pursuant to the
agreement of merger; or
- would cause any of the notifying party's representations or
warranties under the agreement of merger not to be correct and/or
complete;
- if any condition precedent in the agreement of merger will not be
satisfied.
- Before the effective time of the merger, Lions Gate will take all steps
required to cause any acquisition of Lions Gate common stock or derivative
securities resulting from the transactions contemplated by the agreement
of merger, by any individual who is subject to the reporting requirements
of Section 16(a) of the Securities Exchange Act with respect to Trimark,
to be exempt under Rule 16b-3 of the Securities Exchange Act;
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- Trimark will terminate its 401(k) plan effective immediately before the
effective time of the merger;
- Subject to the consummation of the merger, Trimark will terminate its
executive bonus pool for periods after June 30, 2000;
- Trimark will use its commercially reasonable efforts to deliver to Lions
Gate, not later than September 30, 2000, its audited fiscal year 2000
financial statements;
- Trimark will cause William Wesley and each other holder of an equity
interest in any affiliate of Trimark established in connection with the
production of any single completed film in Trimark's film library to
transfer all of that person's equity interest to Lions Gate or its
designee;
- Lions Gate will cause the shares of Lions Gate common stock to be issued
in the merger to be approved for listing on the American Stock Exchange
and Toronto Stock Exchange; and
- If any state takeover statute or similar law is applicable to the
agreement of merger or any of the transactions contemplated by the
agreement of merger, Lions Gate will use all reasonable efforts to ensure
that the merger and the other transactions contemplated by the agreement
of merger may be consummated as promptly as possible on the terms
contemplated by the agreement of merger and otherwise to minimize the
effect of such statute or regulation.
TERMINATION OF THE AGREEMENT OF MERGER
The agreement of merger may be terminated at any time prior to the effective
time of the merger:
- by mutual written agreement of Lions Gate and Trimark;
- by either Trimark or Lions Gate upon notice to the other,
- at any time after November 30, 2000, if the merger has not been
consummated, and the terminating party has not breached the agreement
of merger,
- if the adoption of the agreement of merger by stockholders of Trimark
or Lions Gate is not obtained,
- if the other party has materially breached any provision of the
agreement of merger, and if the breach is curable before November 30,
2000, the breaching party does not use reasonable efforts to cure the
breach,
- if any court or other governmental authority permanently restricts or
prohibits the merger;
- by either Lions Gate or Trimark, if Trimark receives an offer from a third
party to:
- acquire Trimark by merger,
- acquire at least 80% of Trimark's outstanding stock, or
- buy all or substantially all of Trimark's assets,
on terms that Trimark's board determines, in its good faith judgment,
to be more favorable to Trimark's stockholders than the merger, and
Trimark's board, in compliance with the agreement of merger, has
- notified Lions Gate of the offer,
- given Lions Gate at least five business days to make an offer, in
Trimark's board's good faith judgment at least as favorable to
Trimark's stockholders as the third party offer, and Lions Gate has
failed to do so, and
- concluded in good faith, after consultation with its outside counsel,
that, in light of the third party offer, Trimark's board, to properly
discharge its fiduciary obligations to Trimark's
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stockholders, should withdraw or change its favorable recommendation of
the agreement of merger.
Trimark's board may not withdraw or change its favorable recommendation of
the agreement of merger, if Trimark has violated the agreement of merger's
prohibition on soliciting transactions alternative to the merger.
- by Lions Gate, if Trimark breaches the prohibition on soliciting
transactions alternative to the merger.
No termination of the agreement of merger will relieve any party from
liability for material breach.
If Lions Gate or Trimark terminates the agreement of merger because of a
third party offer, Trimark must pay Lions Gate U.S.$3,000,000 and reimburse
Lions Gate up to U.S.$500,000 for out-of-pocket expenses incurred in connection
with the agreement of merger.
If the merger is not completed because Lions Gate failed to increase its
credit line, Lions Gate must pay Trimark U.S.$1,000,000 and reimburse Trimark up
to U.S.$250,000 for out-of-pocket expenses incurred in connection with the
agreement of merger.
U.S. SECURITIES LAW ISSUES RELATING TO MERGER CONSIDERATION
Lions Gate common stock issued in the merger will not be subject to any
restrictions on transfer arising under the Securities Act, except for shares
issued to any Trimark stockholder who may be deemed to be an "affiliate" of
Lions Gate or Trimark for purposes of Rule 145 under the Securities Act.
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OTHER AGREEMENTS RELATED TO AGREEMENT OF MERGER
The description in this proxy statement/prospectus of the Lions Gate
Stockholders Voting Agreement, Trimark Stockholders Voting Agreement, the
Employment Agreement and the Registration Rights Agreement and the discussion of
each of the principal terms thereof does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, such agreements,
copies of which are filed as exhibits to the registration statement of which
this proxy statement/prospectus is a part.
LIONS GATE STOCKHOLDERS VOTING AGREEMENT
As an inducement and condition to Trimark's entering the agreement of
merger, Frank Giustra, Lions Gate's Chairman and beneficial owner of
approximately 9.7% of Lions Gate's common stock, and Trimark entered the Lions
Gate Stockholders Voting Agreement, dated June 6, 2000.
Under the agreement, Mr. Giustra agreed to vote at the Lions Gate
stockholders' meeting the Lions Gate common stock beneficially owned by him in
favor of the agreement of merger, and the transactions contemplated by the
agreement of merger. Mr. Giustra further agreed not to enter any written
agreement with any third party that would be inconsistent with the agreement of
merger.
The agreement will terminate upon the earliest to occur of:
- The effective time of the merger;
- The exercise of the rights of Trimark's board and Trimark with respect to
receipt of an offer from a third party (for a detailed description of such
rights, see Terms of the Agreement of Merger--Termination of the Agreement
of Merger); and
- The termination of the agreement of merger in accordance with its terms
(for a detailed description of the termination provisions, see Terms of
the Agreement of Merger--Termination of the Agreement of Merger).
TRIMARK STOCKHOLDERS VOTING AGREEMENT
As an inducement and condition to Lions Gate's entering the agreement of
merger, Mark Amin, Chairman and Chief Executive Officer of Trimark, Reza Amin,
and Lions Gate entered the Trimark Stockholders Voting Agreement, dated June 6,
2000. Mark Amin and Reza Amin beneficially own or hold of record, in the
aggregate, approximately 45% of Trimark's outstanding common stock. Mr. Amin
entered the agreement solely in his capacity as a Trimark stockholder and not in
the capacity as a director of Trimark.
Under the agreement, Mark Amin and Reza Amin agreed to vote at the Trimark
stockholders' meeting their Trimark common stock beneficially owned or held of
record by them in favor of the agreement of merger and the transactions
contemplated by the agreement of merger, and against, except as permitted by the
agreement of merger, any competing or alternative proposal. Mark Amin and Reza
Amin further agreed not to enter any written agreement with any third party the
effect of which would be inconsistent with the agreement of merger.
Subject to certain permitted exceptions as set forth in the agreement, Mark
Amin and Reza Amin agreed that they will not:
- Solicit, or facilitate any inquiries or the making of any proposal that
is, or may reasonably be expected to lead to, an alternative acquisition
proposal, nor will they permit any of their agents to do so;
- Offer for sale, sell, encumber, or otherwise dispose of, their Trimark
common stock;
- Grant any proxy or power of attorney with respect to the matters in the
agreement;
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- Deposit any of their Trimark common stock in a voting trust or enter a
voting agreement with respect to the matters in the agreement.
The agreement will terminate upon the earliest to occur of:
- The effective time of the merger;
- The exercise of the rights of Trimark's board and Trimark with respect to
receipt of an offer from a third party (for a detailed description of such
rights, see Terms of the Agreement of Merger--Termination of the Agreement
of Merger); and
- The termination of the agreement of merger in accordance with its terms.
(For a detailed description of the termination provisions, see Terms of
the Agreement of Merger--Termination of the Agreement of Merger).
REGISTRATION RIGHTS AGREEMENT
Simultaneously with the execution of the agreement of merger, Mark Amin and
Reza Amin entered a registration rights agreement with Lions Gate that will take
effect upon the completion of the merger. The agreement provides for demand
rights and "piggyback" rights with respect to the registration under the
Securities Act of the shares of Lions Gate common stock to be received by each
of them in the merger and with respect to the shares of Lions Gate common stock
issuable upon the exercise of options granted by Lions Gate to Mark Amin under
his employment agreement with Lions Gate.
The demand rights entitle Mark Amin and Reza Amin to require, on two
occasions any time after 180 days from the effective time of the merger, that
Lions Gate use its commercially reasonable best efforts to register the shares
of Lions Gate common stock then owned by them, for public resale, so long as
Mark Amin and Reza Amin are demanding registration of at least 25% of the shares
of Lions Gate common stock received by Mark Amin in connection with the merger.
The piggyback rights entitle Mark Amin and Reza Amin to require, at any time
after the effective time of the merger, that Lions Gate include their shares of
Lions Gate common stock in other registration statements filed by Lions Gate for
shares that Lions Gate wishes to sell.
Mark Amin's and Reza Amin's demand rights and piggyback rights are subject
to the ability of the underwriters, if any, to limit the number of shares
included in the registration statement, and other customary conditions.
Lions Gate will bear all expenses of these registration statements, except
for fees and expenses of counsel for Mark Amin and Reza Amin, stock transfer
fees and underwriters' discounts, commissions and fees, if any.
Lions Gate has agreed not to enter into any agreement with respect to its
securities that is inconsistent with or violates the rights granted to Mark Amin
and Reza Amin under the agreement, and further agreed to grant to Mark Amin and
Reza Amin any more favorable rights that Lions Gate may grant to others in the
future with respect to registration of its securities.
Mark Amin agreed, subject to specified conditions during the six-month
period beginning upon the effective time of the merger, to neither sell the
shares of Lions Gate common stock that he acquires in the merger nor exercise
his piggyback rights.
The agreement also contains other customary provisions, such as
indemnification undertakings by Lions Gate, Mark Amin and Reza Amin in
connection with registration statements filed under the agreement.
The demand rights and piggyback rights of Mark Amin and Reza Amin under the
agreement may expire as early as two years after the effective time of the
merger, if the shares of Lions Gate common
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stock then owned by them are eligible for sale pursuant to Rule 144 under the
Securities Act, but will terminate in any event five years after the effective
date of the merger.
EMPLOYMENT AGREEMENT
Mark Amin has entered a three-year employment agreement with Lions Gate.
Under the agreement, which is contingent upon the completion of the merger,
Mr. Amin will provide high-level advisory and consulting services to the home
video operations of Lions Gate and Trimark. Mr. Amin will hold the title of Vice
Chairman and will also have the right to serve as a director of Lions Gate. In
addition, he will remain Chairman of CinemaNow, Inc., a majority-owned
subsidiary of Trimark, for so long as CinemaNow remains under Lions Gate's
control. Mr. Amin will not, however, be an officer of Lions Gate.
As compensation, Mr. Amin will receive an annual salary of no less than
U.S.$500,000, fully vested options to purchase one million shares of Lions Gate
common stock at a price of U.S.$2.55 per share and an additional 400,000 shares
at a price of U.S.$4.00 per share and forgiveness of indebtedness to Trimark in
the amount of approximately U.S.$795,000. Of the total options granted to
Mr. Amin, options to purchase 125,000 shares of Lions Gate common stock shall be
immediately exercisable on the date of consummation of the merger; one-third of
the balance shall become vested in equal installments on each of the first,
second and third anniversaries of the employment agreement provided that options
to acquire 637,500 shares shall not become exercisable unless the average
closing price of the Lions Gate common stock for a period of 20 consecutive
trading days is not less than U.S.$4.00 and the remaining options will not
become exercisable until the average stock price is not less than U.S.$6.00.
Mr. Amin is entitled to allocate some of the options to Trimark employees. In
the event any payments to Mr. Amin become subject to the "golden parachute"
excise tax provisions of the Internal Revenue Code, Mr. Amin will also be
entitled to an excise tax "gross-up" in an amount sufficient to offset fully the
effects of the excise tax.
In general, during the four year period following the effective time of the
merger, Mr. Amin will not be permitted to engage in enterprises that compete
with Lions Gate in the business of United States and/or foreign theatrical or
home video distribution of theatrical or home video motion pictures, in each
case for so long as Lions Gate remains materially engaged in these businesses.
However, Mr. Amin will be permitted to engage in the development,
pre-production, financing, production or distribution of motion pictures. In
addition, if Mr. Amin is no longer serving on Lions Gate's board, he will be
permitted to serve in an executive or other capacity with competitors of Lions
Gate, so long as his duties do not directly involve the areas of theatrical and
home video distribution of theatrical or home video motion pictures. To the
extent consistent with his non-compete obligations, Mr. Amin will be permitted
to engage in outside employment, consulting, business, charitable and/or
investment activities, and he will not be required to dedicate such number of
hours to the performance of his duties to Lions Gate as would materially
interfere with his taking on substantial daily responsibilities unrelated to his
employment with Lions Gate.
In general, while Mr. Amin is employed by Lions Gate, Lions Gate will have a
right of first refusal with respect to worldwide distribution rights in any
motion picture produced by Mr. Amin (other than as a producer for hire) to the
extent Mr. Amin controls the licensing of the distribution rights. Exceptions to
the right of first refusal apply to motion pictures whose distribution rights
Mr. Amin does not control, and six projects which Mr. Amin brought to Trimark
prior to the merger and as to which he will reimburse Trimark for its sunk
development costs, upon completion of the merger or commencement of principal
photography of each project, as provided in the employment agreement.
If Lions Gate terminates Mr. Amin's employment without cause or materially
breaches the employment agreement, Mr. Amin will be entitled to receive a lump
sum equal to the balance of the compensation due under the employment agreement,
with a minimum of 12 months compensation. In such event, Mr. Amin's obligations
under the non-competition and right of first refusal provisions of the
employment agreement will immediately terminate, as well as his obligations
under the "stand-off" provisions of the registration rights agreement (see Other
Agreements Related To Agreement of Merger--Registration
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Rights Agreement). The failure of the Lions Gate stockholders to approve an
amendment to the Lions Gate Entertainment Corp. Employees' and Directors' Equity
Incentive Plan increasing the number of shares reserved under the plan to permit
the grant of Mr. Amin's options described above will also be treated as a
material breach of the employment agreement.
To enforce his rights to serve on Lions Gate's board, Lions Gate is required
to issue to Mr. Amin all of the issued and outstanding shares of a new class of
preferred stock to be issued by Lions Gate, subject to approval of its
stockholders.
If Lions Gate's stockholders approve the Series B Preferred Shares, 10
shares will be authorized and issued to Mr. Amin at a price of U.S.$10 per
share, and the terms of the Series B Preferred Shares will be as follows:
Holders of the Series B Preferred Shares, exclusively and separately as a
class, will be entitled to elect one director of Lions Gate, who will be
Mark Amin.
The Series B Preferred Shares will bear no dividend rights.
In the event of the liquidation, dissolution or winding up of Lions Gate,
whether voluntary or involuntary, or any other distribution of the assets of
Lions Gate among its members for the purposes of winding up its affairs, holders
of the Series B Preferred Shares will have a liquidation preference of U.S.$10
per share.
Lions Gate may redeem all of the Series B Preferred Shares at a price of
US$10.00 per share,
- If, at any time after the third anniversary of the first issuance of any
Series B Preferred Shares, the holders of Series B Preferred Shares and
their controlled affiliates, family members, and trusts over which such
persons maintain sole voting power own, as a group, fewer than 2,000,000
shares of Lions Gate common stock; or
- If at any time Lions Gate or its stockholders shall be a party to any
transaction, including without limitation, any amalgamation, arrangement,
takeover bid, issuer bid, consolidation or merger that results in the
holders of Lions Gate common stock immediately prior to the effective date
of such transaction (calculated on a pro forma basis, including the common
stock issuable upon the conversion of all outstanding Series A Preferred
Shares) holding, in the aggregate, less than 50% of the corporation or
entity surviving the transaction, or any sale of all or substantially all
of Lions Gate's assets.
If the Lions Gate stockholders fail to approve the issuance of the new class
of preferred stock, then, under the employment agreement, Mr. Amin will
nonetheless have the right to serve on Lions Gate's board under the same terms
and conditions as if the new class of preferred stock had in fact been issued to
him. Breach of this provision by Lions Gate would constitute a material breach
of the employment agreement, having the consequences described above.
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U.S. AND CANADIAN FEDERAL INCOME TAX CONSEQUENCES
U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material U.S. federal income tax
considerations of the merger relevant to certain holders (identified later in
this paragraph) of Trimark common stock who receive cash and Lions Gate common
stock in the merger and of their ownership and disposition of Lions Gate common
stock. The discussion is based upon provisions of the Internal Revenue Code, its
legislative history, judicial authority, current administrative rulings and
practice, and existing and proposed Treasury Regulations, all as in effect and
existing on the date hereof. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the conclusions
set forth below, possibly retroactively. This discussion applies only to a
holder of Trimark common stock that is (i) an individual who is a citizen or
resident of the U.S., (ii) a corporation, partnership or limited liability
company (other than one that is disregarded as an entity separate from a
non-U.S. Holder for U.S. tax purposes) created or organized in or under the laws
of the U.S., any State thereof or the District of Columbia, (iii) an estate the
income of which is subject to U.S. federal income taxation regardless of source,
or (iv) a trust, if (a) a court within the U.S. is able to exercise primary
supervision over the administration of such trust, and one or more U.S. persons
has the authority to control all substantial decisions of such trust, or (b) it
was in existence on August 20, 1996, was not a wholly owned grantor trust, was
treated as a domestic trust for U.S. federal income tax purposes and elected to
continue to be treated as a U.S. person for U.S. federal income tax purposes
(each, a "U.S. Holder"), who holds its shares of common stock of Trimark as a
capital asset under Section 1221 of the Internal Revenue Code. Non-U.S. Holders
are advised to consult their own tax advisors regarding the tax considerations
incident to the merger. In addition, this discussion does not purport to deal
with all aspects of U.S. federal income taxation that might be relevant to
particular U.S. Holders in light of their personal investment circumstances or
status, nor does it discuss the U.S. federal income tax consequences to certain
types of U.S. Holders that may be subject to special rules under the U.S.
federal income tax laws, such as employees or other persons that received
Trimark common stock or options in connection with the performance of services,
financial institutions, insurance companies, dealers in securities or foreign
currency, tax-exempt organizations, persons that hold Trimark common stock that
is a hedge against, or that is hedged against, currency risk or that are part of
a straddle, constructive sale, or conversion transaction, or persons who own,
directly or constructively, at least 10% of the voting power or value of Lions
Gate. Moreover, the effect of any U.S. federal tax laws other than those
pertaining to income tax, or of any applicable state, local or foreign tax laws
is not discussed.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. YOU ARE STRONGLY
URGED TO CONSULT WITH YOUR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF YOUR
PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF THE MERGER AND
YOUR RESULTING OWNERSHIP AND ULTIMATE DISPOSITION OF LIONS GATE COMMON STOCK,
INCLUDING THE TAX CONSEQUENCES UNDER U.S. FEDERAL, STATE, LOCAL, FOREIGN OR
OTHER TAX LAWS.
TREATMENT OF CASH AND LIONS GATE COMMON STOCK RECEIVED
The merger is intended to constitute a reorganization within the meaning of
Section 368 of the Internal Revenue Code, and is intended to comply with the
Treasury regulations promulgated under Section 367(a) of the Internal Revenue
Code, relating to "indirect" transfers of shares in U.S. corporations to foreign
corporations. The following discussion assumes that these provisions are
satisfied; they are discussed in greater detail following the discussion of
anticipated tax consequences.
Under the agreement of merger, Trimark stockholders will exchange their
shares of Trimark common stock for a combination of cash and shares of Lions
Gate common stock. Each identifiable block of common stock owned by a Trimark
stockholder must be analyzed separately to determine whether a loss or a gain is
realized on that exchange, taking into account the stockholder's adjusted basis
of the Trimark
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stock in the block, the cash received, and the fair market value of the Lions
Gate common stock received at the effective time of the merger.
If a stockholder realizes a loss with respect to one or more identifiable
blocks of Trimark stock, the loss will not be recognized, and the basis of the
Lions Gate common stock received will be equal to the adjusted basis of the
block of Trimark stock, reduced by the amount of cash received.
Gains realized with respect to a block of Trimark stock will be recognized,
to the extent of the lesser of the amount of cash received or the total gain
realized. The gain not currently recognized is deferred by reducing the tax
basis in the stock received below its fair market value. For example, if a
stockholder has a basis of U.S.$3.00 for each share of Trimark stock, and
receives U.S.$4.50 in cash plus Lions Gate stock valued at U.S.$5.50, the gain
realized (per share) is U.S.$7.00 (U.S.$10.00 of value received minus U.S.$3.00
of tax basis), of which U.S.$4.50 will be recognized and currently subject to
U.S. federal income tax, at rates discussed below. The total tax basis of the
two shares of Lions Gate common stock received will be U.S.$3.00 (the basis of
the Trimark stock surrendered (U.S.$3.00), plus U.S.$4.50 of gain recognized,
less U.S.$4.50 of cash received), or U.S.$1.50 per Lions Gate share received.
Gain equal to U.S.$2.50 (U.S.$7.00 of gain realized minus U.S.$4.50 gain
recognized or U.S.$5.50 of value of stock received minus U.S.$3.00 of tax basis
in the stock received) per Trimark share will be deferred until the stockholder
makes a taxable disposition of the Lions Gate stock received with respect to
that block of Trimark shares.
On the other hand, if the tax basis of the Trimark stock surrendered is
U.S.$7.00 per share, there will be a gain realized of U.S.$3.00 (U.S.$10.00 of
value received minus U.S.$7.00 tax basis), and all of that gain will be
recognized. No gain will be deferred. The total tax basis of the two Lions Gate
shares received will be U.S.$5.50 (U.S.$7.00 tax basis of shares surrendered
plus U.S.$3.00 gain recognized, less U.S.$4.50 cash received), or U.S.$2.75 per
Lions Gate share received.
Cash received in lieu of a fractional share will be treated as if a
fractional share were received, and the stockholder subsequently sold the
fractional share for cash. As a result, the cash in lieu of the fractional share
is not taken into account with the cash received, but will separately generate a
gain or loss on the deemed sale of the fractional share.
The holding period of the Lions Gate common stock received will include the
holding period of the shares of Trimark common stock surrendered in exchange
therefor.
If a Trimark stockholder has differing tax bases and/or holding periods with
respect to the stockholder's Trimark common stock surrendered in the exchange,
the stockholder should consult a tax advisor to identify the particular tax
bases and holding periods of the particular shares of Lions Gate common stock
received in the exchange.
Any gain recognized by a Trimark stockholder will generally be treated as
capital gain. The capital gain on Trimark common stock for which the holding
period is greater than one year as of the date of the merger will be long-term
capital gain, and will be short-term, if the holding period is one year or less
as of that date. In the case of individuals, long-term capital gains are
generally taxed at a maximum federal rate of 20%, while short-term capital
gains, like ordinary income, may be subject to tax at rates of up to 39.6% (in
each case, before considering various collateral matters such as "phaseouts"
that may increase the effective tax rate).
However, if the receipt of the cash has "the effect of the distribution of a
dividend," any gain recognized by the stockholder will be treated as ordinary
dividend income to the extent of the stockholder's ratable share of the
undistributed earnings and profits of Lions Gate and/or Trimark. For purposes of
determining whether the cash received has the effect of a distribution of a
dividend, a Trimark stockholder is treated as if the stockholder first exchanged
all of the stockholder's Trimark common stock solely for Lions Gate common stock
and then Lions Gate immediately redeemed a portion of the Lions Gate common
stock in exchange for the cash the stockholder actually received. This is called
a "deemed
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redemption." Under this analysis, in general, if the receipt of cash by the
holder in the deemed redemption results in a "substantially disproportionate"
reduction in the holder's voting stock interest in Lions Gate, or is "not
essentially equivalent to a dividend," the receipt of the cash will not have the
effect of the distribution of a dividend.
The deemed redemption will be "substantially disproportionate," and,
therefore, will not have the effect of a distribution of a dividend with respect
to a Trimark stockholder, if the percentage of the outstanding Lions Gate common
stock that is actually and constructively owned by the stockholder immediately
after the deemed redemption is less than 80% of the percentage of the
outstanding Lions Gate common stock that is considered to be actually and
constructively owned by the stockholder immediately before the deemed
redemption. The deemed redemption will not be "essentially equivalent to a
dividend," and, therefore, will not have the effect of a distribution of a
dividend with respect to a Trimark stockholder, if it results in a "meaningful
reduction" in the stockholder's proportionate interest in Lions Gate. If a
stockholder that is considered to have a relatively minimal stock interest in
Lions Gate and no right to exercise control over corporate affairs suffers a
reduction in the stockholder's proportionate interest in Lions Gate, the
stockholder should be regarded as having suffered a meaningful reduction of his
or her interest in Lions Gate. For example, the Internal Revenue Service has
held in a published ruling that, in the case of a less than 1% stockholder who
does not have management control over the corporation, any reduction in the
stockholder's proportionate interest will constitute a "meaningful reduction."
In applying this deemed redemption analysis, certain constructive ownership
rules apply in determining a Trimark stockholder's ownership interest in Lions
Gate immediately after the acquisition, but before the deemed redemption, and
after the deemed redemption. Under those rules, a Trimark stockholder is deemed
to own stock held by certain family members, estates and trusts of which the
stockholder is a beneficiary, a partnership in which the stockholder is a
partner, and a corporation in which the stockholder is a direct or indirect
owner of 50% or more of the stock of such corporation, as well as stock subject
to options that are held by the stockholder or the entities. Because these
constructive ownership rules are complex, each Trimark stockholder should
consult his or her tax advisor.
A Trimark stockholder who receives cash in lieu of a fractional share of
Lions Gate common stock will recognize gain or loss equal to the difference
between the amount of cash received and the portion of the adjusted tax basis of
the stockholder's shares of Trimark common stock that is allocable to the
fractional interest. Such gain or loss will constitute capital gain or loss
under the rules discussed above, and will generally be long-term capital gain or
loss if the holding period for the stock was greater than one year as of the
date of the exchange.
A Trimark stockholder who elects to exercise the right to dissent from the
merger with respect to all owned shares of Trimark common stock and is paid the
appraised value of those shares will generally recognize capital gain or loss
equal to the difference between the amount of cash received and the
stockholder's adjusted tax basis in the shares transferred in connection with
the exercise of the dissenter's rights, although under some circumstances
dividend treatment may be imposed. Any Trimark stockholder who elects to
exercise the right to dissent from the merger should consult with its tax
advisor as to the tax consequences of the merger and the exercise of dissenter's
rights, including the character and timing of gain or loss recognition and the
treatment of any interest that may be awarded pursuant to an appraisal
proceeding.
QUALIFICATION AS A REORGANIZATION AND UNDER SECTION 367
For a merger to constitute a reorganization, it must be recognized as a
merger under the laws of both states involved, have a valid corporate business
purpose, involve substantial continuity of the business enterprise of the target
company after the acquisition is complete, and satisfy a "continuity of
interest" requirement such that the stockholders of the target continue to have
a substantial proprietary interest in
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the surviving company or its parent. The merger has been structured to satisfy
these requirements, some of which are statutory and some the result of case law
and administrative regulations and rulings. In particular, because approximately
55% of the total consideration to be received by the Trimark stockholders will
be common stock of Lions Gate, the parent company of the corporation surviving
the merger, the continuity of interest requirements as set out in administrative
rulings should be satisfied. However, no ruling will be requested from the
Internal Revenue Service concerning the tax effects of the merger on Trimark or
its stockholders.
The constituent companies in the merger are both domestic (U.S.)
corporations. Nevertheless, because the surviving corporation will be a
wholly-owned subsidiary of a Canadian corporation, Treasury regulations under
Section 367 of the Internal Revenue Code impose additional requirements that
must be satisfied for gain realized by Trimark stockholders to be deferred under
the reorganization provisions of the Internal Revenue Code. Specifically,
(i) U.S. stockholders of the domestic target (Trimark) must not receive in
the merger, collectively, stock in the foreign acquiring company (Lions
Gate), that represents 50% or more of the total voting power or total
value of the acquiring company;
(ii) The officers, directors, and stockholders who owned at least 5% of the
voting power or total value (a "5% stockholder") of the domestic target
(Trimark) immediately prior to the merger who are U.S. persons must not
own, immediately after the merger, more than 50% of the value or voting
power of the foreign acquiring company (Lions Gate), taking into
account not only the stock received in the merger, but stock otherwise
owned;
(iii) Any U.S. stockholder of the domestic target (Trimark) who is a 5%
stockholder of the acquiring company (Lions Gate), taking into account
all stock owned after the merger, must agree to recognize gain in the
event of a sale or exchange of the stock of the domestic target
(Trimark) by the acquiring company (Lions Gate) (or the domestic target
(Trimark) disposes of substantially all of its assets other than upon a
liquidation into the acquiring company) within five years after the
effective date of the merger;
(iv) The acquiring company (Lions Gate) must have conducted an active trade
or business outside the United States for the entire 36-month period
prior to the date of the merger and neither the acquiring company nor
the stockholders of the domestic target (Trimark) may have any
intention to discontinue or to substantially dispose of that trade or
business; and
(v) The value of the foreign acquiring company (Lions Gate) must exceed the
value of the domestic target (Trimark) and its subsidiaries. For this
purpose, assets of the acquiring company acquired outside the ordinary
course of business within the 36-month period prior to the merger may be
taken into account only if either (a) they do not produce and are not
held for the production of passive income, and are not acquired for the
principal purpose of satisfying the substantiality test, or (b) they
consist of the stock of a qualified subsidiary or an interest in a
qualified partnership which in turn satisfies the requirements of
clause (a), above. However, in any case, the value of the foreign
acquiring company shall not include any assets that were owned by the
domestic target or its affiliate at any time during the 36-month period
prior to the merger.
In determining whether a person is a 5% stockholder of either Trimark or
Lions Gate, constructive ownership rules similar to those described under
"Treatment of Cash and Lions Gate Common Stock Received" must be applied. In
addition, the acquiring company (Lions Gate) must comply with certain reporting
and information requirements set forth in the regulations.
Trimark's management and Lions Gate's management believe that all
requirements of these regulations will be satisfied. A condition to the
agreement of merger is that the regulations be satisfied, and, thus, Trimark
will be able to terminate the agreement of merger if either the less than 50%
test set forth in subparagraph (i) above, or the "relative value" requirement in
subparagraph (v) above will not be satisfied
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immediately before the effective date of the merger. Trimark's management is not
aware of any cross-ownership of shares in Lions Gate and Trimark that might
cause the requirement in subparagraph (ii) above not to be satisfied. To the
knowledge of Trimark's management, only Mark Amin will be a 5% stockholder of
Lions Gate following the merger, and he has indicated that he will enter into a
gain recognition agreement. Under the agreement of merger, Lions Gate has agreed
that if it should discontinue or dispose of the business of Trimark within five
years in a way that would trigger the recognition of gain, it will "gross up"
the amount paid to any affected Trimark stockholders to compensate for the
effect of the tax liability.
Any Trimark stockholder who believes that it might be considered a 5%
stockholder of Lions Gate following the merger should consult its tax advisors
immediately, to consider whether it should enter a gain recognition agreement to
preserve its right to defer some of the gain realized on the transaction and
should communicate promptly with Trimark management with respect to satisfying
the requirements of that agreement.
BACKUP WITHHOLDING
You may be subject to backup withholding tax at the rate of 31% with respect
to the cash and Lions Gate stock that you receive, unless you are a corporation
or come within certain other exempt categories and, when required, demonstrate
this fact or provide a correct taxpayer identification number ("TIN") (which for
an individual stockholder generally is the stockholder's U.S. Social Security
number), certify as to exemption from U.S. federal backup withholding, and
otherwise comply with applicable requirements of the backup withholding rules.
To prevent U.S. federal backup withholding tax on payments made to you pursuant
to the merger, you must provide the paying agent with your correct TIN by
completing a Form W-9 or substitute Form W-9. If you do not provide Trimark with
your correct TIN, you may be subject to penalties imposed by the Internal
Revenue Service, as well as backup withholding tax. Any amount withheld under
these rules will be creditable against your U.S. federal income tax liability.
Trimark (or its agent) will report to you and the Internal Revenue Service the
amount of any "reportable payments," as defined in Section 3406 of the Internal
Revenue Code, and the amount of tax, if any, withheld.
DISTRIBUTIONS
Subject to the special rules applicable to "PFICs" (described below), U.S.
Holders generally must treat the gross amount of any distribution, actually or
constructively received by the U.S. Holder with respect to its Lions Gate common
stock, without reduction for Canadian withholding taxes, as ordinary taxable
income to the extent such distribution is paid from Lions Gate's current or
accumulated earnings and profits, as determined under U.S. federal income tax
principles. Such distributions will be treated as foreign source dividends, and
will not qualify for the dividends received deduction otherwise available to
corporate U.S. Holders. The U.S. Holder, however, may be able to deduct or
receive a foreign tax credit for the Canadian withholding taxes withheld by
Lions Gate. Distributions in excess of Lions Gate's current and accumulated
earnings and profits will be treated as a non-taxable return of basis to the
extent thereof, and then as gain from the sale of Lions Gate common stock.
The amount of any distribution paid in Canadian dollars will equal the
United States dollar value of the Canadian dollars received, calculated by
reference to the exchange rate in effect on the date the distribution is
received by the U.S. Holder, regardless of whether the Canadian dollars are
converted into United States dollars. If the Canadian dollars received as a
distribution are not converted into United States dollars on the date of
receipt, a U.S. Holder will have a basis in the Canadian dollars equal to its
United States dollar value on the date of receipt. Any gain or loss realized on
a subsequent conversion or other disposition of the Canadian dollars will be
treated as ordinary income or loss.
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DISPOSITIONS
Subject to the special rules applicable to "PFICs," U.S. Holders will
recognize capital gain or loss on the sale, exchange or other taxable
disposition of Lions Gate common stock equal to the difference between the
amount realized and the U.S. Holder's tax basis in such common stock. Such gain
or loss will be long-term capital gain or loss if the common stock has been held
for more than one year. Net long-term capital gain of a non-corporate U.S.
Holder is generally subject to U.S. federal income tax at a maximum rate of 20%.
Any gain or loss recognized by a U.S. Holder will generally be treated as United
States source gain or loss. The deduction of capital losses is subject to
limitations.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
A foreign corporation is a "passive foreign investment company" (a "PFIC")
if, after the application of certain "look-through" rules, (i) at least 75% of
its gross income is "passive income" or (ii) at least 50% of the average value
of its assets is attributable to assets that produce passive income or are held
for the production of passive income. The determination of a foreign
corporation's PFIC status is made annually. If a U.S. Holder is treated as
owning PFIC stock, the U.S. Holder will be subject to special rules generally
intended to eliminate the benefit of the deferral of U.S. federal income tax
that results from investing in a foreign corporation that does not distribute
all its earnings currently. These rules may adversely affect the tax treatment
to a U.S. Holder of distributions paid by Lions Gate and of sales, exchanges and
other dispositions of Lions Gate stock, and may result in other adverse U.S.
federal income tax consequences.
Lions Gate believes that it is not currently a PFIC and does not expect to
become a PFIC in the future. However, there can be no assurance that the U.S.
Internal Revenue Service will not successfully challenge Lions Gate's position
or that Lions Gate will not become a PFIC at some future time as a result of
changes in its assets, income or business operations. U.S. Holders should
discuss the tax consequences of PFIC status with their tax advisors.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, reporting requirements will apply to dividends in respect of
Lions Gate common stock and the proceeds received on the disposition of Lions
Gate common stock paid within the United States (and in certain cases, outside
the United States) to U.S. Holders other than certain exempt recipients (such as
corporations). A 31% backup withholding may apply to such amounts if the U.S.
Holder fails to provide an accurate taxpayer identification number or is
otherwise subject to backup withholding. The amount of any backup withholding is
allowed as a credit against the U.S. Holder's U.S. federal income tax liability.
CANADIAN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material Canadian federal income tax
consequences of holding and disposing of Lions Gate common stock generally
applicable to certain U.S. Holders who acquire Lions Gate common stock in the
merger.
This discussion only applies to a U.S. Holder of Lions Gate common stock who
for the purposes of the INCOME TAX ACT (Canada), as amended (the "Canadian Tax
Act") and at all relevant times:
- is not, and is not deemed to be, a resident in Canada;
- deals at arm's length with Lions Gate;
- holds Lions Gate common stock as capital property; and
- does not use or hold and is not deemed to use or hold Lions Gate common
stock in connection with carrying on a business in Canada.
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<PAGE>
In addition, this summary only applies to persons who, for the purposes of
the CANADA-U.S. INCOME TAX CONVENTION, 1980 (the "Convention") and at all
relevant times, are resident in the United States. Limited liability companies
and partnerships are not considered to be resident in the United States for the
purpose of the Convention. Any limited liability company or partnership that
acquires Lions Gate common stock should consult its tax advisers.
Lions Gate common stock will generally be considered to be capital property
to a U.S. Holder for purposes of the Canadian Tax Act unless (i) the U.S. Holder
is engaged in the business of trading or dealing in securities or the business
of buying and selling securities; or (ii) the U.S. Holder acquired Lions Gate
common stock as part of a transaction considered to be an adventure or concern
in the nature of trade.
This discussion does not apply to a U.S. Holder that is an organization
exempt from tax in the United States and described in Article XXI of the
Convention, a U.S. Holder that is a "financial institution" as defined in the
Canadian Tax Act for purposes of the mark-to-market rules, or a U.S. Holder that
is an insurer.
This discussion is based on the current provisions of the Canadian Tax Act
and the regulations thereunder in force as of the date hereof, the current
published administrative policies of the Canada Customs and Revenue Agency
("Revenue Canada") and all specific proposals to amend the Canadian Tax Act and
such regulations publicly announced by the Minister of Finance (Canada). This
discussion is not exhaustive of all possible Canadian federal income tax
consequences and, except for the announced proposals, does not take into account
or anticipate any changes in law, whether by legislative, governmental or
judicial action, and does not take into account provincial, territorial or
foreign tax consequences, which may differ significantly from those discussed
here.
This summary is of a general nature only and is not intended to be, nor
should it be construed to be, legal or tax advice to any U.S. Holder. U.S.
Holders of Lions Gate common stock should consult with their own tax advisors
for advice relating to the tax consequences to them arising from their own
particular circumstances.
DIVIDENDS
Subject to the provisions of the Convention, Canadian withholding tax will
be payable on the gross amounts of dividends paid or credited, or deemed to be
paid or credited, by Lions Gate to a U.S. Holder of Lions Gate common stock.
Under the Convention, the withholding tax rate is generally reduced from the
statutory 25% rate to 15% or, if the U.S. Holder is a corporation that
beneficially owns 10% or more of Lions Gate voting stock, to 5% of the amount of
the dividend.
DISPOSITION OF LIONS GATE COMMON STOCK
Upon a disposition or deemed disposition by a U.S. Holder of Lions Gate
common stock, a capital gain (or loss) will generally be realized by the U.S.
Holder to the extent that the proceeds of disposition, less costs of
disposition, exceed (or are exceeded by) the adjusted cost base of the Lions
Gate common stock to such U.S. Holder. A deemed disposition of Lions Gate common
stock will arise on the death of a U.S. Holder.
Capital gains realized by a U.S. Holder on a disposition or deemed
disposition of Lions Gate common stock will not be subject to tax under the
Canadian Tax Act unless the Lions Gate common stock constitutes "taxable
Canadian property" (as defined in the Canadian Tax Act) to such U.S. Holder at
the time of the disposition or deemed disposition. Lions Gate common stock will
not be "taxable Canadian property" to a U.S. Holder at the time of a disposition
or deemed disposition of the shares unless, at that time, the shares are not
listed on a prescribed stock exchange, which includes the New York Stock
Exchange, the American Stock Exchange, the Nasdaq, the Montreal Exchange and The
Toronto Stock
55
<PAGE>
Exchange, or, at any time during the five-year period immediately preceding such
time, the U.S. Holder, persons with whom the U.S. Holder does not deal at arm's
length or the U.S. Holder together with such non-arm's length persons, owns or
has an interest in or an option in respect of 25% or more of the issued shares
of any class or series of shares of capital stock of Lions Gate.
Further, under the Convention, a U.S. Holder will generally not be subject
to tax under the Canadian Tax Act on a disposition or deemed disposition of
Lions Gate common stock unless, at the time of the disposition or deemed
disposition, the value of the Lions Gate common stock is derived principally
from real property situated in Canada. Lions Gate believes that the Lions Gate
common stock does not now derive its value principally from real property
situated in Canada; however, the determination must be made at the time of the
disposition or deemed disposition. Former residents of Canada may not be
eligible for protection under the Convention, and should consult their tax
advisors.
APPLICABILITY OF CALIFORNIA LAW TO TRIMARK
Section 2115 of the California General Corporation Law purport to make
substantial portions of the California General Corporation Law applicable, with
limited exceptions, to a foreign corporation with more than half of its
outstanding stock held of record by persons having addresses in California and
more than half of its business conducted in the state (as measured by factors
based on the foreign corporation's levels of property, payroll and sales as
determined for California franchise tax purposes), regardless of the foreign
corporation's state of incorporation. Although Trimark is incorporated in
Delaware, it meets the conditions for application of Section 2115. The sections
of the California General Corporation Law to which Trimark purportedly is
subject include, but are not limited to, provisions governing a director's
standard of care in performing the duties of a director, a stockholder's right
to vote cumulatively in any election of directors, a director's or stockholder's
right to inspect corporate records, indemnification requirements concerning
directors, officers and others and the corporate requirements to effectuate
corporate reorganizations (including mergers and acquisitions). Section 2115
also makes Chapter 13 of the California General Corporation Law, relating to
dissenters' rights, applicable to Trimark. Section 2115 states that the
foregoing provisions of the California General Corporation Law apply to the
exclusion of the law of the jurisdiction in which the foreign corporation is
incorporated.
Upon completion of the merger, the statutory protections purportedly
available to Trimark stockholders pursuant to Section 2115 will cease.
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<PAGE>
APPRAISAL RIGHTS; DISSENTERS' RIGHTS
Holders of record of Trimark common stock who do not vote in favor of the
adoption of the agreement of merger may, under certain circumstances and by
following the procedure prescribed by Section 262 of the Delaware General
Corporation Law, exercise appraisal rights and receive cash for their shares of
Trimark common stock. Additionally, although Trimark is a Delaware corporation
and is therefore subject to the Delaware General Corporation Law, Section 2115
of the California General Corporation Law provides that Trimark is subject to
California law with respect to dissenters' rights. Accordingly, pursuant to
Chapter 13 of the California General Corporation Law, Trimark stockholders of
record who do not vote for the adoption of the agreement of merger and who
comply with the requirements of Chapter 13 will have a right to demand payment
for, and appraisal of the "fair market value" of, their shares of Trimark common
stock. Although a dissenting stockholder may choose to proceed under either of
the states' statutes, a dissenting stockholder must follow the appropriate
procedures under the Delaware General Corporation Law or the California General
Corporation Law or suffer the termination or waiver of such rights.
APPRAISAL RIGHTS UNDER DELAWARE LAW
If the merger is completed, record holders of Trimark common stock who
- do not vote to adopt the agreement of merger or consent to it in writing,
and
- continuously hold their shares through the effective time of the merger,
and
- make a demand for appraisal before the vote on the agreement of merger at
the special meeting, and
- otherwise comply with Section 262 of the Delaware General Corporation Law,
will have the right to be paid the fair value of their Trimark common stock, as
determined by the Delaware Court of Chancery. "Fair value" excludes any value
arising from the accomplishment or expectation of the merger, and includes a
fair rate of interest, if any, as determined by the Court of Chancery.
If you wish to exercise appraisal rights, you must deliver to Trimark a
written demand for appraisal of your Trimark common stock before the vote on the
merger at the special meeting. A demand for appraisal will be sufficient if it
reasonably informs us of the stockholder's identity and that the stockholder
intends to demand appraisal of the stockholder's Trimark common stock. A proxy
or vote against the merger does not constitute a demand. You must be the record
holder of the shares of Trimark common stock on the date the written demand for
appraisal is made and continue to hold your Trimark common stock through the
effective time of the merger.
Within 10 days after the effective time of the merger, we will notify each
Trimark stockholder who properly asserted appraisal rights and did not vote in
favor of the merger that the merger has been completed. Within 60 days after the
effective time of the merger, a Trimark stockholder may withdraw the demand for
appraisal and accept the merger consideration under the agreement of merger.
Within 120 days after the effective time of the merger, Trimark, or any
holder of Trimark common stock who complied with the requirements for perfecting
appraisal rights, as summarized above, may file a petition with the Court of
Chancery demanding a determination of the fair value of the common stock held by
all Trimark stockholders who have perfected their appraisal rights. Within
120 days after the effective time of the merger, any Trimark stockholder who has
perfected appraisal rights may, by written request, require that Trimark mail a
statement setting forth the total number of holders of Trimark common stock that
have perfected appraisal rights and the total number of shares of Trimark common
stock held by them.
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<PAGE>
After determining which Trimark stockholders are entitled to appraisal, the
Chancery Court will appraise the fair value of their Trimark common stock and
assess costs of the action, as the court deems equitable.
DISSENTERS' RIGHTS UNDER CALIFORNIA LAW
If the merger is completed, instead of accepting the merger consideration, a
holder of record of Trimark common stock outstanding on the record date for the
special meeting or a transferee of record may require Trimark to purchase the
Trimark common stock for cash, at its fair market value, if the dissenting
stockholder
- does not vote the shares for the adoption of the agreement of merger, and
- demands that Trimark purchase the stockholder's Trimark common stock in
accordance with the California General Corporation Law, and
- submits the stockholder's Trimark common stock for endorsement in
accordance with the California General Corporation Law, and
- otherwise complies with Sections 1300 through 1312 of the California
General Corporation Law.
Fair market value is determined as of the day before the first announcement
of the terms of the proposed merger and excludes any appreciation or
depreciation in connection with the proposed merger. Trimark has determined the
fair market value of the Trimark common stock on June 5, 2000, the day before
the first announcement of the terms of the merger, to be U.S.$8.00 per share.
If the merger is approved, Trimark will mail a notice of approval to Trimark
stockholders within 10 days. The notice will constitute an offer to purchase any
dissenting shares at the fair market value, as determined by Trimark, and will
include a brief description of the procedure to be followed by dissenting
stockholders.
To exercise dissenters' rights, a Trimark stockholder must deliver to
Trimark, or its transfer agent, so that it is received within 30 days after the
notice of approval was mailed, a written demand that Trimark purchase the
stockholder's Trimark common stock for cash at their fair market value. The
demand must state the number of shares of Trimark common stock held of record in
respect of which the demand is made and state what the stockholder claims to be
the fair market value of those shares on June 5, 2000, the day before the first
announcement of the terms of the proposed merger, and excluding any appreciation
or depreciation in connection with the merger. The statement of the fair market
value will constitute an offer by the stockholder to sell the shares at that
price.
The stockholder must also submit, at Trimark's principal offices or at the
office of its transfer agent, within 30 days after the notice of approval is
mailed, certificates representing the Trimark common stock, to be stamped or
endorsed as dissenting shares.
AGREEMENT ON FAIR MARKET VALUE. If Trimark agrees with a dissenting
stockholder that the stockholder is entitled to dissenters' rights and on the
fair market value of the dissenting stockholder's Trimark common stock. Trimark
will pay the price of the shares, together with the legal rate of interest,
within 30 days of the later of the agreement as to price or satisfaction of any
statutory or contractual conditions to the merger, subject to surrender of the
certificates representing the dissenting shares.
DISAGREEMENT REGARDING DISSENTERS' RIGHTS OR FAIR MARKET VALUE. If Trimark
denies that the stockholder is entitled to dissenters' rights, or if the
dissenting stockholder and Trimark disagree on the fair market value of the
dissenting stockholder's shares, within six months from the date the notice of
approval was mailed, the dissenting stockholder must file a petition in the
superior court of Los Angeles County demanding a determination of entitlement or
of the fair market value of the Trimark common stock. The
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<PAGE>
court will assess the costs of any legal action as the court considers
equitable, but, if the appraised value of the stock exceeds Trimark's
determination, Trimark must pay the costs.
TERMINATION OF DISSENTERS' RIGHTS. A dissenting stockholder loses
dissenters' rights, if
- the merger is terminated;
- the Trimark common stock is transferred before being submitted for
endorsement as dissenting shares;
- no action to resolve a dispute between the stockholder and Trimark
regarding the stockholders' entitlement to dissenters' rights or the fair
market value of the stockholder's Trimark common stock is filed within six
months from the date of mailing of notice of approval; or
- the stockholder, with Trimark's consent, withdraws the demand that Trimark
purchase the stockholder's shares.
No dissenting stockholder may withdraw a demand for payment without Trimark's
consent.
GENERAL
Any demand for appraisal or that Trimark purchase your Trimark common stock
or certificates for endorsement as dissenting shares should be submitted, within
the time periods described above, to Trimark Holdings, Inc., 4553 Glencoe
Avenue, Suite 200, Marina del Rey, California 90292, ATTN: Jeff Gonzalez.
Trimark will give Lions Gate prompt notice of any demands received by it for
appraisal of shares of Trimark common stock. Prior to the effective time of the
merger, Trimark will not, except with the prior written consent of Lions Gate,
make any payment with respect to, or settle or offer to settle, any such
demands.
A copy of the relevant provisions of the Delaware General Corporation Law
and the California General Corporation Law is set forth as Appendix C. Any
failure to comply strictly with the requirements of the Delaware or California
provisions will result in termination of your appraisal or dissenters' rights.
INFORMATION ABOUT TRIMARK AND LIONS GATE
GENERAL
This proxy statement/prospectus is accompanied by Trimark's Annual Report on
Form 10-K for the year ended June 30, 1999 and Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000, which are annexed to this proxy
statement/prospectus as Appendix D and Lions Gate's Form 20-F for the year ended
March 31, 2000, which is annexed to this proxy statement/prospectus as
Appendix E. Information relating to Lions Gate's management is incorporated by
reference from Items 10, 11, 12 and 13 of the Form 20-F, and the information
relating to Mark Amin set forth under the caption Proposal 1 Election of
Directors in Trimark's proxy statement dated October 15, 1999 is incorporated
herein by reference.
OWNERSHIP OF TRIMARK VOTING SECURITIES
The following table sets forth, as of August 31, 2000, information relating
to beneficial ownership (within the meaning of SEC Rule 13d-3) of Trimark voting
securities by Trimark directors and executive officers and owners of more than
5% of any class of Trimark voting securities who are known to Trimark. Except as
otherwise specified, the named beneficial owner claims sole investment power and
voting power
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<PAGE>
as to the securities reflected in the table. The options held by the individuals
identified below are either currently exercisable or will become exercisable
upon approval of the merger by Trimark's stockholders.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES BENEFICIALLY OWNED PERCENTAGE OF CLASS
------------------------------------ ------------------------- -------------------
<S> <C> <C>
Mark Amin(1).......................................... 1,755,375(2) 35.3%
Gordon Stulberg....................................... 19,800(3) *
Matthew H. Saver...................................... 13,000(4) *
Tofigh Shirazi........................................ 44,762(5) *
Peter J. Dekom........................................ 2,000(6) *
Sergei Yershov........................................ 10,000(7) *
Jeff Gonzalez......................................... 12,500(8) *
Cami Winikoff......................................... 18,000(9) *
Peter Block........................................... 91,000(10) 1.9%
Andrew Reimer......................................... 5,000(11) *
Reza Amin(1)(12)...................................... 571,316(13) 12.0%
Yahoo! Broadcast Services(14)......................... 412,363(15) 8.7%
Directors and Executive
Officers as a group (10 persons)...................... 1,971,437(16) 38.3%
</TABLE>
------------------------
* Represents less than 1% of the 4,764,300 shares of Trimark common stock
outstanding on August 31, 2000.
(1) Mark Amin and Reza Amin are brothers.
(2) Mark Amin disclaims beneficial ownership of 66,390 of these shares, which he
holds as trustee of a trust for the benefit of certain family members.
Includes options to purchase 200,000 shares.
(3) Includes options to purchase 18,000 shares.
(4) Includes options to purchase 12,000 shares.
(5) Includes 32,000 shares held by a family limited partnership and options to
purchase 12,000 shares.
(6) Includes options to purchase 2,000 shares.
(7) Includes options to purchase 10,000 shares.
(8) Includes options to purchase 12,500 shares.
(9) Includes options to purchase 18,000 shares.
(10) Includes options to purchase 91,000 shares.
(11) Includes options to purchase 5,000 shares.
(12) The address of Reza Amin is c/o Trimark, 4553 Glencoe Avenue, Suite 200,
Marina del Rey, California, 90292.
(13) Reza Amin disclaims beneficial ownership of 132,780 of these shares which
he holds as trustee of a trust for the benefit of certain family members.
(14) The address of Yahoo! Broadcast Services (formerly known as
broadcast.com.inc.) is 2914 Taylor Street, Dallas, Texas 75226.
(15) As of March 29, 1999, as reported in Schedule 13G.
(16) Includes options to purchase 380,500 shares.
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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information combines
the historical financial statements of Lions Gate and Trimark to show the
effects of the merger on a pro forma basis, including related financing for the
acquisition. These pro forma financial statements have been prepared in
accordance with Canadian generally accepted accounting principles ("GAAP")
expressed in Canadian dollars. The Trimark balance sheet has been translated at
the March 31, 2000 exchange rate of $1.4494 and the Trimark statement of
operations has been translated at an average rate of $1.4713 for the 12 months
ended March 31, 2000.
The unaudited pro forma balance sheet gives effect to the merger as if it
had occurred on March 31, 2000. The unaudited pro forma statement of operations
for the year ended March 31, 2000 gives effect to the merger as if it had
occurred on April 1, 1999.
The unaudited pro forma balance sheet is based on the audited consolidated
balance sheet of Lions Gate as at March 31, 2000 and the unaudited consolidated
balance sheet of Trimark as at March 31, 2000. The unaudited pro forma statement
of operations is based on the audited consolidated statement of operations for
Lions Gate for the year ended March 31, 2000, and the unaudited statement of
operations of Trimark for the nine months ended March 31, 2000 combined with the
unaudited statement of operations of Trimark for the three months ended
June 30, 1999. The information presented on the following pages is not
necessarily indicative of the results of operations or financial position that
might have occurred had the merger actually closed on the assumed dates. The pro
forma information does not reflect any adjustments for expected revenue
synergies and cost savings as a result of the merger of Lions Gate and Trimark,
nor is it necessarily indicative of the future results of operations or
financial position of Lions Gate after the acquisition.
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LIONS GATE ENTERTAINMENT CORP.
PRO FORMA COMBINED BALANCE SHEET UNDER CANADIAN GAAP
AS AT MARCH 31, 2000
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
PRO FORMA
----------------------------
ACQUISITION
ADJUSTMENTS
LIONS GATE TRIMARK (NOTE 2) COMBINED
---------- -------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Cash and equivalents........................ $ 19,283 $ 4,992 -- $ 24,275
Accounts receivable......................... 107,344 30,146 -- 137,490
Investment in films and television
programs.................................. 128,375 63,788 37,667(d) 229,830
Investment in Mandalay Pictures, LLC........ 64,058 -- -- 64,058
Capital assets.............................. 44,505 1,122 1,746(d) 47,373
Goodwill.................................... 29,163 -- 19,583(e) 48,746
Other assets................................ 9,245 4,026 (1,988)(c)(d) 11,283
-------- -------- ------- --------
$401,973 $104,074 $57,008 $563,055
======== ======== ======= ========
LIABILITIES
Bank loans.................................. 14,385 49,280 33,116(a) 96,781
Accounts payable and accrued liabilities.... 74,965 24,331 3,273(a)(d) 102,569
Production and distribution loans........... 41,838 -- -- 41,838
Long-term debt.............................. 40,158 -- -- 40,158
Deferred income taxes....................... -- -- 5,920(d)(e) 5,920
Deferred revenue............................ 19,269 470 -- 19,739
Non-controlling interest.................... 4,944 2,912 -- 7,856
-------- -------- ------- --------
195,559 76,993 42,309 314,861
======== ======== ======= ========
STOCKHOLDERS' EQUITY
Capital stock
Lions Gate................................ 226,290 -- 41,780(a) 268,070
Trimark................................... -- 20,641 (20,641)(b) --
Retained earnings (deficit)................. (21,320) 5,311 (5,311)(b) (21,320)
Cumulative translation adjustments.......... 1,444 -- -- 1,444
Other accumulated comprehensive income...... -- 1,129 (1,129)(b) --
-------- -------- ------- --------
206,414 27,081 14,699 248,194
-------- -------- ------- --------
$401,973 $104,074 $57,008 $563,055
======== ======== ======= ========
</TABLE>
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LIONS GATE ENTERTAINMENT CORP.
PRO FORMA COMBINED STATEMENT OF INCOME UNDER CANADIAN GAAP
FOR THE YEAR AND TWELVE MONTH PERIOD ENDED MARCH 31, 2000
(UNAUDITED)
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
----------------------
ACQUISITION
ADJUSTMENTS
LIONS GATE TRIMARK (NOTE 3) COMBINED
---------- -------- ----------- --------
<S> <C> <C> <C> <C>
REVENUE............................................ $271,251 $136,709 -- $407,960
DIRECT OPERATING EXPENSES.......................... 222,875 115,087 1,382(a) 339,344
GROSS PROFIT....................................... 48,376 21,622 (1,382) 68,616
-------- -------- ------ --------
OTHER EXPENSES
General and administration....................... 31,388 18,608 -- 49,996
Amortization..................................... 7,074 -- 1,715(b) 8,789
Interest......................................... 4,466 (353) 3,125(c) 7,238
Non-controlling interest......................... 1,308 (178) -- 1,130
Severance and relocation costs................... 1,698 -- -- 1,698
-------- -------- ------ --------
45,934 18,077 4,840 68,851
-------- -------- ------ --------
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY
INTEREST......................................... 2,442 3,545 (6,222) (235)
INCOME TAX EXPENSE/(RECOVERY)...................... 2,000 112 (2,558)(d) (446)
-------- -------- ------ --------
INCOME/(LOSS) BEFORE EQUITY INTEREST............... 442 3,433 (3,664) 211
EQUITY INTEREST IN LOSS OF MANDALAY PICTURES,
LLC.............................................. (5,894) -- -- (5,894)
OTHER EQUITY INTEREST.............................. 159 -- -- 159
-------- -------- ------ --------
NET (LOSS)/INCOME FOR THE YEAR..................... (5,293) 3,433 (3,664) (5,524)
======== ======== ====== ========
Basic Loss per Share (Note 2)...................... $ (0.22) $ 0.79 $ (0.17)
-------- -------- --------
Weighted Average Number of Common Shares
Outstanding (000s)............................... 30,665 4,341 41,037
======== ======== ========
</TABLE>
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO THE PRO FORMA FINANCIAL INFORMATION
1. PRO FORMA TRANSACTIONS
The pro forma financial statements have been prepared giving effect to the
acquisition of Trimark by Lions Gate for an aggregate purchase price of
U.S.$53,574,000 (Cdn$77,651,000) computed as follows:.
The aggregate purchase price for the acquisition of Trimark consists of the
following:
<TABLE>
<CAPTION>
U.S.$000S CDN$000S
--------- --------
<S> <C> <C>
Cash of US$4.50 per share................................ 22,848 33,116
Issuance of 10,372,000 shares of Lions Gate common
stock.................................................. 28,523 41,340
Accrual for severance and integration costs.............. 1,000 1,450
Issuance of Lions Gate stock options to a stockholder.... 303 440
Transaction costs........................................ 900 1,305
------ ------
Total purchase price..................................... 53,574 77,651
====== ======
</TABLE>
Trimark stockholders will receive for each of their Trimark shares U.S.$4.50
in cash, without interest, and two shares of Lions Gate common stock, or, if
greater, the number of shares of common stock obtained by dividing U.S.$5.50 by
the weighted average Lions Gate stock price over the 30 trading days ending five
days prior to the Trimark stockholder meeting.
The number of shares of Lions Gate common stock to be issued assumes that
two shares of Lions Gate common stock will be issued for each share of Trimark
common stock outstanding or issuable pursuant to Trimark common stock options
outstanding. The number of shares of Lions Gate common stock to be issued in
respect of the Trimark common stock options outstanding may be reduced, and the
cash consideration correspondingly increased, if the option holders elect the
cashless exercise option described elsewhere in this proxy statement/prospectus.
Under the agreement of merger, the number of shares of Lions Gate common
stock to be issued may be adjusted as further described in this proxy
statement/prospectus. For purposes of these pro forma financial statements, the
number of shares to be issued has been based on U.S.$2.75, the Lions Gate common
stock closing price on June 7, 2000. Under Canadian GAAP, the transaction will
ultimately be accounted at a price per share determined on the consummation date
based on the closing price of Lions Gate common stock for a reasonable period
before and after the consummation date. If the average closing price of Lions
Gate common stock at the closing date is less than U.S.$2.75, the number of
shares to be issued will increase. If the average closing price decreases 10%
from U.S.$2.75, the number of shares to be issued will be 11,512,920.
The purchase price and the allocations of the purchase price in these pro
forma financial statements are based on Lions Gate management's preliminary
estimates. Certain adjustments may be made based on more current information at
the time of closing and the finalization of plans related to severance and
closure activities.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO THE PRO FORMA FINANCIAL INFORMATION (CONTINUED)
2. PRO FORMA BALANCE SHEET ADJUSTMENTS
Pro forma adjustments have been made to the balance sheet to reflect:
(a) Consideration of $77,651,000 (bank loans of $33,116,000; common
stock value of $41,780,000; accrued liabilities of $2,755,000) paid to
complete the acquisition as outlined in note 1 above, including acquisition
related costs.
(b) The elimination of stockholders' equity accounts of Trimark (capital
stock of $20,641,000; retained earnings of $5,311,000; other accumulated
comprehensive income of $1,129,000).
(c) The elimination of the loan of US$795,000 (Cdn$1,152,000) due from a
Trimark stockholder that will be forgiven on consummation of the
acquisition.
(d) The net assets of Trimark at estimated fair value as at March 31,
2000.
(e) Goodwill of $4,696,000 and $14,887,000 (total of $19,583,000)
representing the excess of the purchase price over the fair value of net
assets acquired, and related future income taxes resulting from temporary
differences between the taxation and accounting bases of acquired net
assets, respectively.
If the average closing price of the Lions Gate common stock increases by 10%
as at the closing date, from the price of US$2.75 used in the preparation of the
pro forma financial statements, the acquisition price under Canadian GAAP and
resulting goodwill will increase by $4,134,124.
3. PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
The pro forma statement of operations has been prepared to give effect to
the acquisition of Trimark by Lions Gate and the issuance of bank debt by Lions
Gate to finance the cash portion of the consideration as if the transaction
occurred on April 1, 1999. Pro forma adjustments have been made to reflect:
(a) Additional amortization for investment in films and television
programs based on the fair value increment over a period of ten years.
(b) Additional amortization of intangibles included in capital assets
over a period of three years and amortization of goodwill over a period of
20 years.
(c) Interest expense at an assumed annual rate of 9.37% on the bank
loans issued to fund the cash consideration paid.
(d) Income tax effects of the above adjustments, excluding
non-deductible goodwill, using an effective income tax rate of 40%.
For Canadian GAAP purposes, in preparing its consolidated financial
statements up to March 31, 2000, Lions Gate has followed the tax allocation
method of accounting for income taxes whereby earnings are charged with taxes
related to reported earnings. Under this method, differences between such taxes
and taxes currently payable are reflected in the accounts and arise because
certain items of revenue and expense are reported in the accounts at different
times than they are reported for income tax purposes. Commencing April 1, 2000,
for Canadian GAAP purposes, Lions Gate will be required to adopt the liability
method of income taxes whereby future tax assets and liabilities are recorded
for the expected future income tax consequences of assets and liabilities
recorded in the financial statements. In the preparation of these pro forma
financial statements, Lions Gate has adopted the liability method of accounting
for income taxes in respect of the net assets acquired in the Trimark
transaction.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO THE PRO FORMA FINANCIAL INFORMATION (CONTINUED)
3. PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS (CONTINUED)
The basic pro forma loss per share has been computed based on the weighted
average number of shares outstanding as follows:
<TABLE>
<S> <C>
Weighted average number of common stock for Lions Gate for
the year ended March 31, 2000 (000s)...................... 30,665
Shares to be issued as partial consideration for the
acquisition (000s)........................................ 10,372
------
Total weighted average number of shares (000s).............. 41,037
======
</TABLE>
Options, warrants, convertible debt and the convertible series A preferred
shares of Lions Gate have been excluded from the computation of fully diluted
loss per share as the inclusion of these items would be anti-dilutive.
If the average closing price of the Lions Gate common stock were to increase
by 10% as at the closing date, from the price of US$2.75 used in the preparation
of the pro forma financial statements, annual goodwill amortization would
increase by $207,000 and the pro forma net loss would amount to $5,731,000
($0.17 per share).
4. RECONCILIATION TO UNITED STATES GAAP
The unaudited pro forma financial statements have been prepared in
accordance with Canadian GAAP. The material differences between Canadian and
U.S. GAAP affecting Lions Gate are described in Note 25 to the consolidated
financial statements of Lions Gate for the year ended March 31, 2000, which
readers should refer to for detailed information.
Under US GAAP, the unaudited pro forma combined net loss and loss per share
amounts for the year ended March 31, 2000 and stockholders' equity as at
March 31, 2000 would be as follows:
<TABLE>
<CAPTION>
COMBINED COMBINED
PRO FORMA PRO FORMA
NET LOSS STOCKHOLDERS' EQUITY
----------- --------------------
(UNAUDITED) (UNAUDITED)
(ALL AMOUNTS IN THOUSANDS OF
CANADIAN DOLLARS)
<S> <C> <C>
AS REPORTED UNDER CANADIAN GAAP................. (5,524) 248,194
Equity in loss of Mandalay Pictures........... 1,907 (5,719)
Television business pre-operating costs....... 962 (3,835)
NET LOSS/STOCKHOLDERS' EQUITY UNDER US GAAP..... (2,655) 238,640
ADJUSTMENT TO CUMULATIVE TRANSLATION ADJUSTMENTS
ACCOUNT (NET OF TAX OF $NIL).................. (2,981)
COMPREHENSIVE LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS UNDER U.S. GAAP.................. (5,636)
BASIC AND FULLY-DILUTED LOSS PER SHARE OF COMMON
STOCK UNDER U.S. GAAP......................... $ 0.10
</TABLE>
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COMPARISON OF RIGHTS OF HOLDERS OF
TRIMARK STOCK AND LIONS GATE STOCK
Trimark is a Delaware corporation, and the California General Corporation
Law also governs Trimark, to the extent provided by Section 2115 of the
California General Corporation Law. Lions Gate is a British Columbia company.
While the rights and privileges of stockholders of a British Columbia company
are, in many instances, comparable to those of stockholders of a Delaware
corporation or of a California corporation, differences arise from differences
among British Columbia, Delaware and California law, among the British Columbia
Company Act, the Delaware General Corporation Law and the California General
Corporation Law and between the Lions Gate memorandum and articles and the
Trimark certificate of incorporation and bylaws. The following is a comparison
of the material differences among the stockholders' rights provisions of the
British Columbia Company Act and the Delaware General Corporation Law and the
California General Corporation Law.
QUORUM; REQUIRED VOTES
Section 144 of the British Columbia Company Act provides that the quorum for
the transaction of business at a general meeting of a corporation which has more
than one stockholder is two persons unless the Articles of Association of the
corporation otherwise provide. The Articles of Association of Lions Gate
provide, at Part 10 thereof, for a quorum at general meetings of two
stockholders.
Under the British Columbia Company Act, certain extraordinary corporate
actions, such as amalgamations, continuances and sales, leases or exchanges of
all or substantially all the property of a company other than in the ordinary
course of business, providing financial assistance in certain circumstances and
other extraordinary corporate actions such as liquidations, dissolutions and (if
ordered by a court) arrangements, are required to be approved by special
resolution. Under the British Columbia Company Act, a special resolution is a
resolution passed by a majority of not less than three-quarters of the votes
cast by the stockholders who, being entitled to vote, actually voted in respect
of that resolution. In certain cases, a special resolution to approve an
extraordinary corporate action is also required to be approved separately by the
holders of a class or series of shares or by minority stockholders.
Unless otherwise provided in the certificate of incorporation or bylaws of a
Delaware corporation, the presence in person or by proxy of holders of a
majority of the voting stock constitutes a quorum. The vote of holders of a
majority of the voting stock represented at a stockholders meeting of a Delaware
corporation constitutes stockholder action, except that directors are elected by
a plurality of the votes, and the affirmative vote of a majority of the voting
stock is required to authorize any merger, consolidation, dissolution or sale of
substantially all of the assets of a corporation. However, no vote by
stockholders of a Delaware corporation surviving a merger is required if:
- the surviving corporation's certificate of incorporation is not amended by
the merger;
- each share of stock of the surviving corporation will be an outstanding or
treasury share of the surviving corporation after the merger; and
- the shares to be issued in the merger do not constitute more than 20% of
the surviving corporation's outstanding common stock immediately prior to
the effective date of the merger.
In general, no vote by stockholders of a parent corporation is required to
authorize a merger of a subsidiary with or into another corporation or of the
parent with or into a subsidiary of which the parent owns at least 90% of each
class of stock.
Under the British Columbia Company Act, any amendment to the memorandum or
articles generally requires approval by special resolution, which is a
resolution passed by a majority of not less than three-quarters of the votes
cast by stockholders who voted in respect of the resolution.
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The Delaware General Corporation Law requires a vote of the corporation's
board of directors followed by the affirmative vote of a majority of the voting
stock to authorize any amendment to the certificate of incorporation, unless a
greater proportion is required by the certificate of incorporation. Bylaws may
be amended by vote of the stockholders, or, if authorized in the certificate of
incorporation, by the board.
STOCKHOLDER CONSENT IN LIEU OF MEETING
Under the British Columbia Company Act, in general, stockholder action
without a meeting may only be taken by written resolution signed by all
stockholders who would be entitled to vote thereon at a meeting. Extraordinary
meetings of stockholders may be called by the board of directors or, in certain
circumstances, requisitioned by a holder of at least 5% of the outstanding
shares or by the court.
Under the Delaware General Corporation Law, unless otherwise provided in the
certificate of incorporation, any action required to be taken or that may be
taken at a meeting of stockholders may be taken without a meeting, if a consent
in writing is signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize the action at a
meeting at which all shares entitled to vote were present and voted. Trimark's
certificate of incorporation does not otherwise so provide.
INSPECTION OF BOOKS AND RECORDS
Sections 163 and 164 of the British Columbia Company Act require each
company to maintain at its records office certain corporate records, documents
and instruments, and provides that any stockholder of a company may examine and
take extracts from such records, documents and instruments of the company other
than the minutes of the meetings of the directors of the company, documents or
instruments approved by the directors during the preceding 10 years, or any
mortgages created or assumed by the company. Members of the public other than
stockholders or directors have certain rights to inspect the records of a
company other than the records referred to above, and any minutes of the
proceedings of the stockholders of the company or the financial statements of
the company. The company is entitled to impose reasonable restrictions on the
inspection of its records.
Section 167 of the British Columbia Company Act provides that a company must
provide to any person a list setting out the names and addresses of each
stockholder and debentureholder of the company and the number of shares held by
them, made up to a date not more than 14 days prior to the date on which the
request for such information is made, provided that the person making the
request delivers to the company an affidavit stating their name, address and
occupation and confirming that the information is required and will only be used
for corporate purposes.
The Delaware General Corporation Law entitles a stockholder to inspect the
corporation's books and records, including its stockholder list, for any purpose
reasonably related to the person's interest as a stockholder. For 10 days prior
to any stockholders meeting, the stockholder list must be available for
inspection by stockholders for any purpose germane to the meeting.
APPRAISAL RIGHTS
The British Columbia Company Act provides holders of shares with a right, in
certain circumstances, to dissent in respect of significant corporate
proceedings when the resolution is passed by the requisite majority of
stockholders and the company or its liquidator proposes to act on the authority
of the resolution. Rights of dissent are permitted to be given when a resolution
is called to consider, among other things, the transfer of incorporation of the
company from British Columbia to another jurisdiction; the company grants
financial assistance for the purposes of a purchase or subscription of shares of
the company; the directors are seeking to sell the whole or substantially the
whole of the undertaking of the company; or in the event of an amalgamation or
wind-up of the company. Dissent rights are not required
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to be granted in the circumstance of an arrangement transaction, but the court,
in approving the arrangement, may require that dissent rights be granted. If the
dissent rights are properly exercised, the stockholder has the right to apply to
a court for payment for their shares of an amount equal to their fair value, as
determined by the court.
Under the Delaware General Corporation Law, stockholders of record have the
right, in certain circumstances, to dissent from a merger or consolidation by
demanding payment in cash for their shares equal to their fair value, as
determined by a court in an action timely brought by the corporation or the
dissenters. The Delaware General Corporation Law grants appraisal rights only in
the case of mergers or consolidations, but not in the case of a sale or transfer
of assets or a purchase of assets for stock. Further, no appraisal rights are
available for shares of any class or series listed on a national securities
exchange or the Nasdaq National Market or held of record by more than 2,000
stockholders, unless the agreement of merger or consolidation requires the
holders to accept for such shares anything other than stock of the surviving
corporation, stock of another corporation that is either listed on a national
securities exchange or the Nasdaq National Market or held of record by more than
2,000 stockholders, cash in lieu of fractional shares, or some combination of
the above.
The limitations on the availability of dissenters' rights under California
law are somewhat different from those under Delaware law. Stockholders of a
California corporation whose shares are listed on a national securities exchange
or on the Nasdaq National Market generally do not have such appraisal rights,
unless the holders of at least 5% of the class of outstanding shares claim the
right. Stockholders of a corporation like Trimark, whose shares are listed on
the Nasdaq SmallCap Market, would have such appraisal rights.
Delaware law does not provide appraisal rights when a corporation acquires
another business through the issuance of its stock in exchange for the assets of
the business to be acquired, in exchange for the outstanding stock of the
corporation to be acquired or in a merger of the corporation to be acquired with
a subsidiary of the acquiring corporation. California law treats these kinds of
acquisitions in the same manner as a direct merger of the acquiring corporation
with the corporation to be acquired.
