Lions Gate Entertainment Corporation

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Lions Gate Entertainment Corporation

595 Burrard Street, Suite 3123
P.O. Box 49139
Vancouver, British Columbia V7X 1J1
Canada
Telephone: (604) 609-6100
Fax: (604) 609-6149
Web site: http://www.lionsgate-ent.com

Public Company
Incorporated: 1997
Employees: 342
Sales: $78.4 million
Stock Exchanges: American Toronto
Ticker Symbol: LGF
NAIC: 51211 Motion Picture and Video Production; 51212 Motion Picture and Video Distribution; 512191 Teleproduction and Other Postproduction Services

Lions Gate Entertainment Corporation is a leading independent film and television production company based in Canada. Lions Gate has a number of subsidiaries located in both Canada and the United States, and the company is also a partner in several other ventures. Subsidiaries include Lions Gate Films, which produces and distributes motion pictures, Lions Gate Studios, the largest film and television production facility in Canada, Lions Gate Television, which makes TV series and movies, and Avalanche Films, a video distribution company. Lions Gate also has stakes in Peter Guber’s Mandalay Pictures, a producer of theatrical films for release through Paramount, Cine-Groupe, which produces animated television programs, and Sterling Home Entertainment, a video distributor. Lions Gate continues to grow by making acquisitions, including video company Trimark Holdings, which it purchased in 2000. The company’s founder, Frank Giustra, stepped down as CEO in June of that year and his place was taken by former Sony Pictures executive Jon Feltheimer.

Origins in 1997

Lions Gate Entertainment Corporation was founded by financier Frank Giustra in the summer of 1997. Giustra, the son of a Sudbury, Ontario nickel miner, had served previously as CEO of Yorkton Securities, Inc., an investment bank that specialized in funding mining ventures. During his years as a banker, he also had been involved in the financing of a half dozen films. A lifelong movie fan, Giustra had decided that he wanted to enter the entertainment business when he reached the age of 40. Leaving Yorkton in December of 1996, he set out to assemble a Canadian film company that could compete with Hollywood on its own terms.

To fund the new venture he put up $16 million of his own money and used his banking connections to arrange for $40 million in financing from investors, including Yorkton. Giustra then obtained $64 million when Lions Gate merged with Toronto Stock Exchange listee Beringer Gold Corp. to became a public company. Beringer’s mining assets were quickly sold off, and the newly christened Lions Gate Entertainment set out to purchase several existing Canadian film businesses with its new war chest.

One of Lions Gate’s first purchases was Cinepix Film Properties, a Montreal-based producer and distributor that had been founded in 1962 by John Dunning and Andre Link, who both still ran the company. Cinepix released both English- and French-language films, and it was one of Canada’s leading independent motion picture companies. Cinepix also had a U.S. distribution arm based in New York. The company produced ten to 12 modestly budgeted titles annually and also distributed edgy art-house fare such as grunge rock documentary Hype, Vincent Gallo’s offbeat Buffalo 66, and Sick: The Life & Death of Bob Flanagan, Supermasochist. In addition, Cinepix owned 56 percent of Cine-Groupe, a Montreal-based animated film, production company. Giustra renamed Cinepix Lions Gate Films after the acquisition, but kept its leadership intact. An offshoot, Lions Gate International, was later formed in Los Angeles to serve as a worldwide distribution branch.

Lions Gate also bought North Shore Studios, located in Giustra’s home base of Vancouver, British Columbia. North Shore (subsequently renamed Lions Gate Studios) was Canada’s largest film production facility, with six busy sound stages. Because it was cheaper to work there, many American production companies chose Vancouver to shoot their movies and TV shows. The series The X Files was shot at North Shore for its first five seasons, and other American shows such as Millennium used the studio as well.

Another branch of Lions Gate was Mandalay Television, a California-based producer of made-for-TV movies. Mandalay was acquired in a deal with Hollywood mogul Peter Guber, who was given four percent ownership of Lions Gate. Guber was a controversial figure in the film world, with a string of hit movies such as Batman and Midnight Express to his credit, but also a reputation for profligate spending. He had run Columbia Pictures for five years starting in 1989, but the company had been forced to write down $510 million in lawsuit and contract settlement expenses following his departure.

Gambling on Guber in 1998

In early 1998 Lions Gate announced a second, larger deal with Guber to form Mandalay Pictures, which would produce feature films costing between $15 and $75 million each. Guber and his partners Paul Schaeffer and Adam Platnick would own 55 percent of Mandalay, and Lions Gate would own the rest. The complicated financial arrangement called for Giustra’s company to put up $80 million, with more than $700 million coming from Paramount Pictures and other companies who would share distribution rights. Lions Gate would not earn anything from the deal until after the distributors had recouped their costs. Noting Guber’s reputation, Lions Gate declared that it had protective measures in place that would guard against excessive spending. A total of 20 films was to be produced in a five-year period, with the first due in 2000.

In June of 1998, Lions Gate completed another purchase, this time picking up a bankrupt film distributor called International Movie Group, Inc. (IMG). Ten years earlier IMG had received $14 million in financing from Frank Giustra and Yorktown Securities, but the company had gone belly up in 1996. IMG’s main asset was its film library, which included such titles as Jean-Claude Van Damme’s Kickboxer. IMG’s holdings were inte-grated into Lions Gate’s other operations, and its former CEO Peter Strauss was named president of newly formed Lions Gate Entertainment, Inc., which would become the American parent company for Lions Gate’s U.S. interests. Strauss had put in many years in the movie business, going back to Allied Artists Pictures Corp., where he had overseen production of such classic films as Cabaret and The Man Who Would Be King. Strauss had been instrumental in bringing Giustra and Guber together.

Lions Gate’s newly allied divisions were now beginning to bring home contracts and make production plans. Mandalay Television announced that it would be shooting TV series for ABC (Cupid), Lifetime (Oh Baby), UPN (Mercy Point), and Showtime (Rude Awakening). Lions Gate Films also picked up distribution deals for Paul Schrader’s Affliction, a to-be-titled Ted Demme drama, and several others. Another new subsidiary, Lions Gate Media, was formed at this time to explore additional television production possibilities.

Lions Gate also was drawing attention for two controversial projects with which it was involved. One was the Adrian Lyne-directed remake of Vladimir Nabokov’s Lolita, which was slated to be released uncut in Canada through Lions Gate Films. The portrait of an obsessive pedophile had received a great deal of negative prerelease publicity, as well as a few critical raves. It eventually was released for a limited run before being broad-cast on cable television. A much bigger controversy involved the company’s plans to film Bret Easton Ellis’s novel American Psycho, which depicted a stockbroker who was also a sexual sadist. The company was wooing Leonardo Di Caprio for the lead, his first role after the blockbuster Titanic. Despite the offer of a reported $21 million, Di Caprio turned the project down, possibly because his fan base of teenage girls would be unable to view the anticipated R to NC-1.7 rated film. The company continued with its production plans after Di Caprio dropped out, however, and signed Christian Bale for the role.

Assessing the First Year’s Results

At the end