OPPRESSION REMEDY
The British Columbia Company Act provides an oppression remedy that, upon
application by a stockholder, enables the court to make any order, both interim
and final, to rectify the matters complained of if, the court is satisfied that
the affairs of the company are being conducted, or the powers of the directors
are being exercised, in a manner oppressive to one or more of the members,
including the applicant, or that some act of the company has been done, or is
threatened, or that some resolution of the members or any class of members has
been passed or is proposed, that is unfairly prejudicial to one or more of the
members, including the applicant. The Delaware General Corporation Law does not
provide for a similar remedy.
BOARD COMPOSITION
Under the British Columbia Company Act, a corporation that is a reporting
company (defined to include a corporation that has any of its securities listed
for trading on any stock exchange wherever located, and certain other
corporations) must have not fewer than three directors, the majority of whom
must be ordinarily resident Canadians and one of whom must be ordinarily
resident in British Columbia.
The Delaware General Corporation Law does not have comparable requirements,
although the certificate of incorporation or bylaws may prescribe qualifications
for directors. The number of directors ordinarily is fixed by, or in the manner
provided in, the bylaws. The certificate of incorporation or bylaws adopted by
stockholders can divide the board into two or three classes, the terms of the
members of which expire in successive years. The board can designate committees,
which can exercise all of the powers and authority of the board, to the extent
provided by board resolution or the bylaws, except to approve any
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<PAGE>
action that the Delaware General Corporation Law requires to be submitted to
stockholders or to adopt, amend, or repeal any of the bylaws. In general,
directors may be removed, with or without cause, by holders of a majority of the
voting stock.
Under the Delaware General Corporation Law, stockholders are not entitled to
cumulative voting in the election of directors unless such right is specifically
provided for in the corporation's certificate of incorporation. Trimark's
certificate of incorporation does not contain such a provision. The California
General Corporation Law purports to provide Trimark stockholders with the right
to cumulate their vote to elect directors, subject to the stockholders'
providing notice of their intent to cumulate votes prior to the voting.
FIDUCIARY DUTIES OF DIRECTORS
Directors of companies governed by the Company Act have fiduciary
obligations to the company. Under the British Columbia Company Act, directors
must act honestly and in good faith and in the best interests of the company,
and exercise the care, diligence and skill of a reasonably prudent person. Every
director of a company who is in any way, directly or indirectly, interested in a
proposed contract or transaction with the company must disclose the nature and
extent of his interest at a meeting of directors and abstain from voting on the
matter. A director must account to the company for any profit made as a
consequence of the company's entering into or performing the contract or
transaction in which the director has an interest, unless the director discloses
his or her interest as required, among other requirements.
Directors of Delaware corporations have fiduciary obligations to the
corporation and its stockholders. The directors must act in accordance with the
so-called duties of "due care" and "loyalty." The duty of care requires that the
directors act in an informed and deliberative manner and that they inform
themselves, prior to making a business decision, of all material information
reasonably available to them. The duty of loyalty may be summarized as the duty
to act in good faith, not out of self-interest, and in a manner that the
directors reasonably believe to be in the best interests of the corporation.
DERIVATIVE ACTION
Under the British Columbia Company Act, a member or a director may apply to
the court for leave to enforce a right, duty or obligation owed to the company
that could be enforced by the company itself or to obtain damages for any breach
of a right, duty or obligation owed to the company that could be enforced by the
company itself or to defend an action brought against the company. The British
Columbia Company Act requires that a member establish that he or she was a
member at the time of the breach and any member or director must establish
before the court that he or she made reasonable efforts to cause the directors
of the company to commence or diligently prosecute or defend an action in
connection with the breach. A member includes any person, in the court's
discretion, who is a proper person to make an application.
Derivative actions may be brought in Delaware by a stockholder on behalf of,
and for the benefit of, the corporation, if the plaintiff was a stockholder of
the corporation at the time of the transaction complained of. A stockholder may
not sue derivatively unless the stockholder first makes demand on the
corporation that it bring suit, and such demand has been refused, unless it is
shown that such demand would have been futile.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under the British Columbia Company Act, a company may, with the approval of
the court, indemnify a director or officer, a former director or officer or a
person who acts or acted at the company's request as a director or officer of a
body corporate of which the company is or was a stockholder or creditor, and his
or her heirs and legal representatives, against all costs, charges and expenses,
including an amount paid to settle an action or satisfy a judgement, actually
and reasonably incurred by him or her in respect of any
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civil, criminal or administrative action or proceeding to which he or she is
made a party by reason of being or having been a director or officer of such
company or such body corporate, if he or she acted honestly and in good faith
with a view to the best interests of such company; and in the case of a criminal
or administrative action or proceeding that is enforced by a monetary penalty,
he or she had reasonable grounds for believing that his or her conduct was
lawful.
The Delaware General Corporation Law provides that a corporation may
indemnify its current and former directors, officers, employees and agents
against all reasonable expenses (including attorneys' fees) and, except in
actions initiated by or in the right of the corporation, against all judgments,
fines and amounts paid in settlement in actions brought against them, if such
individual acted in good faith and in a manner that he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
in the case of a criminal proceeding, had no reasonable cause to believe his or
her conduct was unlawful. The corporation must indemnify a current or former
director or officer to the extent that he or she is successful on the merits or
otherwise in the defense of any claim, issue, or matter associated with an
action.
The Delaware General Corporation Law allows for the advance payment of an
indemnified party's expenses prior to the final disposition of an action,
provided that, in the case of a current director or officer, the director
undertakes to repay any such amount advanced if it is later determined that the
director was not entitled to indemnification with regard to the action for which
the expenses were advanced.
Notwithstanding the foregoing, the California General Corporation Law
purports to apply its provisions governing the indemnification of directors,
officers and employees to Trimark. The Delaware General Corporation Law is
generally more favorable to directors than the California General Corporation
Law. The significant differences in directors' protection between the California
General Corporation Law and the Delaware General Corporation Law today deal with
limitation of liability and indemnification.
Both the California General Corporation Law and the Delaware General
Corporation Law allow corporations to authorize in their charter documents and
bylaws broader indemnification of officers and directors as provided to such
persons by statute. Both states also allow corporations to expand
indemnification of their directors and officers through written agreements.
However, the California General Corporation Law provides that a corporation may
not indemnify a director for the following matters for which the Delaware
General Corporation Law permits indemnification: matters as to which a person is
adjudged liable to the corporation in the performance of his or her duties
(unless the court expressly authorizes indemnity); amounts paid in settlements
of pending derivative actions if the court has not approved the settlement;
expenses incurred in defending a pending derivative action if the court has not
approved the settlement; matters for which indemnification is inconsistent with
provisions in the corporation's articles of incorporation or bylaws or an
agreement, resolution of the stockholders, or condition expressly imposed by a
court in approving a settlement; and any acts for which elimination of liability
is prohibited, including those described above.
Further, the standard of care required to be met prior to allowing director
indemnification under the California General Corporation Law is higher than
under the Delaware General Corporation Law, and the procedures required to
obtain such indemnification are more restrictive under the California General
Corporation Law. Accordingly, a director's right of indemnification is broader
and more certain under the Delaware General Corporation Law.
DIRECTOR LIABILITY
The Delaware General Corporation Law provides that the certificate of
incorporation may include a provision that limits or eliminates the liability of
directors to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided such liability does not arise from
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certain proscribed conduct, including acts or omissions not in good faith or
that involve intentional misconduct or breach of the duty of loyalty. Trimark's
Certificate of Incorporation includes a provision that eliminates the liability
of directors to the extent permitted by the Delaware General Corporation Law.
The British Columbia Company Act does not permit the limitation of a director's
liability.
The California General Corporation Law and the Delaware General Corporation
Law both permit a corporation to adopt provisions eliminating personal monetary
liability of directors, and both impose certain restrictions on the
corporation's right to eliminate such liability. The California General
Corporation Law prohibits elimination of liability for a broader class of acts
than does the Delaware General Corporation Law, including: reckless disregard of
duty in the face of a serious risk of injury to the corporation or its
stockholders and acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's obligation to the
corporation. Elimination of liability for such acts would be permitted under the
Delaware General Corporation Law, unless a court concluded that such exculpation
was void as a breach of the duty of loyalty. As a result, directors of a company
governed by the California General Corporation Law have a greater likelihood of
a possible stockholder challenge to the elimination of their monetary liability.
ANTI-TAKEOVER PROVISIONS AND INTERESTED STOCKHOLDER TRANSACTIONS
The Delaware General Corporation Law prohibits, in certain circumstances, a
"business combination" between the corporation and an "interested stockholder"
within three years of the stockholder becoming an "interested stockholder." An
"interested stockholder" is a holder who, directly or indirectly, controls 15%
or more of the outstanding voting stock or is an affiliate of the corporation
and was the owner of 15% or more of the outstanding voting stock at any time
within the prior three-year period. A "business combination" includes a merger,
consolidation, sale or other disposition of assets having an aggregate value in
excess of 10% of the consolidated assets of the corporation and certain
transactions that would increase the interested stockholder's proportionate
share ownership in the corporation. This provision does not apply where:
(i) the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder is approved by the corporation's
board of directors prior to the time the interested stockholder acquired such
15% interest; (ii) upon the consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the outstanding voting stock of the corporation excluding, for
the purpose of determining the number of shares outstanding, shares held by
persons who are directors and also officers and by employee stock plans in which
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered; (iii) the business combination is
approved by a majority of the board of directors and the affirmative vote of
two-thirds of the outstanding votes entitled to be cast by disinterested
stockholders at an annual or special meeting; (iv) the corporation does not have
a class of voting stock that is listed on a national securities exchange,
authorized for quotation on an inter-dealer quotation system of the Nasdaq Stock
Market, or held of record by more than 2,000 stockholders unless any of the
foregoing results from action taken, directly or indirectly, by an interested
stockholder or from a transaction in which a person becomes an interested
stockholder; (v) the corporation has opted out of this provision; or (vi) in
certain other limited circumstances. Trimark has not opted out of this
provision. The British Columbia Company Act has no such provisions.
LEGAL MATTERS
The law firm of Heenan Blaikie has provided its legal opinion as to matters
relating to the issuance of the shares pursuant to the laws of British Columbia.
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EXPERTS
The financial statements as at March 31, 2000 and 1999 and for the years
ended March 31, 2000 and 1999 and the period from April 28, 1997, date of
formation, to March 31, 1998 for Lions Gate incorporated by reference in this
proxy statement/prospectus have been so incorporated in reliance on the report
of PricewaterhouseCoopers LLP (Canada), independent accountants, given on the
authority of said firm as experts in auditing and accounting. The financial
statements for Trimark as of June 30, 1999 and 1998 and for each of the three
years in the period ended June 30, 1999 incorporated by reference in this proxy
statement/prospectus have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP (United States), independent accountants, given on
the authority of said firm as experts in auditing and accounting.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at Trimark's annual meeting
of stockholders to be held in 2000 (if the merger is not consummated prior to
such time), to be considered for inclusion in Trimark's proxy statement and form
of proxy relating to that meeting, must have been received at Trimark's
executive offices on or before June 26, 2000.
The SEC has promulgated rules related to the exercise of discretionary
voting authority pursuant to proxies solicited by Trimark's board. If a
stockholder intends to submit a proposal at the 2000 annual meeting of
stockholders and does not notify Trimark of the proposal by September 11, 2000,
the proxies solicited by Trimark's board for use at the 2000 annual meeting may
be voted on the proposal without discussion of the proposal in Trimark's proxy
statement for that annual meeting.
In each case, written notice must be given to the secretary of Trimark,
whose name and address are Jeff Gonzalez, Trimark Holdings, Inc., 4553 Glencoe
Avenue, Suite 200, Marina del Rey, California 90292.
ENFORCEABILITY OF CIVIL LIABILITIES UNDER
U.S. FEDERAL SECURITIES LAWS
Lions Gate is incorporated under the laws of British Columbia, Canada.
Certain directors, officers and controlling persons of Lions Gate, as well as
certain of the experts named in this proxy statement/ prospectus, reside outside
the United States of America and all or a substantial portion of their assets
and the assets of Lions Gate are located outside the U.S. As a result, it may be
difficult for you to effect service of process within the U.S. upon such persons
or to enforce against them judgments of courts of the U.S. predicated upon civil
liabilities under the U.S. federal securities laws.
Lions Gate has irrevocably appointed Jon Feltheimer as its agent to receive
service of process in actions against it arising out of or in connection with
the U.S. federal securities laws or out of violations of such laws in any
federal court or state court in California, relating to the transactions covered
by this proxy statement/prospectus.
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WHERE YOU CAN FIND MORE INFORMATION
INFORMATION ABOUT TRIMARK
Trimark files annual, quarterly and special reports, proxy statements and
other information with the SEC under the Securities Exchange Act. You may read
and copy any reports, statements or other information Trimark files at the SEC's
public reference rooms at 450 Fifth Street, N.W., Room 1024, Washington, DC
20549; 7 World Trade Center, Suite 1300, New York, New York 10048; and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60061.
You may obtain information on the operation of the SEC's public reference
rooms by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet website that contains reports, proxy
statements and other information regarding issuers, like Trimark, that file
electronically with the SEC. The address of that site is http://www.sec.gov.
The SEC allows Trimark to "incorporate by reference" information into this
proxy statement/ prospectus. This means that we can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is considered to be a part of
this proxy statement/prospectus, except for any information that is superseded
by information that is included directly in this proxy statement/prospectus.
This proxy statement/prospectus incorporates by reference the documents
listed below that Trimark has previously filed with the SEC. They contain
important information about Trimark and its financial condition.
<TABLE>
<CAPTION>
TRIMARK SEC FILINGS (FILE NO. 0-18613) PERIOD
-------------------------------------- ------
<S> <C>
Annual Report on Form 10-K............. Year ended June 30, 1999
Quarterly Report on Form 10-Q.......... Quarter ended March 31, 2000
Quarterly Report on Form 10-Q.......... Quarter ended December 31, 1999
Quarterly Report on Form 10-Q.......... Quarter ended September 30, 1999
Current Report on Form 8-K............. June 6, 2000
Proxy Statement dated October 15, Annual Meeting of Stockholders held November 17, 1999
1999.................................
</TABLE>
Trimark also incorporates by reference additional documents that it may file
with the SEC between the date of this proxy statement/prospectus and the date of
the special meeting. These documents may include periodic reports, such as
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K as well as proxy statements.
A copy of Trimark's Annual Report on Form 10-K for the year ended June 30,
1999 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2000
are annexed as Appendix D.
You can obtain any of the documents incorporated by reference in this proxy
statement/prospectus through Trimark or from the SEC through the SEC's website
at the address described above. Documents incorporated by reference are
available from Trimark without charge, excluding any exhibits to those
documents, unless the exhibit is specifically incorporated by reference into the
information that this proxy statement/prospectus incorporates. You can obtain
documents incorporated by reference in this proxy statement/prospectus by
requesting them in writing or by telephone from Trimark at the following
address:
Jeff Gonzalez
Secretary
Trimark Holdings, Inc.
4553 Glencoe Avenue, Suite 200
Marina del Rey, CA 90292
Telephone (310) 314-2000
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INFORMATION ABOUT LIONS GATE
Lions Gate files annual and special reports and other information with the
SEC under the Securities Exchange Act. Lions Gate, as a foreign private issuer,
is exempt from the rules under the Securities Exchange Act which prescribes the
furnishing and content of proxy statements, and its officers, directors and
principal stockholders are exempt from the reporting and "short-swing" profit
recovery provisions contained in Section 16 of the Securities Exchange Act. You
may read and copy any reports or other information Lions Gate, files at the
SEC's public reference rooms at 450 Fifth Street, N.W., Room 1024, Washington,
DC 20549; 7 World Trade Center, Suite 1300, New York, New York 10048; and 500
West Madison Street, Suite 1400, Chicago, Illinois 60061.
You may obtain information on the operation of the SEC's public reference
rooms by calling the SEC at 1-800-SEC-0330.
The SEC allows Lions Gate to "incorporate by reference" information into
this proxy statement/ prospectus. This means that Lions Gate can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is considered
to be a part of this proxy statement/prospectus, except for any information that
is superseded by information that is included directly in this proxy
statement/prospectus.
This proxy statement/prospectus incorporates by reference the documents
listed below that Lions Gate has previously filed with the SEC. They contain
important information about Lions Gate and its financial condition.
<TABLE>
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REPORT PERIOD
------ ------
<S> <C>
Registration Statement on Form 8-A........... Dated November 12, 1998
Report on Form 6-K........................... For the month of December 1999
Report on Form 6-K........................... For the month of January 2000
Annual Report on Form 20-F................... Year ended March 31, 2000
Report on Form 6-K........................... For the month of August 2000
</TABLE>
Lions Gate's Annual Report on Form 20-F for the year ended March 31, 2000 is
annexed to this proxy statement/prospectus as Appendix E.
Lions Gate also incorporates by reference any additional reports on
Form 20-F or 6-K or other documents that it may file with the SEC between the
date of this proxy statement/prospectus and the date of the special meeting.
------------------------
Neither Lions Gate nor Trimark has authorized anyone to give any information
or to make any representation about the merger that is different from, or in
addition to, that contained in or incorporated by reference into this proxy
statement/prospectus. Therefore, if anyone gives you information of this sort,
you should not rely upon it. The information contained in this proxy
statement/prospectus speaks only as of the date of this proxy
statement/prospectus unless the information specifically indicates that another
date applies.
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APPENDIX A
<PAGE>
AGREEMENT AND PLAN OF MERGER
AMONG
LIONS GATE ENTERTAINMENT CORP.,
LGE MERGER SUB, INC.
AND
TRIMARK HOLDINGS, INC.
------------------------
JUNE 6, 2000
------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
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ARTICLE I DEFINITIONS................................................. A-1
1.1 Certain Definitions......................................... A-1
1.2 Other Definitions........................................... A-7
ARTICLE II BASIC TRANSACTION........................................... A-8
2.1 Merger; Surviving Corporation............................... A-8
2.2 Certificate of Incorporation................................ A-8
2.3 By-Laws..................................................... A-8
2.4 Directors and Officers...................................... A-8
2.5 Effective Time.............................................. A-8
2.6 Surrender of Company Certificates........................... A-8
2.7 Merger Consideration; Conversion and Cancellation of
Securities.................................................. A-10
2.8 Stock Transfer Books........................................ A-11
2.9 Dissenting Shares........................................... A-11
2.10 Closing..................................................... A-11
2.11 Treatment of Certain Outstanding Options.................... A-11
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... A-12
3.1 Organization and Qualification.............................. A-12
3.2 Capitalization.............................................. A-12
3.3 Authority and Validity...................................... A-13
3.4 No Breach or Violation...................................... A-13
3.5 Consents and Approvals...................................... A-13
3.6 Title to Non-Film Assets.................................... A-14
3.7 Non-Film Intellectual Property.............................. A-14
3.8 Compliance with Legal Requirements.......................... A-14
3.9 Financial and Other Information............................. A-15
3.10 Subsequent Events........................................... A-15
3.11 Undisclosed Liabilities..................................... A-16
3.12 Legal Proceedings........................................... A-16
3.13 Taxes....................................................... A-16
3.14 Employee Benefits; Employees................................ A-17
3.15 Material Company Contracts.................................. A-18
3.16 Books and Records........................................... A-18
3.17 Insurance................................................... A-19
3.18 Environmental Matters....................................... A-19
3.19 Matters Regarding the Company Film Library.................. A-19
3.20 Films In Progress........................................... A-21
3.21 Development Projects........................................ A-22
3.22 Brokers or Finders.......................................... A-22
3.23 Fairness Opinion............................................ A-22
3.24 Disclosure.................................................. A-22
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF LIONS GATE................ A-22
4.1 Organization and Qualification.............................. A-22
4.2 Capitalization.............................................. A-22
4.3 Authority and Validity...................................... A-23
4.4 No Breach or Violation...................................... A-23
4.5 Consents and Approvals...................................... A-24
</TABLE>
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<TABLE>
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4.6 Title to Assets............................................. A-24
4.7 Non-Film Intellectual Property.............................. A-24
4.8 Compliance with Legal Requirements.......................... A-24
4.9 Legal Proceedings........................................... A-24
4.10 Subsequent Events........................................... A-25
4.11 Undisclosed Liabilities..................................... A-25
4.12 Taxes....................................................... A-25
4.13 Employee Benefits; Employees................................ A-26
4.14 Material Lions Gate Contracts............................... A-26
4.15 Books and Records........................................... A-26
4.16 Insurance................................................... A-26
4.17 Environmental Matters....................................... A-27
4.18 Matters Regarding Lions Gate Film Library................... A-27
4.19 Films In Progress........................................... A-29
4.20 Development Projects........................................ A-29
4.21 Financial and Other Information............................. A-29
4.22 Canadian Control............................................ A-30
4.23 Canadian Tax Credits........................................ A-30
4.24 Canadian Securities Compliance.............................. A-30
4.25 Canadian Securities Laws Matters............................ A-30
4.26 Vote Required............................................... A-30
4.27 No Orders................................................... A-30
4.28 Listings.................................................... A-30
4.29 Brokers or Finders.......................................... A-31
4.30 Fairness Opinion............................................ A-31
4.31 Disclosure.................................................. A-31
ARTICLE V REPRESENTATIONS AND WARRANTIES OF MERGER SUB................ A-31
5.1 Organization and Qualification.............................. A-31
5.2 Certificate of Incorporation and Bylaws..................... A-31
5.3 Authority................................................... A-31
5.4 No Conflict; Required Filings and Consents.................. A-32
5.5 Legal Proceedings........................................... A-32
5.6 Vote Required............................................... A-32
ARTICLE VI PRE-CLOSING COVENANTS OF THE COMPANY........................ A-32
6.1 Additional Information...................................... A-32
6.2 No Solicitations............................................ A-33
6.3 Continuity and Maintenance of Operations.................... A-33
6.4 Consents and Approvals...................................... A-34
6.5 Meeting of the Company Shareholders......................... A-35
6.6 Securities Filings; Financial Information................... A-36
6.7 Notification of Certain Matters............................. A-36
6.8 Company Disclosure Statement................................ A-36
6.9 State Statutes.............................................. A-36
6.10 Employee Matters............................................ A-37
6.11 Termination of Bonus Plan................................... A-37
6.12 2000 Company Financial Statements........................... A-37
6.13 Transfer of Stock of Certain Production Affiliates.......... A-37
</TABLE>
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<TABLE>
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ARTICLE VII PRE-CLOSING COVENANTS OF THE LIONS GATE PARTIES............. A-38
7.1 Additional Information...................................... A-38
7.2 Continuity and Maintenance of Operations.................... A-38
7.3 Consents and Approvals...................................... A-38
7.4 Meeting of the Lions Gate Shareholders...................... A-39
7.5 Merger Registration Statement............................... A-39
7.6 Financial and Other Information............................. A-40
7.7 Notification of Certain Matters............................. A-40
7.8 Lions Gate Disclosure Statement............................. A-40
7.9 Section 16 Matters.......................................... A-40
7.10 Stock Exchange Listings..................................... A-40
7.11 State Statutes.............................................. A-41
ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATIONS OF THE LIONS GATE
PARTIES..................................................... A-41
8.1 Accuracy of Representations................................. A-41
8.2 Covenants................................................... A-41
8.3 Consents and Approvals...................................... A-41
8.4 Dissenters' Rights.......................................... A-42
8.5 Delivery of Documents....................................... A-42
8.6 No Material Adverse Change.................................. A-42
8.7 No Litigation............................................... A-43
8.8 Lions Gate Merger Registration Statement; Blue Sky Laws..... A-43
8.9 Canadian Exemption.......................................... A-43
8.10 Employment Agreement........................................ A-43
8.11 Credit Line................................................. A-43
8.12 Section 367................................................. A-43
ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY.......... A-44
9.1 Accuracy of Representations................................. A-44
9.2 Covenants................................................... A-44
9.3 Consents and Approvals...................................... A-44
9.4 Delivery of Documents....................................... A-45
9.5 No Material Adverse Change.................................. A-45
9.6 No Litigation............................................... A-45
9.7 Exchange Listing............................................ A-45
9.8 Lions Gate Merger Registration Statement; Blue Sky Laws..... A-45
9.9 Canadian Exemption.......................................... A-46
9.10 Employment Agreement........................................ A-46
9.11 Credit Line................................................. A-46
9.12 Section 367................................................. A-46
ARTICLE X POST CLOSING COVENANTS...................................... A-46
10.1 Board Appointment........................................... A-46
10.2 Indemnification of Directors, Officers and Managers of the
Company and its Predecessors; Directors' and Officers'
Insurance................................................... A-46
10.3 Reports Under Securities Exchange Act of 1934............... A-47
10.4 Employee Benefits........................................... A-47
10.5 Gain Recognition Agreement. In order to satisfy Sections
8.12 and 9.12, certain Company Shareholders must each enter
into a "Gain Recognition Agreement Under.................... A-47
10.6 Section 367 Reporting....................................... A-48
</TABLE>
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ARTICLE XI TERMINATION................................................. A-48
11.1 Termination................................................. A-48
11.2 Effect of Termination....................................... A-49
ARTICLE XII SURVIVAL OF REPRESENTATIONS AND WARRANTIES.................. A-50
12.1 Survival of Representations and Warranties.................. A-50
ARTICLE XIII MISCELLANEOUS............................................... A-51
13.1 Parties Obligated and Benefited............................. A-51
13.2 Notices..................................................... A-51
13.3 Attorneys' Fees............................................. A-52
13.4 Headings.................................................... A-52
13.5 Choice of Law............................................... A-52
13.6 Rights Cumulative........................................... A-52
13.7 Further Actions............................................. A-52
13.8 Time of the Essence......................................... A-52
13.9 Late Payments............................................... A-52
13.10 Counterparts................................................ A-52
13.11 Entire Agreement............................................ A-52
13.12 Third Party Beneficiaries................................... A-52
EXHIBITS
Exhibit 1 Registration Rights Agreement
Exhibit 2 Top Company Films
Exhibit 3 Top Lions Gate Films
Exhibit 4 Voting Agreement
Exhibit 5 Additional Films
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF MERGER, dated June 6, 2000 (the "Agreement"), among
LIONS GATE ENTERTAINMENT CORP., a corporation incorporated under the laws of the
British Columbia, ("Lions Gate"), LGE MERGER SUB, INC., a Delaware corporation
("Merger Sub") and TRIMARK HOLDINGS, INC., a Delaware corporation (the
"Company"). Lions Gate, Merger Sub and the Company are collectively referred to
herein as the "Parties." Lions Gate and Merger Sub are sometimes referred to
herein collectively as the "Lions Gate Parties."
RECITALS:
The Parties intend for Lions Gate to acquire the Company and its
Subsidiaries by means of the merger of the Company with and into Merger Sub,
upon the terms and subject to the conditions set forth herein.
For federal income tax purposes, it is intended that the Merger will qualify
as a reorganization under Section 368(a) of the Code.
NOW, THEREFORE, in consideration of the premises and mutual promises herein
made, and in consideration of the representations, warranties, covenants and
agreements herein contained, and intending to be legally bound hereby, the
Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 CERTAIN DEFINITIONS. The following terms shall, when used in this
Agreement, have the following meanings:
"Acquisition" means the acquisition by a Person of any businesses, assets or
property other than in the Ordinary Course, whether by way of the purchase of
assets or stock, by merger, consolidation or otherwise.
"Acquisition Proposal" means any proposal for a merger or other business
combination to which the Company, or any Subsidiary of the Company is a party or
the direct or indirect acquisition of any substantial equity interest in, or a
substantial portion of the assets of the Company, or any Subsidiary of the
Company, other than the transactions contemplated by this Agreement.
"Adverse Consequences" means all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, assessments, dues, penalties, fines,
interest, costs, amounts paid in settlement, Liabilities, obligations, Taxes,
liens, losses, expenses and fees (including court costs, settlement costs,
legal, accounting, experts' and other fees, costs and expenses).
"Affiliate" means, with respect to any Person: (i) any Person directly or
indirectly owning, controlling, or holding with power to vote 10% or more of the
outstanding voting securities of such other Person (other than passive or
institutional investors); (ii) any Person 10% or more of whose outstanding
voting securities are directly or indirectly owned, controlled, or held with
power to vote, by such other Person; (iii) any Person directly or indirectly
controlling, controlled by, or under common control with such other Person; and
(iv) any officer, director or partner of such other Person. "Control" for the
foregoing purposes shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities or voting interests,
by contract or otherwise.
"BCSC" means the British Columbia Securities Commission.
"Business Day" means any day other than Saturday, Sunday or a day on which
banking institutions in Los Angeles, California, are required or authorized to
be closed.
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"Canadian Securities Laws" means all applicable securities laws in each of
the provinces of British Columbia, Alberta, Manitoba, Ontario and Quebec and the
respective regulations and rules under such laws together with the applicable
published policy statements of the securities regulatory authorities in each of
such provinces.
"Code" means the United States Internal Revenue Code of 1986, as amended.
"Collateral Documents" mean the Exhibits and any other documents,
instruments and certificates to be executed and delivered by the Parties
hereunder or thereunder.
"Commission" means the Securities and Exchange Commission or any Regulatory
Authority that succeeds to its functions.
"Company Assets" mean all properties, assets, privileges, powers, rights,
interests and claims of every type and description that are owned, leased, held,
used or useful in the Company Business and in which the Company or any of its
Subsidiaries has any right, title or interest or in which the Company or any of
its Subsidiaries acquires any right, title or interest on or before the Closing
Date, wherever located, whether known or unknown, and whether or not now or on
the Closing Date on the books and records of the Company or any of its
Subsidiaries, but excluding any of the foregoing, if any, transferred prior to
the Closing pursuant to this Agreement or any Collateral Documents.
"Company Business" means the Film distribution and licensing business
conducted by the Company and its Subsidiaries.
"Company Credit Agreement" means the Credit, Security, Guaranty and Pledge
Agreement, dated December 20, 1996, by and between the Company's principal
operating Subsidiaries, The Chase Manhattan Bank, as Administrative Agent and
Fronting Bank, as amended.
"Company Disclosure Statement" means the disclosure statement delivered by
the Company to Lions Gate concurrently with the execution of this Agreement, as
supplemented pursuant to Section 6.8.
"Company Film Library" means all of the Films in which the Company or any of
its Subsidiaries has any right, title or interest.
"Company SEC Filings" means the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1999, its quarterly reports on Form 10-Q for each of
the quarters ended September 30, 1999, December 31, 1999 and March 31, 2000 and
all other reports filed and to be filed by the Company with the Commission prior
to the Effective Time.
"Company Shareholders" means, as of any particular date, the holders of
Company Capital Stock on that date.
"Completed Film Production Entities" has the meaning provided in
Section 6.13 of this Agreement.
"Employee Benefit Plan" means any: (a) nonqualified deferred compensation or
retirement plan or arrangement that is an Employee Pension Benefit Plan;
(b) qualified defined contribution retirement plan or arrangement that is an
Employee Pension Benefit Plan; (c) qualified defined benefit retirement plan or
arrangement that is an Employee Pension Benefit Plan (including any
Multiemployer Plan); (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program; or (e) other employee benefit arrangement or payroll
practice.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA
Section 3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA
Section 3(1).
"Encumbrance" means any material mortgage, pledge, lien, encumbrance,
charge, security interest, security agreement, conditional sale or other title
retention agreement, limitation, option, assessment,
A-2
<PAGE>
restrictive agreement, restriction, adverse interest, restriction on transfer or
exception to or material defect in title or other ownership interest (including
restrictive covenants, leases and licenses).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
"Exchange Agent" means the institution selected by Lions Gate and approved
by the Company to act as exchange agent in accordance with Section 2.6(a).
"Film" means any feature or non-feature motion picture or other audio-visual
work (including but not limited to any Film In Progress or any New Release),
whether produced for theatrical, non-theatrical, home video or television
release or for release in any other medium now known or unknown or hereafter
developed, including any television program or series, in each case whether
recorded on film, video tape, video cassette, cassette, cartridge, disk or on or
by any other means, method, process or device whether now known or hereafter
developed.
"Film Asset Acquisition Agreement" means, with respect to any Person, a Film
Contract pursuant to which that Person has acquired from another Person, or is
obligated to acquire from another Person, all or any of such other Person's
rights in any Film.
"Film Asset Exploitation Agreement" means, with respect to any Person, a
Film Contract pursuant to which that Person has granted to another Person, or is
obligated to grant to another Person, all or any part of that Person's rights to
exploit any Film.
"Film Contracts" means, with respect to any Person, all contracts,
agreements, warranties, guaranties, indentures, bonds, options, leases,
subleases, mortgages, licenses, commitments or binding arrangements of any
nature whatsoever, express or implied, written or unwritten, relating to any
Film, and all amendments thereto, entered into or binding upon that Person or to
which any right, title or interest of that Person in any Film may be subject.
"GAAP" means, with respect to the Company and its Subsidiaries, United
States generally accepted accounting principles as in effect from time to time
and, with respect to Lions Gate and its Subsidiaries, Canadian generally
accepted accounting principles as in effect from time to time.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
"ITA" means the Income Tax Act (Canada), as amended.
"Legal Requirement" means any statute, ordinance, law, rule, regulation,
code, injunction, judgment, order, decree, ruling, or other requirement enacted,
adopted or applied by any Regulatory Authority, including judicial decisions
applying common law or interpreting any other Legal Requirement.
"Liability" means any liability or obligation (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent, whether accrued
or unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for Taxes.
"Lions Gate Assets" mean all properties, assets, privileges, powers, rights,
interests and claims of every type and description that are owned, leased, held,
used or useful in the Lions Gate Business and in which Lions Gate or any of its
Subsidiaries has any right, title or interest or in which Lions Gate or any of
its Subsidiaries acquires any right, title or interest on or before the Closing
Date, wherever located, whether known or unknown, and whether or not now or on
the Closing Date on the books and records of Lions Gate or any of its
Subsidiaries.
"Lions Gate Business" means the business conducted by Lions Gate and its
Subsidiaries.
"Lions Gate Common Stock" means the no par value common shares of Lions
Gate.
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"Lions Gate Credit Agreement" means, collectively, all credit agreements,
loan agreements and other agreements, notes and instruments providing for each
credit facility to which Lions Gate or any of its Subsidiaries is a party.
"Lions Gate Disclosure Statement" means the disclosure statement delivered
by the Lions Gate Parties to the Company concurrently with the execution of this
Agreement, as supplemented pursuant to Section 7.8.
"Lions Gate Film Library" means all of the Films in which Lions Gate or any
of its Subsidiaries has any right, title or interest.
"Lions Gate Preferred Stock" means the 5.25% Convertible Redeemable
Preferred Shares, Series A of Lions Gate.
"Lions Gate Securities Filings" means Lions Gate's annual report on
Form 20-F for the year ended March 31, 1999, and all other reports filed and to
be filed with the Commission prior to the Effective Time.
"Market Price" per share of Lions Gate Common Stock on any day means the
average of the Quoted Prices of the Lions Gate Common Stock for the 30
consecutive trading days immediately preceding such day.
"Material Adverse Effect on the Company" means a material adverse effect on
(i) the assets, Liabilities, properties or business of the Company and its
Subsidiaries, taken as a whole, (ii) the validity, binding effect or
enforceability of this Agreement or the Collateral Documents or (iii) the
ability of the Company or any of the Company to perform its obligations under
this Agreement and the Collateral Documents; provided, however, that none of the
following shall constitute a Material Adverse Effect on the Company: (i) the
filing, initiation and subsequent prosecution, by or on behalf of shareholders
of the Company, of litigation that challenges or otherwise seeks damages with
respect to the Merger, this Agreement and/or transactions contemplated thereby
or hereby, (ii) occurrences due to a disruption of the Company's or its
Subsidiaries' businesses as a result of the announcement of the execution of
this Agreement or changes caused by the taking of action required by this
Agreement, (iii) general economic conditions, (iv) any changes generally
affecting the industries in which the Company and its Subsidiaries operate, or
(v) a change in market price or trading volume of Company Common Stock.
"Material Adverse Effect on Lions Gate" means a material adverse effect on
(i) the assets, Liabilities, properties or business of Lions Gate and its
Subsidiaries, taken as a whole, (ii) the validity, binding effect or
enforceability of this Agreement or the Collateral Documents or (iii) the
ability of Lions Gate or any of the Lions Gate Parties to perform its
obligations under this Agreement and the Collateral Documents; provided,
however, that none of the following shall constitute a Material Adverse Effect
on Lions Gate: (i) the filing, initiation and subsequent prosecution, by or on
behalf of shareholders of Lions Gate, of litigation that challenges or otherwise
seeks damages with respect to the Merger, this Agreement and/or transactions
contemplated thereby or hereby, (ii) occurrences due to a disruption of Lions
Gate's or its Subsidiaries' businesses as a result of the announcement of the
execution of this Agreement or changes caused by the taking of action required
by this Agreement, (iii) general economic conditions, (iv) any changes generally
affecting the industries in which Lions Gate and its Subsidiaries operate, or
(v) a change in market price or trading volume of Lions Gate Common Stock.
"Merger Consideration" means the shares of Lions Gate Common Stock and cash
deliverable by Lions Gate in exchange for Company Capital Stock pursuant to
Section 2.7.
"Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).
"Ordinary Course" with reference to a Person means the ordinary course of
business consistent with past practice of that Person and its Subsidiaries
(including with respect to quantity and frequency).
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"Permit" means any license, permit, consent, approval, registration,
authorization, qualification or similar right granted by a Regulatory Authority.
"Permitted Liens" means (i) liens for Taxes not yet due and payable or being
contested in good faith by appropriate proceedings; (ii) rights reserved to any
Governmental Authority to regulate the affected property; (iii) statutory liens
of banks and rights of set-off; (iv) as to leased Assets, interests of the
lessors and sublessors thereof and liens affecting the interests of the lessors
and sublessors thereof; (v) inchoate materialmen's, mechanics', workmen's,
repairmen's or other like liens arising in the Ordinary Course; (vi) liens
incurred or deposits made in the Ordinary Course in connection with workers'
compensation and other types of social security; (vii) licenses of trademarks or
other intellectual property rights granted by the Company or Lions Gate, as the
case may be, in the Ordinary Course and not interfering in any material respect
with the Ordinary Course of the business of the Company or Lions Gate, as the
case may be; (viii) as to any Film or related assets, SAG or other union, guild
or similar lien or right against such assets; (ix) as to any liens or other
encumbrances which are customarily incurred in connection with production
financing; and (x) as to real property, any encumbrance, adverse interest,
constructive or other trust, claim, attachment, exception to or defect in title
or other ownership interest (including, but not limited to, reservations, rights
of entry, rights of first refusal, possibilities of reverter, encroachments,
easement, rights-of-way, restrictive covenants, leases, and licenses) of any
kind, which otherwise constitutes an interest in or claim against property,
whether arising pursuant to any Legal Requirement, under any Contract or
otherwise, that do not, individually or in the aggregate, materially and
adversely affect or impair the value or use thereof as it is currently being
used in the Ordinary Course.
"Person" means any natural person, corporation, partnership, trust,
unincorporated organization, association, limited liability company, Regulatory
Authority or other entity.
"Physical Properties" shall mean all physical properties of every kind or
nature of or relating to any Film and all versions thereof, including, without
limitation, exposed film, developed film, positives, negatives, prints, answer
prints, special effects, preparing materials (including interpositives,
negatives, duplicate negatives, internegatives, color reversals, intermediates,
lavenders, fine grain master prints and matrices, and all other forms of
pre-print elements which may be necessary or useful to produce prints or other
copies or additional pre-print elements, whether now known or hereafter
devised), soundtracks, recordings, audio and video tapes and discs of all types
and gauges, cutouts, trims and any and all other physical properties of every
kind and nature relating to any Film in whatever state of completion, and all
duplicates, drafts, versions and copies of each thereof.
The "Quoted Price" of the Lions Gate Common Stock on any day means the last
reported sale price on such day (regular way) of the Lions Gate Common Stock as
reported by the American Stock Exchange.
"Regulatory Authority" means: (i) the United States of America; (ii) any
state, commonwealth, territory or possession of the United States of America and
any political subdivision thereof (including counties, municipalities and the
like); (iii) Canada and any other foreign (as to the United States of America)
sovereign entity and any political subdivision thereof; or (iv) any agency,
authority or instrumentality of any of the foregoing, including any court,
tribunal, department, bureau, commission or board.
"Registration Rights Agreement" means the form of registration rights
agreement attached hereto as Exhibit 1.
"Representative" means any director, officer, employee, agent, consultant,
advisor or other representative of a Person, including legal counsel,
accountants and financial advisors.
"Securities Act" means the Securities Act of 1933, as amended, and the rules
and regulations thereunder.
"Subsidiary" of a specified Person means (a) any Person if securities having
ordinary voting power (at the time in question and without regard to the
happening of any contingency) to elect a majority of the
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directors, trustees, managers or other governing body of such Person are held or
controlled by the specified Person or a Subsidiary of the specified Person;
(b) any Person in which the specified Person and its Subsidiaries collectively
hold a 50% or greater equity interest; (c) any partnership or similar
organization in which the specified Person or Subsidiary of the specified Person
is a general partner; or (d) any Person the management of which is directly or
indirectly controlled by the specified Person and its Subsidiaries through the
exercise of voting power, by contract or otherwise. For purposes of this
Agreement, Subsidiaries of the Company shall be deemed to include each
Subsidiary of William Wesley.
"Superior Offer" means any unsolicited, bona fide written offer made by a
third party to consummate any of the following transactions (other than the
Merger): (i) a merger or consolidation involving the Company which results in a
sale of the Company and its Subsidiaries, as a group, (ii) the acquisition by
any Person or group (including by way of a tender offer or an exchange offer or
a two step transaction involving a tender offer or exchange offer followed with
reasonable promptness by a cash-out merger involving the Company), directly or
indirectly, of ownership of 80% or more of the then outstanding shares of
capital stock of the Company, or (iii) the sale or disposition of all or
substantially all the assets of the Company to a third party, in each case on
terms that the Board of Directors of the Company determines, in its good faith
judgment, to be more favorable to the Company Shareholders than the terms of the
Merger; provided, however, that any such offer shall not be deemed to be a
"Superior Offer" if any financing required to consummate the transaction
contemplated by such offer is not committed and is not likely in the good faith
judgment of the Company's board of directors to be obtained by such third party
on a timely basis.
"Tax" means any U.S. or Canadian federal, state, provincial, local or
foreign income, gross receipts, license, payroll, employment, excise, severance,
stamp, occupation, premium, windfall profits, environmental, customs duties,
capital, franchise, profits, withholding, social security (or similar),
unemployment, disability, real property, personal property, intangible property,
recording, occupancy, sales, use, transfer, registration, value added minimum,
estimated or other tax of any kind whatsoever, including any interest, additions
to tax, penalties, fees, deficiencies, assessments, additions or other charges
of any nature with respect thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund or
credit or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
"Top Company Films" means those Films set forth on Exhibit 2.
"Top Lions Gate Films" means the Films set forth on Exhibit 3.
"Treasury Regulations" means regulations promulgated by the U.S. Treasury
Department under the Code.
"Voting Agreement" means the form of voting agreement attached hereto as
Exhibit 4.
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1.2 OTHER DEFINITIONS. The following terms shall, when used in this
Agreement, have the meanings assigned to such terms in the Sections indicated.
<TABLE>
<CAPTION>
TERM SECTION
---- -----------
<S> <C>
"Agreement"................................................. Preamble
"Assumed Tax on Gain"....................................... 10.5
"Assumed Tax Factor"........................................ 10.5
"Canadian Lions Gate Reports"............................... 4.24
"Certificate of Merger"..................................... 2.5
"CGCL"...................................................... 2.9
"Closing"................................................... 2.10
"Closing Date".............................................. 2.10
"Company Capital Stock"..................................... 2.7(a)
"Company Certificates"...................................... 2.6(c)
"Company Development Projects".............................. 3.21
"Company Films in Progress"................................. 3.20(a)
"Company Financial Statements".............................. 3.9(a)
"Company Non-Film Intellectual Property Rights"............. 3.7(a)
"Company Shareholders' Meeting"............................. 6.13
"Company Termination Fee"................................... 11.2(b)
"Completed Film Production Entities......................... 6.5(a)
"Current Market Price"...................................... 2.7(a)(ii)
"DGCL"...................................................... 2.1
"Dissenting Shares"......................................... 2.9
"Effective Time"............................................ 2.5
"Environmental Laws"........................................ 3.18
"Five-Year Gain Recognition Agreement....................... 10.5
"Gross-Up Amount"........................................... 10.5
"Lions Gate Development Projects"........................... 4.20
"Lions Gate Financial Statements"........................... 4.21(a)
"Lions Gate Merger Registration Statement".................. 7.5
"Lions Gate Non-Film Intellectual Property Rights".......... 4.7
"Lions Gate Parties"........................................ Preamble
"Lions Gate Shareholders' Meeting".......................... 7.4(a)
"Lions Gate Termination Fee................................. 11.2(c)
"Material Company Contract"................................. 3.4
"Material Lions Gate Contract".............................. 4.4
"Merger".................................................... 2.1
"Notice of Superior Offer".................................. 6.5(c)
"Options"................................................... 3.2(c)
"Parties"................................................... Preamble
"Section 367 Gain".......................................... 10.5
"Surviving Corporation"..................................... 2.1
</TABLE>
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ARTICLE II
BASIC TRANSACTION
2.1 MERGER; SURVIVING CORPORATION. In accordance with and subject to the
provisions of this Agreement and the General Corporation Law of the State of
Delaware ("DGCL"), at the Effective Time, the Company shall be merged with and
into Merger Sub (the "Merger"), and Merger Sub shall be the surviving
corporation in the Merger (hereinafter sometimes called the "Surviving
Corporation") and shall continue its corporate existence under the laws of the
State of Delaware. At the Effective Time, the separate existence of the Company
shall cease. All properties, franchises and rights belonging to the Company and
Merger Sub, by virtue of the Merger and without further act or deed, shall be
vested in the Surviving Corporation, which shall thenceforth be responsible for
all the liabilities and obligations of each of Merger Sub and the Company.
2.2 CERTIFICATE OF INCORPORATION. Merger Sub's certificate of
incorporation, as in effect at the Effective Time, shall be amended and restated
effective at the Effective Time to be as set forth in the Certificate of Merger,
and, as so amended and restated shall thereafter continue in full force and
effect as the certificate of incorporation of the Surviving Corporation until
altered or amended as provided therein or by law.
2.3 BY-LAWS. Merger Sub's by-laws, as in effect at the Effective Time,
shall be the by-laws of the Surviving Corporation until altered, amended or
repealed as provided therein or by law.
2.4 DIRECTORS AND OFFICERS. The directors of Merger Sub prior to the
Effective Time shall continue to serve after the Effective Time, but Lions Gate
shall immediately thereafter take such action as may be necessary to cause those
Persons mutually agreed upon by the Parties to be elected to serve as directors
of the Surviving Corporation. The members of the board of directors of the
Surviving Corporation, as so reconstituted, shall serve thereafter in accordance
with the certificate of incorporation and by-laws of the Surviving Corporation
and the DGCL. The officers of Merger Sub prior to the Effective Time shall
continue to serve as officers of the Surviving Corporation, but Lions Gate
shall, immediately thereafter, cause those Persons mutually agreed upon by the
Parties to be appointed as the officers of the Surviving Corporation. The
officers of the Surviving Corporation shall thereafter serve at the pleasure of
the board of directors of the Surviving Corporation in accordance with the
certificate of incorporation and by-laws of the Surviving Corporation and the
DGCL.
2.5 EFFECTIVE TIME. The Merger shall become effective at the time and date
that the certificate of merger (the "Certificate of Merger"), in form and
substance acceptable to the Parties, is accepted for filing by the Secretary of
State of the State of Delaware in accordance with the provisions of Section 251
of the DGCL. The Certificate of Merger shall be executed by the Surviving
Corporation and delivered to the Secretary of State of the State of Delaware for
filing on the Closing Date. The date and time when the Merger becomes effective
are referred to herein as the "Effective Time."
2.6 SURRENDER OF COMPANY CERTIFICATES.
(a) EXCHANGE AGENT. Lions Gate shall engage Chase Mellon Shareholder
Services, LLC, or such other institution as may be reasonably approved by
the Company to act as the Exchange Agent in the Merger.
(b) LIONS GATE TO PROVIDE MERGER CONSIDERATION. Within five Business
Days prior to the Effective Time, Lions Gate shall make available to the
Exchange Agent for exchange in accordance with this 0 at least 95% of
(i) the cash component of the Merger Consideration and (ii) any dividends or
distributions to which holders of shares of the Company Common Stock may be
entitled pursuant to Section 0.
(c) EXCHANGE PROCEDURES. Promptly after the Effective Time, Lions Gate
shall cause the Exchange Agent to mail to each holder of record (as of the
Effective Time) of a certificate or
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certificates (the "Company Certificates") which immediately prior to the
Effective Time represented outstanding shares of Company Common Stock whose
shares were converted into the right to receive the Merger Consideration,
(i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Company Certificates shall pass,
only upon delivery of the Company Certificates to the Exchange Agent and
which shall be in such form and have such other provisions as Lions Gate may
reasonably specify) and (ii) instructions for use in effecting the surrender
of the Company Certificates in exchange for the Merger Consideration, cash
in lieu of any fractional shares pursuant to Section 0 and any dividends or
other distributions pursuant to Section 0. Upon surrender of Company
Certificates for cancellation to the Exchange Agent or to such other agent
or agents as may be appointed by Lions Gate, together with such letter of
transmittal, duly completed and validly executed in accordance with the
instructions thereto, the holders of such Company Certificates shall be
entitled to receive the Merger Consideration in exchange therefor, payment
in lieu of fractional shares which such holders have the right to receive
pursuant to Section 0 and any dividends or distributions payable pursuant to
Section 0, and the Company Certificates so surrendered shall forthwith be
canceled. Until so surrendered, outstanding Company Certificates will be
deemed from and after the Effective Time, for all corporate purposes,
subject to Section 0, to evidence the ownership of the number of full shares
of Lions Gate Common Stock into which such shares of the Company Common
Stock shall have been so converted and the right to receive the other Merger
Consideration pursuant to Section 0, the right to receive an amount in cash
in lieu of the issuance of any fractional shares in accordance with Section
0 and any dividends or distributions payable pursuant to Section 0.
(d) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or
other distributions declared or made after the date of this Agreement with
respect to Lions Gate Common Stock with a record date after the Effective
Time, will be paid to the holders of any unsurrendered Company Certificates
with respect to the shares of Lions Gate Common Stock represented thereby
until the holders of record of such Company Certificates shall surrender
such Company Certificates. Subject to applicable law, following surrender of
any such Company Certificates, the Exchange Agent shall deliver to the
record holders thereof, without interest, the Merger Consideration along
with payment in lieu of fractional shares pursuant to Section 0 hereof and
the amount of any such dividends or other distributions with a record date
after the Effective Time payable with respect to such whole shares of Lions
Gate Common Stock.
(e) TRANSFERS OF OWNERSHIP. If certificates for shares of Lions Gate
Common Stock are to be issued in a name other than that in which the Company
Certificates surrendered in exchange therefor are registered, it will be a
condition of the issuance thereof that the Company Certificates so
surrendered will be properly endorsed and otherwise in proper form for
transfer and that the persons requesting such exchange will have paid to
Lions Gate or any agent designated by it any transfer or other taxes
required by reason of the issuance of certificates for shares of Lions Gate
Common Stock in any name other than that of the registered holder of the
Company Certificates surrendered, or established to the satisfaction of
Lions Gate or any agent designated by it that such tax has been paid or is
not payable.
(f) REQUIRED WITHHOLDING. Each of the Exchange Agent, Lions Gate and
the Surviving Corporation shall be entitled to deduct and withhold from any
consideration payable or otherwise deliverable pursuant to this Agreement to
any holder or former holder of the Company Common Stock such amounts as may
be required to be deducted or withheld therefrom under the Code or under any
provision of state, local or foreign tax law or under any other applicable
laws. To the extent such amounts are so deducted or withheld, such amounts
shall be treated for all purposes under this Agreement as having been paid
to the person to whom such amounts would otherwise have been paid.
(g) NO LIABILITY. Notwithstanding anything to the contrary in this
Section 0, neither the Exchange Agent, Lions Gate, the Surviving Corporation
nor any party hereto shall be liable to any
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Person for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law. If any Company
Certificate shall not have been surrendered prior to the date immediately
prior to the date on which such property would otherwise escheat to or
become the property of any Governmental or Regulatory Authority, any such
property, to the extent permitted by applicable law, shall become the
property of the Surviving Corporation, free and clear of all claims or
interest of any person previously entitled thereto.
(h) TERMINATION. Any property provided to the Exchange Agent which
remains undistributed to holders of the Company Certificates for 120 days
after the Effective Time shall be delivered to Lions Gate, upon demand, and
any holders of the Company Certificates who have not theretofore complied
with this 0 shall thereafter look only to Lions Gate or the Surviving
Corporation for, and Lions Gate and the Surviving Corporation shall remain
liable for, payment of their claim for Merger Consideration, any cash in
lieu of fractional shares of Lions Gate Common Stock and any dividends or
distributions with respect to Lions Gate Common Stock, without interest
thereon.
2.7 MERGER CONSIDERATION; CONVERSION AND CANCELLATION OF SECURITIES.
(a) CONVERSION OF COMPANY CAPITAL STOCK. At the Effective Time of the
Merger each of the issued and outstanding shares of the common stock of the
Company, par value of $0.001 per share (the "Company Capital Stock")
outstanding immediately before the Effective Time, other than shares
described in Section 0 and other than Dissenting Shares, shall be converted,
by virtue of the Merger and without any further action on the part of the
holders thereof, into:
(i) the right to receive U.S.$4.50 in cash; and
(ii) 2 shares of Lions Gate Common Stock; provided, however, that to
the extent the Market Price per share of Lions Gate Common Stock as of
the fifth calendar day prior to the date of the Company Shareholders'
Meeting (and not any adjournment thereof) ("Current Market Price") is
less than U.S.$2.75 per share, then the number of shares of Lions Gate
Common Stock delivered as part of the Merger Consideration shall be the
result obtained by dividing U.S.$5.50 by the Current Market Price.
If between the date of this Agreement and the Closing Date, Lions Gate shall
subdivide or combine the outstanding Lions Gate Common Stock or shall declare a
dividend on Lions Gate Common Stock payable in Lions Gate Common Stock (or set a
record date with respect thereto), the number of shares of Lions Gate Common
Stock determined above shall be adjusted to reflect fully the appropriate effect
of any such subdivision, combination or dividend.
(b) TREASURY SHARES, ETC. Each share of Company Capital Stock held in
the treasury of the Company and each share of Company Capital Stock, if any,
held by Lions Gate or any Subsidiary of Lions Gate or of the Company
immediately before the Effective Time shall be cancelled and extinguished,
and nothing shall be issued or paid in respect thereof.
(c) MERGER SUB SHARES. Each share of common stock, par value U.S.$1.00
per share, of Merger Sub issued and outstanding immediately before the
Effective Time shall remain issued and outstanding, and shall in all other
respects remain unaffected by the Merger.
(d) FRACTIONAL SHARES. No certificates or scrip evidencing fractional
shares of Lions Gate Common Stock shall be issued in exchange for Company
Capital Stock. In lieu of any such fractional shares, each holder of Company
Capital Stock shall be paid an amount in cash (without interest), rounded
upward to the nearest cent, determined by multiplying (i) the Market Price
on the Closing Date of the Lions Gate Common Stock by (ii) the fractional
share of Lions Gate Common Stock to which such holder would otherwise be
entitled (taking into account all shares held of record by such holder at
the Effective Time).
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2.8 STOCK TRANSFER BOOKS. At the Effective Time, the stock transfer books
of the Company shall be closed, and there shall be no further registration of
transfers of shares of Company Capital Stock thereafter on the records of the
Company.
2.9 DISSENTING SHARES. Shares of Company Capital Stock which are issued
and outstanding immediately prior to the Effective Time and which are held by
persons who have properly exercised, and not withdrawn or waived, appraisal
rights with respect thereto in accordance with Section 262 of the DGCL or
Section 1300 of the California General Corporation Law ("CGCL"), as applicable
(the "Dissenting Shares"), will not be converted into the right to receive the
Merger Consideration, and holders of such shares of Company Capital Stock will
be entitled, in lieu thereof, to receive payment of the appraised value of such
shares of Company Capital Stock in accordance with the provisions of such
Section 262 or Section 1300 unless and until such holders fail to perfect or
effectively withdraw or lose their rights to appraisal and payment under the
DGCL or the CGCL. If, after the Effective Time, any such holder fails to perfect
or effectively withdraws or loses such right, such shares of Company Capital
Stock will thereupon be treated as if they had been converted at the Effective
Time into the right to receive the Merger Consideration, without any interest
thereon. The Company will give Lions Gate prompt notice of any demands received
by the Company for appraisal of shares of Company Capital Stock. Prior to the
Effective Time, the Company will not, except with the prior written consent of
Lions Gate make any payment with respect to, or settle or offer to settle, any
such demands.
2.10 CLOSING. The closing of the transactions contemplated by this
Agreement and the Collateral Documents ("Closing") shall take place at the
offices of Loeb & Loeb LLP, 10100 Santa Monica Boulevard, Suite 2100, Los
Angeles, California 90067, or at such other location as the parties may agree,
at 8:00 a.m., Pacific Daylight Time, on a Business Day specified by Lions Gate
that may be on, but shall not be more than five Business Days after, all
conditions precedent to the Closing set forth in ARTICLE VIII and ARTICLE IX
have been satisfied or waived, or on such other date and at such other time as
the Parties may agree, provided that all such conditions precedent have been
satisfied or waived. The date on which the Closing actually occurs is referred
to herein as the "Closing Date."
2.11 TREATMENT OF CERTAIN OUTSTANDING OPTIONS.
(a) At the Effective Time, Lions Gate will not assume the Company's
obligations under any of the Options described in Section 3.2(c)(i) of the
Company Disclosure Schedule and the Company shall cause all such Options to
terminate, without liability to Lions Gate or the Surviving Corporation.
Lions Gate shall cooperate with the Company so as to enable Persons who
desire to exercise such Options prior to the Effective Time (which exercise
may be deemed to occur immediately prior to and conditioned upon the Merger)
to effect a complete or partial "cashless exercise" utilizing the Merger
Consideration payable with respect to the Company Shares received (or to be
received) upon the exercise of such Options to pay for both the exercise
price of the Options and any required withholding amounts, provided that the
cash component of the Merger Consideration shall be first applied to the
withholding and then to the exercise price of the Options.
(b) The Board of Directors or compensation committee of the Company and
Lions Gate shall each grant all approvals and take all other actions
required pursuant to Rules 16b-3(d) and 16b-3(e) under the Exchange Act to
cause the disposition in the Merger of the Company Common Stock and Options
and the acquisition in the Merger of Lions Gate Common Stock to be exempt
from the provisions of Section 16(b) of the Exchange Act.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Lions Gate that the statements
contained in this 0 are correct and complete as of the date of this Agreement
and, except as provided in Section 8.1, will be correct and complete as of the
Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout 0, except in the case of
representations and warranties stated to be made as of the date of this
Agreement or as of another date and except for changes contemplated or permitted
by this Agreement).
3.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and each Subsidiary of the Company is a business organization of the
type described in Section 3.1 of the Company Disclosure Statement and is duly
organized, validly existing and in good standing under the laws of the state
identified in Section 3.1 of the Company Disclosure Statement. All of the
Company's Subsidiaries are identified in Section 3.1 of the Company Disclosure
Statement. The Company has, and each of its Subsidiaries has, all requisite
power and authority to own, lease and use its assets as they are currently
owned, leased and used and to conduct its business as it is currently conducted.
The Company is, and each of its Subsidiaries is, duly qualified or licensed to
do business in and is in good standing in each jurisdiction in which the
character of the properties owned, leased or used by it or the nature of the
activities conducted by it make such qualification necessary, all of which are
identified in Section 3.1 of the Company Disclosure Statement, except any such
jurisdiction where the failure to be so qualified or licensed would not have a
Material Adverse Effect on the Company or a material adverse effect on the
validity, binding effect or enforceability of this Agreement or the Collateral
Documents or the ability of the Company to perform its obligations under this
Agreement or any of the Collateral Documents.
3.2 CAPITALIZATION.
(a) The authorized, issued and outstanding capital stock and other
ownership interests of the Company and each of its Subsidiaries (including
all options and warrants to acquire capital stock of the Company and any
Subsidiary) as of June 1, 2000 are fully and accurately described in
Section 3.2(a) of the Company Disclosure Statement.
(b) All of the issued and outstanding ownership interests in each
Subsidiary of the Company are owned, beneficially and of record, by the
Persons set forth in Section 3.2(b) of the Company Disclosure Statement, in
the numbers and percentages set forth therein, and no other Person has any
right, title or interest, whether legal or equitable, in said ownership
interests (except to the extent the Shareholders' ownership of the Company
could be deemed to constitute beneficial ownership of the Company's
Subsidiaries).
(c) Section 3.2(c)(i) of the Company Disclosure Statement lists as of
June 1, 2000 all outstanding or authorized options, warrants, purchase
rights, preemptive rights or other contracts or commitments that could
require the Company or any of its Subsidiaries to issue, sell, or otherwise
cause to become outstanding any of its capital stock or other ownership
interests (collectively "Options"). Except as described in
Section 3.2(c)(ii) of the Company Disclosure Statement, there are no
authorized or outstanding stock appreciation, phantom stock, profit
participation, or similar rights with respect to the Company or any of its
Subsidiaries, and no rights described in Section 3.2(c)(ii) of the Company
Disclosure Statement will be outstanding at the time of the Closing.
(d) All of the issued and outstanding shares of Company Capital Stock,
and all outstanding ownership interests of each of the Company's
Subsidiaries, have been duly authorized and are validly issued and
outstanding, fully paid and nonassessable (with respect to Subsidiaries that
are corporations) and have been issued in compliance with applicable
securities laws and other applicable Legal Requirements, and all of the
outstanding ownership interests of each of the Company's Subsidiaries
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are subject to no Encumbrances other than under the Company Credit
Agreement, or transfer restrictions under applicable securities laws except
as described in Section 3.2(d) of the Company Disclosure Statement.
3.3 AUTHORITY AND VALIDITY. The Company has all requisite corporate power
to execute and deliver, to perform its obligations under, and to consummate the
transactions contemplated by, this Agreement (subject to the approval of the
Company Shareholders as contemplated by Section 6.5 and to receipt of any
consents, approvals, authorizations or other matters referred to in Section
6.4). The execution and delivery by the Company of, the performance by the
Company of its obligations under, and the consummation by the Company of the
transactions contemplated by, this Agreement have been duly authorized by all
requisite action of the Company (subject to the approval of the Company
Shareholders as contemplated by Section 6.5. This Agreement has been duly
executed and delivered by the Company and (assuming due execution and delivery
by the Lions Gate Parties) is the legal, valid, and binding obligation of the
Company, enforceable against it in accordance with its terms, except that such
enforcement may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to enforcement of
creditors' rights generally and (ii) general equitable principles. Upon the
execution and delivery of the Collateral Documents by each Person (other than
the Lions Gate Parties) that is required by this Agreement to execute, or that
does execute, this Agreement or any of the Collateral Documents, and assuming
due execution and delivery thereof by the Lions Gate Parties, the Collateral
Documents will be the legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms,
except that such enforcement may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting or relating to
enforcement of creditors' rights generally and (ii) general equitable
principles.
3.4 NO BREACH OR VIOLATION. Subject to obtaining the consents, approvals,
authorizations, and orders of and making the registrations or filings with or
giving notices to Governmental Authorities and Persons identified in the
exceptions to Section 3.5, the execution, delivery and performance by the
Company of this Agreement and the Collateral Documents to which it is a party,
and the consummation of the transactions contemplated hereby and thereby in
accordance with the terms and conditions hereof and thereof, do not and will not
conflict with, constitute a violation or breach of, constitute a default or give
rise to any right of termination or acceleration of any right or obligation of
the Company under, or result in the creation or imposition of any Encumbrance
upon the Company, any of its Subsidiaries, the Company Assets, the Company
Business or the Company Capital Stock by reason of the terms of (i) the
certificate of incorporation, by-laws or other charter or organizational
document of the Company or any Subsidiary of the Company, (ii) any material
contract, agreement, lease, indenture or other instrument to which the Company
or any Subsidiary of the Company is a party or by or to which the Company, any
Subsidiary of the Company or the Assets may be bound or subject and a violation
of which would result in a Material Adverse Effect on the Company and its
Subsidiaries taken as a whole (a "Material Company Contract"), (iii) any order,
judgment, injunction, award or decree of any arbitrator or Regulatory Authority
or any statute, law, rule or regulation applicable to the Company or any
Subsidiary of the Company or (iv) any Permit of the Company or any Subsidiary of
the Company, which in the case of (ii), (iii) or (iv) above would have a
Material Adverse Effect on the Company or a material adverse effect on the
validity, binding effect or enforceability of this Agreement or the Collateral
Documents or the ability of the Company to perform its obligations under this
Agreement or any of the Collateral Documents.
3.5 CONSENTS AND APPROVALS. Except for (i) requirements under the Exchange
Act, the HSR Act, the NASDAQ Stock Market and the Company Credit Agreement, and
(ii) requirements described in Section 3.5 of the Company Disclosure Statement,
no consent, approval, authorization or order of, registration or filing with, or
notice to, any Regulatory Authority or any other Person is necessary to be
obtained, made or given by the Company or any of its Subsidiaries in connection
with the execution, delivery and performance by them of this Agreement or any
Collateral Document or for the consummation by them of the transactions
contemplated hereby or thereby, except to the extent the failure to obtain any
such
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consent, approval, authorization or order or to make any such registration or
filing would not have a Material Adverse Effect on the Company or a material
adverse effect on the validity, binding effect or enforceability of this
Agreement or the Collateral Documents or the ability of the Company to perform
its obligations under this Agreement or any of the Collateral Documents.
3.6 TITLE TO NON-FILM ASSETS. With respect to all assets and properties of
the Company other than Films:
(a) The Company does not own any real property. Section 3.6 of the
Company Disclosure Statement includes an accurate and complete description
of (i) all real property leased by the Company or any of its Subsidiaries
(identifying the lessee and the lessor and describing the term and the
payment terms) and (ii) each place of business of the Company or any of its
Subsidiaries. The Company and its Subsidiaries have good title to the
material Company Assets, free and clear of any and all Encumbrances, except
(A) Encumbrances arising under the Company Credit Agreement, (B) the matters
described in Section 3.6 of the Company Disclosure Statement (all of which
will have been discharged at or before the Closing unless otherwise
indicated in Section 3.6 of the Company Disclosure Statement),
(C) Permitted Liens, and (D) Encumbrances on property that would not have a
Material Adverse Effect on the Company or a material adverse effect on the
validity, binding effect or enforceability of this Agreement or the
Collateral Documents or the ability of the Company to perform its
obligations under this Agreement or any of the Collateral Documents.
(b) Except as provided by this Agreement, and except as described in
Section 3.2 or 3.6 of the Company Disclosure Statement, no Person has any
right to acquire, directly or indirectly, any interest in any of the
Company's Subsidiaries or any material Company Assets, and there is no
agreement to which the Company, any Subsidiary of the Company or any of
their Affiliates is a party or is otherwise bound relating to the foregoing.
3.7 NON-FILM INTELLECTUAL PROPERTY.
(a) Section 3.7 of the Company Disclosure Statement sets forth a true
and complete list of all registered patents, trademarks, copyrights and
applications therefor relating to assets and properties of the Company other
than Films or matters relating to Films owned by or registered in the name
of the Company or any of its Subsidiaries, or in which the Company or any of
its Subsidiaries has any right, license or interest (the "Company Non-Film
Intellectual Property Rights"). Except as set forth in Section 3.7 of the
Company Disclosure Statement, the Company is not a party to any material
license agreement, either as licensor or licensee, with respect to any
Company Non-Film Intellectual Property Rights. To the knowledge of the
Company, the Company or one of its subsidiaries has good title to or the
right to use all material Company Non-Film Intellectual Property Rights and
all material inventions, processes, designs, formulae, trade secrets and
know-how necessary for the operation of the Company Business without the
payment of any royalty or similar payment.
(b) To the knowledge of the Company, neither the Company nor any of its
Subsidiaries has in its operation of the Company Business infringed upon,
and the operation of the Business as currently conducted does not infringe
upon, any patents, copyrights, trade names, trademarks or service marks of
third parties, except to the extent any such infringement would not have a
Material Adverse Effect on the Company or a material adverse effect on the
validity, binding effect or enforceability of this Agreement or the
Collateral Documents and neither the Company nor any of its Subsidiaries has
received any charge, complaint, claim, demand or notice alleging such
infringement. To the knowledge of the Company, no third party has infringed
upon any Company Non-Film Intellectual Property Rights.
3.8 COMPLIANCE WITH LEGAL REQUIREMENTS. Except as described in
Section 3.8 of the Company Disclosure Statement, the Company and its
Subsidiaries have operated the Company Business in compliance with all Legal
Requirements applicable to the Company and its Subsidiaries except to the extent
the
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failure to operate in compliance with all material Legal Requirements would not
have a Material Adverse Effect on the Company. Except as described in
Section 3.8 of the Company Disclosure Statement, no action, suit, proceeding,
hearing or investigation has been commenced or, to the Company's knowledge,
threatened, and no charge, complaint, claim, demand or notice has been filed,
against the Company or any of its Subsidiaries alleging any failure to so
comply.
3.9 FINANCIAL AND OTHER INFORMATION.
(a) The historical financial statements (including the notes thereto)
("Company Financial Statements") contained in the Company SEC Filings have
been prepared in all material respects in accordance with GAAP applied on a
consistent basis throughout the periods covered thereby (except as may be
indicated in the notes thereto) and present fairly in all material respects
the financial condition of the Persons reported on and their results of
operations as of the dates and for the periods indicated (except as may be
indicated in the notes thereto), subject in the case of the unaudited
financial statements only to normal year-end adjustments (none of which will
be material in amount) and the omission of footnotes. Lions Gate
acknowledges and agrees that Company makes no representation, directly or
indirectly, hereby or otherwise with respect to the impact of the May 2000
amendments to FASB 53.
(b) The Company has filed each Company SEC filing which it was required
to file with the SEC, except to the extent the failure to make such filing
would not have a Material Adverse Effect on the Company or a material
adverse effect on the validity, binding effect or enforceability of this
Agreement or the Collateral Documents or on the ability of the Company or
any of the Company to perform its obligations under this Agreement or the
Collateral Documents. The Company SEC Filings did not, as of their filing
dates contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were or
will be made, not misleading. The Company SEC filings when filed materially
complied with all then applicable requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations promulgated
by the SEC thereunder.
(c) No written information concerning the Company, its Subsidiaries or
its Company Shareholders furnished to Lions Gate by the Company specifically
for inclusion in the Lions Gate Registration Statement will at the time
provided, or as of any later time confirmed in writing by any such Person,
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were or will be
made, not misleading.
3.10 SUBSEQUENT EVENTS. Except as set forth in Section 3.10 of the Company
Disclosure Statement, or to the extent consented to in writing by Lions Gate,
since March 31, 2000, except as disclosed in Company SEC Filings prior to the
date hereof: (i) neither the Company nor any of its subsidiaries has sold,
leased, transferred or assigned any of its material Company Assets outside of
the Ordinary Course; (ii) no third party has accelerated, terminated, modified
or canceled any material agreement, contract, lease or license (or series of
related agreements, contracts, leases and licenses) relating to the Company, any
of its Subsidiaries or the Company Business; (iii) neither the Company nor any
of its Subsidiaries has imposed or permitted the imposition of any Encumbrance
(other than Permitted Liens) upon any of the rights of the Company or its
Subsidiaries in its material Assets outside of the Ordinary Course;
(iv) neither the Company nor any of its Subsidiaries has made any material
capital investment in, any loan to, or any Acquisition of the securities or
assets of, any other Person (or series of related capital investments, loans or
Acquisitions) other than loans to or investments in Subsidiaries of the Company;
(v) neither the Company nor any of its Subsidiaries has delayed or postponed the
payment of accounts payable and other Liabilities outside the Ordinary Course in
excess of $100,000 (exclusive of matters being contested in good faith);
(vi) neither the Company nor any of its Subsidiaries has canceled, compromised,
waived or released any rights or claims outside the Ordinary Course involving
more than the reasonable approximation of
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$100,000 in the aggregate; and (vii) neither the Company nor any of its
Subsidiaries have committed to any of the foregoing. Since March 31, 2000, there
has not been any other occurrence, event, incident, action, failure to act or
transaction involving the Company or any of its Subsidiaries which is reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect on
the Company.
3.11 UNDISCLOSED LIABILITIES.
(a) As of the date of this Agreement, neither the Company nor any of its
Subsidiaries has any Liability, except for (i) Liabilities reflected,
accrued or reserved against in the Company Financial Statements as of
March 31, 2000 or the notes thereto or disclosed in the Company SEC Filings,
(ii) Liabilities incurred after March 31, 2000 in the Ordinary Course,
(iii) Liabilities incurred after March 31, 2000 under the Company Credit
Agreement to finance expenditures not prohibited by this Agreement,
(iv) Liabilities disclosed in Section 3.11 of the Company Disclosure
Statement and (v) Liabilities incurred in connection with this Agreement.
(b) As of the Closing Date, neither the Company nor any of its
Subsidiaries will have any Liability, except for (i) Liabilities reflected,
accrued or reserved against in the Company Financial Statements as of
March 31, 2000, or the notes thereto, (ii) current Liabilities incurred
after March 31, 2000, in the Ordinary Course, (iii) Liabilities incurred
after March 31, 2000, under the Company Credit Agreement to finance
expenditures not prohibited by this Agreement, (iv) Liabilities disclosed in
Section 3.11 of the Company Disclosure Statement, and (v) liabilities
incurred in connection with this Agreement.
3.12 LEGAL PROCEEDINGS. Except as set forth in Section 3.12 of the Company
Disclosure Statement, (i) there are no outstanding judgments or orders against
or otherwise affecting or related to the Company, any of its Subsidiaries, the
Company Business or the Company Assets; (ii) there is no action, suit,
complaint, proceeding or investigation, judicial, administrative or otherwise,
that is pending or, to the Company's knowledge, threatened that, if adversely
determined, would have a Material Adverse Effect on the Company or a material
adverse effect on the validity, binding effect or enforceability of this
Agreement or the Collateral Documents.
3.13 TAXES. The Company has, and each of its Subsidiaries has, duly and
timely filed in proper form all Tax Returns for all Taxes required to be filed
with the appropriate Regulatory Authority, except where such failure would not
have a Material Adverse Effect on the Company. All Taxes due and payable by the
Company and any of its Subsidiaries (or claimed to be due and payable) have been
paid (regardless whether Tax Returns relating to such Taxes have been duly and
timely filed or, if filed, regardless whether such Tax Returns are deficient),
except such amounts as (i) are not in the aggregate material or (ii) are being
contested diligently and in good faith by appropriate proceedings and for which
there are adequate reserves in the Company Financial Statements. The Company has
furnished to Lions Gate true and correct copies of all income Tax Returns filed
by it or any of its Subsidiaries in the past three years, all of which are
accurate and complete in all material respects. Except as set forth in
Section 3.13 of the Company Disclosure Statement, there are no pending Tax
audits, claims or proceedings relating to the Company any of its Subsidiaries,
the Company Assets or the Company Business or income therefrom. Neither the
Company nor any of its Subsidiaries has agreed to any waiver or extension of any
statute of limitations relating to any Tax. Except as set forth in Section 3.13
of the Company Disclosure Statement, neither the Company nor any of its
Subsidiaries is a: (i) member of a partnership, joint venture or other entity
that may allocate income or Taxes to any of its members or (ii) party to any
joint filing arrangement with any third party. Neither the Company nor any of
its Subsidiaries is liable for any Tax of any other Person (other than the
Company or a Subsidiary being acquired by Lions Gate in the Merger). Neither the
Company nor any of its Subsidiaries has an outstanding power of attorney
authorizing any Person to act on its behalf in connection with any Tax or Tax
Return. Neither the Company nor any of its Subsidiaries has an outstanding
closing agreement, request for a ruling or determination, request for a change
in method of accounting, subpoena or request for information with or by any
Regulatory Authority with respect to any Tax or Tax
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return. Neither the Company nor any of its Subsidiaries is required to include
any adjustment under Section 481 of the Code or any corresponding provision of
any Legal Requirement in income for any period ending after March 31, 2000.
3.14 EMPLOYEE BENEFITS; EMPLOYEES. All Employee Benefit Plans maintained
or contributed to by the Company are set forth in Section 3.14 of the Company
Disclosure Statement. Except as set forth in Section 3.14 of the Company
Disclosure Statement:
(a) To the extent applicable, all such Employee Benefit Plans are, and
have been at all times since their establishment, qualified for federal
income tax purposes under Code Section 401(a) and the related trusts are,
and have been at all times since their establishment, exempt from federal
income tax under Code Section 501(a). All such Employee Benefit Plans are in
compliance in all material respects with all applicable provisions of ERISA,
including, but not limited to, the applicable reporting and disclosure
requirements, as they relate to such plans, and the Company is not subject
to any Liabilities based on past non-compliance, if any except to the extent
such Liabilities would not have a Material Adverse Effect on the Company.
Lions Gate and Merger Sub are not presently required under ERISA, the Code,
any collective bargaining agreement or any other agreement to maintain or to
continue to contribute to any Employee Benefit Plan maintained or
contributed to by the Company.
(b) The Company has made all required contributions under each Employee
Benefit Plan listed in Section 3.14 of the Company Disclosure Statement for
all periods through and including the fiscal year ended June 30, 1999, and
has made all required contributions for subsequent periods or has provided
adequate accruals therefor in the Company Financial Statements, except to
the extent the failure to make such contributions or accruals would not have
a Material Adverse Effect on the Company.
(c) There is not now, and has not been, any violation of the Code or
ERISA with respect to the filing of applicable reports, documents, and
notices regarding the Employee Benefit Plans maintained or contributed to by
the Company with the Secretary of Labor and the Secretary of the Treasury or
the furnishing of such documents to the participants or beneficiaries of the
Employee Benefit Plans, except to the extent such violation would not have a
Material Adverse Effect on the Company.
(d) No fiduciary or other party in interest with respect to any of the
Employee Benefit Plans maintained or contributed to by the Company has
caused any of such plans to engage in a "prohibited transaction," as defined
in ERISA Section 406.
(e) The Company has never been obligated to contribute to any
Multiemployer Plan to any benefit or pension plan or arrangement involving
employees or service providers who do not ordinarily report for work within
the United States, other than plans established by unions, guilds or similar
Persons in connection with the motion picture industry.
(f) There has been no violation of the "continuation coverage
requirements" of "group health plans" as set forth in Code Section 4980B and
Part 6 of Subtitle B of Title I of ERISA or the "HIPAA" requirements as set
forth in Code Sections 9801 and 9802 and Part 7 of Subtitle B of ERISA with
respect to any Employee Benefit Plan maintained by the Company to which such
requirements apply.
(g) The Company does not maintain retiree life and retiree health
insurance plans which are Employee Welfare Benefit Plans providing for
continuing benefits or coverage for any employee or any beneficiary of any
employee after such employee's termination of employment (except to the
extent such continued coverage is required by Code Section 4980B and Part 6
of Subtitle B of Title I of ERISA).
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(h) Prior to the Closing, the Company will not establish or create any
new Employee Benefit Plan, except with the consent of Lions Gate, nor will
the Company amend or modify as to any benefit or in any other way any
existing Employee Benefit Plan, except with the consent of Lions Gate.
(i) The Company does not maintain and is not obligated to contribute to
any Employee Benefit Plan that is a defined benefit plan, and has not
maintained and has not been obligated to contribute to such a plan within
the last six years.
(j) "Company," as used in subsections (a) through (i) of this Section 0
shall include any other entity required to be aggregated with the Company
under Sections 414(b), 414(c), 414(m), or 414(o) of the Code and the
regulations thereunder.
(k) Except as set forth in Section 3.14 of the Company Disclosure
Statement, there are no collective bargaining agreements applicable to any
Persons employed by the Company or any of its Subsidiaries, and to the
knowledge of the Company the Company and its Subsidiaries have no duty to
bargain with any labor organization with respect to any such Person. There
are not pending any unfair labor practice charges against the Company or any
of its Subsidiaries, nor is there any demand for recognition, or any other
request or demand from a labor organization for representative status with
respect to any Person employed by the Company or any of its Subsidiaries.
(l) The Company and its Subsidiaries are in substantial compliance with
all applicable Legal Requirements respecting employment conditions and
practices, have withheld all amounts required by any applicable Legal
Requirements or Contracts to be withheld from the wages or salaries of their
employees, and are not liable for any arrears of wages or any Taxes or
penalties for failure to comply with any of the foregoing, except to the
extent the failure to withhold any such amounts would not have a Material
Adverse Effect on the Company.
(m) The Company and its Subsidiaries have not engaged in any unfair labor
practice within the meaning of the National Labor Relations Act and have not
violated any Legal Requirement prohibiting discrimination on the basis of
race, color, national origin, sex, religion, age, marital status, or
handicap in their employment conditions or practices, except where such
violations would not have a Material Adverse Effect on the Company. There is
not pending or, to the best of the Company's knowledge, threatened any
discrimination complaint relating to race, color, national origin, sex,
religion, age, marital status, or handicap against the Company or any of its
Subsidiaries before any Regulatory Authority.
3.15 MATERIAL COMPANY CONTRACTS. Except as set forth in Section 3.15 of
the Company Disclosure Statement:
(a) Each Material Company Contract is legal, valid, binding, enforceable
and in full force and effect;
(b) Subject to obtaining any consent referred to in Section 3.4 or
disclosed in Section 3.4 of the Company Disclosure Schedule, the
transactions contemplated by this Agreement will not prevent the Material
Company Contract from continuing to be legal, valid, binding, enforceable
and in full force and effect on identical terms following the consummation
of the transactions contemplated hereby; and
(c) Neither the Company nor any of its Subsidiaries, nor, to the
knowledge of the Company, any other party thereto, is in material breach or
default, and no event has occurred which with notice or lapse of time would
constitute a material breach or default, or permit termination, modification
or acceleration, under the Material Company Contract.
3.16 BOOKS AND RECORDS. The books and records of the Company and its
Subsidiaries accurately and fairly represent the Company Business and its
results of operations in all material respects. All
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accounts receivable and inventory of the Company Business are reflected properly
on such books and records in all material respects.
3.17 INSURANCE. Except as set forth in Section 3.17 of the Company
Disclosure Statement, the Company has policies of insurance and bonds of the
type and in amounts customarily carried by persons conducting businesses or
owning assets similar to those of the Company and its Subsidiaries. As of the
date of this Agreement, there is no material claim pending under any of such
policies or bonds as to which coverage has been denied or disputed by the
underwriters of such policies or bonds. All premiums due and payable under all
such policies and bonds have been paid and the Company and the Company
subsidiaries are otherwise in compliance in all material respects with the terms
of such policies and bonds. Except as set forth in Section 3.17 of the Company
Disclosure Statement, the Company has no knowledge of any threatened termination
of any such policies.
3.18 ENVIRONMENTAL MATTERS. Except as set forth in Section 3.18 of the
Company Disclosure Statement, neither the Company nor any of the Company
Subsidiaries has violated any environmental, safety or similar law or regulation
applicable to its business or property relating to the protection of human
health and safety, the environment or hazardous or toxic substances or waste,
pollutants or contaminants ("Environmental Laws"), lacks any permits, licenses
or other approvals required of them under applicable Environmental Laws or is
violating any term or condition of any such permit, license or approval, except
in each case as would not, individually or in the aggregate, result in a
Material Adverse Effect on the Company.
3.19 MATTERS REGARDING THE COMPANY FILM LIBRARY.
(a) Section 3.19(a) of the Company Disclosure Statement sets forth a
true and correct list of substantially all of the Films in the Company Film
Library, specifying for each Top Company Film the territory, term and media
for which the applicable rights are held. The Company and/or its
Subsidiaries hold all such rights as are necessary for the distribution,
exhibition and exploitation of the Top Company Films in the territories, in
the media, and for the term indicated in Section 3.19(a) of the Company
Disclosure Statement without, to the Company's knowledge, infringing or
violating any laws or rights of third parties. Neither the Company nor any
of its Subsidiaries has engaged in television series production or is
contractually obligated to engage in television series production or has
acquired, or is contractually obligated to acquire, other than with respect
to its video distribution business, any rights in any produced television
series or episode thereof.
(b) Section 3.19(b) of the Company Disclosure Statement sets forth a
true, correct and complete list of all agreements granting any equity or
income stream interest (other than talent or producer participations) in any
Top Company Film or any other Film listed on Exhibit 5 to this Agreement,
and all film production financing agreements (other than agreements
regarding television licensing fees or producer participations) with parties
other than financial institutions, to which the Company or any of its
Subsidiaries is a party. Section 3.19(b) of the Company Disclosure Statement
also sets forth a true, correct and complete list of: (i) all Film Asset
Exploitation Agreements between the Company or any of its Subsidiaries and
any video wholesale distributor or involving any video sharing arrangement;
and (ii) all Film Asset Exploitation Agreements to which the Company or any
of its Subsidiaries is a party which constitute original license agreements,
or require the Company or any of its Subsidiaries to transfer rights to or
to deliver Physical Properties, with respect to any Film that is not:
(A) in the Company Film Library; or (B) as of the date of this Agreement, a
Film with respect to which the Company or one of its Subsidiaries has
executed a binding acquisition agreement, but with respect to which the
Company's or such Subsidiary's rights have not yet vested because it has not
yet paid in full the fixed purchase price or minimum guarantee; or (C) a
Company Development Project.
(c) Except as set forth in Section 3.19(c) of the Company Disclosure
Statement, each Film Asset Acquisition Agreement with respect to a Top
Company Film to which the Company or any of its Subsidiaries is a party is
the valid and binding obligation of each party thereto, enforceable in
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accordance with its terms and is in full force and effect; to the Company's
knowledge, no party to any such Film Asset Acquisition Agreement or has
breached any provision of or is in default under the terms of any such
agreement (other than failures to deliver music licenses in cases in which
the Company or its applicable Subsidiary has withheld payment of a portion
of the fixed compensation or minimum guarantee to cover the delivery of such
music licenses); and the consummation of the transactions contemplated by
this Agreement will not give any party the right to terminate, or result in
the termination of, any such agreement.
(d) Except as set forth in Section 3.19(d) of the Company Disclosure
Statement, the Company and each of its Subsidiaries has casualty insurance
and errors and omissions insurance with an independent carrier covering the
Films in the Company Film Library, in each case to the extent and in the
manner customary for companies engaged in a similar business or owning
similar assets. Section 3.19(d) of the Company Disclosure Statement is a
true, complete and correct list of all casualty and errors and omissions
insurance policies maintained by the Company or any of its Subsidiaries with
respect to the Films in the Company Film Library (other than policies
covering a single Film). The Company's umbrella errors and omissions
insurance policies provide that, immediately upon the expiration of the
single film errors and omissions policy with respect to any Film produced or
acquired by the Company or any of its Subsidiaries, coverage under the
Company's umbrella errors and omissions policies is extended to cover such
Films. Except as disclosed in Section 3.19(d) of the Company Disclosure
Statement, no insurance claims in an amount exceeding $30,000 have been made
and are currently outstanding and unsettled as of the date of this Agreement
on the producer's errors and omissions policies that the Company or any of
its Subsidiaries maintained or maintains with respect to the Films in the
Company Film Library.
(e) Section 3.19(e) of the Company Disclosure Statement sets forth a
true, correct and substantially complete list of the locations of all of the
Physical Properties in which the Company or any of its Subsidiaries has any
right, title or interest relating to any of the Top Company Films. There are
no other locations of any such Physical Properties, and, except as disclosed
on Section 3.19(e) of the Company Disclosure Statement, all amounts due from
the Company or its Subsidiaries to the laboratories in respect of such
Physical Properties have been paid in full, except in the ordinary course of
business. The Company and its Subsidiaries have in their possession, or have
access pursuant to written agreements with laboratories to, sufficient
positive print, preprint and sound materials relating to each Top Company
Film to enable them to distribute, exhibit, exploit and license the
distribution and exhibition rights in such Top Company Films and to fulfill
the delivery requirements under all Film Asset Exploitation Agreements with
respect to the Top Company Films. All Physical Properties in which the
Company or any of its Subsidiaries has any right, title or interest relating
to Top Company Films are of a commercially acceptable quality suitable for
the making of commercially reasonable sound materials, prints, tapes and
other material (including, but not limited to, interpositives and
internegatives, where available) and dubbed and subtitled versions thereof
suitable for use in the exploitation of the rights in the Top Company Films
by all means and in all media.
(f) The respective rights, titles and interests of the Company or its
Subsidiaries in and to the Top Company Films are free and clear of all
Encumbrances, other than Encumbrances set forth in Section 3.19(f) of the
Company Disclosure Statement; Encumbrances in favor of the Company's line
lender; Encumbrances in favor of the production financier or completion
guarantor with respect to such Top Company Film; Encumbrances in favor of a
motion picture talent guild or film laboratory; and Encumbrances granted to
licensors or licensees of rights with respect to such Top Company Film in
the ordinary course of business.
(g) Except as disclosed in Section 3.19(g) of the Company Disclosure
Statement, neither the Company nor any of its Subsidiaries has received any
notice that any other party thereto intends to cancel, terminate or
repudiate any of the Film Asset Acquisition Agreements relating to any Top
Company Film to which the Company or any of its Subsidiaries is a party.
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(h) Other than as disclosed in Section 3.19(h) of the Company Disclosure
Statement, all advances and guarantees payable prior to the date hereof by
the Company or any of its Subsidiaries in connection with the Top Company
Films have been fully paid, all other obligations of the Company and its
Subsidiaries in connection with the Top Company Films required to be
performed prior to the date of execution of this Agreement (including,
without limitation, delivery obligations) have been fully performed, and
there is no condition or event which, upon notice or lapse of time or both,
would constitute a breach or default by the Company or any of its
Subsidiaries relating to any of such Top Company Films.
(i) Each of the Top Company Films is protected by copyright under the
laws of the United States (either under the United States Copyright Act or
under the applicable similar statutory regime of such Film's country of
origin) to the maximum extent permitted by such laws, and good and
sufficient notice of such copyright is affixed to each such Top Company
Film.
(j) To the Company's knowledge, no Film in the Company Film Library, nor
any part thereof, nor any of the literary, dramatic or musical material
contained therein or upon which any such Film is based, nor the exercise by
any authorized person or entity of any right granted to the Company or any
of its Subsidiaries in connection therewith, will violate or infringe upon
the trademark, service mark, tradename, copyright, literary, dramatic,
music, artistic, personal, private, civil, contract or property right or
rights of privacy or any other right, whether tangible or intangible, of any
Person.
(k) Section 3.19(k) of the Company Disclosure Schedule sets forth a
true, correct and complete list of: (i) each Film in the Company Film
Library with respect to which, to the Company's knowledge, any Person has
received a Canadian content certification from the Canadian Audio Visual
Certification Office; (ii) the amount of the estimated Canadian Production
Tax Credit or the comparable tax credit of any Canadian province received or
to be received in connection with such Film; and (iii) the year in which
such Film was delivered (if applicable).
3.20 FILMS IN PROGRESS.
(a) Section 3.20(a) of the Company Disclosure Statement sets forth for
the Company and its Subsidiaries a complete list as of the date of this
Agreement of all Films (i) currently in scheduled pre-production where
talent other than writers are receiving compensation, principal photography
or post-production; or (ii) which the Company or any of its Subsidiaries has
entered into a Film Asset Acquisition Agreement to acquire under which more
than $200,000 of the acquisition price remains outstanding and unpaid as of
the date of this Agreement, but which have not yet been delivered to the
Company or its applicable Subsidiary pursuant thereto (collectively, the
"Company Films In Progress"), together with the amount payable (or which may
become payable) by the Company or any of its Subsidiaries pursuant to any
Film Asset Acquisition Agreement with respect to any Company Film In
Progress. The Company Financial Statements accurately reflect all
obligations of the Company or any of its Subsidiaries in connection with the
financing of production, print and advertising, or minimum guarantee or
other acquisition costs of any of the Company Films in Progress.
(b) Except as disclosed in Section 3.20(b) of the Company Disclosure
Statement, each Company Film In Progress that is a feature-length motion
picture is being produced in color, will if released theatrically in the
United States, be released (or will be capable of being edited to be
released) with a rating that is not more restrictive than the current rating
equivalent to an "R" under the present system or its equivalent rating under
any successor system, and is being produced primarily in the English
language.
(c) The Company or one of its Subsidiaries has (or will by the
commencement of principal photography have) in effect film negative casualty
and errors and omissions insurance coverage relating to each Company Film In
Progress.
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3.21 DEVELOPMENT PROJECTS. Section 3.21 of the Company Disclosure
Statement identifies all material projects in development by or on behalf of the
Company and its Subsidiaries (the "Company Development Projects").
3.22 BROKERS OR FINDERS. Except as disclosed in Section 3.22 of the
Company Disclosure Statement, no broker or finder has acted directly or
indirectly for the Company, the Company or any of its Affiliates in connection
with the transactions contemplated by this Agreement, and neither the Company,
the Company nor any of its Affiliates has incurred any obligation to pay any
brokerage or finder's fee or other commission in connection with the transaction
contemplated by this Agreement.
3.23 FAIRNESS OPINION. Salem Partners LLC has rendered an oral opinion to
the Board of Directors of the Company (to be followed by a written opinion) that
the consideration to be received by the holders of the Company Capital Stock in
the Merger is fair, from a financial point of view, to such holders.
3.24 DISCLOSURE. No representation or warranty of the Company in this
Agreement or in the Collateral Documents and no statement in any certificate
furnished or to be furnished by the Company pursuant to this Agreement
contained, contains or will contain on the date such agreement or certificate
was or is delivered, or on the Closing Date, any untrue statement of a material
fact, or omitted, omits or will omit on such date to state any material fact
necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF LIONS GATE
Each of Lions Gate and Merger Sub, jointly and severally, represents and
warrants to the Company that the statements contained in this 0 are correct and
complete as of the date of this Agreement and, except as provided in Section
9.1, will be correct and complete as of the Closing Date (as though made then
and as though the Closing Date were substituted for the date of this Agreement
throughout this 0, except in the case of representations and warranties stated
to be made as of the date of this Agreement or as of another date).
4.1 ORGANIZATION AND QUALIFICATION. Each of Lions Gate and Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of British Columbia, Canada and the State of Delaware, respectively, and each
Subsidiary of Lions Gate is duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or formation. Lions
Gate has, and each Subsidiary of Lions Gate (including Merger Sub) has all
requisite power and authority to own, lease and use its assets as they are
currently owned, leased and used and to conduct its business as it is currently
conducted. Lions Gate is, and each of its Subsidiaries (including Merger Sub)
is, duly qualified or licensed to do business in and is in good standing in each
jurisdiction in which the character of the properties owned, leased or used by
it or the nature of the activities conducted by it makes such qualification
necessary, except any such jurisdiction where the failure to be so qualified or
licensed and in good standing would not have a Material Adverse Effect on Lions
Gate or a material adverse effect on the validity, binding effect or
enforceability of this Agreement or the Collateral Documents or the ability of
the Company or any of the Lions Gate Parties to perform its obligations under
this Agreement or any of the Collateral Documents.
4.2 CAPITALIZATION.
(a) Lions Gate's authorized capital stock consists of 500,000,000 shares
of Lions Gate Common Stock and 200,000,000 shares of Lions Gate Preferred
Stock, of which 31,421,374 shares and 12,205 shares, respectively, are
issued and outstanding as of June 1, 2000. Subject to Section 7.2, the
issuance by Lions Gate of additional capital stock or other securities
between the date of this Agreement and the Closing Date shall not be deemed
to cause the representations and warranties in this Section to be untrue or
breached as of the Closing Date. The shares of Lions Gate Common Stock
included in the Merger Consideration, when issued in accordance with this
Agreement, will have been duly authorized, validly issued and outstanding
and will be fully paid and nonassessable.
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(b) All of the issued and outstanding ownership interests in each
Subsidiary of Lions Gate are owned, beneficially and of record, by the
Persons set forth in Section 4.2(b) of the Lions Gate Disclosure Statement,
as set forth therein, and no other Person has any right, title or interest,
whether legal or equitable, in said ownership interests (except to the
extent the Shareholders' ownership of Lions Gate could be deemed to
constitute beneficial ownership of the Lions Gate's Subsidiaries).
(c) Section 4.2(c) of the Lions Gate Disclosure Statement lists all
outstanding or authorized options, warrants, purchase rights, preemptive
rights or other contracts or commitments that could require Lions Gate or
any of its Subsidiaries to issue, sell, or otherwise cause to become
outstanding any of its capital stock or other ownership interests
(collectively "Options"). Except as described in Section 4.2(c) of the Lions
Gate Disclosure Statement, there are no authorized or outstanding stock
appreciation, phantom stock, profit participation, or similar rights with
respect to Lions Gate or any of its Subsidiaries.
(d) All of the issued and outstanding shares of Lions Gate Capital
Stock, and all outstanding ownership interests of each of Lions Gate's
Subsidiaries have been duly authorized and are validly issued and
outstanding, fully paid and nonassessable (with respect to Subsidiaries that
are corporations) and have been issued in compliance with applicable
securities laws and other applicable Legal Requirements. The securities of
the Lions Gate Subsidiaries are subject to no Encumbrances other than under
the Lions Gate Credit Agreement, or transfer restrictions under applicable
securities laws except as described in Section 4.2(d) of the Lions Gate
Disclosure Statement.
4.3 AUTHORITY AND VALIDITY. Each Lions Gate Party has all requisite power
to execute and deliver, to perform its obligations under, and to consummate the
transactions contemplated by, this Agreement and the Collateral Documents. The
execution and delivery by each Lions Gate Party of, the performance by each
Lions Gate Party of its respective obligations under, and the consummation by
the Lions Gate Parties of the transactions contemplated by, this Agreement and
the Collateral Documents have been duly authorized by all requisite action of
each Lions Gate Party (subject to the approval of Lions Gate's shareholders as
contemplated by Section 8.3(b)). This Agreement has been duly executed and
delivered by each of the Lions Gate Parties and (assuming due execution and
delivery by the Company) is the legal, valid and binding obligation of each
Lions Gate Party, enforceable against each of them in accordance with its terms.
Upon the execution and delivery by each of the Lions Gate Parties of the
Collateral Documents to which each of them is a party, and assuming due
execution and delivery thereof by the other parties thereto, the Collateral
Documents will be the legal, valid and binding obligations of each such Person,
as the case may be, enforceable against each of them in accordance with their
respective terms.
4.4 NO BREACH OR VIOLATION. Subject to obtaining the consents, approvals,
authorizations, and orders of and making the registrations or filings with or
giving notices to Regulatory Authorities and Persons identified in the
exceptions to Section 0, the execution, delivery and performance by the Lions
Gate Parties of this Agreement and the Collateral Documents to which each is a
party and the consummation of the transactions contemplated hereby and thereby
in accordance with the terms and conditions hereof and thereof, do not and will
not conflict with, constitute a violation or breach of, constitute a default or
give rise to any right of termination or acceleration of any right or obligation
of any Lions Gate Party under, or result in the creation or imposition of any
Encumbrance upon the property of Lions Gate or Merger Sub by reason of the terms
of (i) the certificate of incorporation, by-laws or other charter or
organizational document of any Lions Gate Party, (ii) any contract, agreement,
lease, indenture or other instrument to which any Lions Gate Party is a party or
by or to which any Lions Gate Party or its property may be bound or subject and
a violation of which would result in a Material Adverse Effect on the Company
and its Subsidiaries taken as a whole ("Material Lions Gate Contract"),
(iii) any order, judgment, injunction, award or decree of any arbitrator or
Regulatory Authority or any statute, law, rule or regulation applicable to any
Lions Gate Party or (iv) any Permit of Lions Gate or Merger Sub, which in the
case of (ii), (iii) or (iv) above would have a Material Adverse Effect on Lions
Gate or a material adverse effect on the validity,
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binding effect or enforceability of this Agreement or the Collateral Documents
or the ability of any Lions Gate Party to perform its obligations hereunder or
thereunder.
4.5 CONSENTS AND APPROVALS. Except for requirements under applicable U.S.,
state, Canadian or provincial securities laws, the Toronto Stock Exchange, the
American Stock Exchange and the HSR Act, no consent, approval, authorization or
order of, registration or filing with, or notice to, any Regulatory Authority or
any other Person is necessary to be obtained, made or given by any Lions Gate
Party in connection with the execution, delivery and performance by them of this
Agreement or any Collateral Documents or for the consummation by them of the
transactions contemplated hereby or thereby, except to the extent the failure to
obtain such consent, approval, authorization or order or to make such
registration or filings or to give such notice would not have a Material Adverse
Effect on Lions Gate or a material adverse effect on the validity, binding
effect or enforceability of this Agreement or the Collateral Documents or the
ability of the Company or any of the Lions Gate Parties to perform its
obligations under this Agreement or any of the Collateral Documents.
4.6 TITLE TO ASSETS.
(a) Lions Gate and its Subsidiaries have good title to their material
Lions Gate Assets, free and clear of any and all Encumbrances, except
(A) Encumbrances arising under the Lions Gate Credit Agreement, (B) the
matters described in Section 4.6 of the Company Disclosure Statement,
(C) Permitted Liens, and (D) Encumbrances on property that would not have a
Material Adverse Effect on Lions Gate.
(b) Except as provided by this Agreement, and except as described in
Section 4.2 or 4.6 of the Lions Gate Disclosure Statement, no Person has any
right to acquire, directly or indirectly, any interest in any of Lions
Gate's Subsidiaries or any material Lions Gate Assets, and there is no
agreement to which any Lions Gate Party, any Subsidiary of Lions Gate or any
of their Affiliates is a party or is otherwise bound relating to the
foregoing.
4.7 NON-FILM INTELLECTUAL PROPERTY. Section 4.7 of the Lions Gate
Disclosure Statement sets forth a true and complete list of all registered
patents, trademarks, copyrights and applications therefor relating to assets and
properties of Lions Gate other than Films owned by or registered in the name of
Lions Gate or any of its Subsidiaries, or in which Lions Gate or any of its
Subsidiaries has any right, license or interest (the "Lions Gate Non-Film
Intellectual Property Rights"). Except as set forth in Section 4.7 of the Lions
Gate Disclosure Statement, Lions Gate is not a party to any material license
agreement, either as licensor or licensee, with respect to any Lions Gate
Non-Film Intellectual Property Rights. To the knowledge of Lions Gate, Lions
Gate or one of its subsidiaries has good title to or the right to use all
material Lions Gate Non-Film Intellectual Property Rights and material all
inventions, processes, designs, formulae, trade secrets and know-how necessary
for the operation of Lions Gate Business without the payment of any royalty or
similar payment.
4.8 COMPLIANCE WITH LEGAL REQUIREMENTS. Lions Gate and its Subsidiaries
have operated Lions Gate Business in compliance with all material Legal
Requirements applicable to Lions Gate and its Subsidiaries, except to the extent
the failure to operate in compliance with all material Legal Requirements would
not have a Material Adverse Effect on Lions Gate or a material adverse effect on
the validity, binding effect or enforceability of this Agreement or the
Collateral Documents.
4.9 LEGAL PROCEEDINGS. Except as set forth in Section 4.9 of the Lions
Gate Disclosure Statement or in the Lions Gate Securities Filings, (i) there are
no outstanding judgments or orders against or otherwise affecting or related to
Lions Gate, any of its Subsidiaries, or their business or assets; and
(ii) there is no action, suit, complaint, proceeding or investigation, judicial,
administrative or otherwise, that is pending or, to the best knowledge of any
Lions Gate Party, threatened that, if adversely determined, would have a
Material Adverse Effect on Lions Gate or a material adverse effect on the
validity, binding effect or enforceability of this Agreement or the Collateral
Documents.
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4.10 SUBSEQUENT EVENTS. Since the date of the balance sheet included in
the most recent Lions Gate Securities Filings, there has not been any
occurrence, event, incident, action, failure to act or transaction involving
Lions Gate or any of its Subsidiaries which is reasonably likely, individually
or in the aggregate, to have a Material Adverse Effect on Lions Gate.
4.11 UNDISCLOSED LIABILITIES.
(a) As of the date of this Agreement, neither Lions Gate nor any of its
Subsidiaries has any Liability, except for (i) Liabilities disclosed in the
Lions Gate Securities Filings, (ii) Liabilities incurred after the date of
the balance sheet included in the most recent Lions Gate Securities Filings
in the Ordinary Course, (iii) Liabilities incurred after the date of the
balance sheet included in the most recent Lions Gate Securities Filings
under the Lions Gate Credit Agreement, (iv) Liabilities disclosed in
Section 4.11 of the Lions Gate Disclosure Statement, and (v) Liabilities
incurred in connection with this Agreement.
(b) As of the Closing Date, neither Lions Gate nor any of its
Subsidiaries will have any Liability, except for (i) Liabilities disclosed
in the Lions Gate Securities Filings, (ii) Liabilities incurred after the
date of the balance sheet included in the most recent Lions Gate Securities
Filings in the Ordinary Course, (iii) Liabilities incurred after the date of
the balance sheet included in the most recent Lions Gate Securities Filings
under the Lions Gate Credit Agreement, (iv) Liabilities disclosed in
Section 4.11 of the Lions Gate Disclosure Statement, and (v) Liabilities
incurred in connection with this Agreement.
4.12 TAXES.
(a) Lions Gate has, and each of its Subsidiaries has, duly and timely
filed in proper form all Tax Returns for all Taxes required to be filed with
the appropriate Governmental Authority, except where such failure to file
would not have a Material Adverse Effect on Lions Gate. All Taxes due and
payable by Lions Gate and any of its Subsidiaries (or claimed to be due and
payable) have been paid (regardless whether Tax Returns relating to such
Taxes have been duly and timely filed or, if filed, regardless whether such
Tax Returns are deficient), except such amounts as (i) are not in the
aggregate material or (ii) are being contested diligently and in good faith
by appropriate proceedings and for which there are adequate reserves in the
Lions Gate Financial Statements. Lions Gate has furnished to the Company
true and correct copies of all income Tax Returns filed by it or any of its
Subsidiaries in the past three years, all of which are accurate and complete
in all material respects. There are no pending Tax audits, claims or
proceedings relating to Lions Gate any of its Subsidiaries, the Lions Gate
Assets or the Lions Gate Business or income therefrom. Neither Lions Gate
nor any of its Subsidiaries has agreed to any waiver or extension of any
statute of limitations relating to any Tax. No amount in respect of any
outlay or expense that is deductible for the purposes of computing the
income of Lions Gate for the purposes of the ITA has been owing by Lions
Gate or any of its Subsidiaries, as the case may be, for longer than two
years to a person not dealing at arm's length (for the purposes of the ITA)
with Lions Gate or such Subsidiary at the time the outlay or expense was
incurred. There are no circumstances which exist and would result in, or
which have existed and resulted in, Section 80 of the ITA applying to Lions
Gate or its Subsidiaries. Neither Lions Gate nor any of its Subsidiaries has
an outstanding power of attorney authorizing any Person to act on its behalf
in connection with any Tax or Tax Return. Neither Lions Gate nor any of its
Subsidiaries has an outstanding closing agreement, request for a ruling or
determination, request for a change in method of accounting, subpoena or
request for information with or by any Regulatory Authority with respect to
any Tax or Tax Return. Neither Lions Gate nor any of its Subsidiaries is
required to include any adjustment under Section 481 of the Code or any
corresponding provision of any Legal Requirement in income for any period
ending after March 31, 2000.
(b) Lions Gate, directly and through Subsidiaries, is, and for the
36 months prior to the Closing Date will have continuously been, engaged in
an active trade or business carried on outside the United
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States, within the meaning of Sections 1.367(a)-3(c)(3) and
1.367(a)-2T(b)(2) and--2T(b)(3) of the Treasury Regulations. Lions Gate and
its Subsidiaries have no intention, and as of the Closing Date will have no
intention, to substantially dispose of or discontinue such trade or
business.
4.13 EMPLOYEE BENEFITS; EMPLOYEES. All Employee Benefit Plans maintained
or contributed to by Lions Gate are set forth in Section 4.13 of the Lions Gate
Disclosure Statement. Except as set forth in Section 4.13 of the Lions Gate
Disclosure Statement:
(a) All such Employee Benefit Plans are in substantial compliance with
all applicable Legal Requirements.
(b) There are not pending any unfair labor practice charges against
Lions Gate or any of its Subsidiaries, nor is there any demand for
recognition, or any other request or demand from a labor organization for
representative status with respect to any Person employed by Lions Gate or
any of its Subsidiaries.
(c) Lions Gate and its Subsidiaries are in substantial compliance with
all applicable Legal Requirements respecting employment conditions and
practices, have withheld all amounts required by any applicable Legal
Requirements or Lions Gate to be withheld from the wages or salaries of
their employees, and are not liable for any of arrears of wages or any Taxes
or penalties for failure to comply with any of the foregoing, except to the
extent the failure to withhold any amounts would not have a Material Adverse
Effect.
(d) To the knowledge of Lions Gate, Lions Gate and its Subsidiaries have
not engaged in any unfair labor practice within the meaning of the National
Labor Relations Act and have not violated any Legal Requirement prohibiting
discrimination on the basis of race, color, national origin, sex, religion,
age, marital status, or handicap in their employment conditions or
practices, except where such violations would not have a Material Adverse
Effect on Lions Gate. There is not pending or to the best of Lions Gate's
knowledge, threatened, any discrimination complaint relating to race, color,
national origin, sex, religion, age, marital status or handicap against
Lions Gate or any of its Subsidiaries before any Regulatory Authority.
4.14 MATERIAL LIONS GATE CONTRACTS.
(a) Each Material Lions Gate Contract is legal, valid, binding,
enforceable and in full force and effect;
(b) Subject to obtaining any consent referred to in Section 4.4 or
disclosed in Section 4.4 of the Lions Gate Disclosure Schedule, the
transactions contemplated by this Agreement will not prevent the Material
Lions Gate Contract from continuing to be legal, valid, binding, enforceable
and in full force and effect on identical terms following the consummation
of the transactions contemplated hereby; and
(c) Neither Lions Gate nor any of its Subsidiaries, nor, to the
knowledge of Lions Gate, any other party thereto, is in material breach or
default, and no event has occurred which with notice or lapse of time would
constitute a material breach or default, or permit termination, modification
or acceleration, under the Material Lions Gate Contract.
4.15 BOOKS AND RECORDS. The books and records of Lions Gate and its
Subsidiaries accurately and fairly represent the Lions Gate Business and its
results of operations in all material respects. All accounts receivable and
inventory of the Lions Gate Business are reflected properly on such books and
records in all material respects.
4.16 INSURANCE. Lions Gate has policies of insurance and bonds of the type
and in amounts customarily carried by persons conducting businesses or owning
assets similar to those of Lions Gate and its Subsidiaries. As of the date of
this Agreement, there is no material claim pending under any of such
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policies or bonds as to which coverage has been denied or disputed by the
underwriters of such policies or bonds. All premiums due and payable under all
such policies and bonds have been paid and Lions Gate and the Lions Gate
Subsidiaries are otherwise in compliance in all material respects with the terms
of such policies and bonds. Lions Gate has no knowledge of any threatened
termination of any such policies.
4.17 ENVIRONMENTAL MATTERS. Neither Lions Gate nor any of the Lions Gate
Subsidiaries has violated any Environmental Laws, lacks any permits, licenses or
other approvals required of them under applicable Environmental Laws or is
violating any term or condition of any such permit, license or approval, except
in each case as would not, individually or in the aggregate, result in a
Material Adverse Effect on Lions Gate.
4.18 MATTERS REGARDING LIONS GATE FILM LIBRARY.
(a) Section 4.18(a) of the Lions Gate Disclosure Statement sets forth a
true and correct list of substantially all of the Films in the Lions Gate
Film Library, specifying for each Top Lions Gate Film the territory, term
and media for which the applicable rights are held. Lions Gate and/or its
Subsidiaries hold all such rights as are necessary for the distribution,
exhibition and exploitation of the Top Lions Gate Films in the territories,
in the media, and for the term indicated in Section 4.18(a) of the Lions
Gate Disclosure Statement without, to Lions Gate's knowledge, infringing or
violating any laws or rights of third parties.
(b) Section 4.18(b) of the Lions Gate Disclosure Statement sets forth a
true, correct and complete list of all agreements granting any equity or
income stream interest (other than talent or producer participations) in any
Top Lions Gate Film, and all film production financing agreements (other
than agreements regarding television licensing fees or producer
participations) with parties other than financial institutions, to which
Lions Gate or any of its Subsidiaries is a party. Section 4.18(b) of the
Lions Gate Disclosure Statement also sets forth a true, correct and complete
list of: (i) all Film Asset Exploitation Agreements between Lions Gate or
any of its Subsidiaries and any video wholesale distributor or involving any
video sharing arrangement; and (ii) all Film Asset Exploitation Agreements
to which Lions Gate or any of its Subsidiaries is a party which constitute
original license agreements, or require Lions Gate or any of its
Subsidiaries to transfer rights to or to deliver Physical Properties, with
respect to any Film that is not: (A) in the Lions Gate Film Library; or
(B) as of the date of this Agreement, a Film with respect to which Lions
Gate or one of its Subsidiaries has executed a binding acquisition
agreement, but with respect to which Lions Gate's or such Subsidiary's
rights have not yet vested because it has not yet paid in full the fixed
purchase price or minimum guarantee; or (C) a Lions Gate Development
Project.
(c) Each Film Asset Acquisition Agreement with respect to a Top Lions
Gate Film to which Lions Gate or any of its Subsidiaries is a party is the
valid and binding obligation of each party thereto, enforceable in
accordance with its terms and is in full force and effect; to Lions Gate's
knowledge, no party to any such Film Asset Acquisition Agreement has
breached any provision of or is in default under the terms of any such
agreement (other than failures to deliver music licenses in cases in which
Lions Gate or its applicable Subsidiary has withheld payment of a portion of
the fixed compensation or minimum guarantee to cover the delivery of such
music licenses); and the consummation of the transactions contemplated by
this Agreement will not give any party the right to terminate, or result in
the termination of, any such agreement.
(d) Lions Gate and each of its Subsidiaries has casualty insurance and
errors and omissions insurance with an independent carrier covering the
Films in the Lions Gate Film Library, in each case to the extent and in the
manner customary for companies engaged in a similar business or owning
similar assets. Section 4.18(d) of the Lions Gate Disclosure Statement is a
true, complete and correct list of all casualty and errors and omissions
insurance policies maintained by Lions Gate or any of its Subsidiaries with
respect to the Films in the Lions Gate Film Library (other than policies
covering a single Film). Lions Gate's umbrella errors and omissions
insurance policies provide that, immediately
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upon the expiration of the single film errors and omissions policy with
respect to any Film produced or acquired by Lions Gate or any of its
Subsidiaries, coverage under Lions Gate's umbrella errors and omissions
policies is extended to cover such Films. Except as disclosed in
Section 4.18(d) of the Lions Gate Disclosure Statement, no insurance claims
in an amount exceeding $30,000 have been made and are currently outstanding
and unsettled as of the date of this Agreement on the producer's errors and
omissions policies that Lions Gate or any of its Subsidiaries maintained or
maintains with respect to the Films in the Lions Gate Film Library.
(e) Section 4.18(e) of the Lions Gate Disclosure Statement sets forth a
true, correct and substantially complete list of the locations of all of the
Physical Properties in which Lions Gate or any of its Subsidiaries has any
right, title or interest relating to any of the Top Lions Gate Films. There
are no other locations of any such Physical Properties, and, except as
disclosed on Section 4.18(e) of the Lions Gate Disclosure Statement, all
amounts due from Lions Gate or its Subsidiaries to the laboratories in
respect of such Physical Properties have been paid in full, except in the
ordinary course of business. Lions Gate and its Subsidiaries have in their
possession, or have access pursuant to written agreements with laboratories
to, sufficient positive print, preprint and sound materials relating to each
Top Lions Gate Film to enable them to distribute, exhibit, exploit and
license the distribution and exhibition rights in such Top Lions Gate Films
and to fulfill the delivery requirements under all Film Asset Exploitation
Agreements with respect to the Top Lions Gate Films. All Physical Properties
in which Lions Gate or any of its Subsidiaries has any right, title or
interest relating to Top Lions Gate Films are of a commercially acceptable
quality suitable for the making of commercially reasonable sound materials,
prints, tapes and other material (including, but not limited to,
interpositives and internegatives, where available) and dubbed and subtitled
versions thereof suitable for use in the exploitation of the rights in the
Top Lions Gate Films by all means and in all media.
(f) The respective rights, titles and interests of Lions Gate or its
Subsidiaries in and to the Top Lions Gate Films are free and clear of all
Encumbrances, other than Encumbrances set forth in Section 4.18(f) of the
Lions Gate Disclosure Statement; Encumbrances in favor of Lions Gate's line
lender; Encumbrances in favor of the production financier or completion
guarantor with respect to such Top Lions Gate Film; Encumbrances in favor of
a motion picture talent guild or film laboratory; and Encumbrances granted
to licensors or licensees of rights with respect to such Top Lions Gate Film
in the ordinary course of business.
(g) Except as disclosed in Section 4.18(g) of the Lions Gate Disclosure
Statement, neither Lions Gate nor any of its Subsidiaries has received any
notice that any other party thereto intends to cancel, terminate or
repudiate any of the Film Asset Acquisition Agreements relating to any Top
Lions Gate Film to which Lions Gate or any of its Subsidiaries is a party.
(h) Other than as disclosed in Section 4.18(h) of the Lions Gate
Disclosure Statement, all advances and guarantees payable prior to the date
hereof by Lions Gate or any of its Subsidiaries in connection with the Top
Lions Gate Films have been fully paid, all other obligations of Lions Gate
and its Subsidiaries in connection with the Top Lions Gate Films required to
be performed prior to the date of execution of this Agreement (including,
without limitation, delivery obligations) have been fully performed, and
there is no condition or event which, upon notice or lapse of time or both,
would constitute a breach or default by Lions Gate or any of its
Subsidiaries relating to any of such Top Lions Gate Films.
(i) Except as set forth in Section 4.18(i) of the Lions Gate Disclosure
Statement, each of the Top Lions Gate Films is protected by copyright under
the laws of the United States (either under the United States Copyright Act
or under the applicable similar statutory regime of such Film's country of
origin) to the maximum extent permitted by such laws, and good and
sufficient notice of such copyright is affixed to each such Top Lions Gate
Film.
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(j) To Lions Gate's knowledge, no Film in the Lions Gate Film Library,
nor any part thereof, nor any of the literary, dramatic or musical material
contained therein or upon which any such Film is based, nor the exercise by
any authorized person or entity of any right granted to Lions Gate or any of
its Subsidiaries in connection therewith, will violate or infringe upon the
trademark, service mark, tradename, copyright, literary, dramatic, music,
artistic, personal, private, civil, contract or property right or rights of
privacy or any other right, whether tangible or intangible, of any Person.
(k) Section 4.18(k) of Lions Gate Disclosure Schedule sets forth a true,
correct and complete list of: (i) each Top Lions Gate Film with respect to
which, to Lions Gate's knowledge, any Person has received a Canadian content
certification from the Canadian Audio Visual Certification Office; (ii) the
amount of the estimated Canadian Production Tax Credit or the comparable tax
credit of any Canadian province received or to be received in connection
with such Film; and (iii) the year in which such Film was delivered (if
applicable).
4.19 FILMS IN PROGRESS.
(a) Section 4.19(a) of the Lions Gate Disclosure Statement sets forth
for Lions Gate and its Subsidiaries a complete list as of the date of this
Agreement of all Films (i) currently in scheduled pre-production where
talent other than writers are receiving compensation, principal photography
or post-production; or (ii) which Lions Gate or any of its Subsidiaries has
entered into a Film Asset Acquisition Agreement to acquire under which more
than $200,000 of the acquisition price remains outstanding and unpaid as of
the date of this Agreement, but which have not yet been delivered to Lions
Gate or its applicable Subsidiary pursuant thereto (collectively, the "Lions
Gate Films In Progress"), together with the amount payable (or which may
become payable) by Lions Gate or any of its Subsidiaries pursuant to any
Film Asset Acquisition Agreement with respect to any Lions Gate Film In
Progress. The Lions Gate Financial Statements accurately reflect all
obligations of Lions Gate or any of its Subsidiaries in connection with the
financing of production, print and advertising, or minimum guarantee or
other acquisition costs of any of the Lions Gate Films in Progress.
(b) Except as disclosed in Section 4.19(b) of the Lions Gate Disclosure
Statement, each Lions Gate Film In Progress that is a feature-length motion
picture is being produced in color, will if released theatrically in the
United States, be released (or will be capable of being edited to be
released) with a rating that is not more restrictive than the current rating
equivalent to an "R" under the present system or its equivalent rating under
any successor system, and is being produced primarily in the English
language.
(c) Lions Gate or one of its Subsidiaries has (or will by the
commencement of principal photography have) in effect film negative casualty
and errors and omissions insurance coverage relating to each Lions Gate Film
In Progress.
4.20 DEVELOPMENT PROJECTS. Section 4.20 of the Lions Gate Disclosure
Statement identifies all material projects in development by or on behalf of
Lions Gate and its Subsidiaries (the "Lions Gate Development Projects").
4.21 FINANCIAL AND OTHER INFORMATION.
(a) The historical financial statements (including the notes thereto)
("Lions Gate Financial Statements") contained (or incorporated by reference)
in the Lions Gate Securities Filings have been prepared in accordance with
GAAP applied on a consistent basis throughout the periods covered thereby,
(with reconciliations to U.S. GAAP) and present fairly the financial
condition of the Persons reported on and their results of operations as of
the dates and for the periods indicated, subject in the case of the
unaudited financial statements only to normal year-end adjustments (none of
which will be material in amount) and the omission of footnotes.
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(b) The Lions Gate Securities Filings did not, as of their filing dates,
contain (directly or by incorporation by reference) any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein (or incorporated therein
by reference), in light of the circumstances under which they were or will
be made, not misleading.
(c) No written information concerning Lions Gate, its Subsidiaries or
shareholders furnished to the Company by Lions Gate specifically for
inclusion in the Company Proxy Statement will at the time provided, or as of
any later time confirmed in writing by any such Person, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were or will be made, not misleading.
4.22 CANADIAN CONTROL. Lions Gate and each of its Subsidiaries organized
under the laws of Canada are Canadian Controlled as defined under the Investment
Canada Act.
4.23 CANADIAN TAX CREDITS. Lions Gate and each of its Subsidiaries
organized under the laws of Canada has complied in full with all applicable
Canadian federal and provincial statutory and regulatory requirements and
policies in connection with their respective applications, if any, for Canadian
federal or provincial film or television tax credits.
4.24 CANADIAN SECURITIES COMPLIANCE. Lions Gate has filed all forms,
reports and documents with the BCSC required to be filed by it pursuant to the
Securities Act (British Columbia) and the regulations promulgated thereunder and
the other Canadian Securities Law (the "Canadian Lions Gate Reports"), all of
which complied when filed in all material respects with all applicable
requirements of the Canadian Securities Laws. None of the Canadian Lions Gate
Reports at the time filed, or as subsequently amended, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading.
4.25 CANADIAN SECURITIES LAWS MATTERS. The issuance of the Merger
Consideration will not result in any contravention by Lions Gate of the Canadian
Securities Laws.
4.26 VOTE REQUIRED. The affirmative vote of the holders of greater than
50% of the outstanding Lions Gate Common Stock is the only vote of the holders
of any class or series of securities of Lions Gate necessary to approve the
Merger and all shareholders of such class are entitled to vote upon such matter.
4.27 NO ORDERS. No order suspending the sale or ceasing the trading of the
Lions Gate Common Stock has been issued by any court, securities commission or
regulatory authority in Canada or the United States, and no proceedings for such
purpose are pending or, to the knowledge of Lions Gate, after reasonable
inquiry, threatened.
4.28 LISTINGS. The Lions Gate Common Stock is registered pursuant to
Section 12(b) of the Securities Exchange Act of 1934 and is listed on the
American Stock Exchange and the Toronto Stock Exchange. Lions Gate is a
reporting issuer under the Canadian Securities Laws and Lions Gate is not on the
list of defaulting reporting issuers maintained by any of the Canadian
securities commissions. Lions Gate has taken no actions designed to cause, or
likely to result in, the termination of the registration of the Lions Gate
Common Stock under Section 12(b) of the Securities Exchange Act of 1934 or Lions
Gate's reporting issuer status under the Canadian Securities Laws or the
delisting of the Lions Gate Common Stock from the American Stock Exchange or the
Toronto Stock Exchange, nor has Lions Gate received any notification that the
Securities and Exchange Commission or any Canadian securities commission or the
National Association of Securities Dealers, Inc. or the Toronto Stock Exchange
is contemplating the termination of such registration or listing. Lions Gate is
a reporting issuer (or has equivalent status) only in the Provinces of British
Columbia, Alberta, Manitoba, Ontario and Quebec and is not subject to the filing
obligations under securities laws in any other Canadian jurisdiction.
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4.29 BROKERS OR FINDERS. Except as disclosed in Section 4.29 of the Lions
Gate Disclosure Statement, no broker or finder has acted directly or indirectly
for Lions Gate, any Lions Gate Party or any of their Affiliates in connection
with the transactions contemplated by this Agreement, and neither Lions Gate,
any Lions Gate Party nor any of their Affiliates has incurred any obligation to
pay any brokerage or finder's fee or other commission in connection with the
transaction contemplated by this Agreement.
4.30 FAIRNESS OPINION. Ladenburg Thalmann & Company, Inc. has rendered an
oral opinion to Lions Gate (to be followed by a written opinion) confirming that
the Merger is fair to Lions Gate from a financial point of view.
4.31 DISCLOSURE. No representation or warranty of Lions Gate in this
Agreement or in the Collateral Documents and no statement in any certificate
furnished or to be furnished by Lions Gate pursuant to this Agreement contained,
contains or will contain on the date such agreement or certificate was or is
delivered, or on the Closing Date, any untrue statement of a material fact, or
omitted, omits or will omit on such date to state any material fact necessary in
order to make the statements made, in light of the circumstances under which
they were made, not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF MERGER SUB
Each of Lions Gate and Merger Sub, severally and jointly, represents and
warrants to the Company that the statements contained in ARTICLE V are correct
and complete as of the date of this Agreement and, except as provided in
Section 9.1, will be correct and complete as of the Closing Date (as though made
then and as though the Closing Date were substituted for the date of this
Agreement throughout ARTICLE V), except in the case of representations and
warranties stated to be made as of the date of this Agreement or as of another
date.
5.1 ORGANIZATION AND QUALIFICATION. Merger Sub is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Merger Sub was formed solely for the purpose of engaging in the
transactions contemplated by this Agreement.
5.2 CERTIFICATE OF INCORPORATION AND BYLAWS. Merger Sub has heretofore
made available to the Company a complete and correct copy of the certificate of
incorporation and the bylaws of Merger Sub, each as amended to date. Such
certificate of incorporation and bylaws are in full force and effect. Merger Sub
is not in violation of any of the provisions of its certificate of incorporation
or bylaws.
5.3 AUTHORITY. Merger Sub has the necessary corporate power and authority
to enter into this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by Merger Sub and the consummation by Merger Sub of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action and no other corporate proceedings on the part of
Merger Sub are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by Merger Sub and, assuming the due authorization, execution and
delivery by the Company, constitutes a legal, valid and binding obligation of
Merger Sub, enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and other similar laws of general applicability relating to or
affecting creditors' rights generally and by the application of general
principles of equity.
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5.4 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Agreement by Merger Sub do not,
and the performance by Merger Sub of its obligations under this Agreement
will not (i) conflict with or violate the certificate of incorporation or
bylaws of Merger Sub, (ii) conflict with or violate any law, statute
ordinance, rule, regulation, order, judgment or decree applicable to Merger
Sub or by which any of its properties is bound or affected, or (iii) result
in any breach of or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, or result
in the creation of any Encumbrance on any of the properties or assets of
Merger Sub pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or
obligation to which Merger Sub is a party or by which Merger Sub or any of
its properties or assets is bound or affected, except, in the case of
clauses (ii) and (iii) above for any such conflicts, violations, breaches,
defaults or other alterations or occurrences that would not prevent or delay
consummation of the Merger in any material respect, or otherwise prevent
Merger Sub from performing its obligations under this Agreement in any
material respect.
(b) The execution and delivery of this Agreement by Merger Sub does not,
and the performance of this Agreement by Merger Sub will not, require any
consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Entity, except (i) for (A) applicable
requirements, if any, of the Securities Act, the Exchange Act, state
takeover laws, exchanges on which Lions Gate's securities are traded, the
HSR Act, (B) filings and recordation of appropriate merger documents as
required by Delaware law and (ii) where failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or
notifications, would not prevent or delay consummation of the Merger in any
material respect.
5.5 LEGAL PROCEEDINGS. There are no outstanding judgments or orders
against or otherwise affecting or related to Merger Sub or its business or
assets, and there is no action, suit, complaint, proceeding or investigation,
judicial, administrative or otherwise, that is pending or threatened against or
otherwise affecting or related to Merger Sub or its business or assets.
5.6 VOTE REQUIRED. The affirmative vote of Lions Gate, the sole
shareholder of Merger Sub, is the only vote of the holder of any class or series
of Merger Sub capital stock necessary to approve any of the transactions
contemplated hereby.
ARTICLE VI
PRE-CLOSING COVENANTS OF THE COMPANY
Between the date of this Agreement and the Closing Date:
6.1 ADDITIONAL INFORMATION. The Company shall provide to Lions Gate and
its Representatives such financial, operating and other documents, data and
information relating to the Company and its Subsidiaries, the Company Business
and the Company Assets and Liabilities of the Company and its Subsidiaries, as
Lions Gate or its Representatives may reasonably request. In addition, the
Company shall take all action necessary to enable Lions Gate and its
Representatives to review, inspect and audit the Company Film Library and the
other Assets, the Company Business and Liabilities of the Company and its
Subsidiaries and discuss them with the Company's officers, employees,
independent accountants, customers, licensees, and counsel. Notwithstanding any
investigation that Lions Gate may conduct of the Company and its Subsidiaries,
the Company Business, the Company Assets and the Liabilities of the Company and
its Subsidiaries, the Lions Gate Parties may fully rely on the Company's
warranties, covenants and indemnities set forth in this Agreement, the
Collateral Documents and any documents or certificates delivered hereunder and
thereunder, which will not be waived or affected by or as a result of such
investigation.
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6.2 NO SOLICITATIONS.
(a) From and after the date of this Agreement until the Effective Time
or termination of this Agreement pursuant to ARTICLE XI, the Company will
not, nor will it authorize or permit any of its Subsidiaries or any of their
respective officers, directors, affiliates or employees or any investment
banker, attorney or other advisor or representative retained by any of them
to, directly or indirectly, (i) solicit or initiate the making, submission
or announcement of any Acquisition Proposal, (ii) participate in any
discussions or negotiations regarding, or furnish to any person any
non-public information with respect to any Acquisition Proposal,
(iii) engage in discussions with any Person with respect to any Acquisition
Proposal, except as to the existence of these provisions, (iv) approve,
endorse or recommend any Acquisition Proposal or (v) enter into any letter
of intent or similar document or any contract agreement or commitment
contemplating or otherwise relating to any Acquisition Proposal; provided,
however, that nothing contained in this Agreement shall prohibit or restrict
the Board of Directors of the Company from furnishing information to or
entering into discussions or negotiations with, any Person that makes an
unsolicited (from and after the date of this Agreement) proposal that the
Board of Directors of Company believes may constitute or may lead to a
Superior Offer or to the extent the Board of Directors of Company concludes
in good faith that such action is reasonably necessary for the Board of
Directors of Company to comply with its fiduciary obligations to
shareholders under applicable law. The Company shall provide Lions Gate with
a copy of any correspondence to be delivered by the Company in connection
with such proposal or Superior Offer prior to sending such correspondence to
any third-party.
(b) In addition to the obligations of the Company set forth in
Section 6.2(a), the Company as promptly as practicable shall advise Lions
Gate orally and in writing of any Acquisition Proposal or any request for
non-public information or inquiry which the Company reasonably believes
would lead to an Acquisition Proposal, the material terms and conditions of
such Acquisition Proposal, request or inquiry, and, unless prohibited by
such proposal, the identity of the person or group making any such
Acquisition Proposal, request or inquiry. The Company shall keep Lions Gate
informed as promptly as practicable in all material respects of the status
of any such Acquisition Proposal, request or inquiry.
6.3 CONTINUITY AND MAINTENANCE OF OPERATIONS.
(a) The Company shall, and shall cause its Subsidiaries to: (i) comply in
all material respects with all Legal Requirements applicable to the
Company and its Subsidiaries relating to the Company Business;
(ii) fulfill in all material respects all of its obligations under and
use commercially reasonable efforts to maintain in full force and effect
all Material Company Contracts (other than those that expire by their
terms or as otherwise consented to by Lions Gate), and shall not, without
the prior written consent of Lions Gate, seek to materially alter, modify
or amend any of the foregoing in a manner adverse to the Company or its
Subsidiaries (other than those Material Company Contracts that expressly
provide that they will be amended or modified upon the happening of
specified contingencies, and other than amendments or modifications that
are consented to by Lions Gate); (iii) use its commercially reasonable
efforts to promote the financial success of the Company Business and
promptly notify Lions Gate of any material adverse change in the
condition (financial or otherwise) of the Company Business; and (iv) use
its commercially reasonable efforts to promote, develop and preserve its
relationships with its present employees as well as the goodwill of its
customers and promptly notify Lions Gate of any material adverse change
in such relationships. Without limiting the generality of the foregoing,
the Company shall, and shall cause its Subsidiaries to maintain the
Company Assets in materially good order, condition and repair, maintain
insurance relating to the Company Business in all material respects as in
effect on the date of this Agreement, operate the Company Business in the
Ordinary Course, and keep and maintain all of the books and records in
the Ordinary Course. Other than in the Ordinary Course, the Company and
its Subsidiaries shall not pay or credit in
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any way any accounts receivable prior to the Closing Date, and shall not
permit any of its Representatives to do so either.
(b) The Company shall not, and shall cause its Subsidiaries not to, without
the prior written consent of Lions Gate sell, lease, transfer, convey or
assign any material Company Assets other than in the Ordinary Course (or
enter into any contract to do any of the foregoing) or permit the
creation of any Encumbrance on any of its Company Assets except Permitted
Liens or Liens under the Company Credit Agreement, or as otherwise
contemplated by this Agreement.
(c) Unless the Company shall have obtained the prior written consent of
Lions Gate or except as set forth in Section 6.3(c) of the Company
Disclosure Statement or required by Section 6.13 of this Agreement, the
Company shall not, and shall cause its Subsidiaries not to:
(i) engage in any Acquisition;
(ii) amend the Company Credit Agreement;
(iii) declare or pay any dividends or make any other distributions to
the Company Shareholders;
(iv) redeem or repurchase any stock (other than stock of employees in
connection with termination of their employment on terms consistent with
the terms of any employment agreement described in Section 3.15 of the
Company Disclosure Statement);
(v) issue additional shares of Company Capital Stock (except pursuant
to options outstanding on the date hereof) or additional Options or any
stock appreciation, phantom stock, profit participation or similar
rights;
(vi) incur any material debt (except borrowings under the Company
Credit Agreement to finance expenditures not prohibited by this
Agreement, and other obligations incurred in the Ordinary Course
including, without limitation, project loans for Films);
(vii) make any loans other than in the Ordinary Course; or
(viii) enter into any agreement to do any of the foregoing.
(d) The Company shall not take or omit to take any action that would
cause any of its representations or warranties in this Agreement or the
Collateral Documents to be untrue in any material respect as of the Closing
Date, nor take or omit to take any action that would cause it to be in
breach in any material respect of any of the covenants made by it in this
Agreement or the Collateral Documents or that would, if such action had been
taken or omitted on or before the date of this Agreement, have been required
to be disclosed in Section 3.11 of the Company Disclosure Statement.
6.4 CONSENTS AND APPROVALS
(a) As soon as practicable after execution of this Agreement, the
Company shall use commercially reasonable efforts to obtain any necessary
consent, approval, authorization or order of, make any registration or
filing with or give any notice to, any Regulatory Authority or Person as is
required to be obtained, made or given by the Company to consummate the
transactions contemplated by this Agreement and the Collateral Documents,
including, without limitation, the consent of Chase Manhattan Bank under the
Company Credit Agreement without giving rise to any prepayment, penalty or
premium, and all of the authorizations, consents, approvals, actions,
filings or notices set forth in Section 3.5 of this Agreement or
Section 3.5 of the Company Disclosure Statement.
(b) The Company shall cooperate with Lions Gate in providing such
information and reasonable assistance as may be required in connection with
the obligations of the Lions Gate Parties under Section 7.4(a).
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6.5 MEETING OF THE COMPANY SHAREHOLDERS.
(a) Promptly after the date hereof, but subject to Section 6.5(c), the
Company will take all action necessary in accordance with the DGCL and its
Certificate of Incorporation and by-laws to convene a meeting of the
Company's shareholders to consider adoption and approval of this Agreement
and approval of the Merger (the "Company Shareholders' Meeting") to be held
as promptly as practicable. Subject to Section 6.5(c), the Company will use
its commercially reasonable efforts to solicit from its shareholders proxies
in favor of the adoption and approval of this Agreement and the approval of
the Merger and will take all other action necessary or advisable to secure
the vote or consent of its shareholders required by the DGCL to obtain such
approvals. Notwithstanding anything to the contrary contained in this
Agreement, the Company may adjourn or postpone the Company Shareholders'
Meeting to the extent necessary to ensure that any necessary supplement or
amendment to the Company's proxy statement is provided to the Company's
shareholders in advance of a vote on the Merger and this Agreement or, if as
of the time for which the Company Shareholders' Meeting is originally
scheduled (as set forth in the Company's proxy statement) there are
insufficient shares of the Company Common Stock represented (either in
person or by proxy) to constitute a quorum necessary to conduct the business
of the Company's Shareholders' Meeting. Subject to Section 6.5(c), the
Company shall ensure that the Company Shareholders' Meeting is called,
noticed, convened, held and conducted, and that all proxies solicited by the
Company in connection with the Company Shareholders' Meeting are solicited,
in compliance with the DGCL, the Company's Certificate of Incorporation and
by-laws, and all other applicable laws.
(b) Subject to Section 6.5(c): (i) the Board of Directors of the Company
shall recommend that the Company's shareholders vote in favor of and adopt
and approve this Agreement and approve the Merger at the Company
Shareholders' Meeting; (ii) the Company's proxy statement shall include a
statement to the effect that the Board of Directors of the Company has
recommended that the Company's shareholders vote in favor of and adopt and
approve this Agreement and the Merger at the Company Shareholders' Meeting;
and (iii) neither the Board of Directors of the Company nor any committee
thereof shall withdraw, amend or modify, or propose or resolve to withdraw,
amend or modify in a manner adverse to Lions Gate, the recommendation of the
Board of Directors of the Company that the Company's shareholders vote in
favor of and adopt and approve this Agreement and the Merger.
(c) Nothing in this Agreement shall prevent the Board of Directors of
the Company from withholding, withdrawing, amending or modifying its
recommendation in favor of the Merger if (i) a Superior Offer is made to the
Company and is not withdrawn, (ii) the Company shall have provided written
notice to Lions Gate (a "Notice of Superior Offer") advising Lions Gate that
the Company has received a Superior Offer, specifying the material terms and
conditions of such Superior Offer and identifying the person or entity
making such Superior Offer, (iii) Lions Gate shall not have, within five
Business Days of Lions Gate's receipt of the Notice of Superior Offer, made
an offer that the Company's Board of Directors by a majority vote determines
in its good faith judgment to be at least as favorable to the Company's
Shareholders as such Superior Offer (it being agreed that the Company Board
shall convene a meeting to consider any such offer by Lions Gate promptly
following the receipt thereof), (iv) the Board of Directors of the Company
concludes in good faith, after consultation with its outside counsel, that,
in light of such Superior Offer, the withholding, withdrawal, amendment or
modification of such recommendation is required or advisable in order for
the Board of Directors of the Company to properly discharge its fiduciary
obligations to the Company Shareholders under applicable laws and (v) the
Company shall not have violated in any material respect any of the
restrictions set forth in Section 6.2 or this Section 6.5. The Company shall
provide Lions Gate with at least three Business Days prior notice (or such
lesser prior notice as provided to the members of the Company's Board of
Directors but in no event less than 24 hours) of any meeting of the
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Company's Board of Directors at which the Company's Board of Directors is
reasonably expected to consider any Acquisition Proposal.
6.6 SECURITIES FILINGS; FINANCIAL INFORMATION. The Company shall make all
required filings with the Commission at or before the date they are due and
shall simultaneously furnish Lions Gate with a copy thereof. The Company shall,
promptly after execution of this Agreement and from time to time thereafter,
provide such information and documents to Lions Gate and its Affiliates
concerning the Company, its Subsidiaries and shareholders as may be required or
appropriate for inclusion in the Lions Gate Merger Registration Statement or any
other filing, notification or report made by Lions Gate or any Affiliate of
Lions Gate under the Securities Act, the Exchange Act or any state, provincial
or Canadian securities law; shall cause their respective counsel and independent
accountants to cooperate with Lions Gate, its Affiliates and their investment
bankers, counsel and independent accountants in the preparation of such filings,
notifications and reports; and shall use their best efforts to obtain consents
and "comfort letters" from such accountants as required in connection with such
filings, notifications and reports. The Company represents and warrants to Lions
Gate that no information or document provided by the Company for inclusion in
any filing, notification or report made by Lions Gate or any Affiliate under the
Securities Act, the Exchange Act or any state, provincial or Canadian securities
law will contain any untrue statement of material fact or omit to state any
material fact necessary in order to make the statements made therein, in light
of the circumstances under which they are made, not misleading.
6.7 NOTIFICATION OF CERTAIN MATTERS. The Company shall promptly notify
Lions Gate of any fact, event, circumstance or action known to it that is
reasonably likely to cause the Company to be unable to perform any of its
covenants contained herein or any condition precedent in ARTICLE VIII not to be
satisfied, or that, if known on the date of this Agreement, would have been
required to be disclosed to Lions Gate pursuant to this Agreement or the
existence or occurrence of which would cause any of the Company's
representations or warranties under this Agreement not to be correct and/or
complete. The Company shall give prompt written notice to Lions Gate of any
adverse development causing a breach of any of the representations and
warranties in ARTICLE III. However, except as provided in Section, no disclosure
pursuant to this Section, shall be deemed to amend or supplement this Agreement
or to prevent or cure any misrepresentation, breach of warranty, or breach of
covenant by the Company.
6.8 COMPANY DISCLOSURE STATEMENT. The Company shall, from time to time
prior to Closing, supplement the Company Disclosure Statement with additional
information that, if existing or known to it on the date of delivery of the
Company Disclosure Statement to the Lions Gate Parties, would have been required
to be included therein. For purposes of determining the satisfaction of any of
the conditions to the obligations of the Lions Gate Parties in ARTICLE VIII, the
Company Disclosure Statement shall be deemed to include only (a) the information
contained therein on the date of this Agreement and (b) information added to the
Company Disclosure Statement by written supplements delivered prior to Closing
by the Company that (i) are accepted in writing by Lions Gate, or (ii) reflect
actions expressly permitted by this Agreement to be taken prior to Closing that
(A) do not breach any covenant in this Agreement so as to cause the condition
precedent stated in Section 8.2 not to be fulfilled at or prior to the Closing,
and (B) do not in the aggregate have a Material Adverse Effect on the Company or
a material adverse effect on the validity, binding effect or enforceability of
this Agreement or the Collateral Documents or the ability of the Company or any
of the Lions Gate Parties to perform its obligations under this Agreement or any
of the Collateral Documents.
6.9 STATE STATUTES. The Company and its Board of Directors shall, if any
state takeover statute or similar law is or becomes applicable to the Merger,
this Agreement or any of the transactions contemplated by this Agreement, use
all reasonable efforts to ensure that the Merger and the other transactions
contemplated by this Agreement may be consummated as promptly as practicable on
the terms contemplated by this Agreement and otherwise to minimize the effect of
such statute or regulation on the Merger, this Agreement and the transactions
contemplated hereby. Notwithstanding anything herein to the contrary, nothing in
this Agreement shall be deemed to require Lions Gate or the Company or any
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Subsidiary or Affiliate thereof to agree to any divestiture by itself or any of
its Affiliates of shares of capital stock or of any business, assets or
property, or the imposition of any material limitation on the ability of any of
them to conduct their businesses or to own or exercise control of such assets,
properties and stock.
6.10 EMPLOYEE MATTERS. The Company shall, or shall cause the sponsor of
the 401(k) Qualified Retirement Plan (the "401(k) Plan") to, take the following
actions: (i) adopt resolutions, or take such other action as required by the
401(k) Plan, to (A) terminate the 401(k) Plan effective immediately prior to the
Closing Date, subject to receipt of a ruling from the District Director of
Internal Revenue that the termination of the 401(k) Plan does not adversely
affect the tax qualified status of the 401(k) Plan, and (B) cease contributions
under the 401(k) Plan effective as of the Closing Date; and (ii) file Internal
Revenue Service Form 5310 (Application for Determination for Terminating Plan)
with respect to the 401(k) Plan termination with the District Director of
Internal Revenue, such Form fully disclosing the corporate transaction
contemplated by this Agreement and the status of 401(k) Plan participants after
the transaction. Such resolutions (or other action required by the 401(k) Plan)
and Form 5310 shall be in a form satisfactory to Lions Gate. To the extent a
distribution from the 401(k) Plan is an eligible rollover distribution (as
defined in Section 402(c)(4) of the Code), Lions Gate shall permit the direct
rollover of such distribution to the 401(k) Plan of Lions Gate provided that the
individual requesting the rollover contribution is a participant in the 401(k)
Plan of Lions Gate at the time of such rollover, and further provided that the
rollover contribution is in cash and/or other property acceptable to the trustee
of the Lions Gate Plan.
6.11 TERMINATION OF BONUS PLAN. Subject to the consummation of the Merger,
the Company shall terminate its Executive Bonus Pool for periods after June 30,
2000.
6.12 2000 COMPANY FINANCIAL STATEMENTS. The Company shall use its
commercially reasonable efforts to deliver to Lions Gate not later than
September 30, 2000, its audited financial statements as of and for the year
ended June 30, 2000, accompanied by the report thereon of PriceWaterhouseCoopers
LLP. The delivery of such audited financial statements shall constitute a
representation and warranty that such financial statements (including the notes
thereto) have been prepared in accordance with GAAP on a consistent basis with
past practice and that such financial statements present fairly the financial
condition of the Company and its Subsidiaries and the results of their
operations as of June 30, 2000, and for the year then ended.
6.13 TRANSFER OF STOCK OF CERTAIN PRODUCTION AFFILIATES. The Company shall
cause William Wesley and each other holder of an equity interest in any
Affiliate of the Company established in connection with the production of any
single Film in the Company Film Library (other than Films which, at the Closing
Date, are in pre-production, principal photography or post-production)
(collectively, the "Completed Film Production Entities"), including but not
limited to Augmented Productions, Inc., Crocodile Productions, Inc., and Skipped
Parts Productions Inc., to transfer all of such Person's right, title and
interest in such Completed Film Production Entities to such Person as Lions Gate
shall identify to the Company in writing.
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ARTICLE VII
PRE-CLOSING COVENANTS OF THE LIONS GATE PARTIES
Between the date of this Agreement and the Closing Date,
7.1 ADDITIONAL INFORMATION. Lions Gate shall provide to the Company and
its Representatives such financial, operating and other documents, data and
information relating to Lions Gate and its Subsidiaries, the Lions Gate Business
and the Lions Gate Assets and the Liabilities of Lions Gate and its
Subsidiaries, as Company or its Representatives may reasonably request. In
addition, the Company shall take all action necessary to enable the Company and
its Representatives to review and inspect the Lions Gate Assets, the Lions Gate
Business and the Liabilities of Lions Gate and its Subsidiaries and discuss them
with the Company's officers, employees, independent accountants and counsel.
Notwithstanding any investigation that the Company may conduct of Lions Gate and
its Subsidiaries, the Lions Gate Business, the Lions Gate Assets and the
Liabilities of Lions Gate and its Subsidiaries, the Company may fully rely on
the Lions Gate Parties' warranties, covenants and indemnities set forth in this
Agreement, the Collateral Documents and any documents or certificates delivered
hereunder and thereunder, which will not be waived or affected by or as a result
of such investigation.
7.2 CONTINUITY AND MAINTENANCE OF OPERATIONS.
(a) Lions Gate shall, and shall cause each of its Subsidiaries to use
its commercially reasonable efforts to promote the financial success of the
Lions Gate Business and promptly notify the Company of any material adverse
change in the condition (financial or otherwise) of the Lions Gate Business
and use its commercially reasonable efforts to promote, develop and preserve
its relationships with its present employees as well as the goodwill of its
customers and promptly notify the Company of any material adverse change in
such relationships.
(b) No Lions Gate Party shall take or omit to take any action that would
cause any of them to be in material breach of any representations,
warranties or covenants made by them in this Agreement or the Collateral
Documents or that would, if such action had been taken or omitted on or
before the date of this Agreement, have been required to be disclosed in
Section 4.10 of the Lions Gate Disclosure Statement.
(c) Before entering into any Film Asset Acquisition Agreement, Film
Asset Exploitation Agreement or other Film Contract with respect to a Film
where any of (a) the print and advertising costs, (b) production costs, or
(c) acquisition costs exceed U.S.$3,000,000, Lions Gate will consult with
the Company respecting such transaction so as to allow the Company to
express its views with respect to such transaction. Further, neither Lions
Gate nor any Subsidiary controlled by Lions Gate shall enter into any
contractual obligation or otherwise effect any transaction, acquisition or
stock issuance involving Lions Gate or such Subsidiary which involves Lions
Gate's or such Subsidiary's financial commitment of U.S.$20,000,000 or more
or is reasonably valued in excess of U.S.$20,000,000, without the prior
reasonable approval of the Company. Further, before entering into any
Acquisition outside of the Ordinary Course of less than U.S.$20,000,000 (a
"Minor Acquisition") (or agreement to effect a Minor Acquisition) which when
combined with any prior Minor Acquisition(s) (or agreement to effect such
prior Minor Acquisition(s)) from the date hereof aggregate at least
U.S.$20,000,000 Lions Gate (or any Subsidiary controlled by Lions Gate) will
consult with the Company respecting such transaction so as to allow the
Company to express its views with respect to such transaction.
7.3 CONSENTS AND APPROVALS. As soon as practicable after execution of this
Agreement, the Lions Gate Parties shall use their commercially reasonable
efforts to obtain any necessary consent, approval, authorization or order of,
make any registration or filing with or give notice to, any Regulatory Authority
or Person as is required to be obtained, made or given by any of the Lions Gate
Parties to consummate the transactions contemplated by this Agreement and the
Collateral Documents, including without limitation
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any authorizations, consents, approvals, actions, filings or notices set forth
in Section 4.5 of this Agreement or Section 4.5 of the Lions Gate Disclosure
Statement.
7.4 MEETING OF THE LIONS GATE SHAREHOLDERS.
(a) Lions Gate will take all action in accordance with Canadian law and
its charter documents to convene a meeting of Lions Gate's shareholders to
consider adoption and approval of this Agreement and approval of the Merger
(the "Lions Gate Shareholders' Meeting") to be held as promptly as
practicable after the date of the Company Shareholders' Meeting. Lions Gate
will use its commercially reasonable efforts to solicit from its
shareholders proxies in favor of the adoption and approval of this Agreement
and the approval of the Merger and will take all other action necessary or
advisable to secure the vote or consent of its shareholders required by
applicable law and to obtain such approvals. Notwithstanding anything to the
contrary contained in this Agreement, Lions Gate may adjourn or postpone the
Lions Gate Shareholders' Meeting to the extent necessary to ensure that any
necessary supplement or amendment to Lions Gate's proxy statement is
provided to Lions Gate's shareholders in advance of a vote on the Merger and
this Agreement or, if as of the time for which the Lions Gate Shareholders'
Meeting is originally scheduled (as set forth in Lions Gate's proxy
statement) there are insufficient shares of Lions Gate Common Stock
represented (either in person or by proxy) to constitute a quorum necessary
to conduct the business of the Lions Gate's Shareholders' Meeting. Lions
Gate shall ensure that the Lions Gate Shareholders' Meeting is called,
noticed, convened, held and conducted, and that all proxies solicited by
Lions Gate in connection with the Lions Gate Shareholders' Meeting are
solicited, in compliance with applicable law and Lions Gate's charter
documents.
(b) The Board of Directors of Lions Gate shall recommend that Lions
Gate's shareholders vote in favor of and adopt and approve this Agreement
and approve the Merger at the Lions Gate Shareholders' Meeting. Lions Gate's
proxy statement shall include a statement to the effect that the Board of
Directors of Lions Gate has recommended that Lions Gate's shareholders vote
in favor of and adopt and approve this Agreement and the Merger at the Lions
Gate Shareholders' Meeting. Neither the Board of Directors of Lions Gate nor
any committee thereof shall withdraw, amend or modify, or propose or resolve
to withdraw, amend or modify in a manner adverse to the Company, the
recommendation of the Board of Directors of Lions Gate that Lions Gate's
shareholders vote in favor of and adopt and approve this Agreement and the
Merger.
7.5 MERGER REGISTRATION STATEMENT. Lions Gate shall prepare and file with
the Commission a registration statement on Form F-4 (such registration
statement, together with any amendments thereof or supplements thereto, being
the "Lions Gate Merger Registration Statement") registering under the Securities
Act the Lions Gate Common Stock. Lions Gate shall provide the Company and its
counsel reasonable opportunity to review and comment upon the contents of the
Lions Gate Merger Registration Statement prior to any filing, mailing or
amendment thereof. Lions Gate will use commercially reasonable efforts to cause
the Lions Gate Merger Registration Statement to become effective as promptly as
practicable. Lions Gate shall also file an application with the securities
commission in each Canadian jurisdiction for a ruling that the issuance of the
Merger Consideration shall be exempt from the prospectus and registration
requirements of, and the first trade by the Company Shareholders of the Lions
Gate Common Stock, shall be exempt from the prospectus requirements of, and not
be subject to any hold period under, Canadian Securities Laws or the securities
laws of any other Canadian jurisdiction where such application may be necessary,
subject to any restrictions that may be applicable to a Company Shareholder
should he be considered to be a controlling shareholder of Lions Gate for the
purposes of Canadian Securities Laws, provided that no application need be filed
in any jurisdiction from which the Company has received from Lions Gate a legal
opinion of local counsel that an exemption from the prospectus and registration
requirements in that jurisdiction exists.
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7.6 FINANCIAL AND OTHER INFORMATION. Lions Gate shall, promptly after
execution of this Agreement and from time to time thereafter, provide such
information and documents to the Company and its Affiliates concerning Lions
Gate, its Subsidiaries and shareholders as may be required or appropriate for
inclusion in the Company Proxy Statement or any other filing, notification or
report made by the Company or any Affiliate of the Company under the Securities
Act, the Exchange Act or any state securities law; shall cause their respective
counsel and independent accountants to cooperate with the Company, its
Affiliates and their investment bankers, counsel and independent accountants in
the preparation of such filings, notifications and reports; and shall use their
best efforts to obtain consents and "comfort letters" from such accountants as
required in connection with such filings, notifications and reports. Lions Gate
represents and warrants to the Company that no information or document provided
by Lions Gate for inclusion in any filing, notification or report made by the
Company or any Affiliate under the Securities Act, the Exchange Act or any state
securities law will contain any untrue statement of material fact or omit to
state any material fact necessary in order to make the statements made therein,
in light of the circumstances under which they are made, not misleading.
7.7 NOTIFICATION OF CERTAIN MATTERS. Lions Gate shall promptly notify the
Company of any fact, event, circumstance or action known to it that is
reasonably likely to cause any Lions Gate Party to be unable to perform any of
its covenants contained herein or any condition precedent in ARTICLE IX not to
be satisfied, or that, if known on the date of this Agreement, would have been
required to be disclosed to the Company pursuant to this Agreement or the
existence or occurrence of which would cause any of the Lions Gate Parties'
representations or warranties under this Agreement not to be correct and/or
complete. The Lions Gate Parties shall give prompt written notice to the Company
of any adverse development causing a breach of any of the representations and
warranties in ARTICLE IV or ARTICLE V as of the date made. However, except as
provided in Section 7.5, no disclosure by the Lions Gate Parties pursuant to
this Section shall be deemed to amend or supplement this Agreement or to prevent
or cure any misrepresentation, breach of warranty, or breach of covenant by the
Lions Gate Parties.
7.8 LIONS GATE DISCLOSURE STATEMENT. The Lions Gate Parties shall, from
time to time prior to Closing, supplement the Lions Gate Disclosure Statement
with additional information that, if existing or known to it on the date of this
Agreement, would have been required to be included therein. For purposes of
determining the satisfaction of any of the conditions to the obligations of the
Company in ARTICLE IX, the Lions Gate Disclosure Statement shall be deemed to
include only (a) the information contained therein on the date of delivery of
the Company Disclosure Statement to the Lions Gate Parties and (b) information
added to the Lions Gate Disclosure Statement by written supplements delivered
prior to Closing by the Lions Gate Parties that (i) are accepted in writing by
the Company or (ii) reflect actions taken or events occurring after the date
hereof and prior to Closing that (A) do not breach any covenant in this
Agreement so as to cause the condition precedent stated in Section 9.2 not to be
fulfilled at or prior to the Closing, and (B) do not in the aggregate have a
Material Adverse Effect on Lions Gate or a material adverse effect on the
validity, binding effect or enforceability of this Agreement or the Collateral
Documents or the ability of the Company or any of the Lions Gate Parties to
perform its obligations under this Agreement or any of the Collateral Documents.
7.9 SECTION 16 MATTERS. Prior to the Effective Time, Lions Gate shall take
all such steps as may be required to cause any acquisitions of Lions Gate Common
Stock and derivative securities resulting from the transactions contemplated by
this Agreement by each individual who is subject to the reporting requirements
of Section 16(a) of the Exchange Act with respect to the Company, to be exempt
under Rule 16b-3 promulgated under the Exchange Act, such steps to be taken in
accordance with the No-Action Letter dated January 12, 1999, issued by the SEC
to Skadden, Arps, Slate, Meagher & Flom LLP.
7.10 STOCK EXCHANGE LISTINGS. Lions Gate shall cause the shares of Lions
Gate Common Stock to be issued in the Merger to be approved for listing on the
American Stock Exchange and Toronto Stock Exchange subject to official notice of
issuance, prior to the Effective Time.
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7.11 STATE STATUTES. Lions Gate and its board of directors shall, if any
state takeover statute or similar law is or becomes applicable to the Merger,
this Agreement or any of the transactions contemplated by this Agreement, use
all reasonable efforts to ensure that the Merger and the other transactions
contemplated by this Agreement may be consummated as promptly as practicable on
the terms contemplated by this Agreement and otherwise to minimize the effect of
such statute or regulation on the Merger, this Agreement and the transactions
contemplated hereby. Notwithstanding anything herein to the contrary, nothing in
this Agreement shall be deemed to require Lions Gate or any Subsidiary or
Affiliate thereof to agree to any divestiture by itself or any of its Affiliates
of shares of capital stock or of any business, assets or property, or the
imposition of any material limitation on the ability of any of them to conduct
their businesses or to own or exercise control of such assets, properties and
stock.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE LIONS GATE PARTIES
All obligations of the Lions Gate Parties under this Agreement shall be
subject to the fulfillment at or prior to Closing of each of the following
conditions, it being understood that the Lions Gate Parties may, in their sole
discretion, to the extent permitted by applicable Legal Requirements, waive any
or all of such conditions in whole or in part.
8.1 ACCURACY OF REPRESENTATIONS. All representations and warranties of the
Company (other than those set forth in Sections 3.19 through 3.21, inclusive, of
this Agreement) contained in this Agreement (giving effect to Section 6.8), the
Collateral Documents and any certificate delivered by any of the Company at or
prior to Closing shall be, if specifically qualified by materiality, true in all
respects and, if not so qualified, shall be true in all material respects, in
each case on and as of the Closing Date with the same effect as if made on and
as of the Closing Date, except for representations and warranties expressly
stated to be made as of the date of this Agreement or as of another date other
than the Closing Date and except for changes contemplated or permitted by this
Agreement. All representations and warranties of the Company set forth in
Sections 3.19 through 3.21 inclusive of this Agreement shall be true in all
respects on and as of the Closing Date with the same effect as if made on and as
of the Closing Date, except for representations and warranties expressly stated
to be made as of the date of this Agreement and except: (i) for changes
contemplated or permitted by this Agreement; (ii) to the extent that (A) Lions
Gate possessed actual knowledge on the date of execution of this Agreement of
information contrary to any such representation or warranty (and then only to
the extent of such information of which Lions Gate had actual knowledge) or
(B) the falsity or misleading nature of such representations and warranties
would not, individually or in the aggregate, have a Material Adverse Effect on
the Company; a material adverse effect on the validity, binding effect or
enforceability of this Agreement or the Collateral Documents; or a material
adverse effect on the value of the Company Film Library. The Company shall have
delivered to Lions Gate and Merger Sub a certificate dated the Closing Date to
the foregoing effect.
8.2 COVENANTS. The Company shall, in all material respects, have performed
and complied with each of the covenants, obligations and agreements contained in
this Agreement and the Collateral Documents that are to be performed or complied
with by them at or prior to Closing. The Company shall have delivered to Lions
Gate and Merger Sub a certificate dated the Closing Date to the foregoing
effect.
8.3 CONSENTS AND APPROVALS.
(a) All consents, approvals, authorizations and orders required to be
obtained from, and all registrations, filings and notices required to be
made with or given to, any Regulatory Authority or Person as provided in
Sections 6.4(a) and 7.3 shall have been duly obtained, made or given, as the
case may be, and shall be in full force and effect, and any waiting period
required by applicable law, including the HSR Act, or any Regulatory
Authority in connection with such transactions shall have expired or have
been earlier terminated, unless the failure to obtain, make or give any such
consent, approval, authorization, order, registration, filing or notice, or
to allow any such waiting period to
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expire or terminate would not have a Material Adverse Effect on the Company
or a material adverse effect on the validity, binding effect or
enforceability of this Agreement or the Collateral Documents or the ability
of the Company to perform its obligations under this Agreement or any of the
Collateral Documents.
(b) This Agreement and the Merger shall have been approved by the
requisite vote of Lions Gate's shareholders in accordance with the
applicable Canadian law and the rules of the American Stock Exchange and the
Toronto Stock Exchange.
(c) This Agreement and the Merger shall have been approved by the
requisite vote of the Company's Shareholders in accordance with the DGCL and
the Company's Certificate of Incorporation and by-laws.
(d) Lions Gate and Merger Sub shall have been furnished with appropriate
evidence, reasonably satisfactory to it and its counsel, of the granting of
such consents, approvals, authorizations and orders, the making of such
registrations and filings and the giving of such notices referred to in
subsections (a), (c) and (d).
8.4 DISSENTERS' RIGHTS. The period for assertion of dissenters' rights
pursuant to Section 262 of the DGCL and Section 1300 of the CGCL shall have
expired, and the holders of Company Capital Stock entitled to receive not more
than 9.5% of the Lions Gate Common Stock included in the Merger Consideration
shall have perfected their dissenters' appraisal rights under Section 262 of the
DGCL and Section 1300 of the CGCL in connection with the Merger.
8.5 DELIVERY OF DOCUMENTS. The Company shall have delivered, or caused to
be delivered, to Lions Gate and Merger Sub the following documents:
(i) The Registration Rights Agreement, executed by the parties
thereto other than Lions Gate.
(ii) Concurrently with the execution of this Agreement, the Voting
Agreement, executed by the parties thereto.
(iii) Certified copies of the Company's certificate or incorporation
and by-laws and certified resolutions of the board of directors and
Shareholders of the Company authorizing the execution of this Agreement
and the Collateral Documents to which it is a party and the consummation
of the transactions contemplated hereby and thereby.
(iv) An opinion of Bryan Cave LLP, counsel to the Company, dated the
Closing Date, in form and substance reasonably satisfactory to Lions
Gate.
(v) All books and records of the Company and its Subsidiaries.
(vi) Such other documents and instruments as Lions Gate may
reasonably request: (A) to evidence the accuracy of the Company's
representations and warranties under this Agreement, the Collateral
Documents and any documents, instruments or certificates required to be
delivered thereunder; (B) to evidence the performance by the Company of,
or the compliance by the Company with, any covenant, obligation,
condition and agreement to be performed or complied with by the Company
under this Agreement and the Collateral Documents; or (C) to otherwise
facilitate the consummation or performance of any of the transactions
contemplated by this Agreement and the Collateral Documents.
8.6 NO MATERIAL ADVERSE CHANGE. Since the date hereof, there shall have
been no material adverse change in the Company Assets, the Company Business or
the financial condition or operations of the Company and its Subsidiaries, taken
as a whole.
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8.7 NO LITIGATION. No action, suit or proceeding shall be pending or
threatened by or before any Regulatory Authority, and no Legal Requirement or
policy or any applicable regulatory authority, shall have been enacted,
promulgated or issued that would: (i) prohibit or adversely affect in any
material respect Lions Gate's or the Surviving Corporation's and its
Subsidiaries' ownership or operation of all or a material portion of the Company
Business or the Company Assets or materially and adversely affect the value of
the Company Assets; (ii) materially restrict or limit or otherwise condition
Lions Gate's or the Surviving Corporation's and its Subsidiaries' right to
transfer and/or assign the Company Business or the Company Assets in the future;
(iii) compel Lions Gate or the Surviving Corporation or any of its Subsidiaries
to dispose of or hold separate all or a material portion of the Company Business
or the Company Assets as a result of any of the transactions contemplated by
this Agreement and the Collateral Documents; (iv) prevent or make illegal the
consummation of any transactions contemplated by this Agreement and the
Collateral Documents; or (v) cause any of the transactions contemplated by this
Agreement and the Collateral Documents to be rescinded following consummation.
8.8 LIONS GATE MERGER REGISTRATION STATEMENT; BLUE SKY LAWS. The Lions
Gate Merger Registration Statement shall have become effective in accordance
with the provisions of the Securities Act, and no stop order suspending such
effectiveness shall have been issued and remain in effect and no proceeding for
that purpose shall have been instituted by the Commission or any state
regulatory authorities. All state securities or "Blue Sky" permits and other
authorizations necessary to issue the Lions Gate Common Stock shall have been
received.
8.9 CANADIAN EXEMPTION. The issuance of the Lions Gate Common Stock and
the first trade of the Lions Gate Common Stock shall be exempt from the
applicable prospectus and registration requirements of any applicable Canadian
jurisdiction and, where necessary, the discretionary rulings of the Canadian
securities commissions contemplated in Section 7.5 shall have been obtained.
8.10 EMPLOYMENT AGREEMENT. Concurrently with the Closing, Mark Amin shall
have entered into an employment agreement with the Surviving Corporation in form
and substance satisfactory to Lions Gate.
8.11 CREDIT LINE. After taking into account the transactions contemplated
by this Agreement, Lions Gate shall have an aggregate credit line of
US$100,000,000 under the Lions Gate Credit Agreement exclusive of (a) the Bank
of Montreal term loans secured by Lions Gate Studios, (b) any debt of
Cine-Groupe Corporation or its productions, (c) the Cdn. $16,500,000
(approximate) Lions Gate convertible promissory notes due July 31, 2003,
(d) the US$750,000 Lions Gate convertible promissory notes issued on the
acquisition of Termite Art Productions, (e) tax credit financing for Hope Island
and Higher Ground from Equicap Financial Corporation, (f) amounts outstanding
under Lions Gate Films prints and advertising facility from Imperial Bank, and
(g) production financing related to American Psycho from Imperial Bank.
8.12 SECTION 367. The requirements set forth in Treasury Regulations
Section 1.367(a)--3(c)(1) shall be satisfied on the Closing Date.
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ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY
All obligations of the Company under this Agreement shall be subject to the
fulfillment at or prior to Closing of the following conditions, it being
understood that the Company may, in its sole discretion, to the extent permitted
by applicable Legal Requirements, waive any or all of such conditions in whole
or in part.
9.1 ACCURACY OF REPRESENTATIONS. All representations and warranties of the
Lions Gate Parties (other than those set forth in Sections 4.18 through 4.20,
inclusive, of this Agreement) contained in this Agreement (giving effect to
Section 7.8) and the Collateral Documents and any other document, instrument or
certificate delivered by any of the Lions Gate Parties at or prior to the
Closing shall be, if specifically qualified by materiality, true and correct in
all respects and, if not so qualified, shall be true and correct in all material
respects, in each case on and as of the Closing Date with the same effect as if
made on and as of the Closing Date, except for representations and warranties
expressly stated to be made as of the date of this Agreement or as of another
date other than the Closing Date and except for changes contemplated or
permitted by this Agreement. All representations and warranties of Lions Gate
set forth in Sections 4.18 through 4.20 inclusive of this Agreement shall be
true in all respects on and as of the Closing Date with the same effect as if
made on and as of the Closing Date, except for representations and warranties
expressly stated to be made as of the date of this Agreement and except:
(i) for changes contemplated or permitted by this Agreement; (ii) to the extent
that (A) the Company possessed actual knowledge on the date of execution of this
Agreement of information contrary to any such representation or warranty (and
then only to the extent of such information of which the Company had actual
knowledge) or (B) the falsity or misleading nature of such representations and
warranties would not, individually or in the aggregate, have a Material Adverse
Effect on Lions Gate; a material adverse effect on the validity, binding effect
or enforceability of this Agreement or the Collateral Documents; or a material
adverse effect on the value of the Lions Gate Film Library. The Lions Gate
Parties shall have delivered to the Company a certificate dated the Closing Date
to the foregoing effect.
9.2 COVENANTS. The Lions Gate Parties shall, in all material respects,
have performed and complied with each obligation, agreement, covenant and
condition contained in this Agreement and the Collateral Documents and required
by this Agreement and the Collateral Documents to be performed or complied with
by the Lions Gate Parties at or prior to Closing. The Lions Gate Parties shall
have delivered to the Company a certificate dated the Closing Date to the
foregoing effect.
9.3 CONSENTS AND APPROVALS.
(a) All consents; approvals, authorizations and orders required to be
obtained from, and all registrations, filings and notices required to be
made with or given to, any Regulatory Authority or Person as provided in
Section 7.3 shall have been duly obtained, made or given, as the case may
be, and shall be in full force and effect, and any waiting period required
by applicable law, including the HSR Act, or any Regulatory Authority in
connection with such transactions shall have expired or have been earlier
terminated, unless the failure to obtain, make or give any such consent,
approval, authorization, order, registration, filing or notice, or to allow
any such waiting period to expire or terminate would not have a Material
Adverse Effect on Lions Gate or a material adverse effect on the validity,
binding effect or enforceability of this Agreement or the Collateral
Documents or the ability of the Company or any of the Lions Gate Parties to
perform its obligations under this Agreement or any of the Collateral
Documents.
(b) This Agreement and the Merger shall have been approved by the
requisite vote of Lions Gate's shareholders in accordance with applicable
law, Lions Gate's Certificate of Incorporation and by-laws and the rules of
the American Stock Exchange and the Toronto Stock Exchange.
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(c) This Agreement and the Merger shall have been approved by the
requisite vote of the Company's Shareholders in accordance with the DGCL and
the Company's Certificate of Incorporation and by-laws.
(d) The Company shall have been furnished with the appropriate evidence,
reasonably satisfactory to them and their counsel, of the granting of such
consents, approvals, authorizations and orders, the making of such
registrations and filings and the giving of such notices referred to in
subsections (a), (b) and (c).
9.4 DELIVERY OF DOCUMENTS. The Lions Gate Parties, as applicable, shall
have executed and delivered, or caused to be executed and delivered, to the
Company the following documents:
(i) The Registration Rights Agreement, executed by Lions Gate.
(ii) Concurrently with the execution of this Agreement, the Voting
Agreement, executed by the parties thereto.
(iii) Certified copies of the certificate of incorporation and by-laws
of Lions Gate and certified resolutions by the board of directors and
Company Shareholders of Lions Gate authorizing the execution of this
Agreement and the Collateral Documents and the consummation of the
transactions contemplated hereby.
(iv) Such other documents and instruments as the Company may
reasonably request: (A) to evidence the accuracy of the representations
and warranties of the Lions Gate Parties under this Agreement and the
Collateral Documents and any documents, instruments or certificates
required to be delivered thereunder; (B) to evidence the performance by
the Lions Gate Parties of, or the compliance by the Lions Gate Parties
with, any covenant, obligation, condition and agreement to be performed
or complied with by the Lions Gate Parties under this Agreement and the
Collateral Documents; or (C) to otherwise facilitate the consummation or
performance of any of the transactions contemplated by this Agreement and
the Collateral Documents.
(v) Opinion of Heenan Blaikie and Loeb & Loeb LLP, counsel to the
Lions Gate Parties, dated the Closing Date, in form and substance
reasonably satisfactory to the Company.
9.5 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse
change in the business, financial condition or operations of Lions Gate and its
Subsidiaries taken as a whole.
9.6 NO LITIGATION. No action, suit or proceeding shall be pending or
threatened by or before any Regulatory Authority and no Legal Requirement shall
have been enacted, promulgated or issued or deemed applicable to any of the
transactions contemplated by this Agreement and the Collateral Documents that
would: (i) prevent consummation of any of the transactions contemplated by this
Agreement and the Collateral Documents; (ii) cause any of the transactions
contemplated by this Agreement and the Collateral Documents to be rescinded
following consummation; (iii) result in the Lions Gate Common Stock being
ineligible for trading on the American Stock Exchange or the Toronto Stock
Exchange; or (iv) have a Material Adverse Effect on Lions Gate.
9.7 EXCHANGE LISTING. The shares of Lions Gate Common Stock issuable in
the Merger shall have been approved for listing on the American Stock Exchange
and the Toronto Stock Exchange upon official notice of issuance.
9.8 LIONS GATE MERGER REGISTRATION STATEMENT; BLUE SKY LAWS. The Lions
Gate Merger Registration Statement shall have become effective in accordance
with the provisions of the Securities Act, and no stop order suspending such
effectiveness shall have been issued and remain in effect and no proceeding for
that purpose shall have been instituted by the Commission or any state
regulatory authorities. All state securities or "Blue Sky" permits and other
authorizations necessary to issue the Lions Gate Common Stock shall have been
received.
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9.9 CANADIAN EXEMPTION. The issuance of the Lions Gate Common Stock and
the first trade of the Lions Gate Common Stock shall be exempt from the
applicable prospectus and registration requirements of any applicable Canadian
jurisdiction and, where necessary, the discretionary rulings of the Canadian
securities commissions contemplated in Section 7.5 shall have been obtained.
9.10 EMPLOYMENT AGREEMENT. Concurrently with the Closing, Mark Amin shall
have entered into an employment agreement with the Surviving Corporation.
9.11 CREDIT LINE. After taking into account the transactions contemplated
by this Agreement, Lions Gate shall have an aggregate credit line of
US$100,000,000 under the Lions Gate Credit Agreement exclusive of (a) the Bank
of Montreal term loans secured by Lions Gate Studios, (b) any debt of
Cine-Groupe Corporation or its productions, (c) the Cdn. $16,500,000
(approximate) Lions Gate convertible promissory notes due July 31, 2003,
(d) the US$750,000 Lions Gate convertible promissory notes issued on the
acquisition of Termite Art Productions, (e) tax credit financing for Hope Island
and Higher Ground from Equicap Financial Corporation, (f) amounts outstanding
under Lions Gate Films prints and advertising facility from Imperial Bank, and
(g) production financing related to American Psycho from Imperial Bank.
9.12 SECTION 367. The requirements set forth in Treasury Regulations
Section 1.367(a)--3(c)(1) shall be satisfied on the Closing Date.
ARTICLE X
POST CLOSING COVENANTS
The Parties agree as follows with respect to the period following Closing:
10.1 BOARD APPOINTMENT. Promptly following the Effective Time, Mark Amin
will be appointed to the Board of Directors of Lions Gate subject to the terms
and conditions of that certain Employment Agreement by and between Lions Gate
and Mark Amin dated as of even date hereof.
10.2 INDEMNIFICATION OF DIRECTORS, OFFICERS AND MANAGERS OF THE COMPANY AND
ITS PREDECESSORS; DIRECTORS' AND OFFICERS' INSURANCE.
(a) For six years after the Effective Time, Lions Gate shall, and shall
cause the Surviving Corporation to, indemnify, defend and hold harmless the
present and former officers, directors, employees and agents of the Company
and its Subsidiaries (the "Indemnified Parties") against all losses,
expenses, claims, damages or liabilities (including advancement of expenses)
arising out actions or omissions occurring on or prior to the Effective Time
(including without limitation, the transactions contemplated by this
Agreement) (i) to the fullest extent permitted by Delaware law, or (ii) if
the protections afforded thereby to an Indemnified Party are greater, to the
same extent and on the same terms and conditions provided for in the
Company's certificate of incorporation and by-laws and agreements in effect
at the date hereof (to the extent consistent with applicable law) (and of
any corporation that shall succeed to it by merger, consolidation or
otherwise), which provisions shall survive the Merger and continue in full
force and effect for a period of six years after the Effective Time. Without
limiting the foregoing, in any case in which approval by the Surviving
Corporation is required to effectuate any indemnification, Lions Gate shall
cause the Surviving Corporation to direct, at the election of the
Indemnified Party, that the determination of any such approval shall be made
by an independent counsel selected by the Indemnified Party.
(b) Lions Gate shall, for six years from the Effective Time, maintain in
effect the current directors' and officers' liability insurance coverage
listed, and identified as such, on Section 3.17 of the Company Disclosure
Statement maintained by the Company (provided that Lions Gate may substitute
therefor policies from insurers of the same quality rating of at least the
same coverage and amounts containing terms and conditions which are no less
advantageous to such officers and directors so long as substitution does not
result in gaps or lapses in coverage) with respect to matters occurring
through
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the Effective Time. Lions Gate shall deliver advance notice of any
substitution of insurance policies to the persons insured thereby. Lions
Gate shall also request that the insurer deliver notice of non-payment of
premiums and at least 30 days advance notice of any cancellation of such
policies to the persons insured by such policies.
(c) In the event Lions Gate or any of its successors or assigns
(i) consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and
assets to any person, then, and in each such case, proper provision shall be
made so that the successors and assigns of Lions Gate shall assume the
obligations set forth in this Section 10.2.
(d) The obligations of Lions Gate under this Section 10.2 shall not be
terminated or modified in such a manner as to adversely affect any director,
officer, employee, fiduciary and agent to whom this Section 10.2 applies
without the consent of each affected director, officer, employee, fiduciary
and agent (it being expressly agreed that the directors, officers,
employees, fiduciaries and agents to whom this Section 10.2 applies shall be
third-party beneficiaries of this Section 10.2).
10.3 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making
available to the Company Shareholders the benefits of Rule 144 and 145
promulgated under the Act and any other rule or regulation of the SEC that may
at any time permit a Company Shareholder to sell securities of Lions Gate to the
public without registration, Lions Gate agrees to: (a) make and keep public
information available, as those terms are understood and defined in SEC
Rule 144 and 145, at all times; (b) file with the SEC in a timely manner all
reports and other documents required of the Company under the Act and the 1934
Act; and (c) furnish to any Company Shareholder forthwith upon request (i) a
written statement by Lions Gate that it has complied with the reporting
requirements of SEC Rule 144 and 145, the Securities Act and the Exchange Act,
(ii) a copy of the most recent annual or periodic report of Lions Gate and such
other reports and documents so filed by Lions Gate, and (iii) such other
information as may be reasonably requested in availing any Company Shareholder
of any rule or regulation of the SEC which permits the selling of any such
securities without registration.
10.4 EMPLOYEE BENEFITS. Lions Gate shall cause the Surviving Corporation
to provide to all active employees of the Company at the Effective Time who
become employed by the Surviving Corporation as of the Effective Time coverage
by benefit plans or arrangements that are similar to benefit plans or
arrangements currently provided by Lions Gate to its U.S.-based employees.
10.5 GAIN RECOGNITION AGREEMENT. In order to satisfy Sections 8.12 and
9.12, certain Company Shareholders must each enter into a "Gain Recognition
Agreement Under Section 1.367(a)-8", as defined in Treasury Regulation Section
1.367(a)-8 ("Five-Year Gain Recognition Agreement"). Upon receipt by Lions Gate
of written notice by each such Company Shareholder that such Company Shareholder
agrees to enter into such a Five-Year Gain Recognition Agreement and be bound by
this Section 10.5, Lions Gate agrees to pay each such Company Shareholder who
gives a copy of his or her executed Five-Year Gain Recognition Agreement to
Lions Gate upon request, as additional consideration in connection with the
Merger, an amount equal to the "Gross-Up Amount," as defined below, in the event
Lions Gate directly or indirectly disposes of all or any portion of Company
Common Stock or Company's assets in a manner that would require such Company
Shareholder to recognize gain pursuant to the Five-Year Gain Recognition
Agreement or the Treasury Regulations under Code Section 367 (the amount of such
gain for each such Company Shareholder shall hereinafter be the "Section 367
Gain"). For purposes of this Section 10.5, "Gross-Up Amount" shall mean a lump
sum payment, payable within thirty (30) days of the event giving rise to the
payment obligation, equal to the product of the "Assumed Tax Factor" multiplied
by the "Assumed Tax on Gain," as such terms are defined below. For purposes of
this Section 10.5, "Assumed Tax on Gain" shall mean an amount of federal and all
applicable state income tax liabilities imposed on the Section 367 Gain for such
Company Shareholder, assuming that the highest marginal rate of federal income
taxation on capital gains applicable to individuals for the taxable year in
which such gain is
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<PAGE>
recognized is imposed and that the highest marginal rate of state income
taxation on capital gains applicable to individuals for the taxable year in
which such gain is recognized is imposed plus interest thereon. For purposes of
this Section 10.5, "Assumed Tax Factor" shall mean the fraction 1 divided by
[1-F-S + (F X S)],
where F is the highest marginal rate of federal income taxation on capital gains
applicable to individuals for the taxable year in which such payment is made and
S is the highest marginal rate of state income taxation on capital gains
applicable to individuals for the taxable year in which such payment is made. In
the event that it is established pursuant to a final determination of a court or
an Internal Revenue Service proceeding that the amount of Section 367 Gain used
as the basis for a payment under this Section 10.5 was too high, or if such
Company Shareholder makes such a determination, files an amended return, and
receives a refund, such Company Shareholder shall repay to Lions Gate, within
30 days of such Company Shareholder's receipt of the refund (or, in the event
there is no refund forthcoming, the notice of such final determination), the
portion of the Gross-Up Amount attributable to such overstated Section 367 Gain,
plus any interest received by such Company Shareholder as part of such refund.
In the event that it is established pursuant to a final determination of a court
or an Internal Revenue Service proceeding settled in good faith that the amount
of Section 367 Gain used as the basis for a payment under this Section 10.5 was
too low, or the capital gain rates were not applicable, or if such Company
Shareholder makes such a determination, files an amended return, and pays tax,
Lions Gate shall make an additional payment to such Company Shareholder, such
amount to be calculated as a Gross-Up Amount but using only the additional
Section 367 Gain or the applicable marginal rate of taxation in the computation.
Mark Amin is an intended third party beneficiary of Sections 10.1 and 10.5 and
by signing this Agreement is deemed to have agreed to enter into a Five-Year
Gain Recognition Agreement and be bound by this Section 10.5.
10.6 SECTION 367 REPORTING. Lions Gate will cause the Surviving
Corporation (in its own capacity, and in its capacity as successor to the
Company) to take any and all actions a U.S. target company must take to avoid
having the transaction treated as a taxable exchange under Code
Section 367(a)(1), including without limitation complying with all reporting
requirements of Section 1.367(a)-3(c)(6) of the Treasury Regulations in
connection with filing the U.S. Federal Income Tax Return for the Company for
the period that ends on the Closing Date, except that Lions Gate and the
Surviving Corporation shall be permitted to dispose of any stock, securities or
assets, even if doing so causes gain recognition to some former shareholder(s)
of the Company. At least 10 days prior thereto, Lions Gate shall notify any
former shareholder of the Company who shall be a party to a gain recognition
agreement pursuant to Section 1.367(a)-8 of the Treasury Regulations of any
disposition of stock, securities or assets that could give rise to the
requirement that gain will be recognized pursuant to such agreement, or that is
required to be reported by such shareholder to the Internal Revenue Service in
order to comply with the terms of such agreement, provided that the obligation
to notify any former shareholder of the Company other than Mark Amin shall not
arise until Lions Gate shall have received written notice from such other former
shareholder that such former shareholder has entered into such a gain
recognition agreement.
ARTICLE XI
TERMINATION
11.1 TERMINATION. This Agreement may be terminated, and the transactions
contemplated hereby may be abandoned, at any time prior to the Effective Time:
(a) by mutual written agreement of Lions Gate and the Company hereto
duly authorized by action taken by or on behalf of their respective Boards
of Directors;
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(b) by either the Company or Lions Gate upon notification to the
non-terminating party by the terminating party:
(i) at any time after November 30, 2000 if the Merger shall not have
been consummated on or prior to such date and such failure to consummate
the Merger is not caused by a material breach of this Agreement by the
terminating party;
(ii) if the Company Shareholder Approval or the Lions Gate
Shareholder Approval shall not be obtained by reason of the failure to
obtain the requisite vote upon a vote held at a meeting of such
shareholders, or any adjournment thereof, called therefor;
(iii) if the terminating party is not in material breach of its
obligations under this Agreement and there has been a material breach of
any representation, warranty, covenant or agreement on the part of the
non-terminating party set forth in this Agreement such that the
conditions in Sections 8.1, 8.2, 9.1 or 9.2 will not be satisfied;
provided, however, that if such breach is curable by the non-terminating
party and such cure is reasonably likely to be completed prior to the
date specified in Section 11.1(b)(i), then, for so long as the
non-terminating party continues to use its reasonable efforts to effect
and cure, the terminating party may not terminate pursuant to this
Section 11.1(b)(iii);
(iv) if any court of competent jurisdiction or other competent
Governmental or Regulatory Authority shall have issued an order making
illegal or otherwise permanently restricting, preventing or otherwise
prohibiting the Merger and such order shall have become final and
nonappealable;
(c) by Lions Gate or the Company if the Company or its shareholders
receive a Superior Offer in connection with which the Board of Directors of
the Company exercises the rights specified in Section 6.5(c) to withhold,
withdraw, amend or modify its recommendation of the Merger; or
(d) by Lions Gate if the Company breaches Section 6.2 of this Agreement
and Lions Gate is in substantial compliance with its obligations under this
Agreement.
11.2 EFFECT OF TERMINATION.
(a) If this Agreement is validly terminated by either the Company or
Lions Gate pursuant to Section 11.1, this Agreement will forthwith become
null and void and there will be no liability or obligation on the part of
the parties hereto, except (i) that nothing, other than Sections 11.2(b) and
11.2(c), contained herein shall relieve any party hereto from liability for
willful breach of its representations, warranties, covenants or agreements
contained in this Agreement, and (ii) as provided in Sections 11.2(b) and
11.2(c).
(b) In the event that Lions Gate or the Company terminates this
Agreement pursuant to Section 11.1(c), then the Company shall, within one
Business Day after receipt of a request from Lions Gate, pay to Lions Gate
in cash (x) a termination fee of US$3,000,000 as liquidated damages and not
as a penalty and (y) an amount equal to all documented out-of-pocket
expenses and fees incurred by Lions Gate in connection with this Agreement
and the transactions contemplated hereby (including, without limitation,
fees and expenses payable to all banks, investment banking firms and other
financial institutions and persons and their respective agents and counsel
for acting as Lions Gate's financial advisor with respect to, or arranging
or committing to provide or providing any financing for, the Merger, Lions
Gate's legal counsel and Lions Gate's independent accountants), PROVIDED,
that in no event shall the amount of such reimbursable fees and expenses
exceed $500,000 in the aggregate (the amounts referred to in clauses
(x) and (y) above are collectively referred to as the "Company Termination
Fee").
(c) In the event that the Merger does not close due to the
nonfulfillment of the conditions specified in Section 8.11 or Section 9.11,
then Lions Gate shall, within one Business Day after receipt
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<PAGE>
of a request from the Company, pay to the Company in cash (x) a termination
fee of US$1,000,000 as liquidated damages and not as a penalty and (y) an
amount equal to all documented out-of-pocket expenses and fees incurred by
the Company in connection with this Agreement and the transactions
contemplated hereby (including, without limitation, fees and expenses
payable to all banks, investment banking firms and other financial
institutions and persons and their respective agents and counsel for acting
as the Company's financial advisor with respect to, or arranging or
committing to provide or providing any financing for, the Merger, the
Company's legal counsel and the Company's independent accountants),
PROVIDED, that in no event shall the amount of such reimbursable fees and
expenses exceed US$250,000 in the aggregate (the amounts referred to in
clauses (x) and (y) above are collectively referred to as the "Lions Gate
Termination Fee").
(d) The Parties acknowledge that the agreements contained in this
Section 11.2 are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, the Parties would not enter
into this Agreement; accordingly, if a Party fails to pay in a timely manner
the amounts due pursuant to this Section 11.2 and, in order to obtain such
payment, the other Party makes a claim that results in a judgment against
such Party for the amounts set forth in this Section 11.2, such Party shall
pay to the other Party its reasonable costs and expenses (including
reasonable attorneys' fees and expenses) in connection with such suit,
together with interest on the amounts set forth in this Section 11.2 as
provided by this Agreement. Payment of the Company Termination Fee or the
Lions Gate Termination Fee described in this Section 11.2 shall be in lieu
of the amount of Adverse Consequences incurred in the event of breach of
this Agreement.
ARTICLE XII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
12.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the
representations and warranties contained in this Agreement shall be deemed
conditions to the Merger, to the extent stated in Sections 8.1 and 9.1, and
shall not survive the Closing or the termination of this Agreement.
ARTICLE XIII
MISCELLANEOUS
13.1 PARTIES OBLIGATED AND BENEFITED. This Agreement shall be binding upon
the Parties and their respective successors by operation of law and shall inure
solely to the benefit of the Parties and their respective successors by
operation of law, and no other Person shall be entitled to any of the benefits
conferred by this Agreement, except that the Company Shareholders shall be third
party beneficiaries of this Agreement and except as provided in Sections 10.5
and 13.12. Without the prior written consent of the other Party, no Party may
assign this Agreement or the Collateral Documents or any of its rights or
interests or delegate any of its duties under this Agreement or the Collateral
Documents.
13.2 NOTICES. Any notices and other communications required or permitted
hereunder shall be in writing and shall be effective upon delivery by hand or
upon receipt if sent by certified or registered mail (postage prepaid and return
receipt requested) or by a nationally recognized overnight courier service
(appropriately marked for overnight delivery) or upon transmission if sent by
telex or facsimile (with request for immediate confirmation of receipt in a
manner customary for communications of such respective type and with physical
delivery of the communication being made by one or the other means specified in
this Section as promptly as practicable thereafter). Notices shall be addressed
as follows:
(a) If to Lions Gate, Merger Sub or the Surviving Corporation, to:
Lions Gate Entertainment Corp.
Suite 3123, Three Bentall Centre
595 Burrard Street
Vancouver, British Columbia V7X 1J1
Attention: Gordon Keep, Senior Vice President
Facsimile No. (604) 609-6145
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<PAGE>
If to the Company before the Closing Date to:
Trimark Holdings, Inc.
4553 Glencoe Avenue, Suite 200
Marina Del Rey, California 90292
Attention: Mark Amin, Chief Executive Officer
Facsimile No. (310) 314-4238
Any Party may change the address to which notices are required to be sent by
giving notice of such change in the manner provided in this Section.
13.3 ATTORNEYS' FEES. In the event of any action or suit based upon or
arising out of any alleged breach by any Party of any representation, warranty,
covenant or agreement contained in this Agreement or the Collateral Documents,
the prevailing Party shall be entitled to recover reasonable attorneys' fees and
other costs of such action or suit from the other Party.
13.4 HEADINGS. The Article and Section headings of this Agreement are for
convenience only and shall not constitute a part of this Agreement or in any way
affect the meaning or interpretation thereof.
13.5 CHOICE OF LAW. This Agreement and the rights of the Parties under it
shall be governed by and construed in all respects in accordance with the laws
of the State of California, without giving effect to any choice of law provision
or rule (whether of the State of California or any other jurisdiction that would
cause the application of the laws of any jurisdiction other than the State of
California).
13.6 RIGHTS CUMULATIVE. All rights and remedies of each of the Parties
under this Agreement shall be cumulative, and the exercise of one or more rights
or remedies shall not preclude the exercise of any other right or remedy
available under this Agreement or applicable law.
13.7 FURTHER ACTIONS. The Parties shall execute and deliver to each other,
from time to time at or after Closing, for no additional consideration and at no
additional cost to the requesting party, such further assignments, certificates,
instruments, records, or other documents, assurances or things as may be
reasonably necessary to give full effect to this Agreement and to allow each
party fully to enjoy and exercise the rights accorded and acquired by it under
this Agreement.
13.8 TIME OF THE ESSENCE. Time is of the essence under this Agreement. If
the last day permitted for the giving of any notice or the performance of any
act required or permitted under this Agreement falls on a day which is not a
Business Day, the time for the giving of such notice or the performance of such
act shall be extended to the next succeeding Business Day.
13.9 LATE PAYMENTS. If either Party fails to pay the other any amounts
when due under this Agreement, the amounts due will bear interest from the due
date to the date of payment at the prime rate reported in the WALL STREET
JOURNAL from time to time.
13.10 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
13.11 ENTIRE AGREEMENT. This Agreement (including the Exhibits, the
Company Disclosure Statement, the Lions Gate Disclosure Statement and any other
documents, instruments and certificates referred to herein, which are
incorporated in and constitute a part of this Agreement) contains the entire
agreement of the Parties.
13.12 THIRD PARTY BENEFICIARIES. The officers and directors of the
Company, including Mark Amin in that capacity, are intended third party
beneficiaries of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement as
of the day and year first above written.
<TABLE>
<S> <C> <C>
LIONS GATE ENTERTAINMENT CORP.,
a British Columbia corporation
By: /s/ JON FELTHEIMER
-----------------------------------------
LGE MERGER SUB, INC.,
a Delaware corporation
By: /s/ JOHN FELTHEIMER
-----------------------------------------
TRIMARK HOLDINGS, INC.,
a Delaware corporation
By: /s/ MARK AMIN
-----------------------------------------
Mark Amin, individually
(as to Section 10.5 only)
</TABLE>
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<PAGE>
EXHIBIT 2
TOP COMPANY FILMS
<TABLE>
<C> <S>
1. "After the Storm"
2. "Another Day In Paradise"
3. "Blood Oranges"
4. "Blood Surf" aka "Krocodylus"
5. "Chairman of the Board"
6. "Cord"
7. "Cube"
8. "Diplomatic Siege" aka "Enemy of My Enemy"
9. "Eve's Bayou"
10. "Fear of Flying" aka "Turbulence II"
11. "Gateway" aka "Turbulence III"
12. "Held Up" aka "Inconvenienced II"
13. "King Cobra"
14. "Leprechaun V"
15. "Mummy" aka "Nora"
16. "Skipped Parts"
17. SNL Titles (including but not limited to "SNL-Chris Farley",
"SNL-Adam Sandler" and "SNL-Mike Myers")
18. "Stalk"
19. "Star Kid"
20. "Storm of the Century"
</TABLE>
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<PAGE>
EXHIBIT 3
TOP LIONS GATE FILMS
<TABLE>
<C> <S>
1. "American Psycho"
2. "Buffalo"
3. "Gods & Monsters"
4. "Affliction"
5. "Dogma"
6. "Ginger Snaps"
7. "Shadow of a Vampire"
8. "Onegin"
9. "The Dinner Game"
10. "8 1/2 Women"
</TABLE>
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<PAGE>
EXHIBIT 5
1. "ANOTHER DAY IN PARADISE"
2. "BILLY'S HOLLYWOOD SCREEN KISS"
3. "BLOOD ORANGES"
4. "BLUE JUICE"
5. "CARNIVAL OF SOULS"
6. "CHAIRMAN OF THE BOARD"
7. "CIRCLE OF PASSION" aka "Never Ever"
8. "COLONY, THE"
9. "CORD"
10. "CUBE"
11. "CURVE" aka "Dead Man's Curve"
12. "DELIVERY, THE"
13. "DENTIST II, THE"
14. "DIPLOMATIC SIEGE" aka "Enemy of My Enemy"
15. "EVE'S BAYOU"
16. "FEAR OF FLYING" aka "Turbulence II"
17. "GOING OVERBOARD"
18. "GROUND CONTROL"
19. "INCONVENIENCED II" aka "Held Up"
20. "JOE THE KING"
21. "KID IN ALADDIN'S PALACE" aka "Kid in Arabian Knights" aka "Kid in Aladdin's
Court"
22. "KING COBRA"
23. "KROCODYLUS" aka "Blood Surf"
24. "LAST SEPTEMBER"
25. "LEPRECHAUN V"
26. "LET THE DEVIL WEAR BLACK"
27. "MEET WALLY SPARKS"
28. "MR. MURDER"
29. "MUMMY" aka "Nora" aka "Trance"
30. "MY TEACHER'S WIFE" aka "Bad with Numbers"
31. "NATURAL BORN KILLERS"
32. "NOAH DEARBORN" aka "The Secret Life of Noah Dearborn"
33. "PHOENIX"
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<PAGE>
34. "SKIPPED PARTS"
35. "SLAM"
36. SNL Titles (including but not limited to "SNL--CHRIS FARLEY", "SNL--ADAM
SANDLER" and "SNL--MIKE MEYERS")
37. "SOMETIMES III" aka "Sometimes They Come Back for More"
38. "SPRUNG" aka "Dogs"
39. "STALK"
40. "STAND OFF" aka "Prairie Fire"
41. "STAR KID"
42. "STORM OF THE CENTURY"
43. "TAIL LIGHTS FADE"
44. "TREEHOUSE"
45. "TRUCKS"
46. "TWICE UPON A YESTERDAY"
47. ULTIMATE FIGHTING CHAMPIONSHIP 16 & 17
48. "WARLOCK III"
49. "AFTER THE STORM"
50. "TURBULENCE III" aka "Gateway"
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<PAGE>
APPENDIX B
<PAGE>
SALEM PARTNERS LLC
June 6, 2000
Board of Directors
Trimark Holdings, Inc.
4553 Glencoe Avenue
Marina del Rey, CA 90292
Gentlemen:
We understand that Lions Gate Entertainment Corp. (together with its
subsidiaries and affiliates, "Lions Gate"), LGE Merger Sub, Inc., a wholly-owned
subsidiary of Lions Gate ("Newco"), and Trimark Holdings, Inc. (the "Company")
propose to enter into a Merger Agreement substantially in the form of the draft
dated June 3, 2000 which has been furnished to us (the "Agreement"), whereby,
among other things, the Company will be merged with and into Newco in a
transaction (the "Merger") in which each share of the Company's outstanding
common stock, par value $.001 per share ("Common Stock"), will be converted (the
"Proposed Transaction") into:
(a) the right to receive US$4.50 in cash; and
(b) two shares of Lions Gate common stock; provided, however that to the
extent the market Price per share of Lions Gate common stock as of the fifth
calendar day prior to the date of the Company shareholders' meeting to
approve the Proposed Transaction (and not any adjournment thereof) ("Current
Market Price") is less than US$2.75 per share, then the number of shares of
Lions Gate common stock delivered shall be the result obtained by dividing
US$5.50 by the Current Market Price. Market Price shall be defined as the
average of the last reported sale prices of Lions Gate common stock on the
American Stock Exchange over the 30 consecutive trading days immediately
prior to the day in which such average is measured.
You have requested our opinion, as investment bankers as to the fairness,
from a financial point of view, to the holders of the Common Stock of the
Company of the consideration to be received by such holders in the Proposed
Transaction.
In conducting our analysis and arriving at our opinion as expressed herein,
we have reviewed and analyzed, among other things, the following:
a. the Agreement and the financial terms of the Proposed Transaction set
forth therein;
b. the Company's Annual Reports on Form 10-K for the fiscal years ended
June 30, 1998 and June 30, 1999;
c. the Company's Quarterly Reports on Form 10-Q for the periods ended
September 30, 1999, December 31, 1999 and March 31, 2000;
d. certain other publicly available information concerning the Company and
the trading market for the Common Stock;
e. certain internal information relating to the Company, including various
financial forecasts and projections based upon differing assumptions, provided
to us by management of the Company;
f. certain publicly available information, including research reports,
concerning certain other companies engaged in businesses which we believe to be
comparable to the Company and the trading markets for certain of such other
companies' securities; and
g. the terms of certain recent business combinations which we believe to be
relevant.
<PAGE>
SALEM PARTNERS LLC
Trimark Holdings, Inc.
June 6, 2000
Page 2
We have also met with certain officers and employees of the Company
concerning its business and operations, assets, present condition and future
prospects and undertaken such other studies, analyses and investigations as we
deemed appropriate.
In addition, we have reviewed and analyzed:
a. Lions Gate's Annual Reports on Form 20-F for the fiscal years ended
March 31, 1998 and March 31, 1999;
b. Lions Gate's Quarterly Reports for the periods ended June 30, 1999,
September 30, 1999 and December 31, 1999;
c. Lions Gate's short form prospectus dated December 20, 1999 relating to
Lions Gate's issuance of up to 13,000 units, each consisting of one 5.25%
Convertible Redeemable Preferred Share, Series A and 425 Common Share Purchase
Warrants;
d. the draft balance sheet of Lions Gate as of March 31, 2000 and provided
to us on June 2, 2000;
e. certain other publicly available information, including research
reports, concerning Lions Gate and the trading market for the common shares of
Lions Gate;
f. certain publicly available information including research reports,
concerning certain other companies engaged in businesses which we believe to be
comparable to Lions Gate; and
g. certain internal information relating to Lions Gate, including various
financial forecasts and projections based upon differing assumptions, provided
to us by management of Lions Gate.
We have also conducted discussions with certain members of senior management
of Lions Gate with respect to Lions Gate's business and operations, assets,
present condition and future prospects, and undertaken such other studies,
analyses and investigations as we deemed appropriate.
In arriving at our opinion, we have not made, obtained or assumed any
responsibility for any independent evaluation or appraisal of any the properties
and facilities or of the assets and liabilities of the Company or Lions Gate. We
have assumed and relied upon the accuracy and completeness of the financial and
other information supplied to or otherwise used by us in arriving at our opinion
and have not attempted independently to verify, or undertaken any obligation to
verify, such information. In addition, we have assumed that the Company's and
Lions Gate's forecasts and projections supplied to us represent the best current
judgment of the Company's and Lions Gate's management, respectively, as to the
future financial condition and results of operations of the Company and Lions
Gate, and have assumed that such forecasts and projections have been reasonably
prepared based on such current judgment. We assume no responsibility for and
express no view as to such forecasts and projections or the assumptions on which
they are based.
We were not asked to and did not participate in any efforts to solicit
third-party offers to acquire all or part of the Company, nor did we evaluate
potential alternative transactions. The management of the Company has instructed
us to provide this opinion on that basis.
We have also taken into account our assessment of general economic, market
and financial conditions and our experience in similar transactions, as well as
our experience in securities valuation in general. Our opinion necessarily is
based upon conditions as they exist and can be evaluated on the date hereof, and
does not represent an opinion as to what the trading value of Lions Gate's
common shares will be when the Merger is consummated.
<PAGE>
SALEM PARTNERS LLC
Trimark Holdings, Inc.
June 6, 2000
Page 3
We do not express any views on any terms of the Proposed Transaction other
than the fairness from a financial point of view of the consideration to be
received by the holders of Common Stock. In particular, we express no views on
any agreements or arrangements which might be concluded between Lions Gate and
the Company after the date thereof.
In addition, upon the advice of the Company, we have assumed that the Merger
will qualify as a tax-free transaction to the holders of the Common Stock,
except to the extent such holders receive cash in the Merger.
As you are aware, Salem Partners has not received any compensation from the
Company or Lions Gate in connection with any prior investment banking services
other than the Proposed Transaction. A significant portion of our fee is
contingent upon the consummation of the Proposed Transaction.
It is understood that this letter is solely for the benefit and use of the
Board of Directors of the Company in its consideration of the Proposed
Transaction. This letter does not constitute a recommendation to any holder of
the Common Stock as to whether to vote in favor of the Merger and should not be
relied upon by any stockholder as such. This opinion does not address the
relative merits of the Proposed Transaction and any other transactions or
business strategies discussed by the Board of Directors of the Company as
alternatives to the Proposed Transaction or the underlying business decision of
the Board of Directors of the Company to proceed with or effect the Proposed
Transaction. This opinion may be included in its entirety in any proxy
statement/prospectus with respect to the Proposed Transaction, but it may not be
summarized, excerpted from or otherwise publicly referred to without our prior
written consent.
Based upon and subject to the foregoing, it is our opinion that the
consideration to be received by the holders of the Common Stock in the Proposed
Transaction is fair from a financial point of view to such holders.
Very truly yours,
/s/ Salem Partners
SALEM PARTNERS LLC
<PAGE>
APPENDIX C
<PAGE>
APPENDIX C
CALIFORNIA CORPORATIONS CODE
SECTIONS 1300-1304
DISSENTERS' RIGHTS
Section1300. (a) If the approval of the outstanding shares (Section 152) of
a corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the National Market System of the NASDAQ Stock Market, and the
notice of meeting of shareholders to act upon the reorganization summarizes
this section and Sections 1301, 1302, 1303 and 1304; provided, however, that
this provision does not apply to any shares with respect to which there
exists any restriction on transfer imposed by the corporation or by any law
or regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case where
the approval required by Section 1201 is sought by written consent rather
than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
Section1301. (a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to
purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the
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price stated any dissenting shares as defined in subdivision (b) of
Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
Section1302. Within 30 days after the date on which notice of the approval
by the outstanding shares or the notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder, the shareholder shall submit to the
corporation at its principal office or at the office of any transfer agent
thereof, (a) if the shares are certificated securities, the shareholder's
certificates representing any shares which the shareholder demands that the
corporation purchase, to be stamped or endorsed with a statement that the shares
are dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder demands
that the corporation purchase. Upon subsequent transfers of the dissenting
shares on the books of the corporation, the new certificates, initial
transaction statement, and other written statements issued therefor shall bear a
like statement, together with the name of the original dissenting holder of the
shares.
Section1303. (a) If the corporation and the shareholder agree that the
shares are dissenting shares and agree upon the price of the shares, the
dissenting shareholder is entitled to the agreed price with interest thereon at
the legal rate on judgments from the date of the agreement. Any agreements
fixing the fair market value of any dissenting shares as between the corporation
and the holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
Section1304. (a) If the corporation denies that the shares are dissenting
shares, or the corporation and the shareholder fail to agree upon the fair
market value of the shares, then the shareholder demanding purchase of such
shares as dissenting shares or any interested corporation, within six months
after the date on which notice of the approval by the outstanding shares
(Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed
to the shareholder, but not thereafter, may file a complaint in the superior
court of the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
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(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
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DELAWARE CODE
SECTION 262
APPRAISAL RIGHTS
Section262 (a) Any stockholder of a corporation of this State who holds
shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of the stockholder's shares of stock under
the circumstances described in subsections (b) and (c) of this section. As used
in this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257,
Section 258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to
SectionSection 251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections
(d) and (e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsection (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall
include in such notice a copy of this section. Each stockholder electing to
demand the appraisal of such stockholder's shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of such stockholder's shares. Such demand will
be sufficient if it reasonably informs the corporation of the identity of
the stockholder and that the stockholder intends thereby to demand the
appraisal of such stockholder's shares. A proxy or vote against the merger
or consolidation shall not constitute such a demand. A stockholder electing
to take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each consitutent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of stock
of such constitutent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are
available for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy of this
section; provided that, if the notice is given on or after the effective
date of the merger or consolidation, such notice shall be given by the
surviving or resulting corporation to all such holders of any class or
series of stock of a constituent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation the
appraisal of such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of such
holder's shares. If such notice did not notify stockholders of the effective
date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the
merger or consolidation notifying each of the holders of any class or series
of stock of such constitutent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second notice to all
such holders on or within 10 days after such effective date; provided,
however, that if such second notice is sent more than 20 days following the
sending of the first notice, such second notice need only be sent to each
stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or
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assistant secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated therein. For
purposes of determining the stockholders entitled to receive either notice,
each constitutent corporation may fix, in advance, a record date that shall
be not more than 10 days prior to the date the notice is given, provided,
that if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day
on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the
effective date of the merger or consolidation, any stockholder shall have the
right to withdraw such stockholder's demand for appraisal and to accept the
terms offered upon the merger or consolidation. Within 120 days after the
effective date of the merger or consolidation, any stockholder who has complied
with the requirements of subsections (a) and (d) hereof, upon written request,
shall be entitled to receive from the corporation surviving the merger or
resulting from the consolidation a statement setting forth the aggregate number
of shares not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after such stockholder's written request for such a
statement is received by the surviving or resulting corporation or within
10 days after expiration of the period for delivery of demands for appraisal
under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow
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money during the pendency of the proceeding. Upon application by the surviving
or resulting corporation or by any stockholder entitled to participate in the
appraisal proceeding, the Court may, in its discretion, permit discovery or
other pretrial proceedings and may proceed to trial upon the appraisal prior to
the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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APPENDIX D
<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
<TABLE>
<C> <S>
/X/ Annual report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended JUNE 30, 1999 or
/ / Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file number: 0-18613
</TABLE>
TRIMARK HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 95-4272695
<S> <C>
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
4553 GLENCOE AVE., SUITE 200 90292
MARINA DEL REY, CALIFORNIA (Zip code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code:
(310) 314-2000
Securities registered pursuant to Section 12(b) of the Act:
(NONE)
Name of each exchange on which registered: (NONE)
Securities registered pursuant to Section 12(g) of the Act:
Title of Class:
COMMON STOCK, $.001 PAR VALUE
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. / /
As of September 1, 1999, the aggregate market value of Common Stock held by
non-affiliates of the registrant was approximately $8,880,000. All officers,
directors and more than ten percent (10%) shareholders of the registrant are
deemed "affiliates" of the registrant solely for the purpose of calculating such
aggregate market value.
The number of shares of Common Stock of the registrant outstanding as of
September 1, 1999 was 4,604,677, excluding shares held by the registrant as
treasury stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement (the "1999 Proxy
Statement") to be filed pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year (June 30, 1999) are incorporated by reference in
Part III.
--------------------------------------------------------------------------------
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<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Trimark Holdings, Inc., a Delaware corporation (the "Company"), through its
wholly-owned subsidiary, Trimark Pictures, Inc., a California corporation
("Trimark"), is a worldwide distributor of entertainment software, primarily
engaged in the distribution of feature films in the domestic home video and
theatrical markets and in the licensing of distribution rights to motion
pictures for international markets. Trimark Television, Inc., a Delaware
corporation and a wholly-owned subsidiary of the Company, licenses television
rights to feature films, television series, music and children specials, and
documentaries in both the international and domestic markets.
As an independent distribution company, the Company acquires the rights to
motion pictures from a variety of sources, including studios, production
companies and independent producers. Generally, the Company acquires the rights
to completed motion pictures. However, in order to secure rights to motion
pictures which might not otherwise be available to the Company and to acquire a
wider array of distribution rights on more favorable terms, the Company also
secures the rights to motion pictures prior to or during production. The Company
distinguishes itself from the major motion picture studios and certain other
independent video distribution companies by acquiring rights to motion pictures
which may not be cost effective for many of its larger competitors to
distribute.
Distribution rights which the Company may acquire include:
(a) DOMESTIC--home video, --free television, --pay television (including cable
and pay-per-view), --theatrical and--electronic publishing
(b) INTERNATIONAL--all media.
The Company was formed in August 1984 and began operations as a domestic
home video distributor in early calendar year 1985 by acquiring exclusive home
video distribution rights to motion pictures and other audio-visual
entertainment programs which it packaged, advertised, promoted, sold, had
duplicated, and shipped to home video wholesalers for resale to retailers
throughout the country. The Company generally sells videocassettes to wholesale
distributors for resale to the approximately 25,000 video rental stores in the
United States.
In 1987, the Company began distributing and sublicensing motion pictures for
distribution in the international market. The Company considered this an
opportunity to grow in an area closely related to its video business, while
offering new opportunities to acquire broader distribution rights to motion
pictures in all media.
On May 15, 1990, the Company was re-incorporated in Delaware. The principal
assets of the Company are the capital stock of Trimark Pictures and Trimark
Television; the material business of the Company is conducted through these
companies. Unless noted otherwise, all references to the Company in this filing
include its subsidiaries.
On June 29, 1990, the Company effected an initial public offering of
1,300,000 shares of Common Stock and an additional 200,000 shares of Common
Stock were sold by selling stockholders.
On December 31, 1991, the Company acquired Trimark Television (which at the
time was named International Broadcast Systems, Ltd.) a publicly traded company,
for $1.6 million in cash. Trimark Television specializes in the distribution of
television programming, and licenses television productions to broadcasters
throughout the world.
On June 1, 1992, the Company changed its name from Vidmark, Inc. to Trimark
Holdings, Inc. On June 24, 1992, Trimark changed its name from Vidmark, Inc. to
Trimark Pictures, Inc. The name changes reflect the Company's diversification of
its distribution streams.
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In March of 1993, the Company formed Trimark Interactive to expand the core
business of film production and video distribution into the emerging market for
interactive entertainment software and multimedia. In March 1997, the Company
sold substantially all assets (primarily intellectual properties and inventory)
of Trimark Interactive to an unrelated independent entertainment and interactive
music publisher. The Company is no longer engaged in the market for interactive
entertainment software and multimedia.
On May 28, 1999, the Company formed a majority owned subsidiary
CinemaNow, Inc. to engage in the business of streaming films over the internet
using Trimark Pictures library as well as acquiring the internet rights of other
films or film libraries.
THE UNITED STATES MOTION PICTURE INDUSTRY
The United States motion picture industry encompasses the production and
theatrical exhibition of feature-length motion pictures and the subsequent
distribution of such pictures in home video, television and other ancillary
markets. The industry is dominated by the major studios--some of which have
divisions which are promoted as "independent" distributors of motion
pictures--including Universal Pictures, Warner Brothers (including Turner
Pictures, New Line Cinema and Castle Rock Entertainment), Twentieth Century Fox,
Sony Pictures Entertainment (including Columbia Pictures and Tristar Pictures),
Paramount Pictures, The Walt Disney Company (including Buena Vista, Touchstone
and Miramax) and MGM (including Metro Goldwyn Mayer Pictures, United Artists
Pictures, Orion Pictures and Goldwyn Entertainment Company), which historically
have produced and distributed the majority of theatrical motion pictures
released annually in the United States. In recent years, however, "independent"
motion picture production companies have played an important role in the
production of motion pictures for the worldwide feature film market. There are
also a large number of smaller production companies such as the Company and
other entities that produce theatrical motion pictures.
The "majors" generally own their production studios and have national or
worldwide distribution organizations. Major studios typically release films with
direct production costs generally ranging from approximately $25 million to
$100 million or more, and provide a continual source of motion pictures to the
nation's theatrical exhibitors. The independents do not own production studios
and, with certain exceptions, have more limited distribution capabilities than
the major studios. Independents typically produce fewer motion pictures at
substantially lower average production costs than major studios.
Motion Picture Production and Financing. The production of a motion picture
begins with the screenplay adaptation of a popular novel or other literary work
acquired by the producer or the development of an original screenplay having its
genesis in a story line or scenario conceived of or acquired by the producer. In
the development phase, the producer typically seeks production financing and
tentative commitments from a director, the principal cast members and other
creative personnel. A proposed production schedule and budget also are prepared
during this phase.
Upon completing the screenplay and arranging financing commitments,
pre-production of the motion picture begins. In this phase, the producer engages
creative personnel to the extent not previously committed; finalizes the filming
schedule and production budget; obtains insurance and secures completion
guarantees, if necessary or available; establishes filming locations and secures
any necessary studio facilities and stages; and prepares for the start of
principal photography.
Principal photography, the actual filming of the screenplay, may extend from
four to sixteen weeks or longer, depending upon such factors as budget,
location, weather and complications inherent in the screenplay. Following
completion of principal photography, the motion picture is edited, opticals,
dialogue, music and any special effects are added, and voice, effects and music
sound tracks and picture are synchronized during post-production. This results
in the production of the negative from which the release prints of the motion
picture are made.
D-3
<PAGE>
The cost of a motion picture produced by an independent production company
for limited distribution ranges from approximately $1 million to $12 million as
compared with $25 million to $100 million or more for commercial films produced
by major studios for wide release. Production costs consist of acquiring or
developing the screenplay, film studio rental, cinematography, post-production
costs and the compensation of creative and other production personnel.
Distribution expenses, which consist primarily of the costs of advertising and
release prints, are not included in direct production costs.
The major studios generally fund production costs from cash flow from their
motion picture and related activities, licensing fees generated from film
library holdings, and, in some cases, from unrelated businesses. Substantial
overhead costs, consisting largely of salaries and related costs of the
development, production, distribution and marketing staff and physical
facilities maintained by the major studios, also must be funded.
Independent production companies generally avoid incurring substantial
overhead costs by hiring creative and other production personnel and retaining
the other elements required for pre-production, principal photography and
post-production activities on a project-by-project basis. Unlike the major
studios, the independents also typically finance their production activities
from bank loans, "pre-sales" agreements, equity offerings and joint ventures.
Independents generally attempt to complete their financing of a motion picture
production prior to commencement of principal photography, at which point
substantial production costs begin to be incurred and require payment.
"Pre-sales" are often used by independent film companies to finance all or a
portion of the direct production costs of a motion picture. Pre-sales consist of
license fees paid to the producer by third parties in return for the right to
exhibit the completed motion picture in theaters or to distribute it in home
video, television, international or other ancillary markets. Producers with
distribution capabilities may retain the right to distribute the completed
motion picture either domestically or in one or more foreign markets. Producers
may separately license theatrical, home video, television, foreign and all other
distribution rights among several licensees. The producer may also at times be
able to acquire additional production funds through "gap financing," whereby a
lender loans a portion of the production funds based on a distributor's estimate
of the value of distribution rights. Although "gap financing" is currently
available through a variety of lenders, there can be no assurance such lenders
will continue to make funds available on this basis in the future.
Both major studios and independent film companies often acquire motion
pictures for distribution through a customary industry arrangement known as a
"negative pickup," under which the studio or independent film company agrees to
acquire from an independent production company all rights to a film upon
completion of production. The independent production company normally finances
production of the motion picture pursuant to financing arrangements with banks
or other lenders in which the lender is granted a security interest in the film
and the independent production company's rights under its arrangement with the
studio or independent. When the studio or independent "picks up" the completed
motion picture, it assumes or pays the production financing indebtedness
incurred by the production company in connection with the film. In addition, the
independent production company is paid a production fee and generally is granted
a participation in the net profits of the motion picture.
Both major studios and independent film companies generally incur various
third-party participations in connection with the production and distribution of
a motion picture. These participations are contractual rights of actors,
directors, screenwriters, owners of rights and other creative and financial
contributors entitling them to share in revenues or net profits (as defined in
the respective agreements) from a particular motion picture. Except for the most
sought-after talent, participations are generally payable after all distribution
and marketing fees and expenses, direct production costs and financing costs are
paid in full.
D-4
<PAGE>
MOTION PICTURE DISTRIBUTION.
Motion picture distribution encompasses the distribution of motion pictures
in theaters and in ancillary markets such as home video, pay-per-view, pay
television, broadcast television, foreign and other markets. The distributor
typically acquires rights from the producer to distribute a motion picture in
one or more markets. For its distribution rights, the distributor typically
agrees to advance the producer a certain minimum royalty or guarantee, which is
to be recouped by the distributor out of revenues generated from the
distribution of the motion picture and is generally nonrefundable. The producer
also is entitled to receive a royalty equal to an agreed-upon percentage of all
revenues received from distribution of the motion picture over and above the
royalty advance.
THEATRICAL DISTRIBUTION. The theatrical distribution of a motion picture
involves the manufacture and transportation of release prints, the promotion of
the picture through advertising and publicity campaigns and the licensing of the
motion picture to theatrical exhibitors. The size and success of the promotional
advertising campaign can materially affect the revenues realized from the
theatrical release of a motion picture. The major studios can spend in excess of
$50 million to promote motion pictures, and have average combined print and
advertising costs in excess of $20 million. The costs incurred in connection
with the distribution of a motion picture can vary significantly, depending on
the number of screens on which the motion picture is to be exhibited and the
competition among distributors for theaters during certain seasons. Similarly,
the ability to exhibit motion pictures in the most popular theaters can affect
theatrical revenues.
The distributor and theatrical exhibitor generally enter into an arrangement
providing for the exhibitor's payment to the distributor of a percentage of the
box office receipts for the exhibition period, in some cases after deduction of
the theater's overhead, or a flat negotiated weekly amount. The distributor's
percentage of box office receipts varies widely, depending upon the success of
the motion picture at the box office and other factors. Distributors carefully
monitor the theaters which have licensed the picture for exhibition to ensure
that the exhibitor promptly pays all amounts due the distributor. Substantial
delays in collection are not unusual.
Successful motion pictures may continue to play in theaters for up to four
(4) months or longer following their initial release. Concurrently with their
release in the United States, motion pictures generally are released in Canada
and may also be released in one or more other foreign markets. Motion pictures
are generally made available for distribution in markets subsequent to
theatrical as follows:
<TABLE>
<CAPTION>
MONTHS AFTER APPROXIMATE
INITIAL RELEASE RELEASE PERIOD
--------------- --------------
<S> <C> <C>
Domestic home video............................ 4-6 months --
Domestic pay-per-view.......................... 6-9 months 3 months
Domestic pay television........................ 10-18 months 12-21 months
Domestic network or basic cable................ 30-36 months 18-36 months
Domestic syndication........................... 30-36 months 3-15 years
Foreign home video............................. 6-12 months --
Foreign television............................. 18-24 months 3-12 years
</TABLE>
HOME VIDEO. The home video distribution business involves the promotion and
sale of videocassettes and videodiscs to local, regional and national video
retailers (e.g., video specialty stores, convenience stores, record stores and
other outlets), which then rent or sell such videocassettes and videodiscs to
consumers primarily for private viewing.
Certain films are not initially released theatrically but may instead be
initially released to home video. Given the increasing preference of retail
video stores for successful theatrical releases, it has become increasingly
difficult to secure the initial release of a film directly to home video, and
the economic opportunity for such films where such a release is obtained has
greatly diminished. To address the change
D-5
<PAGE>
in preference in the domestic home video market, the Company has focused its
resources on distributing an increased number of specialized films theatrically
as well as films premiering on pay television, and decreasing the releases of
straight-to-video films. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Major feature films are usually scheduled for release in the home video
market within four to six months after theatrical release to capitalize on the
theatrical advertising and publicity for the film. Promotion of new releases is
generally undertaken during the nine to twelve weeks before the release date.
Videocassettes of feature films are generally sold to domestic wholesalers at
approximately $40 to $60 per unit and generally are rented by consumers for fees
ranging from $1 to $5 per day. Wholesalers who meet certain sales and
performance objectives may earn rebates, return credits and cooperative
advertising allowances. Selected titles, including certain made-for-video
programs, are priced significantly lower to encourage direct purchase by
consumers. Direct sale to consumers is referred to as the "priced-for-sale" or
"sell through" market. Typically, owners of films do not share in video rental
income; however, video distributors are beginning to enter into revenue sharing
arrangements with major video retail stores. Under such arrangements,
videocassettes are sold at a reduced price to video rental stores (usually $8 to
$15 per video cassette) and a percentage of the video rental revenue is then
shared with the owners (or licensors) of the films. Home video arrangements in
international territories are similar to those in domestic territories except
that the wholesale prices may differ.
Overall growth in the domestic home video market has slowed as growth in the
number of new outlets and new VCR homes has moderated. The growth in outlets
designed to specifically serve the rental market has decreased over the past
year, while the number of outlets which offer videocassettes and digital video
discs (DVD) for sale has increased. The sell through market continues to grow
with strong sales in the traditional family entertainment market and a growing
number of hit feature films initially released at prices generally below $30.
Furthermore, technological developments which internet companies, regional
telephone companies and others are developing could make competing delivery
systems economically viable and could affect the home video marketplace.
PAY-PER-VIEW. Pay-per-view television allows cable and satellite television
subscribers to purchase individual programs, including recently released motion
pictures and live sporting, music or other events, on a "per use" basis. The
subscriber fees are typically divided among the program distributor, the
pay-per-view operator and the cable system operator.
PAY TELEVISION. Pay television allows subscribers to view premium channels
such as HBO/Cinemax, Showtime/The Movie Channel and other pay television
networks offered by cable and satellite system operators for a monthly
subscription fee. The pay television networks acquire a substantial portion of
their programming from motion picture distributors. New markets may develop with
the maturation of newly emerging direct broadcast satellite (DBS) systems and
other digital television systems.
Broadcast and Basic Cable Television. Broadcast television allows viewers to
receive, without charge, programming broadcast over the air by affiliates of the
major networks (ABC, CBS, NBC and Fox), recently formed networks (UPN and WB
Network), independent television stations and cable and satellite networks and
stations. In certain areas, viewers may receive the same programming via cable
transmission for which subscribers pay a basic cable television fee.
Broadcasters or cable systems operators pay fees to distributors for the right
to air programming a specified number of times.
FOREIGN MARKETS. In addition to their domestic distribution activities,
some motion picture distributors generate revenues from distribution of motion
pictures in foreign theaters, home video, television and other foreign markets.
There has been a dramatic increase in recent years in the worldwide demand for
filmed entertainment. This growth is largely due to the privatization of
television stations, introduction of direct broadcast satellite services, and
increased home video and cable penetration.
D-6
<PAGE>
OTHER MARKETS. Revenues also may be derived from the distribution of motion
pictures to airlines, schools, libraries, hospitals and the military, licensing
of rights to perform musical works and sound recordings embodied in a motion
picture, and licensing rights to manufacture and distribute merchandise,
clothing and similar commercial articles derived from characters or other
elements of a motion picture.
NEW TECHNOLOGIES. New means of delivery of entertainment product are
constantly being developed and offered to the consumer. The impact of emerging
technologies such as direct broadcast satellites and the internet, on the
Company's operations cannot be determined at this time. However, as a holder of
entertainment copyrights, the Company monitors these new media possibilities.
ACQUISITION OF MOTION PICTURE DISTRIBUTION RIGHTS BY THE COMPANY
GENERAL. Distribution rights to motion pictures can encompass various media
(e.g., theatrical, home video, free or pay television, electronic publishing)
and various markets or territories (e.g., the United States and Canada, Great
Britain, Japan). The Company prefers to acquire worldwide distribution rights to
a motion picture in all media wherever feasible.
The Company uses a similar decision making process in analyzing the
acquisition of a completed or an uncompleted movie. The Company collects
information concerning new motion pictures being contemplated or entering the
production cycle. This information is obtained from trade sources and from
personal relationships and contacts. The acquisition process focuses on
productions which seem most likely to fit the Company's requirements. Before the
Company acquires distribution rights for any motion picture, the Company
analyzes not only the picture's projected costs, revenues, and scheduling but
also the effect of these assumptions on overall Company performance. Management
bases its acquisition decisions on the results of this evaluation process and
will not make offers with risks that, in management's opinion, could materially
adversely affect the Company's profitability. The Company's credit facility
imposes limitations on the size of minimum guarantees or production or
acquisition costs the Company can incur without the lender's approval. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
When the Company acquires distribution rights to a motion picture prior to
its production, it makes only limited commitments to advance funds before
completion. After acquisition of the rights of a motion picture prior to its
production, the Company typically has approval rights over key production
elements and maintains a production supervisory staff to monitor the production
process. The Company's current policy is to acquire distribution rights for
motion pictures which will not be subject to material restrictions on release
and exhibition.
DOMESTIC HOME VIDEO DISTRIBUTION RIGHTS. The Company generally acquires
domestic (United States and Canadian) home video rights under exclusive
licenses, for terms ranging from five years to perpetuity, in return for a
minimum guarantee against future royalties based on a percentage of a
videocassette's wholesale net revenues. The value of a motion picture's domestic
home video rights generally increases as its domestic theatrical print and
advertising budget increases. Some of the Company's licenses require the
licensor or theatrical distributor to make minimum print and advertising
expenditures. In other instances, the Company has agreed to release and or pay
print and advertising expenses for a motion picture's theatrical distribution.
Domestic home video sales are promoted through regional direct sales
personnel who contact home video wholesale distributors and large retail video
stores. Substantially all of the Company's home video rental sales have been
made to ten (10) wholesale video distributors and two (2) retail video stores.
In February 1994, the Company formed a sell through unit to maximize the
profit potential of its 600+ title library and acquire new products for the
growing video sell through and DVD market. Currently the Company distributes or
sells directly to mass merchandisers such as Wal-Mart, Costco, Target and Best
Buy and others who buy large volumes of the Company's videos and DVD's to be
sold directly to the consumer.
D-7
<PAGE>
DOMESTIC THEATRICAL DISTRIBUTION RIGHTS. The Company acquires theatrical
distribution rights on a selective basis and distributes motion pictures for
exhibition by both major theater chains and numerous independent theaters
throughout the United States.
Management of the Company considers the theatrical distribution of film
important as a marketing tool which enhances video and international sales.
Accordingly, the Company seeks to acquire theatrical distribution rights as part
of an acquisition where possible, even if a film ultimately will not be released
theatrically. The Company released six films during fiscal 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company currently targets motion pictures for distribution to
various demographic audiences on a specialized basis, and such pictures can be
distributed less expensively on a limited or more regional basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Specialized motion pictures are characterized by underlying
literary and artistic elements intended to appeal primarily to sophisticated or
niche audiences and are generally substantially less expensive to produce and
distribute than films produced for wide release. It is not uncommon for films to
suffer theatrical losses primarily due to increased advertising expenditures,
but to have increased performance in video and other ancillary media that may
partially or totally offset such losses. The management of the Company believes
that the theatrical market has significant upside potential should any
particular film perform well. However, no assurance can be made as to results
with respect to any particular release.
The Company is in various stages of post production, production, development
and pre-production on a number of projects, and intends to release theatrically
six (6) to eight (8) films in fiscal 2000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
DOMESTIC TELEVISION DISTRIBUTION RIGHTS. The Company acquires television
distribution rights as part of the overall acquisition whenever possible. In
addition, television distribution rights are acquired specifically for
distribution by Trimark Television.
The Company hired additional personnel in fiscal 1998 to develop and oversee
the production and sales of long-form programming for initial release on
broadcast or major cable networks. The Company intends to sell four (4) to six
(6) films and "movies of the week" which will premier on major cable networks or
broadcast stations.
Television networks, independent television networks, television stations
and cable system operators generally license television series, films and film
packages (consisting of theatrically released feature films and
made-for-television movies) pursuant to agreements with distributors or
syndicators that allow a fixed number of telecasts over a prescribed period of
time for a specified cash license fee or for barter of advertising time.
Pay/Cable television services usually license pictures for initial
exhibition commencing approximately 10 to 18 months after initial domestic
theatrical release or six months after domestic home video release. Licensing of
such properties is generally accomplished pursuant to agreements which allow a
fixed number of telecasts over a prescribed period of time for a specified
license fee.
INTERNATIONAL DISTRIBUTION RIGHTS. International distribution rights
include rights in various media (e.g., television, theatrical and home video)
and to various territories (e.g., Germany, Italy, Japan and the United Kingdom).
To acquire these rights, the Company is usually required to pay a minimum
guarantee. The minimum guarantee, along with specific recoupable marketing and
other expenses, is recovered from the motion picture's gross revenues before the
producer begins to participate in the net revenues. The Company maintains a
sales force to manage international sales and to promote its motion pictures at
film markets, including the Cannes Film Festival in France, the American Film
Market (AFM) in Los Angeles and The Milan Film Festival (MIFED) in Italy.
D-8
<PAGE>
MARKETING AND SELLING
The Company's marketing operations are focused on domestic home video,
international licensing, theatrical distribution and television distribution.
The Company designs its own promotional campaigns for each motion picture;
commissions the art work for advertising, trade show displays and packaging; and
arranges for the printing, production and distribution of all promotional
materials.
Domestic home video sales are promoted through regional direct sales
personnel who contact home video wholesale distributors and large retail video
stores. The Company's largest wholesale video customer is Ingram Entertainment
which represents approximately eleven percent (11%) of net revenues for the
fiscal year ended June 30, 1999.
The Company, when appropriate, test markets its motion pictures in the
domestic theatrical market. If the response is satisfactory, the Company will
proceed to distribute the picture. The Company handles the sales, marketing and
servicing of its theatrical releases.
International sales operations consist of promoting and sublicensing the
Company's motion pictures to independent territorial distributors for release on
specified media within designated territories.
The Company maintains a sales force to manage international sales and to
promote its motion pictures at foreign film markets. The Company continues to
expand its worldwide television distribution in order to maximize the
unexploited television rights which it holds. The Company distributes product
directly to broadcasters in both the international and domestic markets and
licenses product for other companies and producers.
COMPETITION
The motion picture distribution business and other related entertainment
businesses are highly competitive. The Company's competitors in domestic home
video distribution have included the home video divisions of the major studios,
such as Warner Bros., The Walt Disney Company, Universal, Paramount, Fox and
Sony/Columbia; and independent distributors, including Artisan Entertainment.
Many of these competitors have greater access to feature films and significantly
greater resources than the Company.
In the international distribution market, the Company competes with a wide
range of companies from small independents exclusively focused upon certain
classes of motion pictures like J & M Entertainment and Mark Damon Productions,
to the major studios which have expanded distribution in international
territories, such as Disney's Buena Vista International.
INTELLECTUAL PROPERTY RIGHTS
Copyright protection is a serious problem in the video cassette distribution
industry because of the ease with which cassettes may be duplicated. In the
past, certain countries permitted video pirating to such an extent that the
Company did not consider these markets viable for distribution. Video
distributors, including the Company, have initiated legal actions to enforce
copyright protection and management believes the problem to be less critical at
the present time.
The Company is currently using the trademark "TRIMARK HOME VIDEO" in
connection with its domestic home video distribution, "TRIMARK PICTURES" in
connection with films distributed domestically and licensed internationally and
uses "TRIMARK TELEVISION" in connection with licenses to free, pay and cable
television. The trademark "TRIMARK PICTURES" has been registered with the
Commissioner of Patents and Trademarks. The Company regards its trademarks as
valuable assets and believes that its trademarks are an important factor in
marketing its products.
D-9
<PAGE>
REGULATION AFFECTING THE COMPANY
Distribution rights to motion pictures are granted legal protection under
the copyright law of the United States and most foreign countries, which provide
substantial civil and criminal sanctions for unauthorized duplication and
exhibition of motion pictures. The Company endeavors to maintain copyright
protection for all its films under the laws of all applicable jurisdictions.
The Code and Ratings Administration of the Motion Picture Association of
America, an industry trade association, assigns ratings for age group
suitability for theatrical distribution of motion pictures. The Company submits
most of its films for such ratings. A substantial number of the Company's films
are rated "R;" under rules enforced by theatrical exhibitors, children under
certain ages may attend the applicable motion picture only if accompanied by an
adult.
In addition, United States television stations and networks as well as
foreign governments impose additional restrictions on the content of motion
pictures which may restrict in whole or in part exhibition on television or in a
particular territory. There can be no assurance, therefore, that current or
future restrictions on the content of Company films, may not limit or affect the
Company's ability to exhibit certain of such motion pictures in such media or
markets.
EMPLOYEES
As of June 30, 1999, the Company had 97 full-time employees, 40 of whom were
engaged in sales and marketing. None of the Company's employees are covered by a
collective bargaining agreement, although some of the Company's subsidiaries are
subject to guild agreements. Management believes that its employee relations are
good.
ITEM 2. PROPERTIES
The Company began leasing new corporate office space in Marina del Rey,
California in September 1999 for a term of ten years expiring on September 3,
2009. These premises contain approximately 23,000 square feet of office space.
Previously the Company had leased 26,000 Square feet of corporate office space
in Santa Monica, CA under a lease of seven years.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to claims and suits arising from disputes over
copyrights, clear title and contractual matters arising from its distribution
contracts. Such proceedings are not considered material to the Company's
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable. No matters were submitted to a vote by the Company's
security holders during the fourth quarter of its fiscal year.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and all positions with the
Company currently held by each person who may be deemed an executive officer of
the Company. Executive officers serve at the discretion of the Board of
Directors. Except as otherwise indicated, each of the executive officers serves
in
D-10
<PAGE>
similar positions for both the Company and Trimark. Unless otherwise noted, all
references to the Company include Trimark.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
Mark Amin................................. 49 Chairman of the Board and Chief Executive
Officer
Cami Winikoff............................. 36 Executive Vice President and Chief
Administrative Officer of Trimark
Peter Block............................... 36 Executive Vice President of Trimark
Sergei Yershov............................ 33 Senior Vice President of Trimark
Jeff Gonzalez............................. 31 Chief Financial Officer, Treasurer and
Secretary
Andrew Reimer............................. 42 Senior Vice President of Trimark
</TABLE>
MARK AMIN is a founder of the Company and has served as its Chairman of the
Board since November 1988 and Chief Executive Officer since January 1994.
Mr. Amin served as a Director, President and Chief Executive Officer of the
Company from its incorporation in 1984 until December 1989. In 1981, Mr. Amin
co-founded 20/20 Video, a video specialty store in Los Angeles, California, and
served as a director of 20/20 Video from 1981 until 1988. Mr. Amin sold his
entire stock interest in 20/20 Video in 1987. Mr. Amin graduated from the
Graduate School of Management at the University of California, Los Angeles with
an MBA in marketing in 1975, and was previously awarded a BA degree in economics
by the University of Kansas.
CAMI WINIKOFF joined Trimark in August 1990, in November 1991 was appointed
Director of Production, in January 1995 was appointed Vice President of
Production, in January 1997 was appointed Senior Vice President and has served
as Executive Vice President, Chief Administrative Officer since September 1997.
Before joining Trimark Ms. Winikoff was an independent producer.
PETER BLOCK joined Trimark in September 1993 and was recently appointed
Executive Vice President of Acquisitions, Distribution and New Media for
Trimark. Prior to Trimark, Mr. Block represented writers and producers, worked
for the WGA, and in the marketing and studio operations departments at the Walt
Disney Company. Mr. Block received his J.D. from USC, MBA from the University of
California, Los Angeles and B.A. from Duke University.
SERGEI YERSHOV joined Trimark in January 1995 as Director of International
Sales, in January 1996 was appointed Vice President of International
Distribution and has served as Senior Vice President, International since
August 1998. From November 1991 to June 1992 Mr. Yershov was Director of
International Sales for West Side Studios located in Los Angeles, California,
and from July 1992 to December 1994 served as Vice President of International
Distribution for the same organization. Mr. Yershov graduated in 1988 from
Military Aerospace Academy, St. Petersburg with a major in Computer Science and
Telecommunications.
JEFF GONZALEZ joined the Company in September 1998 as Chief Financial
Officer and Secretary. From 1994 until 1998, Mr. Gonzalez was Controller of
Morgan Creek Productions, Inc., a motion picture production company based in
Burbank, California. From 1991 until 1994, Mr. Gonzalez was a Senior Auditor at
PricewaterhouseCoopers LLP, a worldwide public accounting firm. Mr. Gonzalez
graduated in 1990 from the University of California, Los Angeles with a BA in
economics and is a certified public accountant (non-active).
ANDREW REIMER joined Trimark in April 1995 as the Vice President of Domestic
Television. In July 1997 he was appointed Senior Vice President of Worldwide
Television. Prior to joining Trimark, Mr. Reimer was one of the founders of, as
well as the senior programming executive at, Action Pay-Per-View. Mr. Reimer
also spent 6 1/2 years at Warner Bros. in various capacities, including Business
Affairs, Film Acquisition, and Strategic Planning. Mr. Reimer graduated from the
Graduate School of Management at the University of California, Los Angeles with
an MBA in marketing, and was previously awarded a BA degree in Music from the
State University of New York at Binghamton.
D-11
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock began trading on the over-the-counter market on
June 29, 1990 following the effectiveness of the Company's Registration
Statement on Form S-1. Prior to that date, there was no public market for the
Common Stock. The Common Stock is listed and reported on the National
Association of Securities Dealers Automated Quotation SmallCap Market ("NASDAQ")
under the symbol "TMRK." As of September 1, 1999, there were 4,604,677 shares of
Common Stock outstanding, excluding shares held by the Company as treasury
stock, held by approximately 45 shareholders of record. Until November 1998, the
Common Stock had been listed on the NASDAQ National Market, but was moved to the
SmallCap when the NASD panel determined the Common Stock did not meet applicable
public float requirements.
The following table sets forth the high and low last sales prices as
reported on NASDAQ for fiscal 1998 and fiscal 1999.
<TABLE>
<CAPTION>
SALES PRICES
FOR
COMMON
STOCK
----------------------
QUARTER ENDING HIGH LOW
-------------- ---------- ---------
<S> <C> <C>
September 30, 1997.......................................... 6 7/8 4 1/4
December 31, 1997........................................... 5 7/8 4 1/8
March 31, 1998.............................................. 5 1/2 4
June 30, 1998............................................... 4 5/8 3 1/8
September 30, 1998.......................................... 4 1/4 1 5/8
December 31, 1998........................................... 4 5/8 1 5/8
March 31, 1999.............................................. 11 5/8 2 1/8
June 30, 1999............................................... 8 3/8 4 1/8
</TABLE>
The Company has not paid any cash dividends since its organization and has
no present intention to pay cash dividends in the foreseeable future. The
present policy of the Company is to retain its earnings, if any, to provide
funds for the operation of its business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the selected financial data for the Company
and should be read in conjunction with the Consolidated Financial Statements and
Notes thereto and with Management's Discussion and Analysis of Financial
Condition and Results of Operations which appear elsewhere in this report.
D-12
<PAGE>
TRIMARK HOLDINGS, INC. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
JUNE 30
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Earnings Statement Data:
Net revenues:
Domestic:
Home Video................................. $58,242 $48,053 $38,823 $34,615 $52,103
Theatrical................................. 1,123 8,297 5,380 286 1,746
Television................................. 14,446 11,622 4,824 5,063 7,861
International
All media.................................. 18,332 12,178 12,791 17,668 21,812
Interactive:
All Media.................................. -- -- 1,347 2,200 1,472
------- ------- ------- ------- -------
Net revenues............................. 92,143 80,150 63,165 59,832 84,994
Film costs and Distribution expenses......... 81,188 67,089 53,421 57,495 70,721
------- ------- ------- ------- -------
Gross profit............................. 10,955 13,061 9,744 2,337 14,273
Operating expenses:
Selling.................................... 7,209 7,461 6,857 6,352 5,715
General and Administrative................. 5,465 5,100 4,239 5,447 5,873
Bad debt................................... (288) 1,109 321 31 276
------- ------- ------- ------- -------
12,386 13,670 11,417 11,830 11,864
------- ------- ------- ------- -------
Operating (loss)
Earnings................................... (1,431) (609) (1,673) (9,493) 2,409
Other (income) expenses:
Interest expense........................... 3,849 4,443 1,934 847 1,230
Interest and Investment income............. (79) (172) (84) (95) (38)
Minority interest.......................... -- -- -- (38) (422)
------- ------- ------- ------- -------
(Loss) earnings before income taxes........ (5,201) (4,880) (3,523) (10,207) 1,639
Income taxes................................... (40) 299 -- (2,380) 656
------- ------- ------- ------- -------
Net (loss) earnings............................ $(5,161) $(5,179) $(3,523) $(7,827) $ 983
------- ------- ------- ------- -------
Other Comprehensive Income, net of tax......... $ 3,101 -- -- -- --
------- ------- ------- ------- -------
Comprehensive (loss) Income.................... $(2,060) $(5,179) $(3,523) $(7,827) $ 983
------- ------- ------- ------- -------
Net (loss) earnings per common share:
------- ------- ------- ------- -------
Net (loss)earnings per common share............ $ (1.19) $ (1.24) $ (0.84) $ (1.83) $ 0.22
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Total assets................................... $83,278 $89,220 $90,223 $48,401 $64,385
Total liabilities.............................. 67,197 74,076 70,014 24,051 31,775
Retained earnings.............................. (1,180) 3,981 9,160 12,683 20,510
Stockholders' equity........................... 16,081 15,144 20,209 24,350 32,572
</TABLE>
D-13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
NET REVENUES: Net revenues for the year ended June 30, 1999 increased
$12 million or 15% compared with the prior fiscal year. The increase was
primarily attributable to increases in most revenue segments, including domestic
home video, television and international distribution, partially offset by
decreases in revenues generated from theatrical exhibition. Net revenues
increased $17 million, or 27%, in fiscal 1998 compared to fiscal 1997. The
increase was primarily attributable to increases in revenues generated from
domestic theatrical, home video, and television partially offset by decreases in
revenues generated from international and interactive distribution.
To address the continuing competition in the domestic home video rental
market, in the periods presented, the Company has focused its resources on
distributing an increased number of films in the specialized theatrical market,
the made for television market and home video sell through market and decreasing
the releases of straight-to-video rental films. See "Liquidity and Capital
Resources." The production and distribution of theatrical motion pictures
requires capital commitments which may not be recouped, if at all, until the
picture is released in home video, international and ancillary markets.
DOMESTIC HOME VIDEO: Net revenues from domestic home video increased
$10.2 million or 21% for the year ended June 30, 1999 compared with the prior
fiscal year. In fiscal 1999, the Company released 36 motion pictures for the
domestic home video rental market compared to 35 motion pictures released in
fiscal 1998 and 27 motion pictures released in fiscal 1997. The increase in
fiscal 1999 revenues was primarily due to the $6 million increase in DVD sales
and $4 million increase in video sell through sales. Fifty-five (55) DVD titles
were released in fiscal 1999 as compared to only 5 in the prior fiscal year.
Furthermore, the increased emphasis on the exploitation of Trimark's 600+ title
library contributed to the increase in video sell through sales. Net revenues
from domestic home video increased $9.2 million or 24% for the year ended
June 30, 1998 compared with fiscal year 1997. The increase in fiscal 1998
revenues was primarily due to the initial home video distribution in fiscal 1998
of three wide theatrically released films: "Sprung" (October 1997), "Eve's
Bayou" (March 1998, the rental title with the largest shipments in Company
history) and "Star Kid" (aka "Warrior of Waverly Street") (May 1998), compared
to the release on home video of only one comparable title "Meet Wally Sparks" in
fiscal 1997. The overall increase in the number of titles released to the
domestic home video rental market in fiscal 1998 as compared to fiscal 1997 also
contributed to the increased revenue. The increase in releases was primarily due
to the availability of additional titles which have had prior theatrical
releases. The Company plans to release approximately thirty-six (36) titles to
the domestic home video rental market in fiscal 2000.
The Company anticipates that the domestic home video rental market will
continue to be extremely competitive.
DOMESTIC THEATRICAL DISTRIBUTION: Net revenues from domestic theatrical
distribution decreased $7.2 million or 86% for the year ended June 30, 1999
compared with the prior year. The decrease was primarily attributable to the
performance of the wide release theatrical film in the prior year period, "Eve's
Bayou" (the title with the largest box office receipts in Company history) with
no comparable theatrical release in fiscal 1999. In fiscal 1999 the Company
released six (6) motion pictures in the specialized theatrical market compared
to fiscal 1998 in which the Company released six (6) motion pictures
theatrically, two mainstream--"Eve's Bayou" and "Star Kid," three
(3) specialized--"Box of Moonlight," "Chinese Box" and "The Ugly" and one
limited--"Chairman of the Board". The Company anticipates releasing six (6) to
eight (8) titles in the specialized and limited theatrical market in fiscal 2000
(see Liquidity and Capital Resources).
D-14
<PAGE>
Theatrical revenues increased $2.9 million or 54% for the year ended
June 30, 1998, compared with the prior year. The increase was primarily
attributable to the performance of Eve's Bayou in fiscal 1998 with no comparable
release in fiscal 1997.
TELEVISION DISTRIBUTION: Net revenues from television distribution which
includes such media as network, basic cable, pay television, pay-per-view and
syndication increased $2.8 million or 24% for the year ended June 30, 1999
compared with the prior year. The increase was primarily due to the Company's
first network movie-of-the-week film, "The Simple Life of Noah Dearborn." The
Company had no network film releases in the prior fiscal year. The Company
anticipates distributing four (4) to six (6) pictures for the made for
television market in fiscal 2000 (see Liquidity and Capital Resources). In
fiscal 1998 television revenue increased $6.8 million or 140% compared with
fiscal 1997. The increase was primarily due to the fiscal 1998 releases of the
made for cable television movies "Trucks" and "The Colony" as well as the cable
debut of "Meet Wally Sparks" and "Sprung" and the HBO premiere of "Phoenix." In
contrast, in fiscal 1997, the Company released only two HBO premieres "The
Dentist" and "Crossworlds."
INTERNATIONAL DISTRIBUTION: Net revenues from international distribution
increased $6.2 million or 51% for the year ended June 30, 1999 compared with the
prior year. Trimark's new business plan emphasizes the production and
acquisition of films with strong international commercial appeal. Thus, the
fiscal 1999 international releases of "Cube," "Diplomatic Siege," and "King
Cobra" were highly successful in this market without any comparable commercially
successful releases in fiscal 1998. During fiscal 2000 the Company plans to
release approximately eight (8) to ten (10) motion pictures initially into
international distribution.
Net revenues from international distribution decreased $613,000 or 5% for
the year ended June 30, 1998 compared with the prior year. The decrease in
revenues in fiscal 1998 as compared to fiscal 1997 was primarily due to the
release in the fiscal 1997 period of the wide theatrical release film "Star Kid"
without any comparable film in the fiscal 1998 period.
TRIMARK INTERACTIVE DISTRIBUTION: The Company had no net revenues from
interactive distribution in fiscal 1999 and 1998 as the Company decided to exit
the interactive entertainment software and multimedia business and to sell
substantially all assets (primarily intellectual properties and inventory) of
Trimark Interactive to an unrelated independent entertainment and interactive
music publisher in March 1997. Interactive revenues for fiscal 1997 primarily
reflect the initial release of the Sony PlayStation version of "The Hive."
GROSS PROFIT: The Company's gross profit for the year ended June 30, 1999
decreased $2.1 million or 16.1% compared with the prior year. The decrease in
gross profit was primarily the result of approximately $9.7 million in write
downs to net realizable value coupled with the reduction in estimated future
revenue on older films which was largely offset by the $12.0 million increase in
gross sales. Estimated total revenues and costs are reviewed on a quarterly
basis and revisions to amortization rates are made as necessary including write
downs to net realizable value. These write downs were primarily associated with
the lower than anticipated video performances of the theatrically released films
"Star Kid" and "Chairman of the Board."
In fiscal 1998 gross profit increased $3.3 million or 34% compared with the
prior year. Gross profit as a percentage of net revenues increased to 16% for
fiscal 1998 as compared to 15% for fiscal 1997. The increase in gross profit was
primarily due to the $17 million increase in gross revenue from the prior fiscal
year partially offset by $4.5 million in write downs to net realizable value of
film inventory. These write downs primarily related to a charge associated with
the lower than anticipated performance of the January 1998 domestic theatrical
release of "Star Kid" and a write down associated with management's decision not
to release "Chairman of the Board" with a wide theatrical release, but rather to
have a selected market theatrical release. Fiscal 1997 results were negatively
impacted by a $3.0 million write
D-15
<PAGE>
down of film costs to estimated net realizable value associated with the
January 1997 theatrical release of "Meet Wally Sparks."
SELLING EXPENSES: The Company's selling expenses decreased $252,000 or 3%
in fiscal 1999 as compared to the prior year primarily due to the reduction in
theatrical operations. The Company disbanded its regional theatrical sales
operations during the fourth quarter of fiscal 1998.
The Company's selling expenses increased $604,000 or 9% for the year ended
June 30, 1998 compared with the prior year. The increase was primarily due to an
increase in theatrical operations partially offset by a decrease in interactive
operations. In the quarter ended March 31, 1997, the Company sold substantially
all assets of Trimark Interactive.
Selling expenses as a percentage of net revenues for fiscal 1999, fiscal
1998 and fiscal 1997 were 8%, 9% and 11%, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
increased $365,000 or 7% for the year ended June 30, 1999 compared with the
prior year. The increase was primarily due to increases in medical benefits,
consulting and accounting fees.
General and administrative expenses increased $861,000 or 20% for the year
ended June 30, 1998 compared with the prior year. The increase was primarily due
to the costs associated with establishing three regional theatrical sales
offices in the beginning of the fiscal year to support mainstream national
theatrical releases and costs associated with closing the three regional
theatrical sales offices in the fourth quarter of fiscal 1998.
BAD DEBT EXPENSE: Bad debt expense for the year ended June 30, 1999
decreased $1.4 million or 126% compared with the same period in fiscal 1998 and
increased $788,000 or 245% for the year ended June 30, 1998 compared with fiscal
1997. Bad debt expenses for the periods primarily represent reserves taken
against domestic video and foreign sales. The decrease was partially due to
$388,000 in collections on past due video sales as the Company has strived to
bring all video customers current on their outstanding receivables. The Company
also took $852,000 in reserves during fiscal 1998 due to the Asian currency
crisis. No comparable reserves were taken during fiscal 1999 because of the
recovering Asian economy.
INTEREST EXPENSE: Interest expense decreased $594,000 or 13% for the year
ended June 30, 1999 compared with the prior year and increased $2.5 million or
130% for the year ended June 30, 1998 compared with the year ended June 30,
1997. The decrease in interest expense during fiscal 1999 was primarily due to
lower average borrowing levels as compared to fiscal 1998. The Company did not
incur the costs associated with the distribution of wide theatrical releases as
it did in fiscal 1998 which was also responsible for the 130% increase for the
year ended June 1998 as compared to the year ended June 1997. The Company
expects to continue to use excess cash flow generated by theatrical and library
product to decrease current borrowing levels under its revolving credit line.
See "Liquidity and Capital Resources."
INTEREST AND INVESTMENT INCOME: Interest and investment income decreased
$93,000 for the year ended June 30,1999 compared with the prior year as all
excess cash was used to reduce the Company's debt.
Interest and investment income increased $88,000 for the year ended
June 30, 1998 compared with the prior year. The increase was primarily due to
interest income from loans to officers in the fiscal 1998 period without any
similar income in the fiscal 1997 period.
NET LOSS: The Company's net loss for fiscal 1999 was $5.2 million. The
fiscal 1999 loss was primarily due to approximately $9.7 million in write downs
to net realizable value of film inventory. These write downs primarily related
to charges associated with the lower than anticipated video performances of the
theatrically released films "Star Kid" and "Chairman of the Board". The write
downs were partially offset by increased sales, lower bad debt expense and
interest charges.
D-16
<PAGE>
The Company's net loss for fiscal 1998 was $5.2 million. The fiscal 1998
loss was primarily due to approximately $4.5 million in write downs to net
realizable value of film inventory. These write downs primarily related to
charges associated with the theatrical release of "Star Kid" and "Chairman of
the Board." Earnings were also negatively impacted by higher interest expenses
resulting from the Company's release of theatrical motion pictures as compared
to release of direct-to-video motion pictures. Theatrical releases have a
greater length of time from initial investment in film costs to recoupment in
home video and other ancillary markets. See "Liquidity and Capital Resources."
OTHER COMPREHENSIVE INCOME: Pursuant to an agreement reached on
February 22, 1999, the Company exchanged 412,363 of its shares or 9% of its
outstanding shares, for 45,858 shares of broadcast.com on March 29, 1999. The
$3.1 million other comprehensive income reported in fiscal year 1999 represents
the unrealized gain, net of taxes, on the broadcast.com shares based on the
market price of the shares on June 30, 1999 (Subsequent to June 30, 1999,
Yahoo! Inc. acquired broadcast.com, changed broadcast.com's name to Yahoo!
Broadcast Services, and in connection with such acquisition the 45,858 shares
held by the Company were converted to 35,111 shares of Yahoo! Inc.) As a result
of this new business venture, the Company and Yahoo! Broadcast Services will
work together to distribute movies on the internet under a variety of new
revenue models including pay-per-view, electronic commerce, integrated
advertising, personalized marketing and user interactive content. Under this
agreement, which terminates on January 31, 2001 unless extended, the Company
will use its best efforts on future titles to give Yahoo! Broadcast Services
streaming rights or in certain circumstances rights of first refusal in
connection therewith.
INFLATION:
Generally, costs in connection with the acquisition and distribution of
motion pictures for release have increased in recent years. Such cost increases
may affect results of operations in the future; however, the Company believes
that the effect of such factors has not been material to date.
LIQUIDITY AND CAPITAL RESOURCES:
The Company relies on cash generated by operations and borrowings under its
credit facility to finance its operations. The Company's cash flows from
operating, investing and financing activities for the years ended June 30, 1999,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided (used) by Operating
activities..................................... 10,083 (1,854) ($38,257)
Net cash used by investing Activities............ (263) (316) (504)
Net Cash (used) provided by Financing
activities..................................... (8,858) (336) 42,082
</TABLE>
Cash provided by operations increased by $11.9 million for the fiscal year
ended June 30, 1999 compared to the same period in fiscal 1998. The most
significant change from the prior period was the decrease in additions to film
costs of $15.9 million. The decrease was primarily due to the prints and
advertising costs associated with the wide theatrical release of "Star Kid", and
"Eve's Bayou" in fiscal year 1998. There were no comparable prints and
advertising expenditures associated with wide theatrical releases in the fiscal
year ended June 30, 1999. In accordance with Trimark's new business plan, the
Company endeavors to limit prints and advertising costs associated with wide
theatrical releases which are capitalized as film costs. The $36.9 million
addition to film costs in fiscal 1999 was primarily used for the production and
acquisition of new product with approximately $4.7 million used for prints and
advertising costs on the specialized theatrical releases of "Billy's Hollywood
Screen Kiss," "Cube," "Slam," and "Another Day in Paradise."
D-17
<PAGE>
Investing activities for the year ended June 30, 1999, primarily consisted
of expenditures on production equipment improvement and computer hardware and
software. Investing activities for 1998 and 1997 have primarily consisted of
expenditures on equipment and leasehold improvements related to the expansion of
theatrical operations.
Financing activities, consisting primarily of activity under the Company's
credit facility, decreased $8.5 million in fiscal year 1999 as compared to
fiscal year 1998. The decrease was primarily the result in the increase in
operating cash flows. The combination of the increase in sales along with the
decrease in prints and advertising costs associated with wide theatrical
releases allowed the Company to reduce its outstanding debt balance by
$8.9 million or 16% from the June 30, 1998 year end balance.
Borrowings under the credit facility in fiscal 1998 and 1997 were primarily
the result of motion picture production, acquisition and distribution
expenditures exceeding operating cash inflows due primarily to the Company's
focus on theatrical distribution which began in fiscal 1997. The Company's cash
requirements varied in part with the size and timing of production advances and
minimum guarantee payments along with the timing of its theatrical, home video,
television and international releases.
The Company's principal operating subsidiaries, Trimark Pictures, Inc. and
Trimark Television, Inc., on December 20, 1996 entered into a $75 million
revolving credit facility with a consortium of banks agented and arranged by The
Chase Manhattan Bank which replaced a $25 million revolving credit facility with
Bank of America NT & SA and Westdeustche Landesbank. The credit facility expires
December 20, 2000. Under the credit agreement, the Company may borrow for
various corporate purposes provided that the aggregate borrowings do not exceed
the borrowing base, as defined in the Credit Agreement, which is derived from
specified percentages of approved accounts receivable and film library. The
credit agreement is guaranteed by the Company and certain of its subsidiaries
and is secured by substantially all of the assets of the Company and its
significant subsidiaries. Loans outstanding under the credit facility bear
interest at the rate of 1.5% above Chase Manhattan's prime rate or 2.5% above
the London Interbank Offered Rate for Eurodollars for the loan term specified.
An unused commitment fee is payable on the average unused availability under the
credit facility, at the rate of 0.3725% per annum. As of June 30, 1999 there was
$48.3 million outstanding under the credit facility. The Company expects to use
excess cash flow generated by theatrical and library product to decrease current
borrowing levels. The credit agreement contains various financial and other
covenants to which the Company must adhere. These covenants, among other things,
require the maintenance of minimum net worth and various financial ratios which
are reported to the bank on a quarterly basis and include limitations on
additional indebtedness, liens, investments, disposition of assets, guarantees,
affiliate transactions and the use of proceeds. In relation to management's
strategic review and release schedule described below, the Company amended the
current credit agreement as of December 31, 1998 and June 30, 1999. The amended
agreement provides for less stringent minimum net worth ratios and minimum
equity requirement. In consideration for the adjustment of these ratios and
minimum equity requirement, the amended credit facility reduces the borrowing
limits over the remaining life of the credit facility. For the year ended
June 30, 1999, the borrowing limit was $60 million. By January 31, 2000, the
borrowing limit is reduced to $50 million and by June 30, 2000 is reduced to
$40 million. The amendments to the debt covenants and borrowing limits were
structured to incorporate the Company's overall strategy and presently planned
productions, acquisitions, distribution, and overhead expenditures. The Company
is in compliance with all debt covenants as of June 30, 1999.
The Company's ability to maintain availability under its Credit Facility is
primarily dependent upon the timing of collections on existing sales during the
next twelve months and the amount and timing of collection on anticipated sales
of the Company's current library and films which the Company plans to release or
make available over the next twelve months. Management believes that existing
capital, cash flow from operations and availability under the Company's amended
Credit Facility will be sufficient to enable the Company to fund its planned
productions, acquisitions, distribution and overhead expenditures for the next
twelve months.
D-18
<PAGE>
Management of the Company conducted a strategic review of the Company's
theatrical operations in fiscal 1998. This strategic review focused on the
increase in the theatrical exhibition of specialized films, with which the
Company has demonstrated past successes including "Eve's Bayou" and "Kama Sutra:
A Tale of Love," and a reduction in the distribution of wide mainstream
features. Partially as a result of this review, the Company closed its regional
theatrical offices in the fourth quarter of fiscal 1998.
In the domestic specialized theatrical market the Company plans to release
six (6) to eight (8) motion pictures during fiscal 2000. Furthermore, the
Company plans to release approximately thirty-six (36) motion pictures into the
domestic home video rental market and to continue to expand distribution in the
sell through market. The Company intends to sell four (4) to six (6) films and
"movies of the week" which will premier on major cable networks or broadcast
stations. Also in fiscal 2000 the Company plans to release approximately eight
(8) to ten (10) motion pictures initially into the international distribution
market.
Technicolor Videocassette, Inc. currently serves as the Company's video
cassette duplicator and fulfillment contractor. Technicolor Videocassette, Inc.
has a general lien on all of the Company's materials and products in its
possession.
The Company was authorized to spend up to $150,000 in fiscal 1999 to
purchase shares of its outstanding common stock in the open market or otherwise.
The amended debt covenant at December 31, 1998 limits the purchase of
outstanding common stock to $50,000 per fiscal year. During fiscal year 1999,
the Company purchased 13,215 shares at an average price of $2.39 per share.
IMPACT OF YEAR 2000. The Company is currently working to resolve the
potential impact of the year 2000 on the processing of time-sensitive
information by its computerized information systems. Year 2000 issues may arise
if computer programs have been written using two digits (rather than four) to
define the applicable year. In such case, programs that have time-sensitive
logic may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. Management
completed a review of all significant software and equipment used in the
Company's operations and, to the extent practicable, in the operations of its
key business partners, in order to determine if any year 2000 risks exist that
may be material to the Company as a whole. The Company estimates that repairing
all time sensitive hardware and software will cost the Company approximately
$250,000. As of the year ended June 30, 1999, the Company has purchased
approximately $210,000 in new computer hardware and software through its normal
upgrading of old computer hardware and software as well as a direct result of
year 2000 issues. The Company also entered into a licensing agreement on
February 6, 1999 for the implementation of a new general ledger software system.
The new G/L system became operational on July 1, 1999. If customers or vendors
of the Company are unable to resolve year 2000 processing issues in a timely
manner, it could result in a material financial risk.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations", "Business", and "Market for the Registrants Common
Equity and Related Stockholder Matters" are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievement of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
Changes in public tastes, industry trends and demographic changes, which may
influence the distribution and exhibition of films in certain areas; public
reaction to and acceptance of the Company's video, theatrical and television
product, which will impact the Company's revenues; competition, including
competition from major motion picture studios, which may
D-19
<PAGE>
affect the Company's ability to generate revenues; reliance on management and
key personnel; consolidation in the retail video industry; whether the Company's
current strategy which includes theatrical releases of only specialized films
and production and acquisition of made for television product is successful; new
methods of distributing motion pictures; the costs and risks associated with the
Year 2000 issue; and other factors referenced in this Form 10-K and the
Company's other filings with the Securities and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not consider the potential loss of future earnings caused
by interest rate volatility to have a material impact on its financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF TRIMARK HOLDINGS, INC.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) on page 54 present fairly, in all material respects,
the financial position of Trimark Holdings, Inc. and its subsidiaries at
June 30, 1999 and 1998, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1999, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14(a) on
page 54 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and the financial statement schedule are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements and the financial statement schedule
based on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards, 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.
PRICEWATERHOUSECOOPERS LLP
Century City, California
September 27, 1999
D-20
<PAGE>
TRIMARK HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 2,121 $ 1,159
Accounts receivable, less allowances of $5,352 and $6,005,
respectively (Note 2)..................................... 20,231 16,568
Film costs, net (Note 2).................................... 49,230 65,064
Deferred marketing costs.................................... 1,518 1,963
Inventories, net (Note 2)................................... 1,552 1,190
Investments (Note 2)........................................ 6,036 --
Property and equipment at cost, less accumulated
Depreciation of $2,872 and $2,433 respectively
(Note 2).................................................. 565 741
Due from officers (Note 13)................................. 792 780
Other assets................................................ 1,233 1,755
------- -------
$83,278 $89,220
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving line of credit (Note 5)........................... $48,330 $57,250
Accounts payable and accrued expenses (Note 4).............. 5,710 8,060
Minimum guarantees and royalties payable.................... 12,204 7,623
Deferred income............................................. 889 1,100
Income taxes payable (Note 6)............................... 64 43
------- -------
Total liabilities....................................... 67,197 74,076
------- -------
Stockholders' equity:
Common stock, $.001 par value. Authorized 20,000,000
shares; 5,570,092 shares issued at June 30, 1999 and
5,134,827 shares issued at June 30, 1998................ 6 5
Additional paid in capital................................ 18,617 15,588
Preferred stock, $.01 par value. Authorized 2,000,000
shares; no shares issued and Outstanding................ -- --
Retained earnings......................................... (1,180) 3,981
Accumulated comprehensive income.......................... 3,101 --
Less treasury shares, at cost--965,415 shares and 952,200
shares (Note 8)......................................... (4,463) (4,430)
------- -------
Stockholders' equity.................................... 16,081 15,144
------- -------
$83,278 $89,220
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
D-21
<PAGE>
TRIMARK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT LOSS PER SHARE)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues (Note 2)....................................... $92,143 $80,150 $63,165
Film costs and distribution expenses (Note 2)............... 81,188 67,089 53,421
------- ------- -------
Gross Profit.......................................... 10,955 13,061 9,744
------- ------- -------
Operating expenses:
Selling................................................... 7,209 7,461 6,857
General and administrative................................ 5,465 5,100 4,239
Bad debt.................................................. (288) 1,109 321
------- ------- -------
12,386 13,670 11,417
------- ------- -------
Operating loss........................................ (1,431) (609) (1,673)
Other (income) expenses:
Interest expense.......................................... 3,849 4,443 1,934
Interest and investment income............................ (79) (172) (84)
------- ------- -------
3,770 4,271 1,850
------- ------- -------
Loss before income taxes.................................... (5,201) (4,880) (3,523)
Income taxes (Note 6)....................................... (40) 299 --
------- ------- -------
Net loss.................................................... $(5,161) $(5,179) $(3,523)
------- ------- -------
Other comprehensive income, net of tax (Note 2)............. 3,101 -- --
------- ------- -------
Comprehensive Loss.......................................... (2,060) (5,179) (3,523)
======= ======= =======
Weighted average number of common shares basic and fully
diluted (Note 7)........................................ 4,341 4,183 4,217
======= ======= =======
Net loss per common share
Basic and fully diluted (Note 7)........................ $ (1.19) $ (1.24) $ (0.84)
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
D-22
<PAGE>
TRIMARK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED TOTAL
-------------------- PAID IN COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL INCOME EARNINGS STOCK EQUITY
--------- -------- ---------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996..... 4,274,731 $5 $15,385 $12,683 $(3,723) $24,350
Purchase of treasury
stock.................... (162,350) (707) (707)
Exercise of stock
options.................. 34,500 89 89
Net loss................... (3,523) (3,523)
--------- -- ------- ------- ------- ------- -------
Balance, June 30, 1997..... 4,146,881 5 15,474 9,160 (4,430) 20,209
--------- -- ------- ------- ------- ------- -------
Exercise of stock
options.................. 35,746 114 114
Net loss................... (5,179) (5,179)
--------- -- ------- ------- ------- ------- -------
Balance, June 30, 1998..... 4,182,627 5 15,588 3,981 (4,430) 15,144
--------- -- ------- ------- ------- ------- -------
Purchase of treasury stock
(Note 8)................. (13,215) (33) (33)
Exercise of stock
options.................. 22,902 95 95
Issuance of stock on equity
investment............... 412,363 1 2,934 2,935
Net loss................... (5,161) (5,161)
Other comprehensive income,
Net of tax............... 3,101 3,101
--------- -- ------- ------- ------- ------- -------
Balance, June 30, 1999..... 4,604,677 $6 $18,617 $ 3,101 $(1,180) $(4,463) $16,081
--------- -- ------- ------- ------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements
D-23
<PAGE>
TRIMARK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net loss.................................................. $ (5,161) $ (5,179) $ (3,523)
Adjustments to reconcile net loss to Net cash used by
operating activities:
Film amortization....................................... 52,704 44,976 39,514
Depreciation and other amortization..................... 439 384 300
Provision for returns and bad debt...................... (653) 1,995 (259)
Provision for inventory obsolescence.................... (268) (11) (494)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable............ (3,010) 4,561 (10,408)
Additions to film costs............................... (36,870) (52,747) (66,954)
Decrease (increase) in deferred marketing costs....... 445 (267) (172)
(Increase) decrease in inventories.................... (94) (529) 468
Increase in notes receivable from officers............ (12) (118) (662)
Decrease in other assets................................ 522 570 670
(Decrease) increase in accounts payable and accrued
expenses............................................ (2,350) 485 5,384
Increase (decrease) in minimum guarantees and
royalties payable................................... 4,581 4,231 (1,248)
Increase (decrease) in income taxes payable........... 21 (22) (12)
Decrease in deferred income........................... (211) (183) (861)
-------- -------- --------
Net cash provided (used) by operating activities.... 10,083 (1,854) (38,257)
-------- -------- --------
Investing activities:
Acquisition of property and equipment..................... (263) (316) (504)
-------- -------- --------
Net cash used by investing activities............... (263) (316) (504)
-------- -------- --------
Financing activities:
Net (decrease) increase in revolving line of credit....... (8,920) (450) 42,700
Exercise of stock options................................. 95 114 89
Purchase of treasury stock................................ (33) -- (707)
-------- -------- --------
Net cash (used) provided by financing activities.... (8,858) (336) 42,082
-------- -------- --------
Increase (decrease) in cash and cash equivalents.......... 962 (2,506) 3,321
Cash and cash equivalents at beginning of period............ 1,159 3,665 344
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 2,121 $ 1,159 $ 3,665
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
D-24
<PAGE>
TRIMARK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY:
Trimark Holdings, Inc., a Delaware corporation (the "Company"), is a
broad-based entertainment company which distributes and licenses motion pictures
in the international and domestic arena through its wholly owned subsidiaries
Trimark Pictures, Inc. and Trimark Television, Inc. The significant business
activities of the Company constitute one business segment, filmed entertainment.
The Company is primarily engaged in the distribution of feature films for the
domestic home video market, domestic theatrical and television markets, and in
the licensing of distribution rights to motion pictures for foreign markets. As
an independent distribution company, the Company acquires distribution rights
from a wide variety of studios, production companies and independent producers.
In March of 1993, the Company formed Trimark Interactive to expand the core
business of film production and video distribution into the emerging market for
interactive entertainment software and multimedia. The results of operations of
Trimark Interactive have been included in the Company's consolidated financial
statements since April 1, 1993. Trimark Holdings, Inc. increased its ownership
of Trimark Interactive from 80% to 90% in fiscal 1995. In March 1997, the
Company sold substantially all assets (primarily intellectual properties and
inventory) of Trimark Interactive to an unrelated independent entertainment and
interactive music publisher. In consideration for the assets sold the Company
received 237,037 shares of non-registered convertible preferred stock in the
acquiring company. The convertible preferred shares can be converted into
237,037 shares of common stock of the acquiring company and carry a mandatory
three year redemption value of $800,000 if not converted prior to three years.
The consideration received was determined by arms length negotiation and advice
from an investment banking firm retained by the Company. Due to the uncertainty
of realizing any value from the convertible preferred stock the Company is
carrying the stock at a zero value. No gain or loss was recognized from the sale
of the assets. The Company is no longer engaged in the market for interactive
entertainment software and multimedia.
On June 1, 1992, the Company changed its name from Vidmark, Inc. to Trimark
Holdings, Inc. Certificates that previously represented shares of Vidmark common
stock now represent an equal number of shares of Trimark Holdings, Inc. common
stock.
Purple Tree Productions, Inc., Cheap Date, Inc., Loving Gun
Productions, Inc. and Writers on the Wave are wholly-owned subsidiaries of the
Company, which were formed for the sole purpose of producing motion pictures.
Trimark Music, a wholly-owned subsidiary of the Company, was formed for the
purpose of exploiting revenues from music rights owned by the Company.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
UNCLASSIFIED CONSOLIDATED BALANCE SHEET
In accordance with the provisions of Statement of Financial Accounting
Standards No. 53 ("SFAS 53"), the Company has elected to present an unclassified
consolidated balance sheet.
ACCOUNTING 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
D-25
<PAGE>
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from these estimates.
NET REVENUES
Home video revenues are recognized, net of allowances for estimated returns,
as products are shipped to customers. Revenues from licenses of films to foreign
territories and domestic television are recognized when the films are made
available to sub-distributors and other terms of the license agreements are
satisfied. Revenues from theatrical distribution of films are recognized when
films are exhibited.
FILM COSTS
Film costs primarily represent capitalized theatrical print and advertising
expenditures and the acquisition of film rights from producers for a guaranteed
minimum payment, with the producer retaining a participation in the profits of
the property. The producer's share of the profits is retained by the Company
until it equals the amount of the guarantee, after which the excess is paid to
the producer. In these instances, the Company records as participation expense
an amount equal to the producer's share of the profits. The print and
advertising expenditures and guaranteed minimum payments are capitalized and
amortized using the individual-film-forecast-computation method in accordance
with SFAS 53.
CASH
Cash includes cash equivalents. The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents. The carrying value of the company's cash equivalents approximate
fair value due to their short nature.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts was reduced by $293,000 for fiscal 1999,
and increased by $1.1 Million for 1998, and $321,000 for 1997.
INVENTORIES
Inventories, net of an allowance for excess quantities and obsolescence, are
stated at the lower of cost or market using a first-in/first-out (FIFO) method
of accounting.
INVESTMENTS
Investments represent equity shares which are available for sale and
reported at the market price as of June 30, 1999.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost net of depreciation. Depreciation
of property and equipment is computed using the straight-line method, based on
estimated useful lives of three to seven years.
ROYALTIES PAYABLE
Payable to producers represents an accrual on a film-by-film basis of the
producers' share of revenues recognized by the Company net of the recoupable
costs incurred by the Company. The producers' share of revenue is expensed in
conjunction with the amortization of film costs.
INTEREST
Costs associated with the maintenance of debt are charged to expense and or
capitalized to the extent debt is used for productions.
D-26
<PAGE>
NET LOSS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings per Share," ("SFAS 128")
which is effective for periods ended after December 15, 1997. The Company
adopted SFAS 128 in fiscal year 1997. SFAS 128 replaces the presentation of
primary and fully diluted earnings per share with basic and diluted earnings per
share.
Basic loss per common share amounts are based on the weighted average number
of common shares outstanding during the respective periods. Dilutive loss per
common share amounts are based on the weighted average common shares outstanding
during the period and shares assumed issued upon conversion of stock options
when the effect of such conversions would have been dilutive to net loss. There
is no assumed conversion of stock options for fiscal 1999, fiscal 1998 and
fiscal 1997 as the effect would be anti-dilutive.
The table below presents a reconciliation of weighted average shares used in
the calculation of basic and diluted net loss per common share:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Basic shares--weighted average of common
shares outstanding................................... 4,341 4,183 4,217
Additional shares assuming conversions of stock
options.............................................. -- -- --
----- ----- -----
4,341 4,183 4,217
----- ----- -----
</TABLE>
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income"
("SFAS 130") effective for fiscal years beginning after December 15, 1997. The
new rules establish standards for the reporting of comprehensive income and its
components in financial statements. Comprehensive income consists of net income
and other gains and losses affecting stockholder's equity that, under generally
accepted accounting principles, are excluded from net income, such as unrealized
gains and losses on investments available for sale, foreign currency translation
gains and losses and minimum pension liability. The Company adopted SFAS 130 in
fiscal 1999. The $3.1 million other comprehensive income reported in fiscal year
1999 represents the unrealized gain, net of taxes of $63,000, on broadcast.com
shares based on the market price of the shares on June 30, 1999.
NOTE 3--FILM COSTS:
Film costs, net of amortization, consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Completed not released.................................... 3,938 3,419
In process and development................................ 8,940 11,104
------- -------
$49,230 $65,064
------- -------
</TABLE>
Based on the Company's estimate of future revenues as of June 30, 1999,
approximately 95% of unamortized released film costs will be amortized during
the next three years.
D-27
<PAGE>
NOTE 4--ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable.......................................... $ 3,953 $ 6,777
Accrued marketing costs................................... 1,562 1,035
Accrued other expenses.................................... 195 248
------- -------
$ 5,710 $ 8,060
------- -------
</TABLE>
NOTE 5--DEBT:
The Company's principal operating subsidiaries, Trimark Pictures, Inc. and
Trimark Television, Inc., have a $75 million revolving credit facility with a
consortium of banks agented and arranged by The Chase Manhattan Bank expiring on
December 20, 2000. Under the credit agreement, the Company may borrow for
various corporate purposes provided that the aggregate borrowings do not exceed
the borrowing base, as defined in the Credit Agreement, which is derived from
specified percentages of approved accounts receivable and film library. The
credit agreement is guaranteed by the Company and secured by substantially all
of the assets of the Company and its significant subsidiaries. Loans outstanding
under the credit facility bear interest at the rate of 1.5% above Chase
Manhattan's prime rate (8% at June 30, 1999) or 2.5% above the London Interbank
offered rate for the loan term specified. An unused commitment fee is payable on
the average unused availability under the credit facility, at the rate of
0.3725% per annum. As of June 30, 1999 there was $48.3 million outstanding under
the bank facility.
The Credit Facility is collateralized by a security interest in
substantially all of the Company's assets and contains various covenants
including, among other provisions, the maintenance of a minimum consolidated
tangible net worth and certain financial ratios. For the quarter ended
December 31, 1997 the Company was in violation of certain of these covenants,
however the Banks granted a waiver of these violations and amended the net worth
covenant for the duration of the Credit Facility. The Company also amended the
Credit Facility in December 1998 and June 1999 which provided for less stringent
minimum net worth ratios and reduced the minimum equity requirement. In
consideration for the amendments, the borrowing limits were reduced to
$60 million at March 31, 1999, $50 million at January 31, 2000, and $40 million
at June 30, 2000.
The Company's ability to maintain availability under its Credit Facility is
primarily dependent upon the timing of collections on existing sales during the
next twelve months and the amount and timing of collection on anticipated sales
of the Company's current library and films which the Company plans to release or
make available over the next twelve months. Management believes that existing
capital, cash flow from operations and availability under the Company's amended
Credit Facility will be sufficient to enable the Company to fund its planned
productions, acquisitions, distribution and overhead expenditures for the next
twelve months.
In connection with the credit facility, the Company has capitalized debt
issuance costs as other assets which are being amortized on a straight line
basis over the term of the agreement.
D-28
<PAGE>
NOTE 6--INCOME TAXES:
Consolidated loss before income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic.......................................... $(3,772) $(4,291) $(5,372)
Foreign........................................... (1,429) (589) 1,849
------- ------- -------
$(5,201) $(4,880) $(3,523)
------- ------- -------
</TABLE>
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal............................................. $(240) $ -- $ --
State............................................... 15 15 16
Foreign............................................. 185 284 433
(40) 299 449
Deferred
Federal............................................. -- -- (684)
State............................................... -- -- 235
----- ----- -----
-- -- (449)
----- ----- -----
$ (40) $ 299 $ --
----- ----- -----
</TABLE>
The components of the deferred tax assets and liabilities are summarized as
follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforward......................... $ 9,403 $ 7,620
Foreign tax credit carryforward......................... 433 2,095
Reserves and allowances................................. 1,249 1,297
Bad debts............................................... 1,009 1,041
Deferred income......................................... 399 489
State income taxes...................................... 8 8
Other................................................... 256 205
------- -------
12,757 12,755
------- -------
Deferred Tax Liabilities:
Film cost amortization.................................. (5,214) (5,331)
State taxes............................................. -- --
Net deferred tax asset before valuation allowance....... 7,543 7,424
Valuation allowance....................................... (7,543) (7,478)
------- -------
Net deferred tax (liability) Asset...................... $ (0) $ (54)
------- -------
</TABLE>
D-29
<PAGE>
A reconciliation of the federal statutory tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax rate............................. (34.0)% (34.0)% (34.0)%
State taxes, net of federal income tax benefit...... 0.2% (0.2)% 4.7%
Foreign taxes, net of federal income tax benefit.... 3.6% 5.8% 8.1%
Meals and entertainment Disallowance................ 1.0% 1.0% 1.2%
Utilization of loss Carryforward.................... (4.6)% -- --
Valuation Allowance................................. 32.7% 29.4% 19.5%
Other............................................... 0.3% 3.8% 0.5%
----- ----- -----
(0.8)% 6.1% 0.0%
----- ----- -----
</TABLE>
The net increase of approximately $65,000 in the valuation allowance is
primarily attributable to the establishment of reserves against the current year
net operating loss ("NOL"). For federal income tax purposes, NOLs may be carried
forward 15 years, or until such time as they are fully utilized. For California
purposes NOLs may be carried forward for 5 years or until such time as they are
fully utilized. The valuation allowance was established as a result of the
uncertainty of the utilization of the current year NOLs.
As a result of the acquisition of Trimark Television (formerly IBS) by the
Company, approximately $5.5 million in federal income tax NOLs were acquired.
The NOLs expire in the years 2004-2006. The Internal Revenue Code of 1986, as
amended, imposes substantial limitations on the use of NOL carryforwards
acquired in such an acquisition. Accordingly, a valuation allowance has been
established related to the Federal income tax NOL's acquired from Trimark
Television in prior years and the related balance at June 30, 1999 is
approximately $2.6 million.
NOTE 7--STOCK OPTIONS:
Under the Company's stock option plans, employees and directors may be
granted nonqualified stock options ("options"). Generally, options are
exercisable contingent upon the grantee's continued employment with the Company
and generally have been granted with an exercise price equal to the fair market
value of the underlying Common Stock on the date of grant. Each option is
granted subject to various terms and conditions established on the date of
grant, including vesting periods and expiration dates. The options typically
become exercisable at the rate of 33.3% annually, beginning one year after the
date of grant. Options generally expire 10 years after the date of grant. As of
June 30, 1999 and 1998, a total of 979,369 options had been approved for issue
under employee option plans and other arrangements. As of
D-30
<PAGE>
June 30, 1999 and 1998, a total of 40,000 options had been approved for issue
under the director option plan. Stock option data follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at July 1................. 582,959 $5.20 691,809 $5.20 715,476 $5.30
Granted............................. 175,000 $5.49 13,500 $5.22 83,500 $5.73
Exercised........................... (22,902) $4.44 (35,746) $3.20 (34,500) $2.59
Purchased........................... -- -- (20,000) $4.09 -- --
Terminated............................ (171,334) $5.72 (66,604) $5.95 (72,667) $8.05
-------- ------- -------
Outstanding at June 30................ 563,723 $4.36 582,959 $5.28 691,809 $5.20
======== ======= =======
Exercisable at June 30................ 414,243 $4.24 441,408 $5.25 438,559 $5.11
======== ======= =======
Available for grant at June 30........ 268,599 272,265 199,161
======== ======= =======
</TABLE>
During fiscal 1998, the Board authorized the purchase of 20,000 shares from
a former employee at a negotiated price.
The following table summarizes information concerning outstanding and
exercisable stock options at June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL LIFE EXERCISE NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES NUMBER OF SHARES IN YEARS PRICE SHARES PRICE
----------------------------------- ---------------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$3.00-$5.50........................ 557,723 7.11 $4.34 408,243 $4.21
$6.25-$11.50....................... 6,000 5.69 $6.25 6,000 $6.25
------- ---- ----- ------- -----
$3.00-$11.50....................... 563,723 7.09 $4.36 414,243 $4.24
======= ==== ===== ======= =====
</TABLE>
The Company has adopted SFAS No. 123, "Accounting of Stock-Based
Compensation," which establishes a fair value based method of accounting for
compensation cost related to stock option plans and other forms of stock-based
compensation plans, by providing the pro forma disclosures as if the fair value
based method had been applied for the current period and prior comparable
period. In accordance with SFAS No. 123, the Company applies the intrinsic value
based method of accounting defined under Accounting Principles Board Opinion
No. 25 and accordingly, does not recognize compensation expense for its plans.
Had compensation cost for the plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method of
FASB Statement 123, the Company's pretax and after tax income would decrease by
$548,000 or $0.12 per share, $440,000 or $0.10 per share and $136,000 or $0.03
per share in fiscal 1998, fiscal 1997 and fiscal 1996, respectively. These pro
forma amounts may not be representative of future disclosures since the
estimated fair value of stock options is amortized to expense over the vesting
period, and additional options may be granted in future years.
The weighted average fair value of each option as of the grant date was
$2.31, $2.97 and $3.41 for fiscal 1999, fiscal 1998 and fiscal 1997,
respectively. The fair value of each option grant is estimated on the
D-31
<PAGE>
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998 FISCAL 1997
----------- ----------- -----------
<S> <C> <C> <C>
Expected dividend yield (a).................. -- -- --
Expected stock price volatility.............. 167.56% 78.45% 81.42%
Risk-free interest rate...................... 5.82% 5.37% 6.40%
Expected life of options (years)............. 6.20 5.48 5.94
</TABLE>
------------------------
(a) During fiscal 1999, 1998 and 1997, the Company did not declare any cash
dividends on its common stock. The Company does not have any present
intention to declare a dividend on its common stock in the foreseeable
future.
NOTE 8--TREASURY STOCK:
On February 21, 1997, the Company announced a stock repurchase program
pursuant to which it could spend up to $1,500,000, $750,000 per fiscal year, to
purchase shares of its outstanding common stock in the open market through
June 30, 1998. The Company was authorized to spend $150,000 in fiscal 1999 which
was reduced to $50,000 under the amended debt agreement. During fiscal 1999 the
company spent $33,000 to purchase 13,215 shares under the repurchase program.
During fiscal 1998, the Company did not purchase any shares under the repurchase
program. During fiscal 1997, the Company spent approximately $707,000 to
purchase 162,350 shares under the repurchase program.
At June 30, 1999, the Company held 965,415 shares of treasury stock.
NOTE 9--COMMITMENTS AND CONTINGENCIES:
The Company has entered into certain agreements which provide for guaranteed
royalty advances and promotional and advertising payments totaling
$6.5 million. If the provisions of these agreements are not met by the
licensors, the Company may withdraw from the arrangements. These commitments
extend to June 2000.
As of June 30, 1999, the Company had an operating lease for its corporate
office space on a month to month basis. As of September 3, 1999 the Company
entered into a 10 year operating lease. Rent expense was $479,000 for the year
ended June 30, 1999 and $433,000 and $368,000 for the years ended June 30, 1998
and 1997, respectively.
The future minimum rental commitments as of June 30, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
<S> <C>
2000........................................................ $ 474,000
2001........................................................ $ 474,000
2002........................................................ $ 474,000
2003........................................................ $ 474,000
Thereafter.................................................. $3,335,000
----------
$5,231,000
----------
</TABLE>
NOTE 10--MAJOR CUSTOMERS:
For the years ended June 30, 1999, 1998 and 1997, Ingram, the Company's
major customer, accounted for 11%, 15% and 12% of net revenues, respectively.
With regard to foreign distribution net revenues, there are no individual
geographic areas that account for more than 10% of total net revenues.
D-32
<PAGE>
In carrying out its film distribution activities, the Company grants credit
to customers, primarily all of whom are in the film distribution segment of the
entertainment industry. This customer base is sufficiently diversified by number
of customers, channels of distribution (theatrical exhibition, video
distribution, pay television, cable television and other) and geographic
location to prevent any undue risk related to concentration of credit.
NOTE 11--SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest............................................ $4,387 $4,931 $2,593
Income Taxes........................................ 179 323 433
</TABLE>
Interest costs capitalized as film costs in fiscal 1999, fiscal 1998 and
fiscal 1997 were $1,203,224, $1,031,000 and $935,000, respectively.
NOTE 12--DUE FROM OFFICERS:
Notes receivable from officers are secured by Trimark Holdings stock which
equaled at least 200% of the outstanding loan amounts at the time the original
notes were executed. The loans bear interest at the Company's weighted average
cost of capital and interest is due quarterly. One loan was outstanding as of
June 30, 1999, which is due on June 30, 2000.
D-33
<PAGE>
SCHEDULE II
TRIMARK HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS ADDITIONS
BEGINNING OF CHARGED TO CHARGED TO NET BALANCE AT
DESCRIPTION PERIOD EXPENSE REVENUES DEDUCTIONS END OF PERIOD
----------- ------------ ---------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Provision for returns and
bad debts (1):
Year Ended June 30, 1997........... $4,269 $ 321 $ 72 $ 625 (2) $4,010
Year Ended June 30, 1998........... 4,010 1,109 1,092 206 (2) 6,005
Year Ended June 30, 1999........... 6,005 (288) 1,568 1,933 (2) 5,352
Provision for inventory
obsolescence:
Year Ended June 30, 1997........... 620 -- -- (494) 326
Year Ended June 30, 1998........... 326 -- -- (28) 298
Year Ended June 30, 1999........... 298 265 -- -- 563
</TABLE>
------------------------
(1) Returns are reflected in net revenues and bad debt expense is recorded
separately in the statement of operations.
(2) Doubtful receivables written-off, net of recoveries.
D-34
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
D-35
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers is incorporated
herein by reference from the sections entitled "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's
1999 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the sections entitled "Executive Compensation and Related
Matters," "Compensation Committee Interlocks and Insider Participation,"
"Compensation Committee and Stock Option and Stock Appreciation Rights Plan
Committee Report on Executive Compensation" and "Stock Performance" in the
Registrant's 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the section entitled
"Security Ownership of Certain Beneficial Owners and Management" in the
Registrant's 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED MATTERS
Information concerning certain relationships and related transactions is
incorporated herein by reference from the section entitled "Executive
Compensation and Related Matters" in the Registrant's 1999 Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements included in Part II of this report:
<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
Report of Independent Accountants........................... 34
Consolidated Balance Sheets at June 30, 1999 and 1998....... 35
For the years ended June 30, 1999, 1998 and 1997:
Consolidated Statements of Operations..................... 36
Consolidated Statements of Stockholders' Equity........... 37
Consolidated Statements of Cash Flows..................... 38
Notes to Consolidated Financial Statements................ 40-52
Financial Statement Schedules:
II. Valuation and Qualifying Accounts..................... 52
</TABLE>
All other schedules have been omitted either as inapplicable or not required
under the instructions contained in Regulation S-X or because the
information is included in the financial statements or the notes thereto.
(b) Reports on Form 8-K:
On April 16,1999 the Company filed a Current Report on Form 8-K, under Item
5, announcing it had completed its exchange of stock with broadcast.com.
D-36
<PAGE>
(c) Exhibits:
(i) Except as noted, all Exhibits, numbered as they were numbered for filing
as Exhibits to the Company's Form S-1 Registration Statement,
No. 33-35053, effective June 26, 1990, are incorporated herein by this
reference to such Registration Statements. All filings were made at the
Commission's office in Washington D.C. The registrant's SEC file number
is 0-18613:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------
<S> <C>
2.1 Asset Purchase Agreement between the Registrant, Trimark
Interactive, and Graphix Zone, Inc. dated February 26, 1997.
15
3.1 Certificate of Incorporation of the Registrant, as amended
to date. 4
3.2 By-laws of the Registrant, as amended. 8
4.2 Form of Common Stock Certificate. 4
10.2 Stock Purchase and Option Agreement, dated as of September
1, 1987, as amended, by and between Vidmark, Inc., a
California corporation and Said (Sam) Pirnazar.+
10.4 Stock Purchase and Option Agreement, dated as of September
1, 1989, by and between Vidmark, Inc., a California
corporation and Said (Sam) Pirnazar.+
10.13 1990 Stock Option and Stock Appreciation Rights Plan of the
Registrant, as amended. 13+
10.15 Amendment to Stock Option Agreements, dated as of May 17,
1990, by and among the Registrant, Vidmark, Inc., a
California corporation and Said (Sam) Pirnazar.+
10.22 Standard Office Lease--Gross, dated as of March 9, 1992, and
amendments thereto, by and between Vidmark, Inc., a
California corporation and 2644 SM Partners, a California
limited partnership. 4
10.25 Non-Qualified Stock Option Agreement dated December 5, 1991,
by and between the Registrant and Gordon Stulberg. 4+
10.29 Non-Qualified Stock Option Agreement dated December 2, 1992,
by and between the Registrant and Gordon Stulberg. 5+
10.32 Directors' Stock Option Plan of the Registrant. 13+
10.35 Technicolor Videocassette, Inc. Fulfillment Agreement with
Trimark Pictures, Inc. dated as of March 1, 1994, by and
between Trimark Pictures, Inc., a California corporation and
Technicolor Videocassette, Inc. 7
10.41 Non-Qualified Stock Option Agreement dated March 31, 1994,
by and between the Registrant and Timothy Swain. 8+
10.43 Non-Qualified Stock Option Certificate dated January 14,
1994, by and between the Registrant and Gordon Stulberg. 8+
10.45 Non-Qualified Stock Option Certificate dated January 14,
1995, by and between the Registrant and Gordon Stulberg. 10+
10.46 Non-Qualified Stock Option Certificate dated January 14,
1995, by and between the Registrant and Matthew Saver. 10+
</TABLE>
D-37
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------
<S> <C>
10.47 Non-Qualified Stock Option Certificate dated January 14,
1995, by and between the Registrant and Tofigh Shirazi. 10+
10.50 Letter amendment to Stock Option Agreements dated August 10,
1995 by and between the Registrant and Said (Sam) Pirnazar.
10+
10.53 Non-Qualified Stock Option Agreement, dated January 30, 1996
by and between the Registrant and Mark Amin. 11+
10.54 Amendment to Non-Qualified Stock Option Agreement, dated
January 30, 1996 by and between the Registrant and Timothy
Swain. 11+
10.56 Amendment to Non-Qualified Stock Option Agreement dated
March 31, 1994, by and between the Registrant and Sergio
Aguero. 12+
10.57 Non-Qualified Stock Option Agreement dated August 10, 1995,
by and between the Registrant and Sergio Aguero. 12+
10.58 Non-Qualified Stock Option Certificate dated January 14,
1996. by and between the Registrant and Matthew Saver. 12+
10.59 Non-Qualified Stock Option Certificate dated January 14,
1996, by and between the Registrant and Tofigh Shirazi. 12+
10.60 Non-Qualified Stock Option Certificate dated January 14,
1996, by and between the Registrant and Gordon Stulberg. 12+
10.62 Non-Qualified Stock Option Agreement dated July 2, 1996, by
and between the Registrant and Timothy Swain. 13+
10.63 Employment Agreement, dated August 30, 1995, by and between
Trimark Pictures, Inc., a California corporation and Sergio
Aguero, as amended to date. 14+
10.65 Credit, Security, Guaranty and Pledge Agreement, dated
December 20, 1996, by and between the Registrant's principal
operating subsidiaries, Trimark Pictures, Inc. and Trimark
Television, Inc., and The Chase Manhattan Bank, as
Administrative Agent and Fronting Bank. 14
10.68 Letter waiver and amendment to Credit, Security, Guaranty
and Pledge Agreement, dated February 20, 1997, by and
between the Registrant's principal operating subsidiaries,
Trimark Pictures, Inc. and Trimark Television, Inc., and The
Chase Manhattan Bank, as Administrative Agent and Fronting
Bank. 16
10.69 Non-Qualified Stock Option Certificate dated January 14,
1997, by and between the Registrant and Matthew Saver. 16+
10.70 Non-Qualified Stock Option Certificate dated January 14,
1997, by and between the Registrant and Tofigh Shirazi. 16+
10.71 Non-Qualified Stock Option Certificate dated January 14,
1997, by and between the Registrant and Gordon Stulberg. 16+
10.72 Pledge Agreement, dated May 1, 1997, by and between Trimark
Pictures, Inc. and Mark Amin and Susan Amin. 17+
10.73 Secured Promissory Note, dated May 1, 1997, by and between
Trimark Pictures, Inc. and Mark Amin. 17+
</TABLE>
D-38
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------
<S> <C>
10.76 Letter amendment to Stock Purchase and Option Agreement,
dated July 25, 1997, by and between the Registrant and Sam
Pirnazar. 17+
10.77 Letter waiver and amendment to Credit, Security, Guaranty
and Pledge Agreement, dated June 9, 1997, by and between the
Registrant and The Chase Manhattan Bank, as Administrative
Agent and Fronting Bank. 17
10.79 Amendment no. 1 to the Credit, Security, Guaranty and Pledge
Agreement, dated June 30, 1997, by and between the
Registrant's principal operating subsidiaries, Trimark
Pictures, Inc. and Trimark Television, Inc., and The Chase
Manhattan Bank, as Administrative Agent and Fronting Bank.
17
10.80 Non-Qualified Stock Option Certificate dated January 14,
1998, by and between the Registrant and Gordon Stulberg. 18+
10.81 Non-Qualified Stock Option Certificate dated January 14,
1998, by and between the Registrant and Matthew H. Saver.
18+
10.82 Non-Qualified Stock Option Certificate dated January 14,
1998, by and between the Registrant and Tofigh Shirazi. 18+
10.83 Amendment no. 2 to the Credit, Security, Guaranty and Pledge
Agreement, dated March 31, 1998, by and between the
Registrant's principal operating subsidiaries, Trimark
Pictures, Inc. and Trimark Television, Inc., and The Chase
Manhattan Bank, as Administrative Agent and Fronting Bank.
19
10.84 Consulting Agreement, dated April 2, 1998, by and between
Trimark Pictures, Inc. and Burlage\Edell Productions, Inc.
f/s/o Roger Burlage. 18+
10.85 Letter Agreement, dated April 2, 1998, by and between
Trimark Holdings, Inc. and Roger Burlage. 18+
10.86 Employment Agreement, dated January 30, 1997 between Trimark
Pictures, Inc., and Cami Winikoff. 20+
10.87 Amendment dated November 20, 1998 to August 8, 1992
Non-Qualified Stock Option Agreement between the Company and
Tim Swain. 21+
10.88 Amendment dated November 20, 1998 to January 14, 1992
Non-Qualified Stock Option Agreement between the Company and
Tim Swain. 21+
10.89 Amendment dated November 20, 1998 to March 31, 1994
Non-Qualified Stock Option Agreement between the Company and
Tim Swain. 21+
10.90 Amendment dated November 20, 1998 to July 2, 1996
Non-Qualified Stock Option Agreement between the Company and
Tim Swain. 21+
10.91 Amendment dated November 20, 1998 to July 2, 1996
Non-Qualified Stock Option Agreement between the Company and
Tim Swain. 21+
10.92 Amendment dated November 20, 1998 to January 20, 1993
Non-Qualified Stock Option Agreement between the Company and
Cami Winikoff. 21+
10.93 Amendment dated November 20, 1998 to January 30, 1996
Non-Qualified Stock Option Agreement between the Company and
Cami Winikoff. 21+
10.94 Amendment dated November 20, 1998 to January 30, 1996
Non-Qualified Stock Option Agreement between the Company and
Cami Winikoff. 21+
</TABLE>
D-39
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------
<S> <C>
10.95 Amendment dated November 20, 1998 to February 27, 1997
Non-Qualified Stock Option Agreement between the Company and
Cami Winikoff. 21+
10.96 Letter Amendment dated August 14, 1998 and November 27, 1998
between the Company and Sam Pirnazar. 21+
10.97 Amendment dated December 31, 1998 to the Credit, Security,
Guaranty and Pledge Agreement between the Company and The
Chase Manhattan Bank, as Administrative Agent and Fronting
Bank. 21
10.98 Non-Qualified Stock Option Agreement dated February 2, 1999
between the Company and Cami Winikoff. 22+
10.99 Employment Agreement dated February 1, 1999 between Trimark
Pictures, Inc. and Cami Winikoff. 22+
10.100 Trimark Holdings, Inc. 1999 Directors' Option Plan. 22+
10.101 Non-Qualified Stock Option Certificate dated January 8, 1999
between the Company and Gordon Stulberg. 22+
10.102 Non-Qualified Stock Option Certificate dated January 8, 1999
between the Company and Matthew H. Saver. 22+
10.103 Non-Qualified Stock Option Certificate dated January 8, 1999
between the Company and Tofigh Shirazi. 22+
10.104 Non-Qualified Stock Option Certificate dated January 8, 1999
between the Company and Roger Burlage. 22+
10.105 Agreement dated February 22, 1999 among broadcast.com inc.,
the Company, Trimark Pictures, Inc., Trimark Television,
Inc. and Trimark Music, and amendment thereto dated March
15, 1999 (as indicated by asterisk, portions of the February
22, 1999 agreement have been redacted pursuant to a
confidentiality order). 22
10.106 Waiver letter dated as of March 15, 1999 regarding the
Credit, Security, Guaranty and Pledge Agreement dated as of
December 20, 1996, as amended, among Trimark Pictures, Inc.,
Trimark Television, Inc., the Guarantors referred to
therein, the Lenders referred to therein, and The Chase
Manhattan Bank, as Administrative Agent and Fronting Bank.
22
10.107 Employment Agreement dated August 6, 1998 between Trimark
Pictures, Inc., and Andrew Reimer. 1
21.1 Subsidiaries of Registrant. 12
23.1 Consent of PricewaterhouseCoopers LLP. 1
27 Financial Data Schedule. 1
</TABLE>
------------------------
1 Filed herewith.
2 Incorporated by reference to the identical exhibit number in Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1991.
3 Intentionally omitted.
4 Incorporated by reference to the identical exhibit number in Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1992.
D-40
<PAGE>
5 Incorporated by reference to the identical exhibit number in Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1993.
6 Incorporated by reference to the identical exhibit number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1993.
7 Incorporated by reference to the identical exhibit number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
8 Incorporated by reference to the identical exhibit number in Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1994.
9 Incorporated by reference to the identical exhibit number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.
10 Incorporated by reference to the identical exhibit number in Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1995
11 Incorporated by reference to the identical exhibit number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
12 Incorporated by reference to the identical exhibit number in Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1996
13 Incorporated by reference to the identical exhibit number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
14 Incorporated by reference to the identical exhibit number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1996.
15 Incorporated by reference to the identical exhibit number in Registrant's
Current Report on Form 8-K dated February 21, 1997.
16 Incorporated by reference to the identical exhibit number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
17 Incorporated by reference to the identical exhibit number in Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1997
18 Incorporated by reference to the identical exhibit number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
19 Incorporated by reference to the identical exhibit number in Registrant's
Current Report on Form 8-K dated May 15, 1998 (filed May 26, 1998).
20 Incorporated by reference to the identical exhibit number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
21 Incorporated by reference to the identical exhibit number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1998.
22 Incorporated by reference to the identical exhibit number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
+ This is a management contract or compensatory plan or arrangement.
D-41
<PAGE>
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.
<TABLE>
<S> <C> <C>
TRIMARK HOLDINGS, INC.
By: /s/ MOHAMMED MARK AMIN
-----------------------------------------
Mohammed Mark Amin
CHAIRMAN OF THE BOARD
Date: September 28, 1999
</TABLE>
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MOHAMMED MARK AMIN Chairman of the Board and Chief
------------------------------------------- Executive Officer [Principal 09/28/99
Mohammed Mark Amin Executive Officer]
/s/ PETER DEKOM
------------------------------------------- Director 09/28/99
Peter Dekom
/s/ GORDON STULBERG
------------------------------------------- Director 09/28/99
Gordon Stulberg
/s/ TOFIGH SHIRAZI
------------------------------------------- Director 09/28/99
Tofigh Shirazi
/s/ MATTHEW SAVER
------------------------------------------- Director 09/28/99
Matthew Saver
/s/ JEFF GONZALEZ Chief Financial Officer, and
------------------------------------------- Secretary [Principal Financial 09/28/99
Jeff Gonzalez and Accounting Officer]
</TABLE>
D-42
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 or
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-18613
TRIMARK HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-4272695
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4553 GLENCOE AVE., SUITE 200 90292
MARINA DEL REY, CALIFORNIA (Zip code)
(Address of principal executive offices)
</TABLE>
(310) 314-2000
(Registrant's telephone number, including area code)
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 ______
As of May 8, 2000, 4,657,527 shares of Trimark Holdings, Inc. common stock were
outstanding, excluding shares held by Trimark Holdings, Inc. as treasury stock.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
D-43
<PAGE>
TRIMARK HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at March 31, 2000 and June 30,
1999........................................................ 3
Consolidated Statements of Operations -- Nine months and
three months ended March 31, 2000 and 1999.................. 4
Consolidated Statements of Cash Flows -- Nine months ended
March 31, 2000 and 1999..................................... 5
Notes to Consolidated Financial Statements.................. 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 8-14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk................................................. 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.................... 17-18
</TABLE>
D-44
<PAGE>
TRIMARK HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
----------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 3,444 $ 2,121
Accounts receivable, less allowances of $8,310 and $5,352,
respectively.............................................. 20,799 20,231
Film costs, net (Note 2).................................... 40,579 49,230
Deferred marketing costs.................................... 880 1,518
Inventories, net............................................ 2,551 1,552
Equity investments.......................................... 1,028 6,036
Property and equipment at cost, less accumulated
depreciation of $3,202 and $2,872, respectively........... 774 565
Due from officers........................................... 795 792
Other assets................................................ 955 1,233
------- -------
$71,805 $83,278
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving line of credit.................................... $34,000 $48,330
Accounts payable and accrued expenses....................... 7,010 5,710
Minimum guarantees and royalties payable.................... 9,733 12,204
Deferred income............................................. 324 889
Income taxes payable........................................ 44 64
------- -------
Total liabilities..................................... 51,111 67,197
------- -------
Minority interest (Note 7).................................. 2,009 --
------- -------
Stockholders' equity:
Common stock, $.001 par value. Authorized 20,000,000
shares; 5,657,000, 5,570,000 shares issued at March 31,
2000 and June 30, 1999, respectively.................... 6 6
Additional paid in capital................................ 18,699 18,617
Preferred stock, $.01 par value. Authorized 2,000,000
shares; no shares issued and outstanding................ -- --
Retained earnings......................................... 3,664 (1,180)
Accumulated comprehensive income.......................... 779 3,101
Less treasury shares, at cost -- 965,000 shares........... (4,463) (4,463)
------- -------
Stockholders' equity.................................. 18,685 16,081
------- -------
$71,805 $83,278
======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D-45
<PAGE>
TRIMARK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues............................................ $67,044 $66,270 $25,763 $19,989
Film costs and distribution expenses.................... 53,644 56,611 21,179 19,323
------- ------- ------- -------
Gross profit...................................... 13,400 9,659 4,584 666
Operating expenses:
Selling............................................... 5,029 5,555 1,661 1,867
General and administrative............................ 4,374 4,106 1,610 1,434
Bad debt.............................................. 357 (162) 2 179
------- ------- ------- -------
9,760 9,499 3,273 3,480
------- ------- ------- -------
Operating earnings................................ 3,640 160 1,311 (2,814)
Other (income) expenses:
Interest expense...................................... 1,925 3,023 280 871
Interest and investment income........................ (2,969) (57) (44) (40)
Minority interest..................................... (121) -- (102) --
------- ------- ------- -------
(1,165) 2,966 134 831
------- ------- ------- -------
Earnings before income taxes...................... 4,805 (2,806) 1,177 (3,645)
Income taxes (Note 5)................................... (38) (240) -- --
------- ------- ------- -------
Net earnings...................................... $ 4,843 $(2,566) $ 1,177 $(3,645)
------- ------- ------- -------
Other comprehensive income, net of tax.................. (2,321) 2,485 (270) 2,485
------- ------- ------- -------
Comprehensive income.................................... 2,522 (81) 907 (1,160)
======= ======= ======= =======
Weighted average number of common shares basic and
fully diluted (Note 6).............................. 4,634 4,341 4,634 4,341
======= ======= ======= =======
Net earnings per common share basic and fully diluted
(Note 6)............................................ $ 1.05 $ (0.59) $ 0.25 $ (0.84)
======= ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D-46
<PAGE>
TRIMARK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Operating activities:
Net earnings.............................................. $ 4,843 $ (2,566)
Adjustments to reconcile net earnings to Net cash used by
operating activities:
Film amortization....................................... 31,605 35,231
Depreciation and other amortization..................... 330 326
Provision for returns and bad debt...................... 2,959 (67)
Provision for inventory obsolescence.................... 557 (268)
Change in operating assets and liabilities:
Increase in accounts receivable....................... (3,527) (2,137)
Additions to film costs............................... (22,954) (32,658)
Decrease in deferred marketing costs.................. 638 834
Increase in inventories............................... (1,556) (63)
Increase in notes receivable from officers............ (3) (13)
Decrease in other assets.............................. 278 295
Increase (decrease) in accounts payable and accrued
expenses............................................ 1,300 (2,400)
(Decrease) increase in minimum guarantees and
royalties payable................................... (2,471) 5,684
(Decrease) increase in income taxes payable........... (20) 6
(Decrease) increase in deferred income................ (565) 2,140
Decrease in minority interest......................... 121 --
-------- --------
Net cash provided by operating activities........... 11,535 4,344
-------- --------
Investing activities:
Acquisition of property and equipment..................... (539) (187)
Sale of equity investments at cost........................ 2,687 --
-------- --------
Net cash provided (used) by investing activities.... 2,148 (187)
======== ========
Financing activities:
Net decrease in revolving line of credit.................. (14,330) (3,920)
Exercise of stock options................................. 82 79
Purchase of treasury stock................................ -- (33)
Funds provided by minority shareholders in CinemaNow,
Inc..................................................... 2,130 --
-------- --------
Net cash provided by financing activities........... (12,118) (3,874)
-------- --------
Increase in cash and cash equivalents..................... 1,323 283
Cash and cash equivalents at beginning of period............ 2,121 1,159
-------- --------
Cash and cash equivalents at end of period.................. $ 3,444 $ 1,442
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D-47
<PAGE>
TRIMARK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--THE COMPANY:
The consolidated financial statements of Trimark Holdings, Inc. and
subsidiaries (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
accompanying financial statements should be read in conjunction with the more
detailed financial statements and related footnotes filed with the Form 10-K for
the year ended June 30, 1999. Significant accounting policies used by the
Company are summarized in Note 2 to the June 30, 1999 financial statements.
In the opinion of management, all adjustments required for a fair
presentation of the financial position as of March 31, 2000 and the results of
operations and cash flows for the periods ended March 31, 2000 and March 31,
1999 have been made and all adjustments were of a normal and recurring nature.
Operating results for the nine and three month periods are not necessarily
indicative of the operating results for the fiscal year.
During the nine month period ended March 31, 2000, Trimark Holdings, Inc.
organized a majority owned subsidiary named CinemaNow, Inc. CinemaNow, Inc.
connects independent film watchers with independent filmmakers through the
business of streaming theatrical and short films over the internet while
providing comprehensive virtual studio resources to independent filmmakers.
NOTE 2--FILM COSTS:
Film costs, net of amortization, consist of the following:
<TABLE>
<CAPTION>
2000 JUNE 30,
MARCH 31, 1999
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Released.................................................... $27,105 $36,352
Completed not released...................................... 3,678 3,938
In process and development.................................. 9,796 8,940
------- -------
$40,579 $49,230
======= =======
</TABLE>
NOTE 3--COMMITMENTS & CONTINGENCIES:
The Company has entered into certain agreements, which provide for royalty
advances and promotional and advertising commitments totaling $18 million. If
the conditions to these agreements are not met by the licensors, the Company may
withdraw from the arrangements. These commitments extend to December 2000.
NOTE 4--SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the nine month period for:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Interest.................................................... $2,554 $3,438
Income taxes................................................ 50 155
</TABLE>
D-48
<PAGE>
NOTE 5--INCOME TAXES:
The $240,000 tax benefit represents a tax receivable from a prior year
return recognized in the fiscal year ended June 30, 1999.
NOTE 6--NET EARNINGS PER COMMON SHARE:
Basic earnings per common share amounts are based on the weighted average
number of common shares outstanding during the respective periods. Diluted
earnings per common share amounts are based on the weighted average common
shares outstanding during the period and shares assumed issued upon conversion
of stock options when the effect of such conversions would have been dilutive to
net earnings.
NOTE 7--MINORITY INTEREST:
In the first quarter of calendar year 2000, pursuant to the terms of a
Securities Purchase Agreement dated as of January 6, 2000, as amended, the
Company's majority-owned subsidiary, CinemaNow, Inc. ("CinemaNow"), completed a
private placement financing to accredited investors of 3,155,552 shares of
CinemaNow Series A Convertible Preferred Stock, yielding proceeds of
approximately $2,130,000.
D-49
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
NET REVENUES:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Domestic:
Home video distribution............................... $47,820 $42,256 $19,299 $13,232
Theatrical distribution............................... 1,118 857 319 136
Television distribution............................... 6,301 10,397 1,381 3,665
Foreign:
All media............................................. 11,805 12,760 4,764 2,956
------- ------- ------- -------
$67,044 $66,270 $25,763 $19,989
======= ======= ======= =======
</TABLE>
Net revenue for the nine month and three month period ended March 31, 2000
increased $774,000 or 1.2% and $5.8 million or 29%, respectively, compared with
the same periods in fiscal year 1999. The increase for the nine month period was
primarily due to increases in net revenue from the home video market of
$5.6 million offset by a $955,000 decrease in foreign revenue and by a
$4.1 million decrease in television distribution. The increase in home video
revenue was largely due to the distribution of Saturday Night Live "Best of"
compilations into the sell-through market as well as the highly successful DVD
release of "Natural Born Killers, Director's Cut." The decrease in television
revenue was due to the availability of the wide theatrical release "Star Kid"
and the highly successful theatrical release "Eve's Bayou" during the nine month
period ended March 31, 1999. In contrast, "Meet Wally Sparks" was the only wide
theatrical release film available in the television market during the same
period in fiscal year 2000. The decrease in foreign revenue resulted from the
initial release of seven films in the foreign market along with the initial
release of "Eve's Bayou" in major international territories during the nine
months ended March 31, 1999. In contrast, during the same period in fiscal year
2000, only five films were initially released into the international market.
The increase in net revenue for the quarter ended March 31, 2000 was due
primarily to increases in net revenue from the home video and foreign markets of
$6.1 million and $1.8 million respectively, partly offset by a $2.3 million
decrease in the domestic television market. The increase in the home video
revenue was primarily a result of the release of the Saturday Night Live titles
into the sell-through and DVD market as well as the successful release of
"Natural Born Killers, Director's Cut" into the DVD market. The increase in
foreign distribution revenue was primarily due to the release of four titles in
major foreign territories during the quarter ended March 31, 2000; in contrast,
there was only one comparable release during the same period in fiscal year
1999. The decrease in television revenue was primarily due to the cable premier
of "Chairman of the Board", the availability of "Ground Control" in the domestic
television market and the availability of numerous titles in television
syndication during the quarter ended March 31, 1999. There were no comparable
releases during the same period in fiscal year 2000.
The Company continues to focus its resources on producing and acquiring
films with specialized theatrical potential, the made for television market and
the home video sell through market. See "Liquidity and Capital Resources."
The Company anticipates that the domestic home video rental market will
continue to be extremely competitive.
D-50
<PAGE>
GROSS PROFIT: Gross profit as a percentage of net revenues for the nine
month period ended March 31, 2000 and 1999 was 20% and 14.6%, respectively, and
for the quarters ended March 31, 2000 and 1999 was 17.8% and 3.3%, respectively.
The increase in gross profit for the nine month period was primarily due to
the sale of product which require less capital expenditure and carry higher
profit margins. In contrast, during the same period in fiscal year 1999, two
films with no profit margins, "Star Kid" and "Chairman of the Board", were
released in the video market. The increase in gross profit during the third
quarter of fiscal year 2000 resulted from the increase in sales of the direct to
sell-through product and DVD product. In contrast, lower sales and a
$4.9 million write down to net realizable value of film inventory contributed to
the lower profit margin during the quarter ended March 31, 1999.
SELLING EXPENSES: Selling expenses as a percentage of net revenues for the
nine months ended March 31, 2000 and 1999 were 7.5% and 8.4%, respectively. For
the nine and three months ended March 31, 2000 selling expenses decreased
$526,000 or 9.5% and $206,000 or 11% compared with the same period in fiscal
1999. The decrease in selling expenses resulted from a reduction in travel and
entertainment costs and consulting expenses. The nine month and three month
reductions were partly offset by $287,000 and $126,000, respectively in costs
associated with CinemaNow, Inc.
GENERAL AND ADMINISTRATIVE EXPENSES: For the nine months ended March 31,
2000 general and administrative expenses increased $268,000 or 6.5% compared
with the same period in fiscal 1999. The difference is primarily due to the
payment of corporate bonuses in December 1999 along with administrative costs
associated with CinemaNow, Inc. The $176,000 increase in general and
administrative costs during the three month period ended March 31, 2000 was
primarily due to costs associated with CinemaNow, Inc.
BAD DEBT EXPENSE: Bad debt expense for the nine months ended March 31, 2000
increased $519,000 or 320% compared with the same period in fiscal 1999. Bad
debt expense primarily represents reserves taken against domestic video and
foreign sales. The increase was partially due to $355,000 in collections during
fiscal 1999 on past due video receipts which were previously reserved for during
the prior year. In addition, the reserve was increased due to a number of
international customers' accounts going into arbitration.
INTEREST EXPENSE: Interest expense for the nine month period ended
March 31, 2000 decreased $1.1 million or 36%. Interest expense for the quarter
ended March 31, 2000 decreased $591,000 or 68% compared with the same period in
fiscal 1999. The decrease in interest expense during fiscal 2000 was primarily
due to a lower average borrowing level from the same period in fiscal 1999. As
of March 31, 2000, there was $34 million outstanding under the credit facility
as opposed to $53.3 million on March 31, 1999. The Company has used excess cash
flow generated by theatrical and library product to decrease debt levels. See
"Liquidity and Capital Resources." Furthermore, during the second and third
quarter of fiscal 2000, four films were produced by the Company as opposed to
only one during the same period in fiscal 1999 causing increased capitalization
of interest costs during fiscal 2000 as opposed to fiscal 1999.
INTEREST AND INVESTMENT INCOME: Interest and investment income for the nine
months ended March 31, 2000 increased $2.9 million as a result of the sale of
32,411 shares of Yahoo!, Inc.
NET EARNINGS: The Company's net earnings for the nine months ended
March 31, 2000 increased $7.4 million or 289% compared with the same period in
fiscal 1999. The net earnings for the three months ended March 31, 2000
increased $4.8 million or 132% compared with the same period in fiscal 1999. The
increase for the three month period was primarily attributable to the successful
home video releases of the "Saturday Night Live" titles and "Natural Born
Killer's, Director's Cut" along with the reduction in interest expense. The
increase for the nine month period included the gain on the sale of
Yahoo!, Inc. shares.
D-51
<PAGE>
OTHER COMPREHENSIVE INCOME: The comprehensive income reported during the
nine month period ending March 31, 2000 is a result of the realized and
unrealized gain in Yahoo!, Inc. shares resulting from the sale of the stock
during the period. The comprehensive income reported at March 31, 2000 resulted
from the change in per share price at March 31, 2000.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, 2000
-----------------
<S> <C>
Unrealized holding gains arising during period.............. $ 541,000
Less: Reclassification adjustment for gains included in net
income.................................................... (2,439,000)
Reversal of unrealized gain................................. (424,000)
-----------
Other comprehensive income, net of tax...................... (2,322,000)
Accumulated comprehensive income @ 6/30/99.................. 3,101,000
-----------
Accumulated comprehensive income @ 3/31/00.................. $ 779,000
===========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company relies on cash generated by operations and borrowings under its
credit facility to finance its operations. The Company's cash flows from
operating, investing and financing activities for the nine months ended
March 31, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net cash provided by operating activities................... $ 11,535 $ 4,344
Net cash provided (used) by investing activities............ 2,148 (187)
Net cash used by financing activities....................... (12,118) (3,874)
</TABLE>
Cash provided by operations increased by $7.2 million for the nine month
period ended March 31, 2000 compared to the same period in fiscal 1999
principally as the result of a $7.4 million increase in net earnings, a
$9.7 million decrease in additions to film costs, and a $3.0 million increase in
the provisions for returns and bad debt. The increase was partially offset by an
$8.2 million decrease in the change in minimum guarantees and royalties payable.
The $23 million addition to film costs was primarily used for the production and
acquisition of new product with approximately $3.5 million used for prints and
advertising costs on the specialized theatrical releases of "Twice Upon a
Yesterday," "Better Than Chocolate," "Romance," "Joe the King," and "Beautiful
People."
Investing activities for the nine months ended March 31, 2000 consisted of
the sale of some Yahoo!, Inc. stock, as well as expenditures associated with the
development of the CinemaNow, Inc. web site.
Financing activities, consisting primarily of repayments under the Company's
credit facility, decreased $10.4 million in the nine months ended March 31, 2000
as compared to the nine months ended March 31, 1999. The decrease was primarily
the result of the increase in operating cash flows and investing activities. The
Company's cash requirements vary in part with the size and timing of production
advances and minimum guarantee payments along with the timing of its theatrical,
home video, television and international releases. The combination of steady
sales growth in sell through video and DVD product along with lower investments
in prints and advertising costs and the sale of equity investments has led to
the continued reduction in the overall debt balance.
On December 20, 1996, the Company's principal operating subsidiaries,
Trimark Pictures, Inc. and Trimark Television, Inc., entered into a $75 million
revolving credit facility with a consortium of banks agented and arranged by The
Chase Manhattan Bank which replaced a $25 million revolving credit facility
D-52
<PAGE>
with Bank of America NT & SA and Westdeustche Landesbank. The credit facility
expires December 19, 2000. Under the credit agreement, the Company may borrow
for various corporate purposes provided that the aggregate borrowings do not
exceed the Borrowing Base which is derived from specified percentages of
approved accounts receivable and film library. The credit agreement is
guaranteed by the Company and certain of its subsidiaries and is secured by
substantially all of the assets of the Company and its significant subsidiaries.
Loans outstanding under the credit facility bear interest at the rate of 1.5%
above Chase Manhattan's prime rate or 2.5% above Chase Manhattan's London
Interbank Market for Eurodollars for the loan term specified. An unused
commitment fee is payable on the average unused availability under the credit
facility, at the rate of 0.3725% per annum. As of March 31, 2000 there was
$34 million outstanding under the credit facility. The Company expects to use
excess cash flow generated by theatrical and library product to decrease current
borrowing levels. The credit agreement contains various financial and other
covenants to which the Company must adhere. These covenants, among other things,
require the maintenance of minimum net worth and various financial ratios which
are reported to the bank on a quarterly basis and include limitations on
additional indebtedness, liens, investments, disposition of assets, guarantees,
affiliate transactions and the use of proceeds. In relation to the release
schedule described below, the Company amended the current credit agreement as of
December 31, 1998 and September 27, 1999. The amended agreement provides for
less stringent minimum net worth ratios and minimum equity requirements. In
consideration for the adjustment of these ratios and minimum equity requirement,
the amended credit facility reduces the borrowing limits over the remaining life
of the credit facility. For the year ended June 30, 1999, the amended borrowing
limit was reduced to $60 million. By January 31, 2000, the borrowing limit was
reduced to $50 million and by June 30, 2000 is reduced to $40 million. The
amendments to the debt covenants and borrowing limits were structured to
incorporate the Company's overall strategy and presently planned productions,
acquisitions, distribution and overhead expenditures. The Company is in
compliance with all debt covenants as of March 31, 2000.
The Company's ability to maintain availability under its Credit Facility is
primarily dependent upon the timing of collections on existing sales during the
next three fiscal quarters and the amount and timing of collection on
anticipated sales of the Company's current library and films which the Company
plans to release or make available during the next three fiscal quarters.
Management believes the existing capital, cash flow from operations and
availability under the Company's amended Credit Facility will be sufficient to
enable the Company to fund its planned productions, acquisitions, distribution
and overhead expenditures for the next three fiscal quarters.
In the domestic specialized theatrical market the Company plans to release
five motion pictures in fiscal 2000 (of which four were released in the first
nine months of fiscal 2000). Furthermore, the Company plans to release
approximately thirty-six motion pictures into the domestic home video rental
market (of which twenty-eight were released in the first nine months of fiscal
2000) and to continue to expand distribution in the sell through market. The
Company intends to sell three to four films and "movies of the week" which will
premier on major cable networks or broadcast stations. Also in fiscal 2000, the
Company plans to release approximately ten motion pictures initially into
international distribution (of which seven were released in the first nine
months of the fiscal year).
Technicolor Videocassette, Inc. currently serves as the Company's video
cassette duplicator and fulfillment contractor. Technicolor Videocassette, Inc.
has a general lien on all of the Company's materials and products in its
possession.
The Company is currently authorized to spend up to $750,000 to purchase
shares of its outstanding common stock in the open market or otherwise.
The Financial Accounting Standards Board (known as FASB) recently adopted
certain changes that will alter reporting by motion picture companies. FASB
Statement No. 53, which previously allowed wide latitudes for booking movie
revenues and amortization has been rescinded. The new regulations will impose
numerous changes to reporting, and many motion picture companies will take a
one-time, non-cash
D-53
<PAGE>
charge of significant proportions to conform to the new rules. The Company is
currently calculating the financial impact of these new rules.
Impact of year 2000. No material financial losses were attributed or are
expected in relation to the year 2000 processing issues of time sensitive
information by computerized information systems.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievement of the Company,
or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: Changes in public
tastes, industry trends and demographic changes, which may influence the
distribution and exhibition of films in certain areas; public reaction to and
acceptance of the Company's video, theatrical and television product, which will
impact the Company's revenues; competition, including competition from major
motion picture studios, which may affect the Company's ability to generate
revenues; reliance on management and key personnel; consolidation in the retail
video industry; whether the Company's current strategy which includes theatrical
releases of only specialized films and production and acquisition of made for
television product is successful; new methods of distributing motion pictures;
the impact of new accounting rules on the Company's results of operations; and
other factors referenced in this Form 10-Q and the Company's other filings with
the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not consider that the potential loss of future earnings
which could be caused by interest rate volatility would have a material impact
on its financial position.
D-54
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In the first quarter of calendar year 2000, pursuant to the terms of a
Securities Purchase Agreement dated as of January 6, 2000, as amended, the
Company's majority-owned subsidiary, CinemaNow, Inc. ("CinemaNow"), completed a
private placement financing to accredited investors of 3,155,552 shares of
CinemaNow Series A Convertible Preferred Stock, yielding proceeds of
approximately $2,130,000. CinemaNow connects independent film watchers with
independent filmmakers through the business of streaming theatrical and short
films over the Internet while providing comprehensive virtual studio resources
to independent filmmakers. The investors, CinemaNow and the Company are parties
to an Investors Rights Agreement and to a Co-Sale Agreement pursuant to which
the investors are granted certain registration rights, board representation
rights and rights of first opportunity relating to CinemaNow and future equity
offerings by it, and the founders of CinemaNow (who include the Company) grant
the investors, subject to certain exceptions, the right to participate in sales
by the founders and a right of first opportunity with respect to future sales of
CinemaNow stock held by the founders. In connection with the foregoing
transactions, CinemaNow has issued to the Company's wholly-owned subsidiary,
Trimark Pictures, Inc. ("Trimark Pictures") a $215,000 convertible subordinated
debenture due June 30, 2001 relating to debt CinemaNow owes Trimark Pictures.
CinemaNow and Trimark Pictures are also parties to a five-year exclusive output
agreement (except with respect to an existing agreement between Trimark Pictures
and a third party) with respect to the Internet rights to all of Trimark
Pictures' motion pictures in the U.S. and Canada to the extent Trimark Pictures
controls such rights.
Under CinemaNow's stock option plan, Mark Amin, Chairman of the Board and
Chief Executive Officer of the Company and Chairman of the Board of CinemaNow,
was granted stock options at varying exercise prices (each in excess of current
fair market value) and vesting over a three-year term, to acquire up to
2,100,000 shares of CinemaNow common stock, or 8.9% of such common stock on a
fully-diluted basis. On a fully diluted basis, the Company as of March 31, 2000
owns approximately 78% of the common stock of CinemaNow.
D-55
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION
---------- -----------
<C> <S>
10.112 Non-Qualified Stock Option Certificate dated January 8, 2000
by and between the Registrant and Gordon Stulberg.
10.113 Non-Qualified Stock Option Certificate dated January 8, 2000
by and between the Registrant and Matthew H. Saver.
10.114 Non-Qualified Stock Option Certificate dated January 8, 2000
by and between the Registrant and Tofigh Shirazi.
10.115 Non-Qualified Stock Option Certificate dated January 8, 2000
by and between the Registrant and Peter Dekom.
10.116 Securities Purchase Agreement dated as of January 6, 2000
among CinemaNow, Inc. and the investors names therein (the
schedules are omitted and the Registrant agrees to furnish
supplementally a copy to the Commission upon request)
10.117 Co-Sale Agreement dated as of January 6, 2000 among
CinemaNow, Inc., the investors named therein and the
founders named therein (including the Registrant)
10.118 Investors' Rights Agreement dated as of January 6, 2000
among CinemaNow, Inc., the investors named therein and the
founders named therein (including the Registrant)
10.119 Convertible Subordinated Debenture dated February 2, 2000
issued by CinemaNow, Inc. to Trimark Pictures, Inc.
10.120 Agreement dated as of December 10, 1999 between Trimark
Pictures, Inc. and CinemaNow, Inc.
10.121 Stock Option Agreement (#1) dated March 1, 2000 between
CinemaNow, Inc. and Mark Amin.
10.122 Stock Option Agreement (#2) dated March 1, 2000 between
CinemaNow, Inc. and Mark Amin.
10.123 Stock Option Agreement (#3) dated March 1, 2000 between
CinemaNow, Inc. and Mark Amin.
10.124 Amendment of Employment Agreement, dated as of March 23,
2000, by and between Trimark Pictures, Inc., a California
corporation and Cami Winikoff.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K:
None.
D-56
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
<TABLE>
<S> <C> <C>
TRIMARK HOLDINGS, INC.
By: /s/ JEFF GONZALEZ
-----------------------------------------
Jeff Gonzalez
Chief Financial Officer
Principal Financial
Officer and authorized to sign
on behalf of the Registrant)
</TABLE>
Date: May 15, 2000
D-57
<PAGE>
APPENDIX E
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(MARK ONE)
<TABLE>
<C> <S>
/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF
THE SECURITIES EXCHANGE ACT OF 1934.
OR
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED MARCH 31, 2000.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO .
</TABLE>
COMMISSION FILE NUMBER 000-27730
LIONS GATE ENTERTAINMENT CORP.
(Exact name of Registrant as specified in its charter)
BRITISH COLUMBIA, CANADA
(Jurisdiction of incorporation or organization)
SUITE 3123, THREE BENTALL CENTRE, 595 BURRARD STREET
VANCOUVER, BRITISH COLUMBIA V7X 1J1
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
COMMON SHARES WITHOUT PAR VALUE
(Title of Class)
Securities registered or to be registered pursuant to Section 12(g) of the
Act: NONE
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: NONE
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report (March 31, 2000):
31,404,499 COMMON SHARES WITHOUT PAR VALUE
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 which financial statement item the registrant has
elected to follow.
Item 17 / / Item 18 /X/
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C> <C>
PART I........................................................................ E-3
Item 1: Description of Business..................................... E-3
Item 2: Description of Property..................................... E-21
Item 3: Legal Proceedings........................................... E-21
Item 4: Control of Registrant....................................... E-22
Item 5: Nature of Trading Market.................................... E-23
Item 6: Exchange Controls and Other Limitations Affecting Security
Holders..................................................... E-24
Item 7: Taxation.................................................... E-24
Item 8: Selected Financial Data..................................... E-26
Item 9: Management's Discussion and Analysis of Financial Condition E-30
and Results of Operations.................................
Item 10: Directors and Officers of Registrant........................ E-38
Item 11: Compensation of Directors and Officers...................... E-39
Item 12: Options to Purchase Securities from Registrant or
Subsidiaries................................................ E-41
Item 13: Interest of Management in Certain Transactions.............. E-45
PART II....................................................................... E-46
Item 14: Description of Securities to Be Registered.................. E-46
PART III...................................................................... E-46
Item 15: Defaults Upon Senior Securities............................. E-46
Item 16: Changes in Securities, Changes in Security for Registered E-46
Securities and Use of Proceeds............................
PART IV....................................................................... E-46
Item 17: Financial Statements........................................ E-46
Item 18: Financial Statements........................................ E-47
Item 19: Financial Statements and Exhibits........................... E-47
</TABLE>
<PAGE>
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 rate 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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MARCH 31
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Rate at end of period.......... $1.4828 $1.5092 $1.4180 $1.3835 $1.3635
Average rate during period..... 1.4790 1.5086 1.4060 1.3634 1.3613
High rate...................... 1.5140 1.5770 1.4637 1.3835 1.3998
Low rate....................... 1.4470 1.4175 1.3705 1.3310 1.3312
</TABLE>
On August 15, 2000, 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 $1.4774 = U.S.$1.00.
DIVIDEND POLICY
The Company has not paid any dividends on its outstanding Common Shares
since its inception and does not anticipate that it will do so in the
foreseeable future. The declaration of dividends on the Company's Common Shares
is within the discretion of the Company's Board of Directors and will depend
upon the assessment of, among other things, earnings, financial requirements and
the operating and financial condition of the Company. At the present time, the
Company's anticipated capital requirements are such that it intends to follow a
policy of retaining earnings in order to finance further development of its
business.
The Company is limited in its ability to pay dividends on its Common Shares
by limitations under the COMPANY ACT (British Columbia) relating to the
sufficiency of profits from which dividends may be paid.
E-2
<PAGE>
PART I
ITEM 1: DESCRIPTION OF BUSINESS
THE FOLLOWING DISCUSSION OF THE COMPANY'S BUSINESS CONTAINS "FORWARD-LOOKING
STATEMENTS" THAT CAN BE IDENTIFIED BY THE USE OF TERMINOLOGY SUCH AS "BELIEVES,"
"HOPES," "EXPECTS," "INTENDS," "PLANS," "MAY," "WILL," "SHOULD" OR "ANTICIPATES"
OR THE NEGATIVE THEREOF, OTHER VARIATIONS THEREON, COMPARABLE TERMINOLOGY OR
DISCUSSIONS OF STRATEGY. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" AND
ELSEWHERE IN THIS REPORT.
INCORPORATION
Lions Gate Entertainment Corp. (the "Company") is the continuing company
resulting from the amalgamation of Lions Gate Entertainment Corp. ("Old Lions
Gate") and Beringer Gold Corp., a British Columbia company engaged in
exploration and mining activities ("Beringer"). Old Lions Gate was incorporated
pursuant to the CANADA BUSINESS CORPORATIONS ACT under the name 3369382 Canada
Limited on April 28, 1997. Old Lions Gate amended its articles on July 3, 1997,
to change its name to Lions Gate Entertainment Corp. On September 24, 1997, Old
Lions Gate was continued under the COMPANY ACT (British Columbia). Beringer was
originally incorporated on May 26, 1986, under the COMPANY ACT (British
Columbia) as IMI Computer Corp. Beringer underwent name changes in 1987 and
1994, and on November 18, 1996, the name was changed to Beringer Gold Corp. On
November 13, 1997, Old Lions Gate and Beringer Gold Corp. amalgamated by way of
arrangement under the COMPANY ACT (British Columbia) and the Company's Common
Shares commenced trading on The Toronto Stock Exchange on November 17, 1997.
By virtue of the amalgamation, all of the property and assets of Old Lions
Gate and Beringer became the property and assets of the Company. The Company has
ceased all exploration activity formerly carried on by Beringer and has divested
itself of all of Beringer's mining-related investments and assets.
On November 12, 1998, the Company amended its memorandum to consolidate its
Common Shares from 500 million Common Shares to 250 million Common Shares and to
increase the authorized number of Common Shares, as consolidated, to
500 million.
The registered office and principal executive offices of the Company are
located at Suite 3123, Three Bentall Centre, 595 Burrard Street, P.O. Box 49139,
Vancouver, British Columbia, V7X 1J1.
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SUBSIDIARIES
The following chart sets forth principal subsidiaries of the Company, their
respective jurisdictions of incorporation and the percentage of voting
securities of each that are beneficially owned, or over which control or
direction is exercised, by the Company. Except as noted, there are no non-voting
shares issued by any of these subsidiaries, and all of the voting shares of any
subsidiary are owned by its immediate parent company.
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(1) 99% held directly and 1% held indirectly through Lions Gate Holdings Inc.
(California), a corporation all of the voting shares of which are owned
directly by the Company.
(2) 35% held indirectly through 569157 B.C. Ltd. (a company continued from
Ontario to British Columbia) of which all the voting shares are owned
directly by the Company, and 65% held indirectly through 408376 B.C. Ltd.
(British Columbia), a corporation all of the voting shares of which are
owned directly by the Company. Together, 569157 B.C. Ltd. (as to 35%) and
408376 B.C. Ltd. (as to 65%), hold all of the voting shares of Lions Gate
Studio Management Ltd. (British Columbia), a bare trustee whose only asset
is real property.
(3) 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.
(4) 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.
(5) 55% of Mandalay Pictures LLC is held by Tigerstripes Inc., a corporation
owned by Peter Guber, Paul Schaeffer and Adam Platnick.
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COMPANY OVERVIEW
The Company is an integrated North American entertainment company engaged in
the development, production and distribution of feature films, television
series, movies-of-the-week, mini-series and animated programming, as well as the
management of one of Canada's largest film and television studio complexes. The
Company's divisions and partners consist of: (1) Motion Pictures which includes
Lions Gate Films ("LG Films"), an independent producer and distributor of
English and French-language feature films; (2) Television which includes Lions
Gate Television ("LG Television"), a producer and distributor of family and
non-fiction or reality based television shows and Lions Gate Television
Pictures, LLC ("LGTVP"), a U.S.-based producer of movies-of-the-week and
mini-series for television; (3) Animation which includes an indirect interest in
CineGroupe Corporation ("CineGroupe"), a producer of animated feature films and
television shows; (4) Lions Gate Studios ("LG Studios"), and Eagle Creek
Studios, film and television studio complexes; and (5) a 45% interest in
Mandalay Pictures, LLC ("Mandalay Pictures"), a U.S.-based producer of class-A
motion pictures.
RECENT CORPORATE HISTORY
Since its incorporation in April 1997, the Company has pursued a strategy of
acquiring and integrating existing companies in the entertainment business. To
this end, the Company has made several important acquisitions and has raised
equity capital in order to pursue its acquisition and development strategies.
In May, August and November 1997, the Company completed a number of equity
private placements for gross proceeds of approximately $120 million.
In June and November 1997, the Company acquired Cinepix Film
Properties Inc. (now known as Lions Gate Films Corp.), a leading independent
producer and distributor of English- and French-language films. See
"BUSINESS--Motion Picture Production and Distribution."
In July 1997, the Company acquired North Shore Studios (now known as Lions
Gate Studios) one of the largest film and television studio complexes in Canada,
located in North Vancouver, British Columbia. See "BUSINESS--Studio Operations."
In November 1997, the Company acquired Mandalay Television, LLC (now known
as Lions Gate Television Pictures, LLC), a Los Angeles-based producer of
movies-of-the-week and mini-series for television. See "BUSINESS--Television
Production."
In March 1998, the Company (through an indirect wholly-owned subsidiary) and
Tigerstripes Inc. ("Tigerstripes"), a company owned by Peter Guber, Paul
Schaeffer and Adam Platnick, formed Mandalay Pictures, LLC. Mandalay Pictures
develops, produces and exploits A-level feature length motion pictures with
budgets ranging from U.S.$15-$75 million. Mandalay Pictures has a long-term,
multi-picture financing, production and distribution agreement (the "Paramount
Agreement") with Paramount Pictures Corporation ("Paramount"). In addition,
Mandalay Pictures has foreign distribution agreements with 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 for
distribution in the United Kingdom, Italy, Germany, France, Spain, Japan,
Australia and Greece. See "BUSINESS--Motion Picture Production and
Distribution."
In June 1998, a capital reorganization and financing of CineGroupe was
completed, resulting in new capital through the investment by Fox Family
Worldwide Inc. ("Fox Family"). Fox Family is the owner of U.S. broadcast outlets
Fox Kids Network, Fox Family Channel and Fox Kids International (broadcast in 30
countries). See "BUSINESS--Animated Motion Picture and Television Production."
In June 1998, the Company acquired International Movie Group, Inc. ("IMG"),
an independent distributor of English language films, predominately outside
Canada and the United States. See "BUSINESS--Motion Picture Production and
Distribution."
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In August 1998, the Company, through LG Television, acquired Termite Art
Productions ("Termite Art"). Termite Art is a non-fiction production company
that produces documentary and reality-based programs for television. See
"BUSINESS--Television Production."
In November 1998, the Company's Common Shares were reverse split on a basis
of one (1) new Common Share for two (2) old Common Shares basis, and the Company
listed the new Common Shares on the American Stock Exchange.
In March 1999, the Company completed a public financing in Canada for gross
proceeds of $28.8 million.
In December 1999 and January 2000, the Company completed a preferred equity
public financing in Canada for gross proceeds of U.S.$33.15 million.
On June 6, 2000 the Company and LGE Merger Sub, Inc. ("LGE Merger Sub"), a
wholly-owned subsidiary of the Company, entered an agreement and plan of merger
with Trimark Holdings, Inc. ("Trimark") to acquire Trimark, subject to closing
an expanded credit line for the Company, and shareholder and regulatory
approvals. Each share of Trimark common stock will be converted into the right
to receive U.S.$4.50 in cash, plus two Lions Gate common shares, or, if greater,
the number of Lions Gate common shares obtained by dividing U.S $5.50 by the
average of the closing prices of a Lions Gate share during a measuring period
before the merger. The transaction therefore is valued at approximately
U.S.$50 million, plus assumption of debt. Trimark is a worldwide distributor of
entertainment software, primarily engaged in the distribution of feature films
in the domestic home video and theatrical markets and in the licensing of
distribution rights to motion pictures for international markets.
The Company has arranged a U.S.$200 million revolving credit facility with a
syndicate of global financial institutions. The five year financing commitment,
which was arranged by Chase Securities Inc. and Dresdner Kleinwort Benson, is to
be administered by Chase Manhattan Bank as the Administrative Agent, Dresdner
Bank AG, as the Syndication Agent and National Bank of Canada, as the Canadian
Facility Agent. The facility is intended to be used to finance the development,
production, distribution or acquisition of intellectual properties including
feature films, television and video product and for general corporate purposes,
including acquisitions generally. The facility will also be used to refinance
existing indebtedness of the Company. The facility is currently being documented
and should be available for drawdown in the near future.
The Company continues to integrate its existing operations and to seek out
other acquisition opportunities to complement its growing entertainment
operations.
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INDUSTRY BACKGROUND
THE FEATURE FILM INDUSTRY
The feature film industry encompasses the development, production and
theatrical exhibition of feature-length motion pictures and their subsequent
distribution in the home video, television and other ancillary markets. While
the industry is dominated by the major studios, such as Warner Bros., Universal
Pictures, Twentieth Century Fox, Sony Pictures Entertainment
(Columbia/Tri-Star), Paramount and The Walt Disney Company, independent
distribution and production companies are playing an increasingly 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, nor do they have the capital necessary to maintain the
substantial overhead that is typical of such studios' operations. Independent
producers target their product at specialized markets, usually producing motion
pictures with budgets of less than U.S.$25 million. Generally, independent
producers do not maintain significant infrastructure, but instead hire creative
and other production personnel and retain the other elements required for
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 cash flow.
Financing of a motion picture is generally completed 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 home video, pay-per-view, pay television, free television and ancillary
markets. 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, with the distributor agreeing to advance to the producer a
non-refundable minimum guarantee. The local distributor is generally entitled to
a distribution fee of between 20% and 35% of receipts, while the producer is
entitled to a portion of gross receipts in excess of the distribution fees,
distribution expenses and the monies retained by exhibitors. The local
distributor and theatrical exhibitor generally will enter into an arrangement
providing for the exhibitor's payment to the distributor of a percentage
(generally 40% to 50%) of the box-office receipts for the exhibition period,
depending upon the success of the motion picture.
THE TELEVISION PRODUCTION INDUSTRY
The North American television production and distribution 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, in the last decade the growth of broadcasting
and cable television markets outside North America 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, has led to a higher proportion of revenues from
international markets.
Generally, the right to broadcast a program will be licensed by a production
company 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 program is
available for further commercial exploitation on cable and/or in syndication.
NORTH AMERICAN MARKETS. In North America, programming is delivered to the
end user by way of free television networks, cable channels and networks,
individual television stations and satellite delivery
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services. Free television networks include NBC, CBS, ABC, Fox and PBS in the
United States and CBC, CTV and the Global Television Network in Canada. The
broadcast network market in the United States continues to expand with the
addition of PAXTV, UPN and WB. Cable channels include HBO, Showtime, USA
Network, Lifetime, The Family Channel, TNT, F/X, Odyssey, Fox Family and TBS in
the United States and TMN, Super Ecran, SuperChannel, Canal D and Showcase in
Canada. Independent commercial television stations often purchase programming
from syndicators, which include the major studios and such companies as Pearson
and King World, in exchange for advertising time (referred to 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 subscriber fees
are typically divided among the program distributor, the pay-per-view operator
and the cable system operator.
Each of the major free television networks 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 movies-of-the-week,
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 worldwide television industry is experiencing
growth as a result of the development of new television broadcasting systems
outside of North America. These systems represent significant new sources of
revenue for television producers. European television is the most striking
example of this growth. Over the last 15 years, governments in Europe have
encouraged a major expansion of the public and private broadcasting sector. For
example, Germany and France have each added six television services in the last
15 years, and the United Kingdom has added four. This process is just beginning
in the former East Bloc countries, with a potential market of more than
300 million people, and in Japan, Southeast Asia and Australia, with 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, as well as 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, which
appeals 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, represents approximately a $3 billion
business annually. At the same time as the domestic industry has matured, Canada
has become a leading location for internationally originated productions. Over
the past few years, American studios, television networks and cable services
have increasingly produced in Canada, attracted by the low Canadian dollar and
first-class Canadian casts and crews, locations and facilities. U.S. companies
with a strong presence in Canada include major U.S. studios, such as Paramount,
The Walt Disney Company, Universal Pictures and Columbia/Tri-Star; U.S.
networks, such as ABC, NBC, CBS, Fox and PAXTV; cable services, such as
Showtime, TNT, The Disney Channel and HBO; and film companies, such as The
Hearst Corporation, Kushner-Locke Company and SABAN, Inc., among many others.
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.
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BUSINESS
The Company produces, distributes and markets feature-length films and
documentaries, series and movies-of-the-week television programs, from initial
creative development through principal photography, post-production,
distribution and ancillary sales.
MOTION PICTURE PRODUCTION AND DISTRIBUTION
The Company develops and produces theatrical motion picture projects through
two separate production entities--LG Films and Mandalay Pictures. The Company
operates these production units independently with separate management teams,
benefiting from the distinct creative talents and perspective of each of its
chief production executives, resulting in greater diversity within the Company's
overall release slate. LG Films produces quality films in the low to mid-budget
range, while through its participation in Mandalay Pictures, the Company
produces class-A feature films in the U.S.$15 million to U.S.$75 million range.
FILM PRODUCTION
LG FILMS. Through its wholly-owned subsidiary, LG Films, an independent
production and distribution entity based in Montreal, Toronto, Los Angeles and
New York, the Company produces and distributes English and French-language films
generally budgeted at U.S.$15 million or less. In fiscal 2000, LG Films produced
or co-produced five films, and in 1999, LG Films produced or co-produced eight
films.
LG Films continues to expand its production and co-production of feature
films. Since fiscal 1995, LG Films has produced or co-produced five to ten
full-length feature films each year. Its current strategic plan calls for the
production or co-production of five to ten features annually. LG Films has also
entered into "first look" arrangements with Saturn Films (Nicolas Cage) and
Ignite, LLC.
DISTRIBUTION
LG Films is also actively engaged in the domestic (Canada and U.S.) and
international distribution of feature films for theatrical, television and home
video audiences. In addition to distributing films it produces or co-produces,
LG Films acquires distribution rights and licenses for feature films produced by
others.
THEATRICAL DISTRIBUTION. In Canada, LG Films distributes major motion
pictures theatrically in both the English and French languages and has been
responsible for the release in Canada of such prominent films as AMERICAN
PSYCHO, ELVIS GRATTON II--MIRACLE IN MEMPHIS, GODS AND MONSTERS, AFFLICTION,
ANTONIA'S LINE, THE PIANO, THE CROW, THE CRYING GAME, DOGMA, INDOCHINE, LIKE
WATER FOR CHOCOLATE, ENCHANTED APRIL and STRICTLY BALLROOM. LG Films'
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. LG Films also
acquires feature films from various independent producers for theatrical
distribution in the U.S. markets through its Lions Gate Releasing division. Some
recent titles include DOGMA, THE RED VIOLIN, GODS AND MONSTERS and AFFLICTION.
HOME VIDEO DISTRIBUTION. In Canada, LG Films releases its titles to the
home video market through a distribution arrangement with Columbia TriStar Home
Video.
LG Films also established Locatrak, a joint venture with Rentrak
Corporation, to bring a video "pay per transaction" system to Quebec. LG Films
believes that Locatrak will further expand its penetration into the Canadian
video market.
LG Films has established three U.S. video distribution
operations--wholly-owned Avalanche Home Entertainment, Studio Home
Entertainment, a 50/50 joint venture with Scanbox Asia Pacific Limited, and
Eaton Entertainment LLC, a 50/50 joint venture with Topaz Entertainment LLC. In
addition to exploiting its own films, LG Films has been able to acquire high
quality, star-driven films that, while not on par with a
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theatrical release, are exploitable from a video and ancillary media
perspective. All activities are geared towards building LG Films' library.
LG Films has an agreement with Universal Home Video for the licensing of LG
Films' theatrical releases for distribution in the United States.
PAY AND FREE TELEVISION DISTRIBUTION. LG Films exploits, predominately in
Canada, a library of more than 800 titles in the cable, free and pay television
markets. In January 1999, LG Films concluded an output deal with HBO for its
theatrical releases, granting the network exclusive pay-television rights to its
line-up for three years.
INTERNATIONAL DISTRIBUTION. LG Films licenses its own productions, as well
as productions acquired from third parties, to the international marketplace on
a territory-by-territory basis. It currently has approximately 70 films in
active distribution.
TRIMARK ACQUISITION
The Company has agreed to acquire Trimark, subject to regulatory approval
and approval by the shareholders of both companies. Management believes Trimark
to be an excellent fit for the Company with a 650 title library, a successful
video distribution business having good relationships with vendors, active
broadband operations, established international distribution channels and a
record for producing and distributing specialty and genre films.
CLASS-A FEATURE FILM PRODUCTION
MANDALAY PICTURES. Mandalay Pictures is a co-venture with Tigerstripes, a
company controlled by Peter Guber, a high-level participant in the global
entertainment industry. Mandalay Pictures develops and produces A-level feature
length motion pictures with budgets ranging from U.S.$15 to U.S.$75 million.
The first feature film produced by Mandalay Pictures--SLEEPY HOLLOW starring
Johnny Depp and Christina Ricci--released in November 1999, was nominated for
three Academy Awards and received an Oscar for Art Direction from the Academy of
Motion Picture Arts and Sciences and grossed in excess of U.S.$100 million in
each of the North American and international markets.
Currently in post production at Mandalay Pictures for delivery at the end of
the calendar year is ENEMY AT THE GATES starring Jude Law, Joseph Fiennes, Ed
Harris and Rachel Weiss. Currently in production in Montreal is THE SCORE
starring Robert DeNiro, Marlon Brando, Ed Norton and Angela Bassett.
Mandalay Pictures entered into an agreement securing the exclusive motion
picture services of Peter Guber for a period of five years, excluding certain
pre-existing commitments of Mr. Guber. Currently the Chairman and Chief
Executive Officer of Mandalay Pictures, Mr. Guber was the founder and guiding
force of Mandalay Entertainment, a joint venture with Sony Pictures
Entertainment and is one of the preeminent independent producers and financiers
of major motion pictures for the global market.
Mandalay Pictures is governed by an executive committee, four members of
which are elected by the Company and three members of which are elected by
Tigerstripes. All actions of the executive committee require the vote of at
least one member chosen by the Company and the vote of Peter Guber or his
designee. There is no mechanism for resolving disagreement. Day-to-day
management of Mandalay Pictures, including all creative control, has been
delegated by the executive committee to Peter Guber. Mr. Guber is assisted by
Paul Schaeffer, joint founder of Mandalay Entertainment and previous Executive
Vice-President of Sony Pictures Entertainment, who serves as Vice Chairman and
Chief Operating Officer, and by Adam Platnick, former President of Mandalay
Entertainment, who serves as President. Mandalay Pictures has entered into
employment agreements with each of Messrs. Schaeffer (for a term of five years)
and Platnick (for a term of three years). Each of Peter Guber, Paul Schaeffer
and Adam Platnick also serve
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as members of the executive committee. The Company is evaluating the merits of
reducing its representation on the executive committee to a minority, which may
result in the Company accounting for its investment in Mandalay Pictures under
the cost method, rather than the equity method.
In June 2000 the Company entered an agreement with Cineartist Theater, Film
und Verlags GMBH to explore possible alternatives to assist Mandalay Pictures in
accessing German financing vehicles.
FINANCING, PRODUCTION AND DISTRIBUTION AGREEMENT WITH PARAMOUNT. Mandalay
Pictures entered into a long-term, multi-picture financing, production and
distribution agreement with Paramount pursuant to which Paramount will market
and distribute Mandalay Pictures' feature films worldwide, except in the United
Kingdom, Italy, Germany, France, Japan, Spain, Australia and Greece. In these
territories, distribution will be handled by companies with which Mandalay
Pictures' executives have had a previous relationship. These foreign
distributors, which 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,
contribute approximately 85% to 90% of the cost of each film produced by
Mandalay Pictures, as well as make significant contributions to its overhead
costs. The Paramount Agreement also provides Mandalay Pictures with rights, in
certain circumstances, to "put" film projects to Paramount and gives Paramount a
limited reciprocal put, which films Paramount would then be obligated to
distribute. Other features of the Paramount Agreement include a sharing between
Paramount and Mandalay Pictures of worldwide merchandising rights, as well as
the provision by Paramount to Mandalay Pictures of office space on the Paramount
Studio lot to be used as executive and motion picture production offices.
Although significant financial risks relating to the production, completion and
release of its film projects remain, the Company expects that Mandalay Pictures'
distribution arrangements with Paramount and the foreign distributors will lower
its economic risk profile for the making of feature length motion pictures and
result in a more consistent and varied flow of motion pictures with decreased
capital requirements from Mandalay Pictures.
TELEVISION PRODUCTION
DRAMA ONE-HOUR SERIES. LG Television completed production on 22 episodes of
HOPE ISLAND for PAXTV in the U.S. and Showcase in Canada, and 22 episodes of
HIGHER GROUND (OF WHICH 15 EPISODES WERE DELIVERED IN FISCAL 2000) for the Fox
Family Network in the U.S. and WIC in Canada. Paramount Worldwide is the
international distributor for each series. LG Television is currently in
production of 22 episodes of MYSTERIOUS WAYS that premiered on NBC in July 2000
and will also be broadcast on PAXTV and CTV in Canada. LG Television has several
projects in development for a variety of networks and cable outlets.
MOVIES-OF-THE-WEEK AND MINI-SERIES. LGTVP is actively involved in the
development, acquisition, production and distribution of television productions
in the movie-of-the-week and mini-series formats. LGTVP produced FIRST DAUGHTER,
a movie-of-the-week broadcast on TBS in August 1999 as well as a two-hour
movie-of-the-week entitled FINAL RUN for CBS starring Robert Urich broadcast in
October 1999. LGTVP also produced KING OF THE WORLD, a two hour movie of the
week for ABC broadcast in January 2000 about the early career of Muhammad Ali,
SHUTTERSPEED, a two hour movie of the week for TNT that aired in February 2000
and the LINDA MCCARTNEY STORY for CBS that aired in May 2000. In addition to the
films already completed, LGTVP has approximately 14 projects, representing an
aggregate of 29 hours of television programming, in development with U.S.
broadcasters and cable networks.
DOCUMENTARY AND REALITY-BASED PROGRAMMING. Termite Art, a division of LG
Television created a number of documentary and reality-based programs for such
notable clients as the Discovery Network, Travel Channel, MTV, FX, PBS, The
History Channel and Fox Prime Time. Termite Art produced BUSTED ON THE JOB for
Fox Network, the WILD RESCUES series for the Discovery Network, VACATION VIDEOS
for the Travel Channel, RIPLEY'S BELIEVE IT OR NOT, for TBS and assorted other
non-fiction programming. In addition to distributing Termite Art programs to the
domestic and international markets LG Television acquires third party
productions for distribution.
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ANIMATED MOTION PICTURE AND TELEVISION PRODUCTION
In addition to its live-action film and television productions, the Company
is also involved in animation and interactive production through its partner,
CineGroupe, located in Montreal. In the coming years, CineGroupe plans to expand
production volume and its interactive production in response to heightened
international demand for animated product and to build its library.
CineGroupe develops and produces animated television and feature film
product using 2D and 3D computer generated imagery, as well as traditional ink
and paint techniques. CineGroupe has produced more than 493 half-hour animated
episodes for television, including such series as MEGA BABIES, JIM BOUTON, KIDS
FROM ROOM 402, and BAD DOG II. During fiscal year 2000, CineGroupe delivered 79
half-hours of programming, including 22 half-hours of KIDS FROM ROOM 402 to Fox
Family and Teletoon, 20 half-hours of JIM BUTTON to CBC and France 3 Television
and ARD in Germany, 19 half-hours of MEGA BABIES and 14 half-hours of BAD DOG to
Fox Family and Teletoon. The feature film HEAVY METAL is distributed by Columbia
Tristar and Lions Gate Films. Projects currently in production include a 40
half-hour series for PBS Kids, TVOntario and CBC entitled SAGWA, THE CHINESE
SIAMESE CAT. The series is being produced in association with Sesame Workshop
and will feature complimentary web activities to be produced by CineGroupe.
Other projects include LION OF OZ, a television movie produced in association
with Sony Wonder, to air in August 2000 on the Disney Channel and Super Ecran,
and the second season of the series KIDS FROM ROOM 402 is also under production.
STUDIO OPERATIONS
Film and television production has increased dramatically over the past five
years in Canada. This increase can be attributed to several factors. First,
Canada's geographic proximity to the United States and shared North American
values and interests have led to the establishment of close professional
contacts between Canadian and American studios, independent producers,
distributors and buyers. Moreover, production costs in Canada are generally
lower than in the United States and many other countries due, in part, to lower
guild and union minimums. The favorable exchange rate of the Canadian dollar,
government tax incentives and the availability of free location assistance to
film and television producers offered by many Canadian cities and several
provinces have also increased production activity in Canada. Canada also boasts
a large number of highly-trained and professional crews, technicians and
production personnel. The Canadian Film Centre provides intensive training for
Canadian directors, writers and producers. In addition, Canadian trade unions
are often more flexible and insist upon less onerous requirements than their
American counterparts. Finally, with its wide ranging topography (3,400 miles
from coast to coast) and small population (approximately 27 million people),
Canada is ideally suited for location shooting. Urban centers such as Toronto,
Vancouver and Montreal have been disguised as London, Paris, New York and
Chicago.
The Company has benefited from the high demand for sound stages and
production office space created by this increase in production through its
wholly-owned subsidiary--LG 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 William F.
White, Canada's largest supplier of cinematic lighting, power and grip
equipment; Pinewood Sound, a supplier of audio post-production services; Sim
Video, a supplier of cameras and post-production editing equipment; the local
union of one of the major film and entertainment industry craft guilds;
production companies and others. Studio capacity usage is consistently above
90%, including the current shooting of HIGHER GROUND and the Company's new
series MYSTERIOUS WAYS. Other current studio productions are the James Cameron
television series DARK ANGEL and Universal's feature film JOSIE AND THE
PUSSYCATS.
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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, which 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. LG Studios owns its own telephone
system and rental furniture and, therefore, can 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. LG Studios had revenues of
$7 million for the fiscal year ended March 31, 2000. The Company expects to have
continued high occupancy rates for both its studios and offices for the next
year. The Company has 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. It's current tenant is Warner
Brothers feature film LIKE CATS & DOGS. The addition of Eagle Creek Studios
increases LG Studios sound stage inventory to nine.
COMPETITION
Television and motion picture production and distribution are highly
competitive businesses. The Company faces competition from companies within the
entertainment business, as well as alternative forms of leisure entertainment,
such as travel, sporting events, outdoor recreation and other cultural
activities, among many others. The Company competes 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. Numerous
organizations with which the Company competes in the motion picture and
television industry have significantly greater financial and other resources,
while the independent production companies may have less overhead than the
Company. Most of the major studios are part of large diversified corporate
groups with a variety of other operations, including television networks and
cable channels, which can provide both the means of distributing their products
and stable sources of earnings that offset the fluctuations in the financial
performance of their motion picture and television operations.
In addition, the Company's 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 the Company's motion pictures is
dependent not only on the quality and acceptance of a particular picture, but
also on the quality and acceptance of other competing motion pictures released
into the marketplace at or near the same time. The number of films released by
the Company's competitors, particularly the major film studios, in any given
period, may create an oversupply of product in the market, thereby potentially
reducing the Company's share of gross box-office admissions and may make it more
difficult for the Company's films to succeed. See "RISK FACTORS--Film and
Television Industry" and "--Competition."
EMPLOYEES
As of July 31, 2000, the Company had approximately 460 full-time and 70
part-time regular employees in its worldwide operations. The Company also hires
additional employees on a picture-by-picture basis in connection with the
production of the Company's motion pictures and television programming. The
Company believes that its employee and labour relations are good.
None of the Company's employees are members of unions. The Company has
entered into employment agreements with certain key employees.
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GOVERNMENT INCENTIVES AND REGULATION
GOVERNMENT FINANCIAL SUPPORT. The Canadian Film Development Corporation,
otherwise known as Telefilm Canada, provides financial assistance in the form of
equity investments, interest free and low interest loans, development and
interim financing to Canadian film and television productions that have
significant Canadian creative, artistic and technical content and which meet
certain published criteria. Telefilm Canada's provincial counterparts in Quebec,
Ontario, Manitoba, Saskatchewan, British Columbia, New Brunswick and Nova Scotia
also provide generous financial support to qualifying Canadian productions. In
1996, the Canada Television and Cable Production Fund (now operating as the CTF)
was established by the federal government, 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 substantially 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. Such television
programs are licensed at a premium because, under Canadian law, broacast
licenses require broadcasters to telecast certain minimum amounts of Canadian
programming.
TAX CREDITS. In 1995, the federal government phased out the capital cost
allowance tax shelter system for Canadian-content productions and replaced it
with a fully refundable tax credit for eligible Canadian-content film or video
productions produced by qualified taxable Canadian corporations. The federal tax
credit, in the maximum amount of 12% of eligible production costs, was modeled
on the provincial tax credit that had been introduced years earlier by the
province of Quebec in the maximum amount of 15% of eligible production costs.
The federal and Quebec Canadian-content tax credits were soon joined by
Canadian-content tax credit programs in the provinces of British Columbia
(maximum of 9.6% of eligible production costs with increases available in
respect of location and training incentives), Ontario (maximum of 9.6% of
eligible production costs), Nova Scotia (maximum of 15% of eligible production
costs), New Brunswick (maximum of 15% of eligible production costs), Manitoba
(maximum of 22.5% of total production costs) and Saskatchewan (maximum of 17.5%
of eligible production costs).
In October 1997, the federal government announced the details of a new
refundable "production services" tax credit for eligible film and television
productions that are produced in Canada. The new production services credit 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. The provincial governments of
British Columbia and Ontario have also introduced refundable production services
tax credit programs, each at a rate of 11% of qualifying provincial labor
expenditures for eligible productions. Additional production services tax
credits have been introduced or announced in the provinces of Nova Scotia
(maximum of 15% of eligible production costs), New Brunswick (maximum of 15% of
eligible production costs), Manitoba (maximum of 17.5% of eligible production
costs), Saskatchewan (maximum of 17.5% of production costs) and Quebec (5.5% of
qualifying production costs).
CO-PRODUCTION TREATIES. Canada is a party to film and/or television
co-production treaties with over 50 countries, including Algeria, Argentina,
Australia, Belgium, Bosnia-Herzegovina, Brazil, Chile, China, Croatia, the Czech
Republic, France, Germany, Hong Kong, Hungary, Ireland, Israel, Italy, Japan,
Korea, Mexico, Morocco, the Netherlands, New Zealand, Poland, Romania, Russia,
Slovakia, Slovenia, Spain, Sweden, Switzerland, the United Kingdom and
Venezuela. Since 1964, Canadian producers have been involved in over 300
official co-productions. In 1997, for example, Canada was involved in 66
co-production projects with total budgets amounting to approximately
$500 million, up from 36 projects with aggregate budgets of approximately
$252 million in 1996. The most active relationship has traditionally been and
continues to be with France, with which Canada has agreements covering film,
television, animation and cinematographic relations.
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RISK FACTORS
COMBINATION OF OPERATIONS OF RECENT ACQUISITIONS; MANAGEMENT OF GROWTH
INTEGRATION OF DIVERSE OPERATIONS. The Company's divisions, subsidiaries,
partners and co-ventures consist of LG Films, LG Television, CineGroupe, LG
Studios and Mandalay Pictures, which the Company has acquired over the last few
years. While most of these companies have previously operated in their
respective fields, Lions Gate faces the problems inherent in combining their
different operations. The Company will face the same problems combining
Trimark's operations. Any failure by the Company to do so could have an adverse
effect on the potential profitability of the Company.
STRAIN ON COMPANY RESOURCES DURING RAPID GROWTH. The Company is
experiencing a period of rapid growth that could place a significant strain on
its resources. If the Company's management is unable to manage growth
effectively, operations could be adversely affected. The Company is currently in
the process of implementing appropriate structures in place to deal with future
growth, including management information systems and internal and external
communication systems. However, there can be no assurance that the Company will
be able to achieve its growth as planned, increase its work force or implement
new systems to manage its anticipated growth, and any failure to do so could
have a material adverse effect on the Company's business, results of operations
and financial condition.
INTEGRATION OF THE MERGED BUSINESSES. The Company and Trimark have entered
into the agreement of merger with the expectation that the merger will be
operationally and financially beneficial to the combined company and its
stockholders. The merger will require that the Company integrate Trimark's
operations with those of the Company. There can be no assurance that such
integration will be accomplished successfully or that the expected benefits of
the merger will be achieved. The integration also will require the dedication of
management, which will divert their attention from day-to-day business of the
Company following the merger. The difficulties of integration may be increased
by coordinating geographically separated organizations and integrating
personnel. The process of integrating Trimark's operations with those of the
Company may cause an interruption of, or a loss of momentum in, the activities
of either or both of the companies and may adversely affect the operations of
the Company following the merger. Furthermore, the process of integrating the
operations of the Company with the operations of Trimark could have a material
adverse effect on the ability of the Company to retain the key managerial
personnel who are critical to its operations.
LIMITED WORKING CAPITAL. As of March 31, 2000, the Company had working
capital of approximately $37.3 million. The Company's ability to maintain and
expand its development, production and distribution of feature films and
television series and to cover its general and administrative expenses depends
upon the Company's ability to obtain financing through equity financing, debt
financing (including through the availability of credit facilities) or the sale
or syndication of some or all of its interests in certain projects or other
assets. If the Company's access to existing credit facilities is not available,
and if other funding does not become available, there could be a material
adverse effect on the business of the Company.
FILM AND TELEVISION INDUSTRY
UNPREDICTABILITY OF 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 its commercial success is determined primarily by
audience reaction, which is unpredictable. 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. The Company's success will
depend on the experience and judgment of the Company's management to select and
develop new investment and
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production opportunities. There can be no assurance that the Company's
television programs and feature films will obtain favorable ratings or reviews
or that broadcasters will license the rights to broadcast any of the Company's
television programs in development or renew licenses to broadcast programs
currently produced by predecessors of the Company. Even if licenses to broadcast
the Company's television programming are renewed, the popularity of a particular
program and its ratings may diminish over time.
CAPITAL REQUIREMENTS AND FINANCIAL RISKS. The production, completion and
distribution of television programs and feature films require a significant
amount of capital. Although the Company intends to continue to reduce the risks
of its financial involvement in the production costs of its productions through
financial assistance from broadcasters, distributors, government and industry
programs and studios, there can be no assurance that the Company will
successfully implement such arrangements or that the Company would not be
subject to substantial financial risks relating to the production, completion
and release of future television programs and feature films. In addition, a
significant amount of time may elapse between the expenditure of funds by the
Company and the receipt of revenues from its television programs or feature
films.
POTENTIAL FOR BUDGET OVERRUNS AND OTHER PRODUCTION RISKS. 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, the Company 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 the Company. 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 the
Company's business, results of operations or financial conditions.
DISTRIBUTION UNCERTAINTY. Decisions regarding the timing of release of
television programs, feature films and related products and as to which of the
Company's television programs, feature films and related products, if any, will
receive promotional support from a distributor are important in determining the
success of a particular television program, feature film or related product. As
with most production companies, the Company does not expect to control the
manner in which its distributors distribute the Company's television programs or
feature films, including the number of broadcasters to which its distributors
distribute its television programs, the number of theatres to which its
distributors may distribute a feature film, or the timing of release of the
television programs or feature films. Although its distributors have a financial
interest in the success of any such television programs or feature films, any
decision by its distributors not to distribute or promote one of the Company's
television programs, feature films or related products or to promote
competitors' programs, feature films or related products to a greater extent
than it promotes those of the Company could have a material adverse affect on
the Company's business, operating results or financial condition.
COMPETITION
SOURCES OF COMPETITION. Motion picture and television production and
distribution are highly competitive businesses. The Company faces competition
from companies within the motion picture and television industry and alternative
forms of leisure activities. The Company will compete with a variety of
companies for access to time slots for broadcast of its television programs,
access to theatrical outlets for feature films, acquisition of characters,
storylines, ideas and treatments with which to build its library, the
recruitment and retention of talented personnel, and the licensing and
distribution of its proprietary products. Almost all of the Company's potential
competitors, particularly the major U.S. studios, have longer operating
histories, greater name recognition, larger installed customer bases and
significantly
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greater financial, technical, marketing and other resources, while the
independent production companies may have less overhead than the Company.
LACK OF DIVERSIFICATION. 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 the Company's 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 the Company's share of
gross box-office admissions and make it more difficult for the Company's films
to succeed.
LIMITED NUMBER OF PRIME TIME SLOTS FOR TELEVISION PROGRAMMING. The Company
competes 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 the Company will be able to
compete successfully against current or future competitors.
TECHNOLOGICAL ADVANCES. The entertainment industry in general, and the
motion picture industry in particular, are continuing to undergo significant
changes, primarily due to technological developments. Due to 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.
FLUCTUATION OF OPERATING RESULTS; EFFECT OF ENTERTAINMENT ACCOUNTING POLICIES
DEPENDENCE OF OPERATING RESULTS ON NUMEROUS FACTS. The Company expects to
generate a substantial majority of its future revenue from the development and
production of feature films and television programs. The Company's future
revenues will depend upon the timing and the level of market acceptance of its
television programs and feature films, as well as upon the cost to produce,
distribute and promote such 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, the Company's revenues are, and will continue to be,
extremely difficult to forecast.
SOURCES OF FLUCTUATION IN OPERATING RESULTS. The Company expects that its
future operating results will fluctuate significantly as a result of, among
other things: the timing of domestic and international releases of current and
future television programs or feature films produced by the Company; the success
of these television programs or feature films; the timing of the release of
related products into their respective markets; the costs to distribute and
promote the television programs and feature films; the success of the Company's
distributors in marketing its television programs and feature films; the timing
of receipt of proceeds generated by the television programs and feature films
from distributors; the introduction of new television programs and feature films
by the Company's current and future competitors; the timing and magnitude of
operating expenses and capital expenditures; the level of unreimbursed
production costs in excess of budgeted maximum amounts; and general economic
conditions. As a result, the Company believes that its results of operations may
fluctuate significantly, and it is possible that the Company's operating results
could be below the expectations of equity research analysts and investors.
ENTERTAINMENT ACCOUNTING POLICIES. The Company follows generally accepted
accounting principles for accounting practices related to revenue recognition
and amortization of production costs, including
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Statement of Financial Accounting Standards No. 53 "Financial Reporting by
Producers and Distributors of Motion Picture Films" ("SFAS 53"). Revenues from
production and license agreements, which may provide for the Company's receipt
of non-refundable minimum guaranteed amounts, are recognized when the license
period begins and the programming is available for showing pursuant to the terms
of the agreement, typically when the finished product has been delivered to, and
accepted by, the licensee. Revenues in excess of minimum guarantees under such
agreements are recognized when such amounts have become due and payable and the
Company is reasonably assured of their collection. As a result, The Company's
expected cash flows may not necessarily be related to revenue recognition and
amortization of production costs. Costs of producing television episodes and
other productions will be capitalized and charged against revenues generated by
the delivery of those episodes or productions. Costs will be assessed quarterly
for recoverability and will be written down to their estimated recoverable
amount. Costs incurred to produce or acquire exploitation rights to television
episodes produced by the Company will be capitalized and amortized using the
ratio of current revenue to estimated total revenue for a particular episode or
production. As a result, the Company's estimates of total revenues and costs may
be overstated or understated at any point in time. The inherent uncertainties of
such estimates could materially adversely change the Company's results of
operations and financial condition.
The Financial Accounting Standards Board recently approved certain changes
that will alter reporting by motion picture companies. SFAS 53, which previously
allowed wide latitudes for booking movie revenues and amortization, has been
rescinded, effective for the Company's fiscal 2002 year end. The new standards
will impose numerous changes to reporting, and many motion picture companies
will take a one-time, non-cash charge of significant proportions to conform to
the new rules. The Company and Trimark are currently determining the financial
impact of these new standards.
DEPENDENCE ON PERSONNEL
DEPENDENCE ON KEY PERSONNEL. The Company's success will depend to a
significant extent on the performance of a number of senior management personnel
and other key employees of the Company and its affiliates. In particular, the
Company will be dependent upon the services of such personnel as Frank Giustra,
Jon Feltheimer, Michael Burns, Jeffrey Sackman, Jacques Pettigrew and Peter
Guber. The loss of the services of key persons could have a material adverse
effect on the Company's business, operating results and financial condition.
NEED TO ATTRACT AND RETAIN QUALIFIED PERSONNEL. The Company's success
depends to a significant extent on its ability to identify, attract, hire, train
and retain qualified professional, creative, technical and managerial personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in identifying, attracting, hiring, training and
retaining such personnel in the future. The competition for quality creative and
technical personnel is especially intense due to significant expansion in the
entertainment market over the past several years. If the Company is unable to
identify, attract, hire, train and retain qualified personnel in the future,
particularly creative and technical personnel, such inability could have a
material adverse effect on the Company's business, operating results and
financial condition.
CHANGES IN REGULATORY ENVIRONMENT
CANADIAN CONTENT RESTRICTIONS. Canadian broadcasters and cable, pay
television and pay-per-view television services are typically required, as a
condition of their license, to devote a certain amount of their programming
schedules, including prime time, to Canadian programs. Compliance with these
requirements is enforced by the CRTC, and failure to comply can result in fines
or the loss of license. The CRTC has issued detailed criteria which must be met
for a television production to qualify as a "Canadian program", which require
among other things, that financial and creative functions be performed by
Canadians. If the Company's productions cease to qualify as Canadian programs
under the regulations and policies of the CRTC, the Company may find it more
difficult to secure time slots in Canada for its
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productions. In addition, in the event the Company's productions cease to meet
minimum Canadian content requirements, the Company may be unable to access
various federal and provincial film and television incentive programs, including
refundable tax credits, as discussed below.
GOVERNMENT INCENTIVE PROGRAMS. The Company may benefit from a number of
Canadian incentive and regulatory programs designed to enhance and strengthen
the Canadian film and television program production, distribution and
broadcasting industries. For example, as noted above, the Company may benefit
from certain regulations of the CRTC obliging Canadian broadcasters to telecast
certain minimum levels of Canadian content programming. Such Canadian content
programming requires certification by the CRTC as certified Canadian programming
and the Company may be contractually bound to obtain such certification in
respect of certain programs the Company expects to produce. If a program does
not qualify for such certification, the Company could be in default of its
obligations to Canadian broadcasters, distributors or other licensees.
In addition, the Company expects to receive investments from federal and
provincial government agencies established to foster the development of all
aspects of the Canadian film and television industry. These government agencies,
including, among others, Telefilm Canada, the Ontario Film Development
Corporation, Societe de Developpement des Entreprises Culturelles (SODEC) and
British Columbia Film, administer a variety of programs providing incentives to
qualifying entities in the form of equity investment, non-interest bearing
advances and loans.
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. The Company expects that certain film and
television productions it will produce will incorporate such refundable tax
credits as elements of production financing. In the event that such productions
do not ultimately qualify for anticipated refundable tax credits, the relevant
production may require additional funds for completion.
For the Company's film and television productions to continue to qualify for
several such refundable tax credits, among other statutory requirements, the
Company must remain Canadian-controlled pursuant to the Investment Canada Act.
If the Company ceases to be Canadian-controlled under the Investment Canada Act,
it would no longer 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 access to Canada's official
co-production treaties with other countries. Such a change in status would also
affect the eligibility of the Company to retain the benefit of refundable tax
credits and other incentives arising prior to the change of control of the
Company. There are currently no transfer restrictions on the Company's common
stock as a class and, accordingly, the Company may not be able to prevent such a
change of control. In addition, certain provincial refundable tax credits
require that the applicable applicant be provincially-controlled. If any Company
affiliate which accesses or intends to access such credits ceases to be
provincially controlled, it would no longer be entitled to access the applicable
provincial refundable tax credit.
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS
The Company distributes motion picture and television productions in foreign
countries and derives a significant percentage of its revenues from sources
outside the U.S. and Canada. As a result, the Company's business is subject to
certain risks inherent in international trade, many of which are beyond its
control, such as changes in local regulatory requirements, changes in the laws
and policies affecting trade, investment and taxes (including laws and policies
relating to the repatriation of funds and to withholding taxes), differing
degrees of protection for intellectual property, instability of foreign
economies and governments and cultural barriers. These factors can adversely
affect the Company's business and results of operations.
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CURRENCY FLUCTUATIONS
The Company anticipates that an increasing portion of its revenues and
expenses may be denominated in U.S. dollars or currencies other than Canadian
dollars (the currency in which the Company's financial statements are reported).
The Company does not presently engage in currency hedging activities to limit
the risks of exchange rate fluctuations. As a result, changes in relative value
of the Canadian dollar to the U.S. dollar and other foreign currencies will
affect the Company's revenues and operating margins. 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 cannot be accurately
predicted and could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the ability of the
Company to repatriate to Canada funds arising in connection with its foreign
operations may also be adversely affected by currency and exchange control
regulations imposed by the country in which a production is exploited.
RISKS RELATING TO LIQUIDITY AND FINANCING REQUIREMENTS
The Company's theatrical motion picture and television production activities
require the initial expenditure of significant funds, while revenues relating to
such films and programs are typically not generated for some period after such
expenditure and may be received over an extended period of time. Since the
Company's cash requirements generally have exceeded cash flow from operations,
the Company has been required to utilize borrowings under its principal credit
facilities to fund operations. The Company will continue to be dependent upon
the availability of its principal credit facilities to fund its production and
distribution activities for the foreseeable future. Borrowings under such
principal credit facilities are subject to the Company's continuing satisfaction
of loan conditions. The Company's inability to make such borrowings, or to
borrow funds on satisfactory terms, could have a material adverse effect on its
business.
DEPENDENCE ON PROPRIETARY RIGHTS
The Company's ability to compete will be dependent, in part, upon successful
protection of its proprietary property. The Company plans to protect proprietary
and intellectual property rights to its 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. The Company also expects
to distribute its 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 the Company's productions or certain portions or
applications of the Company's intended productions.
In addition, litigation may be necessary in the future to enforce
intellectual property rights, to protect the Company's 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 the Company's business, operating results or
financial condition. From time to time, the Company 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 the Company's business, financial condition or results of operations.
Regardless of the validity or the success of the assertion of such claims, the
Company could incur significant costs and diversion of resources in defending
against such claims, which could have a material adverse effect on its business,
financial condition or results of operations.
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POSSIBLE VOLATILITY OF MARKET VALUE OF COMMON SHARES
It is expected that factors such as the publication of ratings and reviews,
fluctuations in results of operations, changes in financial estimates by
securities analysts, announcements by the Company or by its competitors, delays
in or cancellation of television programs, feature films or other product
release dates or other events or factors may cause the market value of the
Company's securities to fluctuate. Moreover, in recent years, the stock market
has experienced extreme price and volume fluctuations, some of which have been
unrelated or disproportionate to the operating performances of listed and quoted
companies. These broad market fluctuations may adversely affect the market value
of the Company's securities.
YEAR 2000 COMPLIANCE
In fiscal year 2000 management of the Company reviewed the extent of
potential Year 2000 ("Y2K") problems by identifying operating and information
systems and equipment used by subsidiaries, which required remedial action. The
Company's Information Technology team developed and implemented a Y2K compliance
plan, and well in advance of December 31, 1999, the Company's Y2K contingency
plan was in place. The Company has not experienced any problems associated with
the Year 2000.
ITEM 2: DESCRIPTION OF PROPERTY
The Company's principal executive office is located at Suite 3123, Three
Bentall Centre, 595 Burrard Street, Vancouver, British Columbia. The principal
executive office occupies approximately 5,401 square feet of space under a lease
agreement that expires on April 30, 2002. The Company believes that its current
facilities are adequate to conduct its business operations for the foreseeable
future. The Company's operations and financial personnel are located in Toronto,
Ontario and Los Angeles, California.
LG Films' head office is located in St. Laurent, Quebec, and occupies
approximately 15,000 square feet. LG Films leases a further 5,000 square feet of
space in St. Laurent for storage facilities. The Canadian production and
distribution division operates out of 12,640 square feet of leased premises in
Toronto, while the U.S. distribution division operates out of leased premises in
Los Angeles and New York.
CineGroupe operates from two leased premises in Montreal, Quebec totalling
approximately 55,700 square feet and also has small offices in Los Angeles and
Toronto.
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 $1.5 million and $1.2 million mature
in August 2000 and September 2000, respectively. Loans in the amount of
approximately $8.6 million and $9.6 million mature in April 2003 and July 2003,
respectively. The Company has a five year operating lease for 50,000 square feet
with Eagle Creek Studios in Burnaby, British Columbia.
LGTVP, LG Television and LG Films have leased common office space totalling
approximately 16,300 square feet in Los Angeles.
Mandalay Pictures is provided space on the Paramount Studios lot in Los
Angeles pursuant to the Paramount Agreement. See "BUSINESS--Financing,
Production and Distribution Agreement with Paramount."
ITEM 3: LEGAL PROCEEDINGS
The Company knows of no actual, threatened or pending legal proceedings to
which the Company or any of its subsidiaries is a party which are material or
potentially material, either individually or in the aggregate.
E-21
<PAGE>
ITEM 4: CONTROL OF REGISTRANT
As of July 31, 2000, 31,421,374 Common Shares of the Company were issued and
outstanding with an obligation to issue approximately 39,375 additional Common
Shares with respect to the acquisition of IMG. There are 12,205 preferred shares
issued and outstanding. Each outstanding Common Share is entitled to one vote.
The Series A Preferred shareholders, upon receipt of common shareholder
approval, will be entitled to elect three directors and nominate one Canadian
director to the Company's board of directors. Upon closing of the Trimark
acquisition, Series B Preferred shareholders will be entitled to elect Mark Amin
to the board of directors of the Company. The Company is not directly or
indirectly owned or controlled by another corporation or by any foreign
government, and there are no arrangements that may, at a subsequent date, result
in a change of control of the Company.
The following table sets forth, as of July 31, 2000, certain information
with respect to ownership of the Company's Common Shares of all executive
officers and directors as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
------------------------
NUMBER OF PERCENT
COMMON SHARES OF TOTAL
------------- --------
<S> <C> <C>
Frank Giustra......................................... 3,307,401(2) 10.4%(2)
All executive officers and directors as a group
(14 persons)........................................ 6,333,563(3) 19.4%(3)
</TABLE>
------------------------
(1) Each shareholder is deemed to beneficially own any Common Shares subject to
options, warrants or other rights that are currently exercisable or that
become exercisable within 60 days of July 31, 2000. The inclusion herein of
such shares listed as beneficially owned does not constitute an admission of
beneficial ownership. Percentages are based on 31,421,374 Common Shares
outstanding as of July 31, 2000, as adjusted for warrants and options to
purchase Common Shares held by the person or group indicated that are
exercisable over the next 60 days.
(2) Includes (1) 125,000 Common Shares for which an option has been granted by
Mr. Giustra to David Huberman, a former Executive Vice President of the
Company who retired March 31, 1999, (2) 500,000 Common Shares held by The
Radcliffe Foundation and over which Mr. Giustra exercises voting control,
and (3) 250,000 Common Shares reserved for issuance upon the exercise of
incentive stock options at $5.25 per Common Share. These options are subject
to Shareholder approval.
(3) Includes (1) 545,833 Common Shares reserved for issuance upon the exercise
of incentive stock options at Cdn$5.25 per Common Share, (2) 16,666 Common
Shares reserved for issuance upon the exercise of incentive stock options at
Cdn$2.30 per Common Share, (3) 250,000 Common Shares reserved for issuance
upon exercise of incentive stock options at U.S.$2.55, (4) 33,333 Common
Shares reserved for issuance upon exercise of incentive stock options at
Cdn$2.55, (5) 33,333 Common Shares reserved for issuance upon exercise of
incentive stock options at Cdn$4.85, (6) 24,691 Common Shares reserved for
issuance upon conversion of convertible promissory notes at Cdn$8.10 per
Common Share, (7) 207,000 Common Shares reserved for issuance upon
conversion of Series A Preferred Shares and (8) 87,975 Common Shares
reserved for issuance upon the exercise of warrants at U.S.$5.00.
REGULATORY AND CONTRACTUAL SHARE RESALE RESTRICTIONS
Pursuant to an escrow agreement (the "Escrow Agreement"), dated as of
November 13, 1997, among CIBC Mellon Trust Company, the Company, Frank Giustra,
and Cinepix Inc. (collectively, the "Escrowed Shareholders"), 1,034,068 Common
Shares of the Company are held in escrow (the "Escrowed Shares") pending
release. 1,034,068 Common Shares will be automatically released to the Escrowed
Shareholders on November 13, 2000.
E-22
<PAGE>
In connection with the acquisition of LG Films, certain former shareholders
of LG Films agreed that 2,821,984 Common Shares of the Company received by them
(which included 2,061,594 Escrowed Shares) would be subject to a voluntary
pooling agreement. On November 13, 1998, 940,661 Common Shares of the Company
were released from such pooling restrictions and on November 13, 1999, 560,467
shares were released from such pooling restrictions. The remaining Common Shares
will automatically be released from such pooling restrictions on November 13,
2000.
ITEM 5: NATURE OF TRADING MARKET
TORONTO STOCK EXCHANGE
The Company's Common Shares began trading on The Toronto Stock Exchange (the
"TSE") effective November 17, 1997. The following table sets forth the trading
volume and range of the high and low sale prices for the Company's Common Shares
for the periods indicated as reported by the TSE:
<TABLE>
<CAPTION>
HIGH(1) LOW(1) VOLUME(1)
-------- -------- ---------
<S> <C> <C> <C>
Year ended March 31, 1999
First Quarter................................... 8.00 4.74 5,866,132
Second Quarter.................................. 5.38 2.50 3,626,025
Third Quarter(2)................................ 5.50 3.20 6,110,497
Fourth Quarter.................................. 6.00 4.40 5,428,555
Year ended March 31, 2000
First Quarter................................... 5.50 2.85 3,047,214
Second Quarter.................................. 3.00 2.20 2,188,444
Third Quarter................................... 3.65 2.50 2,827,554
Fourth Quarter.................................. 6.90 3.40 3,393,922
</TABLE>
------------------------
(1) The market quotations are computed from the TSE as of its close on the
relevant dates and do not necessarily reflect the actual price of the last
transaction on the relevant dates.
(2) The Common Shares were reverse split on November 17, 1998.
AMERICAN STOCK EXCHANGE
The Company's Common Shares began trading on the American Stock Exchange
("AMEX") under the symbol "LGF" effective November 17, 1998. The following table
sets forth the trading volume and range of the high and low sale prices for the
Company's Common Shares for the periods indicated as reported by AMEX:
<TABLE>
<CAPTION>
HIGH(1) LOW(1) VOLUME(1)
--------- --------- ----------
<S> <C> <C> <C>
Year ended March 31, 1999
Third Quarter............................ U.S.$3.75 U.S.$2.69 2,187,300
Fourth Quarter........................... U.S.$3.94 U.S.$2.94 14,888,700
Year ended March 31, 2000
First Quarter............................ U.S.$3.75 U.S.$1.94 5,308,800
Second Quarter........................... U.S.$2.06 U.S.$1.50 2,812,700
Third Quarter............................ U.S.$2.56 U.S.$1.63 4,666,100
Fourth Quarter........................... U.S.$4.94 U.S.$2.31 14,902,900
</TABLE>
------------------------
(1) The market quotations are computed from AMEX as of its close on the relevant
dates and do not necessarily reflect the actual price of the last
transaction on the relevant dates.
As of July 31, 2000, there were 310 shareholders of record of the Company
having addresses in the United States, holding 2,304,376 Common Shares or
approximately 7.3% of the Company's outstanding 31,421,374 Common Shares at such
date.
E-23
<PAGE>
ITEM 6: EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There is no law or governmental decree or regulation in Canada that
restricts the export or import of capital, or affects the remittance of
dividends, interest or other payments to a non-resident holder of Common Shares
of the Company, other than withholding tax requirements. See "TAXATION."
There is no limitation imposed by the laws of Canada, the laws of the
Province of British Columbia or by the charter or other constituent documents of
the Company on the right of a non-resident to hold or vote the Common Shares of
the Company, other than as provided in the INVESTMENT CANADA ACT (Canada) (the
"Investment Act"). The following discussion summarizes the principal features of
the Investment Act for a non-resident who proposes to acquire Common Shares of
the Company. The summary is not a substitute for independent advice from an
investor's own advisor and it does not anticipate statutory or regulatory
amendments.
The Investment Act generally prohibits implementation of a reviewable
investment by an individual, government or agency thereof, corporation,
partnership, trust or joint venture (each an "entity") that is not a "Canadian"
as defined in the Investment Act (a "non-Canadian"), unless after review the
Director of Investments appointed under the Investment Act is satisfied that the
investment is likely to be of net benefit to Canada. An investment in Common
Shares of the Company by a non-Canadian, other than a "WTO Investor" (as that
term is defined in the Investment Act, and which includes entities that are
nationals controlled by nationals of member states of the World Trade
Organization) when the Company is not controlled by a WTO Investor, would be
reviewable under the Investment Act, if it is an investment to acquire control
of the Company and the value of the assets of the Company, as determined in
accordance with the regulations promulgated under the Investment Act, is
$5,000,000 or more, or if an order for review is made by the federal cabinet on
the grounds that the investment related to Canada's cultural heritage or
national identity, regardless of asset value. An investment in Common Shares of
the Company by a WTO Investor, or by a non-Canadian when the Company is
controlled by a WTO Investor, would be reviewable under the Investment Act, if
it is an investment to acquire control of the Company and the value of the
assets of the Company, as determined in accordance with the regulations
promulgated under the Investment Act, is not less than a specified amount,
which, for 1999, was $184 million. A non-Canadian would acquire control of the
Company for the purposes of the Investment Act if the non-Canadian acquired a
majority of the Common Shares. The acquisition of less than a majority but
one-third or more of the Common Shares of the Company would be presumed to be an
acquisition of control of the Company, unless it could be established that, on
the acquisition, the Company would not be controlled in fact by the acquiror.
Certain transactions relating to Common Shares of the Company are exempt
from the Investment Act, including (1) an acquisition of Common Shares by a
person in the ordinary course of that person's business as a trader or dealer in
securities; (2) an acquisition of control of the Company in connection with the
realization of security granted for a loan or other financial assistance and not
for a purpose related to the provisions of the Investment Act; and (3) an
acquisition of control of the Company by reason of an amalgamation, merger,
consolidation or corporate reorganization following which the ultimate direct or
indirect de facto control of the Company, through the ownership of Common
Shares, remains unchanged.
For the film and television programs of the Company to continue to qualify
for certain refundable tax credits, the Company must remain Canadian-controlled
pursuant to the INVESTMENT CANADA ACT. See "RISK FACTORS--Changes in Regulatory
Environment"
ITEM 7: 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) (the "Canadian Tax Act") is not, has
not, and will not
E-24
<PAGE>
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.
This summary is not intended to be, and should not be construed to be, legal
or tax advice to any prospective investor and no representation with respect to
the tax consequences to any particular investor is made. The summary does not
address any aspect of any provincial, state or local tax laws or the tax laws of
any jurisdiction other than Canada or the tax considerations applicable to
non-U.S. Holders. Accordingly, prospective investors should consult with their
own tax advisors for advice with respect to the income tax consequences to them
having regard to their own particular circumstances, including any consequences
of an investment in Common Shares arising under any provincial, state or local
tax laws or the tax laws of any jurisdiction other than Canada.
This summary is based upon the current provisions of the Canadian Tax Act,
the regulations thereunder and 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 Canadian Tax
Act.
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 Canadian Tax Act 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 Canadian Tax Act. 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 Canadian Tax
Act 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
Canadian Tax Act 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
E-25
<PAGE>
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 8: 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 for the year ended March 31, 2000, have been audited by
PricewaterhouseCoopers LLP and have been derived from and are qualified by
reference to the Financial Statements and Notes thereto included elsewhere
herein. Historical results are not necessarily indicative of the results of
operations which may be expected in the future. See "CURRENCY AND EXCHANGE
RATES" for historical exchange rate information.
The 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.
E-26
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
FROM INCEPTION
FISCAL YEAR ENDED FISCAL YEAR ENDED APRIL 28, 1997 TO
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
----------------- ----------------- ------------------
<S> <C> <C> <C>
In accordance with Canadian GAAP:
REVENUE........................................ $271,251 $118,297 $64,149
DIRECT OPERATING EXPENSES...................... 222,875 92,931 49,175
-------- -------- -------
GROSS PROFIT................................... 48,376 25,366 14,974
-------- -------- -------
OTHER EXPENSES
General and administrative................... 31,388 23,555 10,337
Amortization................................. 7,074 5,279 1,781
Interest..................................... 4,466 3,655 951
Minority Interest............................ 1,308 612 1,019
Severance and restructuring costs............ 1,698 1,647 --
-------- -------- -------
45,934 34,748 14,088
-------- -------- -------
INCOME (LOSS) BEFORE UNDERNOTED................ 2,442 (9,382) 886
Gain on dilution of investment in a
subsidiary................................... -- 839 --
-------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY
INTERESTS.................................... 2,442 (8,543) 886
Income taxes................................... 2,000 304 1,439
-------- -------- -------
INCOME (LOSS) BEFORE EQUITY INTEREST........... 442 (8,847) (553)
Equity interest in Loss of Mandalay Pictures,
LLC.......................................... (5,894) (5,449) --
Other equity interest.......................... 159 140 --
-------- -------- -------
NET LOSS FOR THE PERIOD........................ (5,293) (14,156) (553)
Dividends paid on preferred shares............. (591) -- --
Accretion on Series A preferred shares......... (727) -- --
DEFICIT, BEGINNING OF PERIOD................... (14,709) (553) --
-------- -------- -------
DEFICIT, END OF PERIOD......................... $(21,320) $(14,709) $ (553)
======== ======== =======
BASIC LOSS PER COMMON SHARE.................... $ (0.22) $ (0.58) $ (0.04)
======== ======== =======
In accordance with U.S. GAAP:
Net Loss for the Period........................ (2,424) (25,804) (1,328)
Comprehensive Loss for the Period.............. (5,405) (21,359) (1,348)
Basic and fully diluted Loss Per Common
Share........................................ $ (0.11) $ (1.05) $ (0.09)
======== ======== =======
</TABLE>
E-27
<PAGE>
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
In accordance with Canadian GAAP
Assets...................................................... $ 19,283 $ 26,254
Cash and equivalents...................................... 107,344 60,673
Accounts receivable....................................... 128,375 88,949
Investment in films and television programs............... 64,058 72,932
Investment in Mandalay Pictures, LLC...................... 44,505 40,691
Capital assets............................................
Goodwill, net of accumulated amortization................. 29,163 31,636
Other assets.............................................. 9,245 6,477
-------- --------
$401,973 $327,612
======== ========
Liabilities
Bank loans................................................ $ 14,385 $ 12,185
Accounts payable and accrued liabilities.................. 74,965 44,668
Production and distribution loans......................... 41,838 48,415
Long-term debt............................................ 40,158 41,145
Deferred revenue.......................................... 19,269 10,780
Non-controlling interest.................................. 4,944 3,635
-------- --------
195,559 160,828
-------- --------
Shareholders' Equity
Capital stock............................................. 226,290 177,068
Deficit................................................... (21,320) (14,709)
Cumulative translation adjustments........................ 1,444 4,425
-------- --------
206,414 166,784
-------- --------
$401,973 $327,612
======== ========
In accordance with U.S. GAAP:
Shareholders' Equity........................................ 197,141 154,361
</TABLE>
E-28
<PAGE>
Selected consolidated financial information for existing quarters indicated
are as follows:
SELECTED QUARTERLY INFORMATION
(in thousands of Canadian dollars, except per share information)
(Unaudited)
<TABLE>
<CAPTION>
2000
-----------------------------------------
MAR. 31 DEC. 31 SEPT. 30 JUNE 30
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total Revenue......................................... 70,167 104,163 68,728 28,193
Net Earnings (Loss)................................... (3,738) 2,994 85 (4,634)
Earnings (Loss) per share............................. $ (.16) $ .10 $ .00 $ (.15)
</TABLE>
<TABLE>
<CAPTION>
1999
-----------------------------------------
MAR. 31 DEC. 31 SEPT. 30 JUNE 30
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total Revenue......................................... 35,809 39,958 24,346 18,184
Net Earnings (Loss)................................... (12,175) (608) (1,348) (25)
Earnings (Loss) per share............................. $ (0.46) $ (0.03) $ (0.06) $ (0.00)
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------
MAR. 31 DEC. 31 SEPT. 30 JUNE 30
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total Revenue......................................... 25,511 15,965 20,358 2,314
Net Earnings (Loss)................................... (559) 232 (103) (122)
Earnings (Loss) per share............................. $ (0.04) $ 0.02 $ (0.02) $ (0.04)
</TABLE>
Other additional and financial information on the Company's consolidated
financial statements for the fiscal year ended March 31, 2000 is provided in the
Company's Annual Report for its most recently completed financial year.
E-29
<PAGE>
ITEM 9: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE
RELATED NOTES THERETO INCLUDED ELSEWHERE HEREIN. THIS DISCUSSION CONTAINS
"FORWARD-LOOKING STATEMENTS" THAT CAN BE IDENTIFIED BY THE USE OF TERMINOLOGY
SUCH AS "BELIEVES," "HOPES," "EXPECTS," "INTENDS," "PLANS," "MAY," "WILL,"
"SHOULD" OR "ANTICIPATES" OR THE NEGATIVE THEREOF, OTHER VARIATIONS THEREON,
COMPARABLE TERMINOLOGY, OR DISCUSSIONS OF STRATEGY. THE COMPANY'S ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE
DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS REPORT.
The following discussion and analysis for the years ended March 31, 2000 and
1999 and the period ended March 31, 1998 should be read in conjunction with the
consolidated financial statements and the notes to the consolidated financial
statements included in this annual report.
The Company develops, produces and distributes a targeted range of film and
television content in North America and around the world. To reflect the
Company's core businesses, this discussion focuses on Motion Pictures,
Television, Animation and Studio Facilities. Motion Pictures includes the
results of operations of LG Films and IMG. Television includes the results of
operations of LG Television (one-hour drama series), LGTVP (television movies)
and Termite Art (reality-based programming). Animation includes the results of
operations of our animation partner, CineGroupe, and Studio Facilities includes
the results of operations of LG Studios. Please also refer to the table in
note 21 to the consolidated financial statements.
In March 2000, Jon Feltheimer was appointed CEO of the Company. It was
announced that Frank Guistra would remain Chairman of the Company. Together with
Michael Burns, who was appointed Co-Vice Chairman, Jon was instrumental in the
organization of a US$33 million preferred equity financing that closed in
December 1999. New financial and strategic partners SBS Broadcasting, Tele
Munchen, Vulcan Ventures, Capital Research and Management Company and Fidelity
Investments among others, participated in the preferred share issue.
In June 2000, the Company announced that it had entered into a definitive
agreement with Trimark, in which Trimark would be merged into a newly-formed,
wholly-owned subsidiary of the Company. The transaction, valued at approximately
US$50 million in cash and Company stock, plus the assumption of Trimark's debt,
is expected to close in fall 2000. The merger is the first step in the
revitalized corporate strategy to grow the Company both internally and through
acquisitions and consolidations. Management believes Trimark to be an excellent
fit for the Company with a 650 title film library, a successful video
distribution business, active broadband operations, established international
distribution channels and a record for producing and distributing specialty and
genre films. In addition, the Company expects to significantly reduce operating
costs of the combined companies commencing in the Company's fourth quarter of
fiscal 2001.
OVERVIEW
Including the equity interest in the non-cash operating loss of Mandalay
Pictures as disclosed in the Statements of Operations, the net loss for the year
was $5.3 million ($0.22 per share including the preferred share dividends and
accretion on 30.7 million weighted average common shares outstanding) compared
to a net loss of $14.2 million ($0.58 per share on 24.6 million weighted average
common shares outstanding) in the prior year. The Company's $5.9 million
(1999--$5.4 million) equity interest in loss of Mandalay Pictures is comprised
of 100% of the non-cash operating losses of Mandalay Pictures for the year, plus
amortization of previously capitalized pre-operating period costs.
However, excluding the equity interest in the non-cash operating loss of
Mandalay Pictures, the Company generated net earnings for the year ended
March 31, 2000 of $600,000, an improvement of
E-30
<PAGE>
$9.3 million compared to the pre-Mandalay Pictures net loss of $8.7 million in
the prior year. These results would equate to earnings per share of $0.02 in
fiscal 2000 (a loss of $0.02 including the preferred share dividends and
accretion) and loss per share of $0.35 in fiscal 1999.
EBITDA (defined as earnings before interest, provision for income taxes,
amortization, non-controlling interest, equity interests and severance and
relocation costs) of approximately $17.0 million for the year ended March 31,
2000 has increased more than eight-fold compared to the prior year's EBITDA of
$1.8 million. 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 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 five-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. Current
year deliveries included: 15 hours of the drama series HIGHER GROUND to
Paramount worldwide, Fox Family in the U.S. and WIC in Canada (the remaining
7 hours were delivered in Q1 of fiscal 2001); and 22 hours of the one-hour drama
series HOPE ISLAND to Paramount worldwide, PAX TV in the U.S. and Showcase
Television in Canada. 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 the current year include FINAL RUN to CBS, KING
OF THE WORLD to ABC, SHUTTERSPEED to TNT and FIRST DAUGHTER to TBS. 47 hours of
reality-based programming were delivered in the current year by Termite Art.
Significant Termite Art deliveries in the year included: 13 hours of WILD
RESCUES to Discovery and 12 hours of RIPLEY'S BELIEVE IT OR NOT to TBS.
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 LG 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 the current year included: DOGMA and THE RED VIOLIN (Oscar winner
for Best Original Score) in the U.S. and ELVIS GRATTON in Canada. Significant
video releases in the current year included: AFFLICTION, GODS AND MONSTERS, THE
RED VIOLIN and DINNER GAME. The most significant production in the current year
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
U.S.$15 million. It is also performing exceptionally well in the international
territories where it has been released to date. Revenue to be generated in North
America and the majority of the international territories will be 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 the current year compared to 135 half-hours in the prior year.
Current year 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 (TF);
19 half-hours of MEGA BABIES; 14 half-hours of BAD DOG to Fox Family and
Teletoon; and the feature film HEAVY METAL. The current year's revenue per
half-hour is significantly increased by the delivery of HEAVY METAL which is
distributed by Columbia Tristar
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<PAGE>
in the U.S. and LG 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 12.9% over
the prior year's revenue of $6.2 million. This is 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 21.5% gross
margin in fiscal 1999. Gross profit increased $23.0 million or 91% and the gross
margin decreased 3.7 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 the current
year compared to 20.1% 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
was noted in fiscal 1999's Management Discussion and Analysis, as a result of
the Company's 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 be unlikely that the gross margin of the
Television business would continue at the rate that was enjoyed in fiscal 1999.
The Company expects the ongoing gross margin for this business to be in the 11%
to 12% range in the short term. The Company is in the process of expanding its
international television distribution capabilities and expects that the
Television gross margin will improve in the future when the Company is able to
more accurately assess international sales risk.
The gross margins in the other businesses continued at the previous year's
levels, except that Motion Pictures gross margin increased from 17.3% in 1999 to
18.7% in the current year 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 ("G&A") of $7.8 million year-over-year.
Approximately half of the year-over-year increase in G&A was in Motion Pictures
where G&A increased $4.2 million to $16.2 million compared to $12.0 million in
the prior year. This increase is due to the significant growth experienced in
all divisions of LG Films. G&A as a percentage of revenue within LG Films
decreased to 11% of revenue in the current year versus 15% of revenue in fiscal
1999. Television G&A 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 G&A, G&A on a gross basis in Television decreased
year-over-year. Animation G&A 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 consolidation of administrative functions and
cost saving initiatives instituted at head office. Severance and relocation
costs recorded in the current year primarily relate 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.
In the current year Mandalay Pictures 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
U.S.$100 million and was nominated for three Academy Awards. In March 2000
SLEEPY HOLLOW won the Oscar for Art Direction. Mandalay Picture's next project,
ENEMY AT THE GATES, a U.S.$70 million production starring Jude Law, Joseph
Fiennes and Ed Harris, directed by internationally-acclaimed director Jean
Jacques Annaud, is scheduled to be delivered in late calendar 2000. Mandalay
Pictures utilized an offshore-based financing structure for a significant
portion of the budget of ENEMY AT THE GATES and, as a result, Mandalay Picture's
investment in the picture was reduced significantly. Other projects include: THE
SCORE, a U.S.$70 million action suspense thriller, financed under a similar
structure, starring Robert DeNiro, Edward Norton and Marlon Brando, co-starring
Angela Basset and directed by Frank Oz
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<PAGE>
(BOWFINGER, IN & OUT), and recently filmed in Montreal; and BEYOND BORDERS,
starring Kevin Costner and Angelina Jolie to be directed by Oliver Stone, with
an anticipated December 2000 start. The Company is currently investigating
several alternatives that may allow it to realize the value of its investment in
Mandalay Pictures.
The current year's provision for income taxes consists of a $1.7 million
provision at CineGroupe (at a 41.9% effective tax rate) and a $0.3 million tax
provision at LG Studios (at a 45.6% effective tax rate). In the prior year, the
negative effective tax rate was due primarily to the benefit of approximately
$3.6 million of losses arising in the U.S. operations and at Lions Gate
Corporate, which were not tax effected. At March 31, 2000 the Company has income
tax losses in excess of $13.8 million, the benefit of which has not been
recognized in the financial statements and are 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.
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 in
note 25 to the financial statements. In the current year, the financial
statements are 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 and the period ended March 31, 1998
have been restated to conform to Item 18 disclosure.
The U.S. GAAP net loss per share in the current year including the equity
interest in the non-cash operating loss of Mandalay Pictures and dividends and
accretion relating to the preferred shares issued in the current year would have
been $0.11. This represents a significant improvement over the prior year's loss
per share of $1.05. The U.S. GAAP net earnings excluding the equity interest in
the non-cash operating loss of Mandalay Pictures would have been $3.5 million
(1999--$20.4 million net loss; 1998--$1.3 million net loss).
In the current year the net loss under U.S. GAAP is 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.
FISCAL 1999 COMPARED TO FISCAL 1998
Revenue in fiscal 1999 was $118.3 million, an increase of $54.2 million or
84.6% compared to $64.1 million in the period ended March 31, 1998. Revenue
increased substantially in all businesses, primarily due to the timing of
acquisitions in both fiscal 1998 and fiscal 1999. Please also refer to table in
note 14(g) to the consolidated financial statements.
Motion Pictures revenue and Animation revenue also increased as a result of
internal growth. Motion Pictures revenue in fiscal 1999 increased $27.0 million
or 53.4% to $77.6 million from $50.6 million in the period ended March 31, 1998
as Lions Gate Films' revenue increased $25.0 million or 49.4% to $75.6 million
in fiscal 1999 compared to $50.6 million in the prior period. The majority of
the revenue growth was in video distribution, where revenue increased
$23.1 million to $39.0 million in fiscal 1999 due to the ramping up of the U.S.
video business through Avalanche which commenced operations in Q3 in fiscal
1999, and Sterling Home Entertainment, which commenced commercial operations in
Q4 in fiscal 1999. These increases were partially offset by a decrease of
$12.4 million in production revenue to $11.4 million in fiscal 1999 due to a
decrease in the number of projects delivered in fiscal 1999 to five projects,
from seven in fiscal 1998, as well as a decrease in the average production
budget per film. All other revenue streams within Lions Gate Films were
relatively consistent year-over-year.
Animation revenue in fiscal 1999 increased $12.3 million or 126.8% to
$22.0 million from $9.7 million in the period ended March 31, 1998 as CineGroupe
delivered 135 half-hours of programming in fiscal
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<PAGE>
1999, compared to 95 half-hours in the period ended March 31, 1998. In addition,
CineGroupe's average half-hour production budget in fiscal 1999 was
approximately $180,000 compared to $100,000 in the period ended March 31, 1998.
Gross profit for the year ended March 31, 1999 was $25.4 million with a
21.5% gross margin compared to gross profit of $14.9 million and a gross margin
of 23.2% for the period ended March 31, 1998.
The most significant influence on the fiscal 1999 gross margin compared to
the gross margin in fiscal 1998 was in Motion Pictures where the gross margin
was 17.3% for the year ended March 31, 1999 compared to 19.8% in the period
ended March 31, 1998 due to additional provision for investment in film taken at
LG Films and softening of the foreign sales markets which impacted the gross
margin realized on LG Films' production deliveries in the fiscal 1999.
The gross margin in Animation decreased slightly to 24.7% for the year ended
March 31, 1999, compared to 26.7% in the period ended March 31, 1998, due to an
increased provision for investment in films and television programs taken in
fiscal 1999 at CineGroupe.
Partially offsetting the above decreases, the gross margin in Television
improved slightly year-over-year from 17.9% on revenue of $0.2 million in the
period ended March 31, 1998 to 20.4% on revenue of $12.5 million in fiscal 1999.
Other expenses of $34.7 million increased $20.6 million in fiscal 1999,
compared to the period ended March 31, 1998, primarily because the period ended
March 31, 1998 did not include a full year of operations. In addition, other
operating expenses for the year ended March 31, 1999 include costs relating to
new businesses, $1.6 million of costs related to severance and relocation
associated with the centralizing of certain head office functions in Toronto and
$1.1 million of development cost write-offs that did not exist in the period
ended March 31,1998.
The Company's effective tax rate for fiscal 1999 was a recovery of 3.5%
compared to a provision of 162.4% for the period ended March 31, 1998. The
effective income tax rate for the year ended March 31, 1999 was negatively
impacted by entity losses, the potential benefit of which was not recognized in
the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
EBITDA increased more than eight-fold or $15.2 million to $17.0 million from
$1.8 million in fiscal 1999. Fiscal 1999 EBITDA had decreased $2.8 million from
$4.6 million in fiscal 1998.
Cash flows from operating activities before working capital increased
$142.2 million or 164% to $229.0 million in fiscal 2000 from $86.9 million in
fiscal 1999 and increased $179.0 million or 357% from $50.1 million in the
period ended March 31, 1998.
Working capital (defined as cash and short-term deposits and accounts
receivable net of bank loans and accounts payable and accrued liabilities) as at
March 31, 2000 of $37.3 million increased $7.2 million, or 23.9%, over working
capital of $30.1 million at March 31, 1999.
The Company's liquidity and capital resources were provided during the year
ended March 31, 2000 principally through cash generated from operations, a
$20 million "borrowing base" credit facility with National Bank of Canada which
closed in December 1999, and a U.S.$33 million convertible preferred share issue
which was also completed in December 1999. Financial and strategic partners SBS
Broadcasting, a leading European broadcaster and distribution company, Tele
Munchen, a German broadcaster and distribution company, Paul Allen's Vulcan
Ventures, Capital Research and Management Company, Fidelity Investments, Jamie
Dimon, current Chairman and CEO of Bank One and former Co-Chairman of Salomon
Smith Barney, Jon Feltheimer and Michael Burns, participated in the preferred
share issue.
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<PAGE>
The Company announced on August 9, 2000 that it is in the process of closing
a US$200 million syndicated Senior Secured Revolving Credit Facility led by
Chase Securities Inc. and Dresdner Bank in the U.S. and National Bank of Canada
in Canada. The purpose of the facility is to allow the Company to grow its film
and television businesses internally and through acquisition, including the
Trimark purchase, for general working capital purposes and to refinance
outstanding loans. The credit facility will be secured by the Company's
borrowing base which is projected over the next four quarters to allow for
significant borrowing base excesses.
The nature of the Company's business is such that significant initial
expenditures are required to produce and acquire films and television programs,
while revenue from these films and television programs are earned over an
extended period of time after their completion and acquisition. As the Company's
operations grow, its financing requirements are expected to grow. The Company
believes that cash flow from operations, cash on hand and credit lines available
and under negotiation will be adequate to meet operational requirements for the
future, including the funding of future film production, film rights
acquisitions, and theatrical and video release schedules. The Company monitors
its cash flow, interest coverage and debt-to-total capital ratio with the
long-term goal of maintaining its creditworthiness.
The Company's current financing strategy is to finance substantially with
equity at the corporate level and to leverage investment in films and television
programs through operating credit facilities and single-purpose production
financing. The Company usually obtains 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, 2000, the Company and its subsidiaries had total net debt,
consisting of bank loans, production and distribution loans, and long-term debt
net of cash and short-term deposits, of $77.1 million (1999--$75.5 million). The
Company's debt to equity ratio at March 31, 2000 improved to 0.37:1.00 from
0.45:1.00 a year earlier.
Bank loans consist of a credit facility and demand loans bearing interest at
rates not exceeding prime plus 2.25%. Production loans consist of bank demand
loans bearing interest at various rates between prime and prime plus 2.5%. The
distribution loan is a revolving credit facility of US$ 10 million bearing
interest at U.S. prime. Long-term debt consists primarily of mortgages on the
Studio Facility at interest rates ranging from 6.47% to 6.9% and convertible
promissory notes bearing interest at a rate of 6.0%.
The Company does not pay and does not intend to pay dividends on common
shares, giving consideration to its business strategy and investment
opportunities. The Company believes it to be in the best interest of
shareholders to invest all available cash in the expansion of the Company's
business. In the current year the Company paid a dividend of $600,000 on the
convertible preferred shares issued during the year.
RISKS AND UNCERTAINTIES
The Company capitalizes costs of production and distribution to investment
in films and television programs. These costs are amortized to direct operating
expenses in accordance with generally accepted accounting principles, consistent
with U.S. Statement of Financial Accounting Standards No. 53 ("SFAS 53"). Under
SFAS 53, all costs incurred in connection with an individual film or television
program, including production costs, release prints and advertising costs and
financing costs, are capitalized to investment in films and television programs.
These costs are stated at the lower of unamortized cost and estimated net
recoverable amount. Production costs for an individual film or television
program are amortized in the proportion that revenue realized relates to
management's estimates of the total revenue expected to be received from such a
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, the Company may be required to write down all or a portion
of the unamortized costs of such film or
E-35
<PAGE>
television programs. No assurances can be given that a write down will not have
a significant impact on the Company's results of operations and financial
condition.
The Company currently finances a portion of its production budgets from
third parties, from Canadian government agencies and incentive programs, as well
as international sources in the case of the Company's co-productions. There can
be no assurance that third party financing and government incentive programs
will not be reduced, amended or eliminated. Any change in these programs may
have an adverse impact on the Company.
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. The company generally maintains insurance policies (completion
bonds) covering certain of these risks.
Profitability depends on revenue and on the cost to acquire or produce a
film or television product 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. The Company's 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.
Management's assessment of the carrying value of the investment in Mandalay
Pictures is based on the carrying value of investment in film which includes the
library value of delivered productions, productions in progress, and projects
under development, supported by estimates of the future revenue streams on a
project-by-project basis. Accordingly any significant negative variation between
the estimated revenue and the actual revenue realized over time may require a
write-down of this investment.
A significant portion of the Company's revenue and expenses are in U.S.
dollars, and, are therefore subject to fluctuation in exchange rates.
Significant fluctuation in exchange rates may have a favorable or unfavorable
impact on the Company's results of operation.
RISK MANAGEMENT
Additionally, as part of its overall risk management program, the Company
evaluates and manages its exposure to changes in interest rates and currency
exchange risks on an ongoing basis. Hedges and derivative financial instruments
will 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 the Company's interest rates and currency exposure.
The principal currency exposure will be between Canadian and US dollars,
however, from time to time there will be currency exposure on distribution
revenue from foreign, principally European countries. The Company does not
intend to enter into financial derivative contracts, other than to hedge its
financial risks.
OUTLOOK
The is 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,
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<PAGE>
television and animation libraries and increase its production slate and
distribution reach to become the first new independent mini-major in years. This
expansion will be fueled by the following growth pillars:
DIVERSIFIED CONTENT
The Company has a reputation for producing and distributing independent,
edgy, sophisticated films.
NORTH AMERICAN DISTRIBUTION NETWORK
The Company is the only Canadian company that distributes theatrical and
video titles in the U.S.
INTERNATIONAL TELEVISION PRODUCT
The Company produces one-hour series and reality-based programming for the
international marketplace.
MERGER AND ACQUISITION STRATEGY
Lions Gate proposes to acquire high quality film and television assets, such
as Trimark, that complement the Company's existing assets.
NEW COMPLEMENTARY BUSINESSES
The Company has applied to the Canadian Radio-television and
Telecommunications Commission ("CRTC") for two Canadian English language digital
specialty channels--The Festival Channel with Craig Broadcast Systems Inc.
(dedicated to programming independent films and documentaries) and Jackpot TV
with third parties (a game and gaming channel).
The Company believes that the success it has achieved in producing and
distributing high quality product, and in raising the necessary capital,
positions the Company to achieve its growth objectives.
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<PAGE>
ITEM 10: DIRECTORS AND OFFICERS OF REGISTRANT
The following table sets forth certain information concerning the directors,
executive officers and key employees of the Company.
<TABLE>
<CAPTION>
PRESENT POSITION POSITION
NAME AND MUNICIPALITY OF RESIDENCE WITH THE COMPANY PRINCIPAL OCCUPATION FOR THE PREVIOUS FIVE YEARS SINCE
------------------------------------- ----------------- ------------------------------------------------ --------
<S> <C> <C> <C>
Michael Burns........................ Vice Chairman and Vice Chairman of the Company since March 2000. 8/3/99
Los Angeles, California Director Managing Director and Head of Prudential
Securities Inc. Los Angeles Investment Banking
Office from 1991 to 2000
John Dellaverson..................... Executive Vice Executive Vice President of the Company since 4/28/00
Los Angeles, California President April 2000; previously Partner, Loeb & Loeb LLP
Jon Feltheimer....................... Vice Chairman, Vice Chairman and CEO of the Company since March 1/5/00
Los Angeles, California CEO and 2000; previously Executive Vice President of
Director, Sony Pictures Entertainment 1997-1999 and
President of Columbia Tri-Star Television Group
1995-1999.
Frank Giustra(2)..................... Chairman and Chairman of the Company since April 1997. 4/28/97
West Vancouver, British Columbia Director Chairman and Chief Executive Officer of Yorkton
Securities Inc. from 1995 to December 1996.
Prior thereto, President of Yorkton Securities
Inc.
Gordon Keep.......................... Senior Vice Senior Vice President of the Company since 10/1/97
Vancouver, British Columbia President and October 1997. Prior thereto, Vice President,
Director Corporate Finance of Yorkton Securities Inc.
Herbert Kloiber...................... Director Managing Director, Tele-Muchen Group 1/5/00
Munich, Germany
Howard Knight(1)(2).................. Director Vice Chairman of SBS Broadcasting July 1996 to 1/5/00
Stamford, Connecticut present; Chief Operating Officer of SBS
Broadcasting January 1998 to present;
Independent Consultant and Director of SBS
Broadcasting, August 1995 to July 1996
Morley Koffman(1)(3)................. Director Partner of Koffman Kalef (lawyer). 11/13/97
Vancouver, British Columbia
Andre Link........................... President and President of the Company since April 2000; Chief 11/13/97
Montreal, Quebec Director Executive Officer of LG Films.
Harald Ludwig(2)..................... Director President of Macluan Capital Corporation. 11/13/97
West Vancouver, British Columbia
James Nicol(3)....................... Director Vice Chairman of Magna International since May 8/24/99
Aurora, Ontario 1998; prior to May 1998 Chairman and CEO of
TRIAM Automotive, Inc.
G. Scott Paterson(1)(3).............. Director Chairman of Yorkton Securities Inc. since May 11/13/97
Toronto, Ontario 1997. Executive Vice President of Yorkton
Securities Inc. from May 1995 to May 1997.
Marni Wieshofer...................... Chief Financial Chief Financial Officer of the Company since 4/23/99
Toronto, Ontario Officer April 1999. Vice President, Finance of the
Company, February--April 1999. Vice President,
Finance of Alliance Atlantis October 1995 to
February 1999. Prior thereto, Principal at
Coopers & Lybrand, Chartered Accountants.
</TABLE>
------------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Corporate Governance Committee.
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<PAGE>
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.
Each of the Company's officers and directors, other than non-employee
officers and directors, devotes substantially their full-time to the affairs of
the Company. Non-employee officers and directors devote such time to the affairs
of the Company as is necessary to discharge their duties. There are no family
relationships among any of the directors, officers or key employees of the
Company.
COMMITTEES
As required by applicable Canadian provincial law, the Company's Board of
Directors has an Audit Committee and a Compensation Committee. The Company also
established a Corporate Governance Committee. The directors that comprise these
committees are identified above.
ITEM 11: COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate remuneration paid by the Company to its directors and
executive officers during the fiscal year ended March 31, 2000, was $3,025,990
in cash compensation. The Company does not provide any retirement pension plan
or retirement compensation arrangement for its directors and officers.
COMPENSATION OF DIRECTORS
Persons elected at the Company's annual general meetings as directors of the
Company and who hold no other executive office with the Company or its
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. In addition, each non-executive director is entitled to receive a fee
of $500 per meeting of the directors or any committee thereof, and to be
reimbursed for reasonable fees and expenses incurred in connection with their
service as directors. During the fiscal year ended March 31, 2000, five
directors received the annual retainer, including one former director. In
addition, options to purchase 1,775,000 common shares were granted by the
Company during the fiscal year to persons who served as directors of the Company
during that period pursuant to the Company's Employees' and Directors' Equity
Incentive Plan.
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<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of all compensation paid during the
fiscal year ended March 31, 2000, to the Named Executive Officers(1):
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION -------------------------- --------
-------------------------------- SECURITIES
OTHER UNDER RESTRICTED
ANNUAL OPTIONS/ SHARES OR ALL OTHER
COMPEN- SARS RESTRICTED LTIP(2) COMPEN-
NAME AND PRINCIPAL FISCAL SALARY BONUS SATION GRANTED SHARE UNITS PAYOUTS SATION
POSITION YEAR ($) ($) ($) (#) ($) ($) ($)
-------------------------------- -------- --------- -------- --------- ---------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Frank Giustra................... 2000 250,000 3,534 -- -- --
Chairman 1999 250,000 990 250,000(7) -- -- --
1998 239,583 1,039 250,000(7) -- -- --
Jon Feltheimer(3)(4)............ 2000 65,077 -- 1,321 1,375,000 -- -- --
Chief Executive Officer 1999 -- -- -- -- -- -- --
1998 -- -- -- -- -- -- --
Dennis Miller(4)(5)............. 2000 1,103,475 -- 11,290 -- -- -- --
Senior Vice President 1999 721,154 -- -- 170,000 -- -- --
1998 -- -- -- -- -- -- --
Roman Doroniuk(6)............... 2000 348,557 62,500 4,816 -- -- -- --
Former President and Chief 1999 83,333 -- 94 250,000 -- -- --
Operating Officer 1998 -- -- -- -- -- -- --
Gordon Keep..................... 2000 285,115 -- 4,957 -- -- -- --
Senior Vice President 1999 255,000 -- 2,131 -- -- -- --
1998 120,000 -- 612 100,000 -- -- --
</TABLE>
------------------------------
(1) "Named Executive Officer" means individuals who were, at the most recently
completed fiscal year-end, the Chief Executive Officer and the four most
highly compensated executive officers of the Company or any of its
subsidiaries, other than the Chief Executive Officer, where such executive
officer's total salary and bonus exceeds $100,000.
(2) "LTIP" means a long-term incentive plan providing compensation intended to
serve as incentive for performance to occur over a period longer than one
fiscal year. The Company does not presently have a long-term incentive plan
for its executive officers.
(3) Mr. Feltheimer was appointed CEO on March 21, 2000.
(4) Messrs. Feltheimer and Miller are compensated in U.S. dollars. The figures
presented are converted to Canadian dollars.
(5) Mr. Miller was appointed Senior Vice President of the Company on April 15,
1998 and resigned from that office on March 31, 2000.
(6) Mr. Doroniuk was appointed President and Chief Operating Officer of the
Company on January 6, 1999, and resigned from that office on April 30, 2000.
(7) Mr. Giustra was granted 250,000 options in the 1998 fiscal year, which
options were canceled in December 1999. Mr Giustra was granted 250,000 new
options in February 2000.
Additional information, including directors' and officers' remuneration and
indebtedness, major security holders of the Company, options to purchase
securities and interests of insiders interested in material transactions is
contained in the Company's Management Information Circular dated August 15,
2000.
E-40
<PAGE>
ITEM 12: OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
EQUITY INCENTIVE PLAN
The Company has implemented an Equity Incentive Plan (the "Plan") that
governs: (1) all future grants of options to purchase Common Shares to
directors, officers, key employees and service providers of the Company and its
affiliates, and (2) the manner in which the options issued will be exercised or
otherwise terminate. The purpose of the Plan is to advance the interests of the
Company and its affiliates by encouraging equity participation in the Company by
directors, officers, employees and service providers through their acquisition
of Common Shares. The aggregate maximum number of Common Shares that the Company
may issue under the Plan, as a whole, may not exceed 4,000,000 Common Shares,
and the aggregate number of Common Shares that the Company may at any time
reserve for issuance under the Plan to any one person may not exceed 5% of the
issued and outstanding Common Shares at such time. The Plan has three
components: the Common Share option plan (the "Option Plan"), the Common Share
bonus plan (the "Bonus Plan"), and the Common Share purchase plan (the "Purchase
Plan").
OPTION PLAN. Participation in the Option Plan is limited to directors of
the Company or its affiliates and certain employees and service providers of the
Company or its affiliates who are, in the opinion of the Board of Directors, in
a position to contribute to the future growth and success of the Company. In
determining the number or value of optioned Common Shares that may be granted to
each participant pursuant to an option, consideration will be given to the
participant's present and potential contribution to the success of the Company
and to any prevailing policies of the principal stock exchange on which the
Company's Common Shares are listed or approved for listing (the "Stock
Exchange"). The exercise price of any such option may not be less than the fair
market value per Common Share on the date of grant based upon the weighted
average price of Common Shares on the Stock Exchange for the five trading days
preceding the date of grant.
Options are generally exercisable for a period of up to five years (but not
more than ten years) from the date the option is granted unless earlier
terminated in the event of death or termination of employment or appointment, as
the case may be. Unless otherwise determined by the Board of Directors, options
become exercisable incrementally over a period of three years, either from the
date of grant or one year after the date of grant, as to one-third of the total
number of Common Shares under option in each such year. The right to exercise an
option may be accelerated in the event a takeover bid in respect of the
Company's Common Shares is made. The Board of Directors may, in their discretion
but subject to applicable law, authorize the Company to make loans to employees
to assist them in exercising options. Such loans (none of which have been made
to date) will be made at prevailing market interest rates and will have terms
not exceeding one year. The terms of any such loans will include security, in
favor of the Company, in the Common Shares issued upon exercise of the options,
which security may be granted on a non-recourse basis. Unless otherwise
determined by the Board of Directors, options granted under the Option Plan
terminate (1) six months after the death of the optionee, unless such options
terminate or expire sooner by their terms, or (2) on the date the optionee
ceases to be employed by or act as a director of the Company for cause, or six
months thereafter for any reason other than cause.
Share appreciation rights (none of which have been made to date) may also be
granted, at the discretion of the Board of Directors, to directors, officers and
employees in conjunction with the grant of an option. Such rights entitle an
optionee who is entitled to exercise his or her option to elect to terminate
such option and receive, in lieu thereof, the number of Common Shares that is
equal to the aggregate sum of the difference between the then fair market value
per share and the option price per Common Share in respect of all Common Shares
under the option divided by the then fair market value per share.
BONUS PLAN. The Bonus Plan permits the Board of Directors to authorize the
issuance, from time to time, of Common Shares for no cash consideration, to
employees of the Company and its affiliates, upon the fulfillment of certain
criteria as the Board of Directors may determine, from time to time, as
indicative of a significant benefit to the Company through the efforts of the
employee. The Bonus Plan provides for
E-41
<PAGE>
the issuance of a maximum of 250,000 Common Shares in respect of bonus awards
(none of which has been made to date).
PURCHASE PLAN. Participants in the Purchase Plan may be employees of the
Company and its affiliates who have completed at least one year (or less, at the
discretion of the Board of Directors) of continuous service on a full-time basis
and who have been designated by the Board of Directors as participants in the
Purchase Plan. Under the Purchase Plan, an eligible employee will be entitled to
contribute up to 10% of his or her annual basic salary to the Purchase Plan in
semi-monthly installments. The Company will make contributions equal to the
employee's contribution on a quarterly basis. Each participant is, at the end of
each calendar quarter during which he or she participates in the Purchase Plan,
issued a number of Common Shares equal to the aggregate amount contributed by
the participant and by the Company on the participant's behalf divided by the
weighted average trading price of the Common Share on the Stock Exchange during
the preceding five days. If the participant's employment with the Company or an
affiliate is terminated for any reason, any portion of the participant's
contribution then held in trust for a participant pending a quarterly purchase
of the Common Shares will be returned to him or her or to his or her estate. The
Purchase Plan has not been utilized to date.
The Company has granted certain stock options under the Plan which exceed
the total of 4,000,000 Common Shares presently available for grant under the
Plan. At the next annual meeting of the Company to be held on September 26,
2000, the shareholders will be asked to vote on an amendment to the Plan to
increase the total number of Common Shares of the Company which may be subject
to stock options under the Plan from 4,000,000 Common Shares to 7,600,000 Common
Shares and to approve certain stock options which have been granted under the
Plan subject to shareholder approval. Specifically, a total of 6,524,247 options
are presently approved under the Plan, which exceeds the amount authorized by
the Plan by 2,524,247. This excess represents grants, subject to shareholder and
regulatory approval, to the following optionees:
<TABLE>
<CAPTION>
NAME TOTAL DATE OF GRANT EXERCISE PRICE EXPIRATION DATE
---- --------- ------------------- -------------- -----------------
<S> <C> <C> <C> <C>
Jon Feltheimer.................. 625,000(1) January 5, 2000 (Note 2) January 5, 2005
Michael Burns................... 1,375,000 January 5, 2000 (Note 2) January 5, 2005
Frank Giustra................... 250,000 February 22, 2000 Cdn$5.25 February 22, 2005
Gordon Keep..................... 33,300 August 15, 2000 U.S.$2.55 August 15, 2005
Marni Wieshofer................. 33,300 August 15, 2000 U.S.$2.55 August 15, 2005
John Dellaverson................ 33,300 August 15, 2000 U.S.$2.55 August 15, 2005
Peter Block (3)................. 100,000 August 15, 2000 (3) U.S.$2.55 August 15, 2005
Wayne Levin (3)................. 75,000 August 15, 2000 (3) U.S.$2.55 August 15, 2005
</TABLE>
------------------------------
(1) Mr. Feltheimer has been granted options to purchase a total of 1,375,000
Common Shares, of which 750,000 options were granted under the Plan, and
625,000 of which were granted in excess of the number of Common Shares
available for issuance under the Plan and therefore subject to Shareholder
approval.
(2) The options granted to Messrs. Feltheimer (including the 750,000 options
granted under the Plan) and Burns are exercisable at a price of U.S.$2.55
per Common Share in respect of 1,000,000 Common Shares, and at a price of
U.S.$5.00 per Common Share in respect of the balance of Common Shares. Of
the total options granted to Messrs. Feltheimer and Burns, options to
acquire 125,000 Common Shares shall be immediately exercisable on the date
of grant (subject to shareholder and regulatory approval for Mr. Burns);
one-third of the balance shall become exercisable on the first, second and
third anniversaries, respectively, of the date of grant provided that, in
respect of the exercise of options to acquire 625,000 Common Shares that the
average closing price of the Common Share, for a period of 20 consecutive
trading days, not less than U.S.$4.00 and, in respect of the exercise of
options to acquire the balance of the Common Shares, is not less than
U.S.6.00.
(3) The options granted to Messrs. Block and Levin are also subject to the
consummation of the Trimark acquisition, and will be cancelled if the
acquisition is not completed.
Under the Plan, as of July 31, 2000 there are outstanding options to
purchase an aggregate of 6,064,663 Common Shares, of which options to purchase
3,562,500 Common Shares are held by the
E-42
<PAGE>
directors and officers of the Company as a group. The following table sets forth
details of such outstanding options:
<TABLE>
<CAPTION>
COMMON SHARES EXERCISE
DESIGNATION OF OPTIONEE UNDER OPTION PRICE EXPIRY DATE
----------------------- ------------- -------- -----------------------
<S> <C> <C> <C>
Frank Giustra....................... 250,000 $ 5.25 2/22/2005
Dennis Miller....................... 113,333 $ 5.25 6/01/2001
Jon Feltheimer...................... 1,000,000 US$2.55 1/05/2001
375,000 US$5.00
Gordon Keep......................... 100,000 $ 5.25 11/12/2002
Roman Doroniuk...................... 250,000 $ 4.85 10/31/2000
Ex-Employees........................ 35,830 $ 5.25 8/04-12/02/2000
Ex-Employee......................... 250,000 $ 5.25 9/30/2000
Ex-Employee......................... 50,000 $ 5.25 10/31/2000
Service Provider.................... 50,000 $ 5.25 3/31/2002
Service Provider.................... 50,000 $ 8.10 11/12/2002
Directors, Officers and Employees... 1,042,500 $ 5.25 11/12/2002
Employees........................... 65,000 $ 5.25 2/20/2003
Employees........................... 263,000 $ 5.25 3/1/2003
Service Provider.................... 12,500 $ 5.25 3/2/2003
Employees........................... 12,500 $ 5.25 4/13/2003
Employee............................ 37,500 $ 5.25 4/20/2003
Employees........................... 67,500 $ 5.25 5/4/2003
Employee............................ 25,000 $ 5.25 5/31/2003
Employee............................ 37,500 $ 5.25 9/8/2003
Employees........................... 52,500 $ 5.25 9/29/2003
Officer............................. 100,000 $ 4.85 2/1/2004
Employee............................ 7,500 $ 5.25 2/22/2004
Employee............................ 7,500 $ 5.25 3/23/2004
Employee............................ 25,000 $ 5.25 3/31/2004
Employee............................ 25,000 $ 5.25 4/15/2004
Employee............................ 25,000 $ 4.00 5/1/2004
Employee............................ 25,000 $ 5.25 6/30/2004
Employees........................... 185,000 $ 2.30 8/01/2004
Director............................ 50,000 $ 2.55 8/24/2004
Director............................ 1,000,000 US$2.55 1/05/2005
Director............................ 375,000 US$5.00 1/05/2005
Directors........................... 100,000 $ 5.25 7/12/2005
---------
TOTAL............................... 6,064,663
</TABLE>
None of the above options may be assigned or transferred by the optionee
other than by will or applicable laws of descent or distribution upon such
optionee's death.
OPTIONS AND STOCK APPRECIATION RIGHTS ("SARs"). No SARs were granted during
the fiscal year ended March 31, 2000. The following table sets forth incentive
stock options granted by the Company to the
E-43
<PAGE>
Named Executive Officers in the fiscal year ended March 31, 2000 pursuant to the
Company's Employees' and Directors' Equity Incentive Plan:
<TABLE>
<CAPTION>
MARKET VALUE OF
% OF TOTAL SECURITIES
SECURITIES OPTIONS/SARS UNDERLYING
UNDER GRANTED TO EXERCISE OR BASE OPTIONS/SARS ON THE
OPTIONS/SARS EMPLOYEES IN PRICE DATE OF GRANT
NAME GRANTED (#) FISCAL YEAR (CDN.$/SECURITY) (CDN.$/SECURITY) EXPIRATION DATE
---- ------------- ------------- ------------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C>
Jon Feltheimer....... 1,375,000 40.9% 1,000,000 U.S.$2.31 January 5, 2005
exercisable at
U.S.$2.55 and
375,000 exercisable
at U.S.$5.00
Frank Giustra........ 250,000 7.4% Cdn.$5.25 Cdn.$3.80 February 22, 2005
</TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES. The following table sets forth the total number of incentive stock
options that were exercised by the Named Executive Officers in the fiscal year
ended March 31, 2000, as well as the aggregate number and value of unexercised
options at fiscal year-end.
<TABLE>
<CAPTION>
SECURITIES UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN-THE-
ACQUIRED ON AT END OF FISCAL 2000 MONEY OPTIONS AT FISCAL
EXERCISE AGGREGATE VALUE EXERCISABLE/ YEAR END EXERCISABLE/
NAME (#) REALIZED ($) UNEXERCISABLE (#) UNEXERCISABLE ($)
---- ----------- --------------- --------------------- ----------------------------
<S> <C> <C> <C> <C>
Jon Feltheimer....... 0 0 125,000/1,250,000 N/A
Dennis Miller........ 0 0 56,667/113,333 N/A
Roman Doroniuk....... 0 0 83,333/166,667 N/A
Gordon Keep.......... 0 0 100,000/0 N/A
Frank Giustra........ 0 0 0/250,000 N/A
</TABLE>
COMPENSATION OPTIONS. On March 2, 1999, the Company issued compensation
options to purchase up to 380,800 Common Shares at an exercise price of $5.25
per Common Share to Yorkton Securities Inc., First Marathon Securities Limited
and Merrill Lynch Canada Inc. in connection with the issuance of Common Shares
pursuant to an underwriting agreement dated February 4, 1999. Such compensation
options expire on September 2, 2000.
In connection with the Trimark Merger the Company has entered into an
employment agreement with Mark Amin effective as of June 6, 2000 (the "Amin
Employment Agreement"). The Amin Employment Agreement provides for the payment
of a fixed salary to Mr. Amin, and the grant to Mr. Amin, subject to shareholder
approval, of options to purchase 1,400,000 Common Shares of the Company at a
price of U.S.$2.55 per Common Share in respect of 1,000,000 Common Shares, and
at a price of U.S.$4.00 in respect of 400,000 Common Shares. Of the total
options granted to Mr. Amin, options to acquire 125,000 Common Shares shall be
immediately exercisable on the date of consummation of the acquisition of
Trimark; one-third of the balance shall become exercisable on the first, second
and third anniversaries respectively, of the date of grant provided that, in
respect of the exercise of options to acquire 637,500 Common Shares, that the
average closing price of the Common Shares for a period of 20 consecutive
trading days, is not less than U.S.$4.00 and, in respect of the exercise of
options to acquire the balance of the Common Shares, is not less than U.S.$6.00.
CONVERTIBLE NON-INTEREST BEARING PROMISSORY NOTES. On August 28, 1998, the
Company issued three convertible non-interest bearing promissory notes
(individually, a "Note," and collectively, the "Notes") to Termite Art, in
connection with the acquisition by LG Television of Termite Art's non-fiction
television programming assets. The Notes have outstanding principal amounts of
U.S.$343,750 and U.S.$343,750, respectively, and mature August 28, 2000 and
August 28, 2001, respectively. At any time, Termite Art may convert the
outstanding principal amounts under the Notes, in whole or in part, into Common
Shares of
E-44
<PAGE>
the Company at a conversion price of $6.50 per Common Share. In addition, if
Termite Art elects to convert any portion of the Notes, the Company has the
option to pay to Termite Art an amount in cash equal to the number of Common
Shares such Note would have converted into times an amount equal to $7.50. The
Notes may be prepaid by the Company at any time without penalty and are
collateralized by the assets acquired from Termite Art. See "BUSINESS--Recent
Corporate History."
REDEEMABLE CONVERTIBLE SUBORDINATED NOTES. The Company has redeemable
convertible subordinated notes ("Sub-Notes") outstanding in the principal amount
of approximately $16,487,235 maturing on July 31, 2003. The Sub-Notes pay 6%
annual interest on a semi-annual basis. The Sub-Notes are convertible by the
holder into Common Shares of the Company at any time prior to redemption or
maturity at $8.10 per share and may be redeemed at par by the Company on at
least 30 days written notice after July 31, 2000, and prior to maturity. The
Sub-Notes are unsecured obligations of the Company subordinate to senior
indebtedness of the Company.
SERIES A PREFERRED SHARES. There are outstanding 12,205 Series A Preferred
Shares, each of which is convertible into 1,000 common shares, at a conversion
value of U.S.$2.55 per common share.
COMMON SHARE PURCHASE WARRANTS. There are outstanding warrants to purchase
5,525,000 common shares at a purchase price of U.S.$5.00. The warrants expire
January 1, 2004.
ITEM 13: INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Jon Feltheimer, Vice Chairman and Chief Executive Officer of Lions Gate, and
Michael Burns, Vice Chairman of Lions Gate, each hold convertible preferred
stock and options to purchase common stock of CinemaNow, Inc., 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, Inc.
G. Scott Paterson, a director of the Company, is Chairman of Yorkton
Securities Inc., which acted during the 2000 fiscal year as agent for placement
of the Company's Series A Preferred Shares. Jon Feltheimer, a Vice Chairman and
CEO of the Company, Michael Burns, a Vice Chairman of the Company, and SBS
Broadcasting and Tele-Muchen, of which directors Howard Knight and Herbert
Kloiber are respectively Vice Chairman and Managing Director, purchased
Series A Preferred Shares in the offering.
Michael Burns, a Vice Chairman of the Company, owns approximately a 40%
interest in Ignite, LLC, which has entered an agreement with the Company giving
the Company a "first look" option on Ignite projects. The Company has agreed to
advance up to U.S.$400,000 to Ignite for overhead expenses during the initial
one-year term of the agreement.
Except as disclosed herein, no director or officer of the Company, or
affiliates of such persons, has or has had any material interest, direct or
indirect, in any transaction since the commencement of the Company's last
completed fiscal year, or in any proposed transaction, which in either such case
has materially affected or will materially affect the Company or any of its
subsidiaries.
The Company is not aware of any conflicts of interest or other risks
associated with any of the above transactions.
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS
Other than routine indebtedness as that term is defined in applicable
Canadian provincial securities legislation, no director or executive officer of
the Company, or associate or affiliate of any such director or executive
officer, is or has been indebted to the Company since the beginning of the last
completed fiscal year of the Company.
E-45
<PAGE>
PART II
ITEM 14: DESCRIPTION OF SECURITIES TO BE REGISTERED
Not Applicable.
PART III
ITEM 15: DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 16: CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS
During the 2000 fiscal year, the Company issued Series A Preferred Shares,
of which 12,205 shares remain outstanding. Each Series A Preferred Share is
convertible into 1,000 common shares and bears a 5 1/4% annual cumulative
dividend. The aggregate annual dividends total U.S.$1,633,944, which, at the
Company's election, is payable in cash or additional shares of Series A
Preferred Shares. Upon any liquidation, dissolution, or winding up of the
Company, including any reorganization, consolidation, or merger of the Company
in which holders of Company common shares, assuming conversion of all Series A
Preferred Shares, do not constitute holders of a majority of the outstanding
shares of the surviving entity, holders of Series A Preferred Shares will be
entitled to a liquidation preference per share equal to the sum of U.S.$2,550
plus all accrued unpaid dividends.
PART IV
ITEM 17: FINANCIAL STATEMENTS
See Item 18.
E-46
<PAGE>
ITEM 18: FINANCIAL STATEMENTS
The financial statements filed as part of this Annual Report are listed in
Item 19, "Financial Statements and Exhibits."
All financial statements herein are stated in accordance with Canadian GAAP
and have been reconciled to U.S. GAAP.
ITEM 19: FINANCIAL STATEMENTS AND EXHIBITS
The following financial statements and exhibits are filed as part of this
annual report:
(a) Financial Statements
<TABLE>
<CAPTION>
PAGE
DESCRIPTION OF FINANCIAL STATEMENT NUMBER
---------------------------------- --------
<S> <C>
Auditors' Report............................................ F-1
Consolidated Balance Sheets of the Company.................. F-2
Consolidated Statements of Operations and Deficit of the
Company................................................... F-3
Consolidated Statements of Cash Flows of the Company........ F-4
Notes to the Consolidated Financial Statements of the
Company................................................... F-5
Report of Independent Accountants........................... F-35
Balance Sheet of Mandalay Pictures.......................... F-36
Statement of Operations of Mandalay Pictures................ F-37
Statement of Changes in Members' Equity of Mandalay
Pictures.................................................. F-38
Statement of Cash Flows of Mandalay Pictures................ F-39
Notes to Financial Statements of Mandalay Pictures.......... F-40
</TABLE>
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENTS NUMBER
--------------------- ------------------------------------------------------------ ------
<C> <S> <C>
1.1* Articles of Incorporation...................................
1.2* Amendment to Memorandum of Understanding among the Company,
LG Pictures Inc., Tigerstripes, Peter Guber, Paul Schaeffer
and Adam Platnick dated December 29, 1998...................
1.3* Amendment to Memorandum of Understanding among the Company,
LG Pictures Inc., Tigerstripes, Peter Guber, Paul Schaeffer
and Adam Platnick dated December 30, 1998...................
1.4 Amendment to Articles of Incorporation to Provide Terms of
the Preferred Shares dated as of December 20, 1999.......... 53
2.1* Employees' and Directors' Equity Incentive Plan.............
2.2* Incentive Plan Stock Option Agreement No. 1.................
2.3* Incentive Plan Stock Option Agreement No. 2.................
2.4* Escrow Agreement among the Company, Frank Giustra, Trevor
Wilson, Cinepix Inc. and CIBC Mellon Trust Company dated as
of November 13, 1997........................................
2.5*+ Memorandum of Understanding among the Company, LG Pictures
Inc., Tigerstripes, Peter Guber, Paul Schaeffer and Adam
Platnick dated March 6, 1998................................
2.6*+ Agreement between Paramount and Mandalay Pictures dated
March 9, 1998...............................................
</TABLE>
E-47
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENTS NUMBER
--------------------- ------------------------------------------------------------ ------
<C> <S> <C>
2.7* Trust Indenture between the Company and CIBC Mellon Trust
Company dated as of April 15, 1998..........................
2.8* Unanimous Shareholders Agreement among CineGroupe, Animation
Cinepix Inc., Jacques Pettigrew, Robert Paul and Fox Family
Worldwide, Inc. dated as of June 23, 1998...................
2.9* Convertible Promissory Note between the Company and Termite
Art dated as of August 28, 1998.............................
2.10** 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................
2.11** Compensation Option Agreements between the Company and
Yorkton Securities Inc. dated as of March 2, 1999...........
2.12** Compensation Option Agreements between the Company and First
Marathon Securities Limited dated as of March 2, 1999.......
2.13** Compensation Option Agreements between the Company and
Merrill Lynch Canada Inc. dated as of March 2, 1999.........
2.14 Warrant Indenture between the Company and CIBC Mellon Trust
Company dated as of December 30, 1999.......................
2.15 Agreement and Plan of Merger among the Company, LGE Merger
Sub and Trimark dated June 6, 2000..........................
2.16 Consent of Independent Accountant...........................
</TABLE>
------------------------
* 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).
+ Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.
UNDERTAKING
Pursuant to Item 601 of Regulation S-K, certain schedules and similar
attachments have been omitted from material plans of acquisition of the Company
filed as exhibits to this annual report. The undersigned Registrant hereby
undertakes to furnish supplementary a copy of any omitted schedule or similar
attachment to such exhibits upon the request of the Commission.
E-48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
LIONS GATE ENTERTAINMENT CORP.
Date: August 16, 2000 By: /s/ FRANK GIUSTRA
--------------------------
Name: Frank Giustra
Title: Chairman
</TABLE>
E-49
<PAGE>
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, 2000 and 1999 and the consolidated statements of
operations and deficit and cash flows for the years ended March 31, 2000 and
1999 and the period from April 28, 1997, date of formation, to March 31, 1998.
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 in accordance with Canadian 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,
2000 and 1999 and the results of its operations and its cash flows for the years
ended March 31, 2000 and 1999 and the period from April 28, 1997, date of
formation, to March 31, 1998 in accordance with Canadian generally accepted
accounting principles.
[PRICEWATERHOUSECOOPER LLP SIG]
Chartered Accountants
Toronto, Ontario
July 7, 2000
F-1
<PAGE>
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31, 2000 AND MARCH 31, 1999
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Cash and equivalents........................................ $ 19,283 $ 26,254
Accounts receivable (NOTE 3)................................ 107,344 60,673
Investment in films and television programs (NOTE 4)........ 128,375 88,949
Investment in Mandalay Pictures, LLC (NOTE 5)............... 64,058 72,932
Capital assets (NOTE 6)..................................... 44,505 40,691
Goodwill, net of accumulated amortization of $5,476
(1999-$3,003)............................................. 29,163 31,636
Other assets (NOTE 7)....................................... 9,245 6,477
-------- --------
$401,973 $327,612
======== ========
LIABILITIES
Bank loans (NOTE 9)......................................... $ 14,385 $ 12,185
Accounts payable and accrued liabilities (NOTE 10).......... 74,965 44,668
Production and distribution loans (NOTE 11)................. 41,838 48,415
Long-term debt (NOTE 12).................................... 40,158 41,145
Deferred revenue............................................ 19,269 10,780
Non-controlling interest.................................... 4,944 3,635
-------- --------
195,559 160,828
======== ========
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 22)
SHAREHOLDERS' EQUITY
Capital stock (NOTE 13)..................................... 226,290 177,068
Deficit..................................................... (21,320) (14,709)
Cumulative translation adjustments.......................... 1,444 4,425
-------- --------
206,414 166,784
-------- --------
$401,973 $327,612
======== ========
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
Signed on behalf of the board
<TABLE>
<S> <C>
FRANK GIUSTRA HOWARD KNIGHT
DIRECTOR DIRECTOR
</TABLE>
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE YEARS ENDED MARCH 31, 2000 AND MARCH 31, 1999
AND PERIOD ENDED MARCH 31, 1998
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenue..................................................... $271,251 $118,297 $64,149
Direct Operating Expenses................................... 222,875 92,931 49,175
-------- -------- -------
Gross Profit................................................ 48,376 25,366 14,974
-------- -------- -------
Other Expenses
General and administration................................ 31,388 23,555 10,337
Amortization (NOTE 15).................................... 7,074 5,279 1,781
Interest (NOTE 16)........................................ 4,466 3,655 951
Non-controlling interest.................................. 1,308 612 1,019
Severance and relocation costs............................ 1,698 1,647 --
-------- -------- -------
45,934 34,748 14,088
-------- -------- -------
Income (Loss) Before Undernoted............................. 2,442 (9,382) 886
Gain on dilution of investment in a subsidiary (NOTE 17).... -- 839 --
-------- -------- -------
Income (Loss) Before Income Taxes and Equity Interest....... 2,442 (8,543) 886
Income taxes (NOTE 18)...................................... 2,000 304 1,439
-------- -------- -------
Income (Loss) Before Equity Interest........................ 442 (8,847) (553)
Equity interest in loss of Mandalay Pictures, LLC
(NOTE 5).................................................. (5,894) (5,449) --
Other equity interest....................................... 159 140 --
-------- -------- -------
Net Loss for the Period..................................... (5,293) (14,156) (553)
Dividends paid on Series A preferred shares................. (591) -- --
Accretion on Series A preferred shares (NOTE 2 (M))......... (727) -- --
Deficit, Beginning of Period................................ (14,709) (553) --
-------- -------- -------
Deficit, End of Period...................................... $(21,320) $(14,709) $ (553)
-------- -------- -------
Basic and Fully Diluted Loss per Common Share............... $ (0.22) $ (0.58) $ (0.04)
======== ======== =======
</TABLE>
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000 AND MARCH 31, 1999
AND PERIOD ENDED MARCH 31, 1998
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period..................................... $ (5,293) $ (14,156) $ (553)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization (note 15).................................... 7,074 5,279 1,781
Amortization of films and television programs............. 220,423 90,667 47,845
Gain on dilution of investment in a subsidiary............ -- (839) --
Non-controlling interest.................................. 1,308 612 1,019
Other equity interest..................................... (159) (140) --
Equity interest in loss of Mandalay Pictures, LLC......... 5,894 5,449 --
--------- --------- ---------
229,247 86,872 50,092
CHANGES IN OPERATING ASSETS AND LIABILITIES, EXCLUDING THE
EFFECTS OF ACQUISITIONS:
Accounts receivable....................................... (46,671) (11,140) (16,269)
Other assets.............................................. (3,570) (6,787) (56)
Accounts payable and accrued liabilities.................. 30,297 14,174 5,968
Deferred revenue.......................................... 8,489 921 2,305
--------- --------- ---------
217,792 84,040 42,040
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issue of capital stock...................................... 48,495 28,965 112,240
Dividend paid on Series A preferred shares.................. (591) -- --
Increase (decrease) in bank loans........................... 2,200 (4,965) 14,068
Increase in production and distribution loans............... 35,900 38,189 18,302
Repayment of production and distribution loans.............. (42,477) (20,457) (8,964)
Increase in long-term debt.................................. 3,162 14,744 --
Repayment of long-term debt................................. (4,149) (5,173) (10,610)
--------- --------- ---------
42,540 51,303 125,036
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Mandalay Pictures............................. -- (338) (71,068)
Acquisition of Lions Gate Films, net of cash acquired....... -- -- (17,823)
Acquisition of Lions Gate Studios........................... -- -- (9,282)
Acquisition of Mandalay Television, net of cash acquired.... -- -- (1,679)
Acquisition of Beringer Gold Corp., net of cash acquired.... -- -- 7,080
Acquisition of Motion Works................................. -- -- (450)
Acquisition of CineGroupe................................... -- -- (271)
Acquisition of International Movie Group, net of cash
acquired.................................................. -- (880) --
Acquisition of Termite Art Productions, net of cash
acquired.................................................. -- (165) --
Minority investment in subsidiary........................... -- 3,000 --
Redemption of capital stock................................. -- (25) --
Increase in investment in films and television programs..... (260,905) (115,770) (63,264)
Purchase of capital assets.................................. (6,398) (3,975) (1,255)
--------- --------- ---------
(267,303) (118,153) (158,012)
--------- --------- ---------
Net change in cash.......................................... (6,971) 17,190 9,064
Cash and equivalents-beginning of period.................... 26,254 9,064 --
--------- --------- ---------
Cash and equivalents-end of period.......................... $ 19,283 $ 26,254 $ 9,064
========= ========= =========
</TABLE>
Supplementary cash flow information is included under note 24.
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 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, reality-based programming and animated programming, as well as the
management of Canadian-based studio facilities. As an independent distribution
company, the Company also acquires distribution rights from a wide variety of
studios, production companies and independent producers. The inception of the
Company occurred on April 28, 1997. Accordingly, the reporting period for fiscal
1998 is the period from April 28, 1997 to March 31, 1998.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
A. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("Canadian GAAP"). In the
case of the Company, these principles conform 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 is the primary functional
currency of the Company's business, defined as the economic environment in which
the Company primarily generates and expends cash, and accordingly these
consolidated financial statements are expressed in Canadian dollars.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Lions Gate and
its subsidiary companies, with provision for non-controlling interests, and its
proportionate share of assets, liabilities, revenues and expenses for 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 additional
common shares, which enable the Company to secure voting control.
The Company's 50% investment in Sterling Home Entertainment LLC ("Sterling")
is accounted for using the proportionate consolidation method.
The Company's investment in Eaton Entertainment LLC ("Eaton") was accounted
for using the equity method until September 30, 1999. 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 accounted for its investment in Eaton using
the proportionate consolidation method.
C. REVENUE RECOGNITION
Revenue from the sale of exhibition and distribution rights, for film and
television programs, under a contract that irrevocably transfers the rights to a
licensee or equity to an investor is recognized once the production has been
completed, the contractual delivery arrangements have been satisfied, the
licensing period has commenced, and collectibility is reasonably assured.
Revenue from the theatrical release of motion pictures is recognized at the
time of exhibition based on the Company's contractually agreed participation in
box office receipts.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue from the sale of video cassettes for both the rental and retail
markets, after taking account of the estimated levels of returns, is recognized
on delivery.
Advances or other amounts received, which have not yet been recognized as
revenue, are recorded as deferred revenue.
D. CASH AND EQUIVALENTS
Cash and equivalents include cash and highly 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 represents the unamortized costs
of 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 development costs.
Costs of producing film and television productions are capitalized and
amortized against revenue generated by the subsequent exploitation of those
productions. Such costs include all production, print and advertising costs and
financing costs that are expected to benefit future periods and be recovered
from estimated future revenue, net of estimated future liabilities.
Film and television programs in progress represent the accumulated costs of
uncompleted motion pictures and television programs that are being produced by
the Company. Development costs represent expenditures directly attributable to
projects prior to the commencement of production. Such costs are capitalized
and, upon commencement of production, are transferred to production costs.
Development costs 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 expenditure.
Investment in films and television programs is stated at the lower of cost,
net of amortization, and net recoverable amount. Net recoverable amount is
management's current estimate of net future cash flows, on an undiscounted
basis, based primarily on future revenue estimates. Amortization of investment
in films and television programs is determined using the individual film
forecast method, whereby costs accumulated in the production and distribution of
a film or television program are amortized in the proportion that current gross
revenue bears to management's estimate of the total gross revenue expected to be
received over periods not exceeding ten years from the date of production or
acquisition. Such revenue estimates are prepared on a title-by-title basis are
reviewed periodically based on current market conditions. For films, such
revenue estimates include principally box office receipts, sale of video
cassettes and DVDs, sale of television broadcasting rights and licensing of film
rights to third parties. For television programs, such revenue estimates include
principally license rights to broadcast television programs in development or
rights to renew licenses for episodic television programs in subsequent seasons.
Estimates of future revenue of necessity 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.
Investment in films and television programs is reviewed on a title-by-title
basis, when events or changes in circumstances indicate that the carrying
amounts may not be recoverable. Estimates of net
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
future cash flows, on an undiscounted basis, are calculated based on future
revenue estimates, and where deemed necessary, titles are written down to their
estimated net recoverable amount.
F. INVESTMENT IN MANDALAY PICTURES, LLC
The Company's investment in Mandalay Pictures, LLC ("Mandalay Pictures") is
accounted for using the equity method.
The Company's investment is comprised of a 45% common stock interest, and a
100% interest in preferred stock. The Company records an equity pick-up of 100%
of the non-cash operating losses of Mandalay Pictures.
The Company's investment in Mandalay Pictures is reviewed periodically to
determine whether there are any changes in facts or circumstances that may
indicate that the carrying amount may not be recoverable. Estimates of net
future cash flows on an undiscounted basis are used to determine whether the
carrying amount is expected to be recoverable, and if necessary, a provision for
a non-temporary diminution in value of the investment would be made.
G. CAPITAL ASSETS
Capital assets are carried at cost less accumulated amortization.
Amortization is provided for using the following rates and methods:
<TABLE>
<S> <C>
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
</TABLE>
Equipment under capital lease is amortized using the above rates.
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.
H. 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
a change in conditions that might trigger impairment. These conditions 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.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I. 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.
J. INCOME TAXES
The Company follows the tax allocation method of accounting for income taxes
whereby earnings are charged with income taxes related to reported earnings.
Differences between such taxes and taxes currently payable are reflected in the
accounts and arise because certain items of revenue and expense are reported in
the accounts at different times than they are reported for income tax purposes.
K. 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 recorded as revenue in accordance with the Company's
revenue recognition policy for completed film and television programs.
Amounts received with respect to 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 claim on any assets of the Company
or for the recovery of the amount invested other than that which 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.
L. 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 not tax effected and
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.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Gains or losses arising on the translation of the accounts of integrated
subsidiaries are included in the determination of earnings.
M. 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 fair value of the basic preferred shares on issuance was determined to
be US$25.9 million (Cdn$37.5 million), calculated as the residual amount of the
total issue proceeds of the units of US$33.2 million (Cdn$48.1 million) after
deducting the estimated fair values of the common share purchase warrants of
US$3.9 million (Cdn$5.7 million) and the preferred share conversion feature of
US$3.4 million (Cdn$4.9 million).
The fair value of the warrants has been estimated to be US$3.9 million
(Cdn$5.7 million) using the Black-Scholes model with assumptions of a three-year
expected term, 35% volatility, and a risk-free interest rate of 6%.
The fair value of the conversion feature has been estimated to be
US$3.4 million (Cdn$4.9 million) using the Black-Scholes model with assumptions
of a three-year expected term, 35% volatility, a risk-free interest rate of 6%
and incorporating the 5.25% cumulative dividend on the preferred shares.
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.
Costs amounting to $2.4 million incurred on the issuance of the preferred
shares and share purchase warrants are deferred and are amortized over a
five-year period to the first redemption date of the preferred shares.
N. 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.
O. RESEARCH AND DEVELOPMENT
Research and development expenses incurred relating to multimedia products
and other interactive software are expensed until technological feasibility is
established. All expenses incurred after technological feasibility is
established are capitalized and will be amortized against future revenue.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
P. 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. Consideration paid by employees on
exercise of stock options or purchase of stock is credited to share capital.
Q. 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; and impairment assessments of various assets
including investment in films and television programs, capital assets,
investment in Mandalay Pictures and goodwill. Actual results could differ from
those estimates.
NOTE 3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Trade accounts receivable, net........................... $ 75,891 $48,343
Government assistance.................................... 27,720 10,535
Other.................................................... 3,733 1,795
-------- -------
$107,344 $60,673
======== =======
</TABLE>
The provision for doubtful accounts included in accounts receivable at
March 31, 2000 was $2.5 million (1999--$5.2 million).
NOTE 4. INVESTMENT IN FILMS AND TELEVISION PROGRAMS
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Completed films and television programs and distribution
rights acquired, net of accumulated amortization....... $ 48,041 $41,463
Films and television programs in progress................ 76,741 43,383
Development costs........................................ 3,593 4,103
-------- -------
$128,375 $88,949
======== =======
</TABLE>
The Company earns revenue from certain productions that have been fully
amortized and are not reflected on the balance sheet.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 5. INVESTMENT IN MANDALAY PICTURES
Mandalay Pictures' pre-operating costs for the period from formation on
March 9, 1998 were deferred until the commencement of commercial operations.
Commercial operations were deemed to begin with the commencement of principal
photography of its first film which was at the end of the third quarter of
fiscal 1999. In fiscal 1999, the Company capitalized $7.5 million of
pre-operating period costs which are being amortized on a straight-line basis
over seventeen quarters together with an amount of $644,000 that was deferred in
fiscal 1998. Accordingly, $1.9 million (1999--$526,000) of amortization was
taken in the current year and is included in equity interest in loss of Mandalay
Pictures.
Summary financial information of the Company's interest in Mandalay
Pictures, which is presented in accordance with U.S. GAAP, is as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Cash and equivalents...................................... $ 19,193 $ 48,778
Restricted cash........................................... 46,400 4,077
Accounts receivable....................................... 10,710 560
Investment in films....................................... 72,558 59,767
Other assets.............................................. 980 1,640
-------- --------
$149,841 $114,822
-------- --------
LIABILITIES
Accounts payable and accrued liabilities.................. $ 15,517 $ 12,260
Production and bank loans................................. 48,349 34,352
Contractual obligations................................... 23,440 --
Deferred revenue.......................................... 7,401 6,732
-------- --------
$ 94,707 $ 53,344
-------- --------
NET ASSETS................................................ $ 55,134 $ 61,478
======== ========
</TABLE>
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenue..................................................... $139,301 $ -- $ --
Direct operating expenses................................... 140,706 1,406 --
-------- -------- --------
Gross loss.................................................. (1,405) (1,406) --
Indirect operating expenses................................. 6,272 15,016 1,674
Interest income............................................. 3,708 4,033 242
-------- -------- --------
Net loss for the period..................................... $ (3,969) $(12,389) $ (1,432)
======== ======== ========
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 6. CAPITAL ASSETS
<TABLE>
<CAPTION>
2000
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
-------- ------------ --------
<S> <C> <C> <C>
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
======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
1999
NET
ACCUMULATED BOOK
COST AMORTIZATION VALUE
-------- ------------ --------
<S> <C> <C> <C>
Land........................................................ $14,500 $ -- $14,500
Buildings................................................... 20,476 453 20,023
Leasehold improvements...................................... 1,136 154 982
Furniture and equipment..................................... 4,041 1,394 2,647
Automobile.................................................. 38 30 8
Computer equipment and software............................. 2,210 586 1,624
Equipment under capital leases.............................. 1,212 305 907
------- ------ -------
$43,613 $2,922 $40,691
======= ====== =======
</TABLE>
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. The length of tenancy varies 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.
NOTE 7. OTHER ASSETS
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Pre-operating costs......................................... $3,835 $4,797
Deferred financing costs and other assets................... 3,236 1,680
Preferred share issue costs................................. 2,174 --
------ ------
$9,245 $6,477
====== ======
</TABLE>
NOTE 8. JOINTLY CONTROLLED COMPANIES
Summarized financial information of the Company's interest in jointly
controlled companies, including Sterling, which was formed in fiscal 1999 and
Eaton, which was previously treated as an equity
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 8. JOINTLY CONTROLLED COMPANIES (CONTINUED)
investment, but has been proportionately consolidated after the acquisition of
joint control on September 30, 1999, is as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Assets...................................................... $ 7,705 $ 9,584
Liabilities................................................. $ 4,558 $ 8,511
Revenue..................................................... $15,079 $ 9,685
Direct operating expenses................................... $10,783 $ 6,209
Net earnings for the year................................... $ 2,251 $ 1,073
Cash flows from operating activities........................ $ 1,147 $ 2,810
Cash flows from financing activities........................ (2,181) 1,449
Cash flows from investing activities........................ 1,797 (2,920)
------- -------
Net cash flows.............................................. $ 763 $ 1,339
======= =======
</TABLE>
Revenue and expenses for Eaton are shown for the period October 1, 1999 to
March 31, 2000. For the period April 1, 1999 to September 30, 1999 the Company
recorded equity in earnings of $159,000.
NOTE 9. BANK LOANS
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Bank loans................................................ $14,385 $12,185
------- -------
</TABLE>
Bank loans consist of a credit facility and demand loans, and bear interest at
rates not exceeding prime plus 2.25%. Exclusive first priority interest in the
carrying value of all assets of Lions Gate Films Corp. less assets securing
permitted liens, of approximately $112.3 million at March 31, 2000 is provided
as collateral for the credit facility. The carrying value of certain accounts
receivable, investment in films and television programs and capital assets of
approximately $7.9 million at March 31, 2000 is provided as collateral for
certain demand loans.
The weighted average interest rate on short term borrowings at March 31,
2000 was 9.02% (1999-8.75%).
The Company has a credit facility available of $20 million in the year ended
March 31, 2000 (1999--$12.0 million). As at March 31, 2000, $4.8 million was
drawn on the facility (1999--$9.5 million). The Company is required to pay a
monthly commitment fee of 0.625% on the $20 million available less the amount
drawn.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Trade accounts payable.................................... $18,037 $17,283
Accrued liabilities....................................... 13,937 10,378
Minimum guarantees and producer royalties payable......... 35,534 12,700
Other..................................................... 7,457 4,307
------- -------
$74,965 $44,668
======= =======
</TABLE>
NOTE 11. PRODUCTION AND DISTRIBUTION LOANS
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Production loans (a)...................................... $32,095 $41,569
Distribution loan (b)..................................... 9,743 6,846
------- -------
$41,838 $48,415
======= =======
</TABLE>
A. PRODUCTION LOANS
Production loans consist of bank demand loans bearing interest at various
rates between prime and prime plus 2.5%. Rights to certain motion pictures, 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 motion pictures have been provided as collateral. The carrying value of
investment in films and television programs relating to these motion pictures
was $19.0 million at March 31, 2000. Federal and Provincial film tax credits
with a carrying value of accounts receivable $24.6 million at March 31, 2000,
guarantees from SODEC (Societe de Developpement des Entreprises Culturelles),
and general security agreements are also provided as collateral for certain of
the loans. Of the outstanding amount security agreements are also provided as
collateral for certain of the loans. Of the outstanding amount, US$13.0 million
(Cdn$18.9 million) (1999--US$19.0 million; Cdn$28.6 million) is repayable in US
dollars.
The weighted average interest rate on production loans at March 31, 2000 was
8.34% (1999-8.35%).
B. DISTRIBUTION LOAN
The distribution loan consists of a US$10 million revolving credit facility
bearing interest at U.S. prime. At March 31, 2000, US$6.7 million was
outstanding (1999--US$4.5 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 $3.3 million (US$2.3 million) at March 31, 2000, has
been provided as collateral. The commitment period of this facility ends
June 30, 2001. This date can be extended to June 30, 2006 if the minimum number
of theatrical releases under the agreement have not been achieved by June 30,
2001.
The weighted average interest rate on the distribution loan at March 31,
2000 was 9.0% (1999-7.75%).
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 12. LONG-TERM DEBT
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Obligations under capital leases, bearing interest at 4.9%
to 14%, due in 2002, with certain equipment provided as
collateral................................................ $ 485 $ 502
Loans bearing interest at 5.75% to prime plus 2.5%, due in
fiscal 2001 and 2002, with certain equipment provided as
collateral................................................ 884 776
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 prime plus 1.75%, due 2003, with
guarantees from SDI (Societe de Developpement Industriel
de Quebec)................................................ 43 56
Loans bearing interest at 6.47% to 6.9%, due August and
September 2000 and May and June 2003, with property,
building and equipment with carrying values of
approximately $36.0 million provided as collateral.
Amounts totalling $2.7 million due for repayment in August
and September 2000 are expected to be refinanced during
fiscal 2001............................................... 21,216 19,367
Non-interest bearing convertible promissory notes issued on
the acquisition of a Company subsidiary, Termite Art
Productions, repayable as US$688,000 (1999--US$2.8
million), due in equal amounts in August 2001 and 2002.
The outstanding principal is convertible at the option of
the holder into common shares of the Company at $6.50 per
share. 1,043 3,957
------- -------
$40,158 $41,145
======= =======
</TABLE>
Required principal payments on long-term debt during future years are as
follows:
<TABLE>
<S> <C>
2001........................................................ $ 4,689
2002........................................................ 1,901
2003........................................................ 1,387
2004........................................................ 32,181
-------
$40,158
=======
</TABLE>
Minimum future payments required under capital leases total $538,000
(1999--$551,000), including interest of $53,000 (1999--$49,000) and are due
$322,000 in 2001, $143,000 in 2002 and $73,000 in 2003.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 13. CAPITAL STOCK
A. AUTHORIZED CAPITAL STOCK
The authorized 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 2000. The
terms of the Series A preferred shares are described in (c) below.
On October 20, 1998 the shareholders approved a two for one share
consolidation of the Company's common stock which took effect on November 17,
1998. All share and per share amounts included in the financial statements have
been adjusted to reflect the common stock consolidation.
B. CONTINUITY OF CAPITAL STOCK
Continuity of issued and outstanding capital stock is as follows:
<TABLE>
<CAPTION>
NUMBER AMOUNT
---------- --------
<S> <C> <C>
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
$900...................................................... 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
---------- --------
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
---------- --------
COMPENSATION WARRANTS:
Issued during fiscal 1999................................... 380,800 --
---------- --------
Balance at March 31, 2000................................... 380,800 --
---------- --------
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, 2000................................... 5,525,000 5,659
---------- --------
Total capital stock at March 31, 2000....................... $226,290
========
</TABLE>
Each compensation warrant entitles the holder to purchase one common share
at a price of $5.25. The warrants expire on September 2, 2000, and are not
transferable except with the consent of the Company.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 13. CAPITAL STOCK (CONTINUED)
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 a total of 13,000 units at a price
of US$2,550 per unit. Each unit is comprised of one 5.25% convertible,
non-voting, redeemable Series A preferred share ("preferred share") and 425
common share purchase warrants. The preferred shares and the warrants became
separate instruments immediately following their issuance. Based on estimated
fair values at the issue date, the Company allocated US$2,250 of the issue price
to each preferred share and US$0.706 to each warrant.
The 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 the option of the Company, the dividend may be paid in cash or
additional preferred shares. The Company declared, and on March 31, 2000 paid in
U.S. dollars, a cash dividend of US$406,000 or US$33.29 per share (Cdn$591,000
or Cdn$48.40 per share).
In the event of the liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary, or any other distribution of assets of the
Company among its shareholders for the purposes of winding-up its affairs, the
preferred shareholders shall be entitled to receive an amount equal to the
offering price and the stated value of all dividends accrued and unpaid on such
shares.
At the option of the holder, preferred shareholders may convert all, but not
less than all, of their preferred shares, at any time into common shares of the
Company at a rate of 1,000 common shares for each preferred share, subject to
certain anti-dilution adjustments.
The common shares issued on conversion of 795 preferred shares during the
year ended March 31, 2000 have been recorded at the carrying amount of the
preferred shares including the recorded value of the related conversion feature,
at the conversion date.
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 preferred
shareholders, subject to certain conditions.
The Company may redeem the preferred shares, in whole or in part, on or
after January 1, 2005 for a cash payment of 105% of the offering price plus
accrued and unpaid dividends up to the date of redemption.
Any holder of the preferred shares has the right to require the Company to
redeem all, but not less than all of the preferred shares owned by such holder,
for a cash payment of 100% of the issue price in the event that the composition
of the Company's Board of Directors ceases to be in compliance with certain
provisions relating to the nomination and election of up to three directors; an
event which the Company considers to be extremely unlikely. 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.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 13. CAPITAL STOCK (CONTINUED)
D. NORMAL COURSE ISSUER BID
On September 14, 1998, the Board of Directors authorized the Company to
purchase by means of a normal course issuer bid from time to time over a period
commencing on September 23, 1998 and terminating on September 29, 1999 up to
1,865,683 common shares of the Company at market prices.
During fiscal 1999, the Company purchased 36,000 shares at an average cost
of $3.54 for a total cost of $128,000.
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 4 million common shares
of the Company to eligible employees, directors and service providers of the
Company and its affiliates. Of the 4 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. To
date, no shares have been issued under the share bonus plan.
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.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 13. CAPITAL STOCK (CONTINUED)
Changes in share options granted and outstanding for fiscal 1998, 1999 and
2000 were as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at March 31, 1997............................... -- $ --
Granted to March 31, 1998................................... 2,963,800 8.20
--------- -----
Outstanding at March 31, 1998............................... 2,963,800 $8.20
Granted to December 14, 1998................................ 842,250 8.16
Cancelled 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
Cancelled 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
Cancelled 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
========= =====
</TABLE>
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, 2000 were as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING CONTRACTUAL
PRICE RANGE LIFE OF OUTSTANDING OPTIONS OUTSTANDING EXERCISABLE
----------- --------------------------- ----------- -----------
<S> <C> <C> <C>
$2.30 to $2.55.................. 4.35 years 235,000 16,666
$3.70 to $5.25.................. 2.60 years 2,734,663 2,681,563
$7.25 to $8.10.................. 4.64 years 800,000 50,000
---------- --------- ---------
3.15 years 3,769,663 2,748,229
========== ========= =========
</TABLE>
The Company has a commitment to grant options for 2,000,000 and 250,000
common shares at an exercise price of US$2.55 and $5.25 respectively, to certain
employees, that 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 2000.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 14. ACQUISITIONS
a. 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 $201,000 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.
b. 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.
<TABLE>
<S> <C>
Identifiable assets acquired:............................... $ 5,508
Liabilities assumed:........................................ 1,049
--------
Net assets acquired:........................................ $ 4,459
========
</TABLE>
c. 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
10 years.
<TABLE>
<S> <C>
Identifiable assets acquired:............................... $ 4,851
Liabilities assumed:........................................ 6,887
--------
Net liabilities acquired:................................... $ (2,036)
========
</TABLE>
d. Effective June 18, 1997, the Company acquired a 47.6% interest in Lions
Gate Films Corp. ("LG Films") for cash of $17.0 million. Effective November 12,
1997, the Company acquired the remaining 52.4% of LG Films for total
consideration of $21.6 million consisting of 3,601,307 common shares at a price
of $6.00 per share. The two acquisitions were accounted for using the step
purchase method.
<TABLE>
<S> <C>
Identifiable assets acquired:............................... $121,347
Liabilities assumed:........................................ 93,388
--------
Net assets acquired:........................................ $ 27,959
========
</TABLE>
As part of the initial acquisition of the 47.6% interest, the Company
secured the right to control 51% of the votes of the Board of Directors;
accordingly, the financial statements of LG Films were consolidated with those
of the Company since June 18, 1997. Goodwill arising on the acquisition
amounting to $21.7 million is being amortized over a twenty-year period.
e. Effective July 31, 1997, the Company acquired Lions Gate Studios
("Studios") for total consideration of $26.0 million, consisting of
$9.4 million cash and vendor take back loans (promissory notes) of
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 14. ACQUISITIONS (CONTINUED)
$16.6 million which were subsequently refinanced. The acquisition was accounted
for as a purchase. The results of Studios were included in the consolidated
accounts of the Company from the date of acquisition.
<TABLE>
<S> <C>
Identifiable assets acquired (including cash of $169):...... $ 36,943
Liabilities assumed:........................................ 10,847
--------
Net assets acquired:........................................ $ 26,096
========
</TABLE>
f. Effective November 12, 1997, the Company acquired Mandalay Television,
LLC ("Mandalay TV") for total consideration of $5.8 million consisting of
625,000 common shares at a price of $6.00 per share and $1.9 million in cash.
The acquisition was accounted for using the purchase method. Goodwill arising on
the acquisition amounting to $6.1 million is being amortized over a ten-year
period. The results of Mandalay TV were included in the consolidated accounts of
the Company from the date of acquisition.
<TABLE>
<S> <C>
Identifiable assets acquired:............................... $ 1,668
Liabilities assumed:........................................ 1,962
--------
Net liabilities acquired:................................... $ (294)
========
</TABLE>
g. The supplemental unaudited consolidated statement of operations presented
below illustrates the results of operations of the Company assuming the
acquisitions of LG Films and Studios had occurred at the beginning of the period
ended March 31, 1998:
<TABLE>
<CAPTION>
1998 UNAUDITED
--------------
<S> <C>
Revenue..................................................... $81,412
Direct operating expenses................................... 62,267
-------
Gross profit................................................ 19,145
Other expenses
General and administration................................ 12,088
Amortization.............................................. 2,967
Interest.................................................. 1,431
Non-controlling interest.................................. 1,117
-------
17,603
-------
Earnings before income taxes................................ 1,542
Income taxes................................................ 1,938
-------
Net loss for the period..................................... $ (396)
-------
Basic and fully diluted loss per common share............... $ (0.03)
=======
</TABLE>
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 15. AMORTIZATION
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Amortization of capital assets...................... $2,584 $2,081 $ 923
Amortization of goodwill............................ 2,473 2,145 858
Write-off of development costs...................... 856 1,053 --
Amortization of pre-operating costs................. 962 -- --
Amortization of deferred financing costs............ 199 -- --
------ ------ ------
$7,074 $5,279 $1,781
====== ====== ======
</TABLE>
NOTE 16. INTEREST
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Interest expense on long-term debt................. $3,023 $3,520 $ 2,366
Interest income.................................... (527) (527) (1,415)
Other interest expense............................. 1,970 662 --
------ ------ -------
$4,466 $3,655 $ 951
====== ====== =======
</TABLE>
Interest capitalized relating to productions during the year ended
March 31, 2000 amounted to $3.6 million (1999--$3.0 million;
1998--$2.9 million).
NOTE 17. GAIN ON DILUTION OF INVESTMENT IN A SUBSIDIARY
On June 23, 1998 a third party invested $3 million in the Company's
animation partner to obtain a 20% interest. The gain on dilution of the
Company's investment was $839,000 (net of tax $nil) and resulted in a decrease
of $202,000 in goodwill.
NOTE 18. INCOME TAXES
The provision for (recovery of) income taxes is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Canada
Current............................................ $1,510 $ 2,007 $1,263
Deferred........................................... 490 (1,703) 176
------ ------- ------
$2,000 $ 304 $1,439
====== ======= ======
</TABLE>
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 18. INCOME TAXES (CONTINUED)
The Company's provision for income tax expense differs from the provision
computed at statutory rates as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Income tax expense (recovery) computed at Canadian
combined federal and provincial statutory
rates........................................... $ 1,088 $(3,896) $ 404
Foreign and provincial operations subject to
different income tax rates.................... (64) 1,322 (100)
Expenses not deductible for income tax
purposes...................................... 862 114 213
Utilization of tax-loss carry-forwards.......... (2,286) (280) (108)
Losses not tax effected......................... 1,650 2,402 184
Unrecognized losses of non-controlling
interest...................................... 584 279 465
Other........................................... 166 363 381
------- ------- ------
$ 2,000 $ 304 $1,439
======= ======= ======
</TABLE>
The Company has certain income tax loss carry-forwards, the benefit of which
have not yet been recognized in the financial statements. These losses amount to
approximately $6 million for Canadian income tax purposes, and US$5.4 million
for U.S. income tax purposes. The expiry dates of these losses, which we are
available to reduce future taxable income in each country, are as follows:
<TABLE>
<CAPTION>
UNITED
CANADA STATES
-------- ---------
<S> <C> <C>
Year ending March 31
2006..................................................... $6,000 US$ --
2019 and 2020............................................ $ -- US$5,400
</TABLE>
NOTE 19. LOSS PER SHARE
Basic loss per share is calculated after adjusting net loss for dividends
and accretion on the preferred shares and using the weighted average number of
common shares outstanding during the period of 30,665,000 shares
(1999 - 24,575,000 shares; 1998 - 14,160,000 shares). The exercise of share
purchase warrants and employee stock options, convertible promissory notes and
Series A preferred shares could potentially dilute earnings per share in the
future, but were not reflected in fully diluted loss per share because to do so
would be anti-dilutive.
NOTE 20. GOVERNMENT ASSISTANCE
Revenue includes tax credits earned totalling approximately $24.0 million
(1999--$3.9 million; 1998--$7.2 million).
Investment in films and television programs as at March 31, 2000 includes a
reduction of $13.0 million (1999--$13.5 million; 1998--$12.1 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 forgiveable in the event that sufficient
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 20. GOVERNMENT ASSISTANCE (CONTINUED)
profits are ultimately not generated by the individual film and television
programs. The amounts ultimately repayable are not determinable.
Direct operating expenses include a reduction of $594,000 (1999 and
1998--$nil) with respect to government assistance towards print and advertising
expenses.
NOTE 21. SEGMENT INFORMATION
The Company has four reportable business segments as follows:
MOTION PICTURES
- Development and production of feature films.
- Acquisition of North American and world-wide distribution rights.
- North American theatrical, video and television distribution of feature
films produced and acquired.
- World-wide licensing of distribution rights to feature films produced and
acquired.
TELEVISION
- Development, production and world-wide distribution of television
productions including television series, television movies and mini-series
and reality-based programming.
ANIMATION
- Development, production and world-wide distribution of animated and live
action television series, television movies and feature films.
- Creation and distribution of interactive digital entertainment.
STUDIO FACILITIES
- Management of Canadian-based Studio facilities.
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
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 21. SEGMENT INFORMATION (CONTINUED)
information analyzed by operating segment, and accordingly details of segment
assets have not been presented.
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
REVENUE
Motion Pictures.............................. $146,910 $ 77,608 $50,637
Television................................... 81,758 12,466 190
Animation.................................... 35,620 22,035 9,660
Studio Facilities............................ 6,963 6,188 3,662
-------- -------- -------
$271,251 $118,297 $64,149
-------- -------- -------
GROSS PROFIT
Motion Pictures.............................. $ 27,475 $ 13,446 $10,025
Television................................... 7,509 2,544 34
Animation.................................... 8,881 5,452 2,583
Studio Facilities............................ 4,511 3,924 2,332
-------- -------- -------
$ 48,376 $ 25,366 $14,974
-------- -------- -------
EBITDA
Motion Pictures.............................. $ 11,291 $ 1,474 $ 5,069
Television................................... (509) (1,532) (614)
Animation.................................... 6,286 3,528 1,606
Studio Facilities............................ 4,238 3,625 2,121
-------- -------- -------
$ 21,306 $ 7,095 $ 8,182
======== ======== =======
</TABLE>
The reconciliation of total segment EBITDA to the Company's total EBITDA is
as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
EBITDA of reportable segments.................. $ 21,306 $ 7,095 $ 8,182
Head office general and administration
expenses..................................... 4,318 5,284 3,545
-------- -------- -------
$ 16,988 $ 1,811 $ 4,637
======== ======== =======
</TABLE>
Revenue by customer geographic location is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Canada......................................... $ 70,050 $ 41,687 $32,049
United States.................................. 131,433 51,735 16,669
Other foreign.................................. 69,768 24,875 15,431
-------- -------- -------
$271,251 $118,297 $64,149
======== ======== =======
</TABLE>
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 21. SEGMENT INFORMATION (CONTINUED)
Assets by geographic location are as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Canada...................................................... $325,044 $235,148
United States............................................... 76,929 92,464
-------- --------
$401,973 $327,612
======== ========
</TABLE>
NOTE 22. COMMITMENTS AND CONTINGENT LIABILITIES
a. Minimum future payments under operating lease commitments are as follows:
<TABLE>
<S> <C>
2001........................................................ $2,384
2002........................................................ 1,579
2003........................................................ 987
2004........................................................ 785
2005........................................................ 95
Thereafter.................................................. --
</TABLE>
b. Under the normal course of business, as at March 31, 2000, a subsidiary
of the Company has 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 $10.2 million that are payable over the
next twelve months (1999--$9.5 million).
c. A subsidiary of the Company has provided guarantees up to a maximum of
$2.1 million (1999--$9.9 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 totalling $15.7 million are 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 may be required to pay by reason
thereof, would have a material adverse effect on the financial condition or
future results of the Company.
NOTE 23. FINANCIAL INSTRUMENTS
A. FAIR VALUE
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
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--
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 23. FINANCIAL INSTRUMENTS (CONTINUED)
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.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
2000 2000 1999 1999
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and short-term deposits......................... $ 19,283 $ 19,283 $ 26,254 $ 26,254
Bank loans........................................... $(14,385) $(14,385) $(12,185) $(12,185)
Production and distribution loans.................... $(41,838) $(41,838) $(48,415) $(48,415)
Long-term debt....................................... $(40,158) $(39,479) $(41,145) $(41,840)
</TABLE>
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, 2000.
Accounts receivable from the federal and provincial governments and
government agencies in connection with production financing represent 25.8% of
total accounts receivable at March 31, 2000 (1999 - 17.4%).
C. INTEREST RATE RISK
The company's exposure to interest rate risk is summarized as follows:
<TABLE>
<S> <C>
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 accured liabilities... non-interest bearing
Production and distribution loans.......... floating interest rate, see also note 11
Long-term debt............................. disclosed in note 12
Cash and short-term deposits carry interest rates as follows:
Canadian dollar bank accounts.............. prime minus 2.50%
U.S. dollar bank accounts.................. US base rate minus 4.25%
Short-term deposits........................ fixed rate of 6.0%
</TABLE>
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 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:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Business combinations financed by debt to the seller........ $ -- $3,968 $16,487
Bank loans and production loans assumed under the terms of
business combinations..................................... $ -- $1,887 $54,414
Common shares issued in conjunction with business
combinations.............................................. $ -- $3,579 $25,358
</TABLE>
Interest paid for the year ended March 31, 2000 amounted to $7.0 million
(1999--$6.0 million; 1998--$5.7 million).
Income taxes paid during the year ended March 31, 2000 amounted to
$ 473,000 (1999--$1.1 million; 1998--$1.0 million).
NOTE 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 as set out in Item 18 of Form 20-F.
Under U.S. GAAP, the net loss and loss per share figures for the years ended
March 31, 2000, 1999 and the period ended March 31, 1998 and the shareholders'
equity as at March 31, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
NET LOSS ---------------------
2000 1999 1998 2000 1999
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
As reported under Canadian GAAP.............. $(5,293) $(14,156) $ (553) $206,414 $166,784
Equity interest in loss of Mandalay Pictures
(a)........................................ 1,907 (6,982) (644) (5,719) (7,626)
Adjustment for capitalized pre-operating
costs (b).................................. 962 (4,797) -- (3,835) (4,797)
Other differences (c)........................ -- 238 (238) -- --
Adjustment on accretion of preferred shares
(e)........................................ -- -- -- 281 --
------- -------- ------- -------- --------
Net loss/shareholders' equity under U.S.
GAAP....................................... (2,424) (25,697) (1,435) $197,141 $154,361
======== ========
Adjustment to cumulative translation
adjustments account (net of tax of $nil)... (2,981) 4,445 (20)
------- -------- -------
Comprehensive loss attributable to common
shareholders under U.S. GAAP............... $(5,405) $(21,252) $(1,455)
------- -------- -------
Basic and fully diluted loss per common share
under U.S. GAAP............................ $ (0.11) $ (1.05) $ (0.10)
======= ======== =======
</TABLE>
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 25. RECONCILIATION TO UNITED STATES GAAP (CONTINUED)
Reconciliation of the movement in the cumulative translation adjustment
account:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Balance--beginning of the year.............................. $ 4,425 $ (20)
Investment in Mandalay Pictures carried at 1.4198 US at
March 31, 1998............................................ -- (71,386)
Investment in Mandalay Pictures carried at 1.5087 US at
March 31, 1999............................................ (75,831) 75,831
Investment in Mandalay Pictures carried at 1.4494 US at
March 31, 2000............................................ 72,850 --
-------- --------
Balance--end of the year.................................... $ 1,444 $ 4,425
======== ========
</TABLE>
Reconciliation of movement in Shareholder's Equity under U.S. GAAP:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Balance--beginning of the year.............................. $154,361 $143,176
Increase in capital stock................................... 49,222 32,544
Dividends paid on preferred shares.......................... (591) --
Accretion on preferred shares............................... (446) --
Net loss under U.S. GAAP.................................... (2,424) (25,804)
Adjustment to cumulative translation adjustments account.... (2,981) 4,445
-------- --------
Balance--end of the year.................................... $197,141 $154,361
======== ========
</TABLE>
A. EQUITY INTEREST IN LOSS OF MANDALAY PICTURES, LLC
The Company accounts for Mandalay Pictures using the equity method. As
described in note 5 to the financial statements, the Company deferred the
pre-operating period costs of Mandalay Pictures prior to December 31, 1998 under
Canadian GAAP and is amortizing the deferred amount over seventeen quarters.
Under Statement of Position 98-5 "Reporting on the Cost of Start-Up Activities"
("SOP 98-5"), these costs of $8.2 million would be reflected in the results of
operations in the period incurred, and the investment in Mandalay Pictures would
decrease by a corresponding amount. The investment in Mandalay Pictures would
decrease by a corresponding amount. The fiscal 2000 amortization of the deferred
pre-operating costs recorded under Canadian GAAP has already been expensed for
U.S. GAAP purposes and accordingly the expense is added back for U.S. GAAP
purposes. The amortization amounted to $1.9 million in the year ended March 31,
2000.
B. ACCOUNTING FOR CAPITALIZED PRE-OPERATING PERIOD COSTS
In the year ended March 31, 1999, costs associated with the launch of the
television one-hour series business, totalling $4.8 million were capitalized and
included in other assets. Under Canadian GAAP, pre-operating costs related to
the period before commencement of commercial operations have been deferred and
are being amortized on a straight-line basis over a period not exceeding five
years commencing once commercial operation levels have been reached. Under
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up
Activities" start-up costs, net of the amortization recorded under Canadian
GAAP, would be reflected in the results of operations. The fiscal 2000
amortization of the deferred pre-operating costs recorded under Canadian GAAP
has already been
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 25. RECONCILIATION TO UNITED STATES GAAP (CONTINUED)
expensed for U.S. GAAP purposes and accordingly the expense is added back for
U.S. GAAP purposes. The amortization amounted to $962,000 in the year ended
March 31,2000.
C. 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 motion picture 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 $238,000 written off in 1998 under U.S.
GAAP reversed in that fiscal year.
D. ACCOUNTING FOR FUTURE INCOME TAXES ARISING IN BUSINESS COMBINATIONS
Under Canadian GAAP, the deferral method of accounting for income taxes is
followed. SFAS 109 requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of assets and liabilities that are
recognized in the financial statements.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"), requires that when assets are acquired in a business
combination which involves the recognition of goodwill, and the tax basis of
that asset is less than its cost, future income taxes recognized at the time of
acquisition should be added to goodwill arising on acquisition. The application
of SFAS 109 to the Company's acquisition of Lions Gate Studios resulted in an
increase in goodwill by $2.8 million (1999--$2.9 million), net of accumulated
amortization of $380,000 (1999--$253,000), and deferred income tax liabilities
by $2.8 million (1999--$2.9 million) due to tax and accounting basis differences
on capital assets acquired. The adjustment has no significant effect on the
reconciliation of the reported net loss under U.S. GAAP.
E. ACCRETION ON PREFERRED SHARES
The Company's preferred shares have been included in shareholders' equity
for Canadian GAAP purposes since the terms of the instrument do not provide a
likely 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. For U.S. GAAP purposes, the
preferred shares are presented outside of shareholders' equity as a form of
mezzanine financing because, as described in note 13(c), the preferred shares
can be redeemed for cash at the option of the holder in certain limited
circumstances.
The fair value of the basic preferred shares on issuance was estimated to be
$40.0 million for U.S. GAAP. The difference between the fair value of the basic
preferred shares at the issue date, net of issue costs, and the redemption
price, amounting to $10.5 million, is being accreted to shareholders' equity on
an imputed interest basis for U.S. GAAP purposes, over the five year period from
the date of issuance to the first available date that the preferred shares are
redeemable at the Company's option. Under Canadian GAAP, the accretion is
calculated on a straight line basis calculated on the difference assigned to the
basic preferred share, excluding the conversion feature, net of issue costs and
the redemption price, amounting
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 25. RECONCILIATION TO UNITED STATES GAAP (CONTINUED)
to $50.5 million. The difference in the accretion amount between Canadian and
U.S. GAAP for the year ended March 31, 2000 amounted to $281,000.
F. 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 by $24.0 million (1999--$3.9 million).
G. ACCOUNTING FOR STOCK BASED COMPENSATION
U.S. GAAP encourages but does not require companies to include in
compensation cost the fair value of stock options granted to employees. A
company that does not adopt the fair-value method must disclose the cost of
stock compensation awards, at their fair value, at the date the award is
granted.
The weighted average estimated fair value of each stock option granted in
the year ended March 31, 2000 was $1.76 (1999- $2.11; 1998--$3.46). 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, 2000 would be $4.0 million (1999--
$2.7 million; 1998--$939,000).
For disclosure purposes the 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: expected dividend yield of
0.0%, expected volatility of 35%, risk-free interest rate of 6.0% and expected
life of 5 years.
The resulting proforma U.S. GAAP loss and loss per share for the year ended
March 31, 2000 was $6.4 million and $0.24 per share respectively
(1999--$28.4 million and $1.16 per share respectively; 1998--$2.4 million and
$0.17 per share respectively).
H. LOSS PER SHARE
Basic U.S. GAAP loss per share is calculated after adjusting net loss for
dividends and accretion on the preferred shares and using the weighted average
number of shares outstanding during the period of 30,665,000 shares
(1999 - 24,575,000 shares; 1998 - 14,160,000 shares). The exercise of share
purchase warrants and employee stock options, convertible promissory notes and
Series A preferred shares could potentially dilute earnings per share in the
future, but were not reflected in fully diluted loss per share because to do so
would be anti-dilutive.
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 25. RECONCILIATION TO UNITED STATES GAAP (CONTINUED)
I. CONSOLIDATED STATEMENTS OF CASH FLOWS
The Company's cash flow statement prepared in accordance with Canadian GAAP
complies with U.S. GAAP.
J. 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.
K. DEFERRED INCOME TAXES
The deferred tax assets (liabilities) of the Company in Canada and the U.S.
under U.S. GAAP are as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Canada
ASSETS
Net Operating losses...................................... $11,906 $11,989
Accounts payable.......................................... 491 502
Valuation allowance....................................... (4,482) (5,793)
------- -------
7,915 6,698
LIABILITIES
Investment in films and television programs............... (7,790) (6,810)
Capital assets............................................ (2,758) (2,801)
Other assets.............................................. (153) --
------- -------
NET......................................................... $(2,786) $(2,913)
------- -------
United States
ASSETS
Net Operating losses...................................... $11,091 $ 6,968
Accounts payable.......................................... 258 --
Valuation allowance....................................... (10,885) (6,509)
------- -------
464 459
------- -------
LIABILITIES
Investment in films and television programs............... (183) (792)
Other assets.............................................. (281) 333
------- -------
NET......................................................... $ -- $ --
------- -------
TOTAL....................................................... $(2,786) $(2,913)
======= =======
</TABLE>
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 25. RECONCILIATION TO UNITED STATES GAAP (CONTINUED)
L. 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 December 1999, the United States Securities and Exchange Commission
issued Staff Accounting Bulletin Number 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 is applicable to the Company's fiscal
2001 year. The Company currently follows the revenue recognition principles set
out in SFAS 53, which will change on adoption of SOP 00-2, as described below.
Therefore, since the entertainment industry follows the more specific FAS 53
with respect to revenue recognition the issuance of SAB 101 is not expected in
itself to result in a change in the Company accounting policies for revenue
recognition.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation", an interpretation of APB
Opinion No. 25. The Interpretation is intended to clarify certain problems that
have arisen in practice since the issuance of APB 25. The Interpretation
provides a great deal of guidance, some of which is a significant departure from
current practice. The Interpretation generally provides for prospective
application for grants or modifications to existing stock options or awards made
after June 30, 2000. This standard is applicable for the Company's 2001 fiscal
year and currently its impact, if any, has not been determined.
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"), which is effective for fiscal years beginning after December 15,
2000. SOP 00-2 establishes new accounting standards for producers and
distributors of films, including changes to existing revenue recognition
criteria, a more restrictive definition of the components of revenue projections
used for amortization and valuation purposes for Investments in Films and
Television Programs, and accounting for promotional, advertising, development
and overhead costs. Among other changes, SOP 00-2 requires that promotional and
advertising costs for Films and Television Programs be expensed as incurred. The
Company expects to adopt SOP 00-2 as the authoritative pronouncement for
preparing its financial statements under Canadian GAAP as well as U.S. GAAP, and
is in the process of evaluating the impact of SOP 00-2 on its consolidated
financial statements. The timing of adoption will be identical for both Canadian
and U.S. GAAP and has not yet been determined.
In December 1997, the Canadian Institute of Chartered Accountants Accounting
Standards Board ("CICA-AsB") approved section 3465 on Income Taxes which has
adopted the liability approach based upon the temporary differences method. This
standard is applicable for the Company's fiscal 2001 year. The Company plans to
adopt this standard without restatement of prior periods. In March 1999, the
CICA-AsB approved section 3461, a new standard for recording and disclosing
pension and other future employee benefits, which is applicable for the
Company's fiscal 2001 year. The Company does not expect application of these two
new standards to have a material effect on Canadian GAAP net income.
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN TABLES ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE
AMOUNTS)
NOTE 26. COMPARATIVE FIGURES
Certain amounts presented in the prior year have been reclassified to
conform with the current year's presentation.
NOTE 27. SUBSEQUENT EVENT
On June 6, 2000 the Company announced that it had entered into a definitive
agreement in which a 100% interest in Trimark Holdings, Inc., a broad-based
entertainment company which distributes and licenses motion pictures
internationally and domestically, will be acquired and merged into a newly
formed, wholly owned subsidiary of the Company. The transaction will be
accounted for as a purchase.
Under the merger agreement the Company will provide US$4.50 in cash and two
common shares for each Trimark common share. A stock adjustment provision will
assure that the minimum total value of the consideration will be US$10 per
Trimark common share at the time of closing. The stock adjustment provision
provides that in the event the average of the last sales price of the Company's
common shares on the American Stock Exchange for the thirty trading days ending
immediately prior to the fifth calendar day before the Trimark shareholder
meeting to vote on the transaction ("Per Share Value") is less than US$2.75 per
share, then additional common shares in the Company will be issued such that the
total value of the common share component will be US$5.50. At US$2.75 Per Share
Value for each of the Company's shares, approximately 10.2 million shares will
be issued. The finalization of the deal is subject to the closing of an expanded
credit line for the Company and regulatory approval and shareholder approval by
both parties.
F-34
<PAGE>
[LOGO]
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
PRICEWATERHOUSECOOPERS LLP
1880 Century Park East
Century City
West Los Angeles CA 90067
Telephone (310) 201 1700
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of
Mandalay Pictures, LLC
In our opinion, the accompanying consolidated balance sheeets 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, 2000 and 1999, 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.
[LOGO]
June 14, 2000
F-35
<PAGE>
MANDALAY PICTURES, LLC
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................. $ 13,241,574 $32,331,264
Restricted cash........................................... 32,012,751 2,702,199
Accounts receivable and prepaid expenses.................. 7,389,123 371,177
Due from affiliates....................................... 244,180 281,329
Film costs................................................ 50,060,931 39,614,602
Other assets.............................................. 432,186 805,266
------------ -----------
TOTAL ASSETS................................................ $103,380,745 $76,105,837
============ ===========
LIABILITIES
Accounts payable and accrued expenses..................... $ 7,505,458 $ 8,126,292
Accrued participations and residuals...................... 3,200,000 --
Bank loan................................................. 2,801,184 3,954,979
Production loans.......................................... 30,557,227 18,813,759
Contractual obligations................................... 16,171,948 --
Deferred revenue.......................................... 5,106,294 4,461,892
------------ -----------
TOTAL LIABILITIES....................................... 65,342,111 35,356,922
============ ===========
MEMBER'S EQUITY
Contributions from members................................ 50,001,000 50,001,000
Accumulated deficit....................................... (11,962,366) (9,252,085)
------------ -----------
TOTAL MEMBER'S EQUITY................................... 38,038,634 40,748,915
------------ -----------
TOTAL LIABILITIES and MEMBERS' EQUITY....................... $103,380,745 $76,105,837
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
MANDALAY PICTURES, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
REVENUES.................................................... $ 94,678,903 $ 0
OPERATING EXPENSES
Production costs.......................................... (95,633,914) (935,216)
General and administration................................ (4,165,285) (9,919,533)
Depreciation.............................................. (98,494) (66,000)
------------ ------------
LOSS FROM OPERATIONS........................................ (5,218,790) (10,920,749)
INTEREST INCOME............................................. 2,520,559 2,682,254
------------ ------------
LOSS BEFORE PROVISION FOR TAXES............................. (2,698,231) (8,238,495)
PROVISION FOR TAXES......................................... (12,050) (2,400)
------------ ------------
NET LOSS.................................................... $ (2,710,281) $ (8,240,895)
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
MANDALAY PICTURES, LLC
CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S EQUITY
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
TIGERSTRIPES, LIONS GATE
LLC PICTURES, INC. TOTAL
------------- -------------- -----------
<S> <C> <C> <C>
BALANCE AT MARCH 31, 1998............................... $550 $48,989,260 $48,989,810
Net loss................................................ (8,240,895) (8,240,895)
---- ----------- -----------
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
==== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
MANDALAY PICTURES, LLC
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $ (2,710,281) $ (8,240,895)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 98,494 66,000
Write-off of abandoned project............................ -- 935,216
Amortization.............................................. 95,633,914 --
(Increase) decrease in assets:
Restricted cash......................................... (29,310,552) (2,702,199)
Accounts receivable and prepaid expenses................ (7,017,946) 50,023
Due from affiliates, net................................ 37,149 (281,329)
Film costs.............................................. (132,381,310) (39,838,396)
Other assets............................................ (53,892) (193,766)
(Decrease) increase in liabilities:
Accounts payable and accrued expenses................... (620,834) 6,693,902
Accrued participations and residuals.................... 3,200,000 --
Contractual obligations................................. 171,948 --
Deferred revenue........................................ 644,402 4,461,892
------------ ------------
Total adjustments....................................... (69,598,627) (30,808,657)
------------ ------------
Net cash used by operating activities................... (72,308,908) (39,049,552)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) proceeds from bank loan, net................. (1,153,795) 3,954,979
Repayments on production loan............................. (33,969,467) --
Proceeds from production loan............................. 45,712,935 18,813,759
Payments relating to financing costs and other assets..... (518,122) (1,388,922)
Proceeds from film financing transactions................. 43,147,667 --
------------ ------------
Net cash provided by financing activities............... 53,219,218 21,379,816
------------ ------------
Net decrease in cash and cash equivalents............... (19,089,690) (17,669,736)
Cash and cash equivalents, beginning of year................ 32,331,264 50,001,000
------------ ------------
Cash and cash equivalents, end of year...................... $ 13,241,574 $ 32,331,264
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid........................................... $2,218,759 $728,858
Income taxes paid....................................... $12,050 $2,400
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
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 intercompany transactions and
accounts have been eliminated.
REVENUE RECOGNITION
The Company has entered into certain all rights international distribution
agreements that provide for the payment of minimum license fees, usually payable
on delivery of the respective completed film, that are further subject to
increase based on the actual distribution results in the respective territory.
Revenue from these agreements is recognized on the date the completed film is
delivered or becomes available for delivery, is available for exploitation in
the first media window purchased and certain other conditions of sale have been
met pursuant to criteria specified by SFAS 53, Financial Reporting By Producers
and Distributors of Motion Picture Films.
The Company has entered into a first look financing and distribution
agreement with Paramount Pictures Corporation ("Paramount") that gives Paramount
the option to contribute certain sums toward the production cost of films
produced in exchange for the right to distribute the film in all territories
other than those covered by the international distribution agreements. Paramount
recoups all of its production cost contribution, any releasing cost expenses,
including participations and residuals paid, and is entitled to a distribution
fee on the results of its distribution before remitting any additional sums to
the Company. Revenue for this agreement is recognized at the time of exhibition
in each of the respective media windows. In addition, this agreement provides
for Paramount to pay annual 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.
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
equivalent 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.
FILM COSTS
Film costs represent the unamortized cost of films which have been developed
and produced by the Company or for which the Company has acquired distribution
rights. Film costs are capitalized and amortized against revenues guaranteed by
the delivery and subsequent exploitation of the film. Such costs
F-40
<PAGE>
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
include all development and production (including an allocation of overhead and
financing costs), an estimate of participations and residuals, and print and
advertising costs that are expected to benefit future periods.
Film costs are 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, production and
distribution 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. 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 costs are written down to net realizable value based on this
appraisal.
Included in film costs are development costs. Development costs represent
expenditures directly attributable to projects which are incurred prior to their
production. Such costs are capitalized and, upon commencement of production, are
charged to the production. Development costs are written off when determined not
to be recoverable or when projects under development are abandoned.
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, 2000, and
March 31, 1999, the Company recorded a provision related to California Limited
Liability Company taxes of $12,050 and $2,400, 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, 2000 and March 31, 1999, respectively.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the American Institute of Certified Public Accountants issued
SOP 00-2, "Accounting by Producers or Distributors of Films." SOP 00-2
establishes new accounting standards for producers and distributors of films,
including changes in revenue recognition and accounting for advertising,
development and overhead costs. SOP 00-2 requires that advertising costs for
theatrical and television product be expensed as incurred. In addition,
development costs for abandoned projects and certain indirect overhead costs are
to be charged directly to expense instead of those costs being capitalized to
film costs, which is what current guidance prescribes. The Company is in the
process of evaluating the overall impact of
F-41
<PAGE>
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
SOP 00-2, which is effective for fiscal years beginning after December 15, 2000,
on its consolidated financial statements.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
3. FILM COSTS:
Film costs consist of the following at March 31:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Projects released, net of amortization...................... $ 7,020,184 $ 0
Projects in production...................................... 37,773,547 36,449,534
Projects in development/pre-production...................... 5,267,200 3,165,068
----------- -----------
Total....................................................... $50,060,931 $39,614,602
=========== ===========
</TABLE>
During the years ended March 31, 2000 and March 31, 1999, the Company
capitalized to film projects: interest of approximately $2,335,000 and $763,000,
respectively and production overhead of $7,000,000 and -0-, respectively.
4. FILM FINANCING TRANSACTIONS:
In December 1999, 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 film 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 the amount of $16,000,000 from an
investor related to the intended production of a motion picture, that as of
March 31, 2000, remains in development/ pre-production. $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. Should production not commence on the
picture by August 31, 2000 (subject to extension), the Company must return these
funds, plus all interest earned on
F-42
<PAGE>
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FILM FINANCING TRANSACTIONS: (CONTINUED)
the restricted deposit. At March 31, 2000, $16,171,948 was included in
contractual obligations related thereto.
5. BANK LOAN:
On February 12, 1999, the Company entered into a credit facility, which
provides a line of credit of $332,500,000, bearing an interest rate of LIBOR
plus 1.75%. At both March 31, 2000 and 1999, the Company had approximately
$26,500,000 of unused available credit with this facility. Borrowings under this
credit facility are guaranteed by a group of A-Rated insurance companies, are
non-recourse to the Company and are collaterized by certain revenues and
copyrights. Borrowings under this credit facility amount to $2,801,184 at
March 31, 2000 and are due when certain film events occur but no later than
February 12, 2005.
6. PRODUCTION LOANS
On October 15, 1999 the Company entered into a non-recourse credit facility
which provides a line of credit of $46,336,190, bearing an interest rate of
LIBOR + 1.5%. At March 31, 2000, the Company had approximately $18,802,000 of
unused available credit with this facility. Borrowings under this credit
facility are collaterized by certain distributor contracts. The outstanding
balance of $27,534,589 at March 31, 2000 is payable during fiscal year 2001 and
2002 from distributor revenues.
On December 1, 1998, the Company entered into a credit facility which
provides a line of credit of $36,993,000 bearing an interest rate of LIBOR plus
1.25%. At March 31, 2000 and March 31, 1999, the Company had approximately $-0-
and $18,180,000, respectively of unused available credit with this facility.
Borrowings under this credit facility are collateralized by certain foreign
distributor contracts. The outstanding balance of $3,022,638 at March 31, 2000
is payable during fiscal year 2001 from foreign distributor revenues.
The bank required the Company to enter into foreign exchange options to
hedge the Japanese Yen translation fluctuation applicable to one of these
distributor contracts. These options, which are exercisable during fiscal years
2000, 2001 and 2002, have a fair value of $9,370 at March 31, 2000.
The Company made restricted cash deposits related to both loans, from which
the bank can withdraw interest and related expenses. The balances at March 31,
2000 total $4,278,785 and any unused funds will be returned to the Company upon
repayment of the loans.
7. COMMITMENTS AND CONTINGENCIES:
EMPLOYMENT AGREEMENTS:
It is the Company's policy to employ all executives under formal employment
agreements. Of the 34 total employees of the Company, 16 have been granted
employment contracts providing individual annual compensation amounts ranging
from a low of $60,000 to a high of $4,444,000. The terms of these agreements
generally terminate on or about February 28, 2001 and provide for employee
mitigation if terminated early by the Company.
The employment and compensation agreement with the Company's two most senior
executives, who are also members, provide for minimum annual base compensation
of $4,444,000 and $1,280,000 respectively, through the earlier of the year
ending February 28, 2003, or such time as the Company has delivered
F-43
<PAGE>
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
20 films. The employment and compensation agreement for another officer of the
Company provides for a minimum annual base compensation of $1,420,000 through
the year ending February 28, 2001. In addition, if this agreement is terminated
early under certain conditions, the prorated portion of the $500,000 signing
bonus paid to this officer must be repaid to the Company.
During the next fiscal year the Company plans to extend the terms of
employment of those executives necessary to fulfill its business plan. No
interruption to the ongoing business activities of the Company is anticipated by
this process.
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.
Based upon the performance of the picture to date, the Company has accrued
$3,200,000 at March 31, 2000 as an estimate of this obligation. Paramount is the
primary obligor of these obligations and the Company anticipates raising certain
defenses to payment of its contractual responsibility under this arrangement due
to certain actions of Paramount during the production and distribution of the
film. Any formal relief of this obligation, if any, will be recorded as income
when legally binding.
Under the terms of the distribution agreement granting worldwide
distribution rights to the Company on "Enemy at the Gates", the Company has
guaranteed a minimum return of $3,000,000 to an investor in the production. Such
guarantee is payable at the third anniversary of the US theatrical release of
the film, only if the film has not generated at lease that amount through the
results of its distribution. Because of the uncertain nature of the obligations
and its dependence on the results of distribution, no liability has been accrued
related thereto at March 31, 2000.
8. MEMBERS' EQUITY:
The Company's equity structure is as follows at each of March 31, 2000 and
March 31, 1999.
<TABLE>
<S> <C>
Class A Preferred Membership Units.......................... $50,000,000
Class B Common Membership Units............................. 450
Class C Common Membership Units............................. 550
-----------
$50,001,000
===========
</TABLE>
The Class A Preferred membership units have a first priority claim on any
distribution, with the exception of a tax related distribution, until exhausted.
F-44
<PAGE>
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTIES:
Due from affiliates consists of the following at March 31:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Lions Gate Entertainment Corporation........................ $244,180 $166,521
Mandalay Television......................................... -0- 114,808
-------- --------
$244,180 $281,329
======== ========
</TABLE>
At March 31, 2000 and March 31, 1999, the Company had a receivable of
$37,000 and $120,000, respectively from an employee, which is included in
accounts receivable. Also included in accounts receivable at March 31, 2000 and
1999, are the amounts of $34,000 and $40,000, respectively, due from Mandalay
Corporate Enterprises, an entity in which a member of the Company has a
significant ownership interest.
Lions Gate Entertainment Corporation, the member that owns class A preferred
and class B common membership units, is required to compensate the Company for
any interest income foregone related to a required equity contribution that was
replaced by the establishment of the Bank Loan. During the years ended
March 31, 2000 and 1999, the Company received $1,287,000 and $300,000,
respectively under this agreement, which amounts are included in Interest
Income.
F-45
<PAGE>
TRIMARK HOLDINGS, INC.
SPECIAL MEETING OF STOCKHOLDERS
OCTOBER 12, 2000
The undersigned stockholder of Trimark Holdings, Inc. (the "Company") hereby
nominates, constitutes and appoints Mark Amin and Jeff Gonzalez, and each of
them, the agent and proxy of the undersigned, each with full power of
substitution to vote all shares of Common Stock of the Company which the
undersigned is entitled to vote at the Special Meeting of Stockholders of the
Company to be held on October 12, 2000 at 9:00 a.m. and at any and all
adjournments thereof, as fully and with the same force and effect as the
undersigned might or could do if personally present thereat, as follows:
1. Approval of the adoption of the Agreement and Plan of Merger, dated June 6,
2000, among Lions Gate Entertainment Corp., LGE Merger Sub, Inc. (a wholly owned
subsidiary of Lions Gate) and the Company, and the transactions contemplated
thereby, pursuant to which the Company will merge into LGE Merger Sub, Inc.
/ / FOR / / AGAINST / / ABSTAIN
(PLEASE SIGN AND DATE THE OTHER SIDE)
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE OF "FOR" ON PROPOSAL 1. THIS PROXY
CONFERS AUTHORITY TO AND SHALL BE VOTED IN ACCORDANCE WITH SUCH RECOMMENDATIONS
OF THE BOARD OF DIRECTORS UNLESS A CONTRARY INSTRUCTION IS INDICATED, IN WHICH
CASE THE PROXY SHALL BE VOTED IN ACCORDANCE WITH SUCH INSTRUCTION. IN ALL OTHER
MATTERS, IF ANY, PRESENTED AT THE MEETING, THIS PROXY SHALL BE VOTED IN
ACCORDANCE WITH THE RECOMMENDATIONS OF THE BOARD OF DIRECTORS.
PLEASE SIGN AND DATE BELOW. DATED: ___________________________
I do __ do not __ expect to attend
the meeting.
__________________________________
(Signature of Stockholder)
__________________________________
(Signature of Stockholder)
(Please date this proxy and sign your
name as it appears on the stock
certificate. Executors,
administrators, trustees, etc. should
give their full title. All joint
owners should sign.)
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS, AND MAY BE
REVOKED PRIOR TO ITS EXERCISE BY
FILING WITH THE SECRETARY OF THE
COMPANY AN INSTRUMENT REVOKING THIS
PROXY OR A DULY EXECUTED PROXY
BEARING A LATER DATE OR BY APPEARING
AND VOTING IN PERSON AT THE MEETING.
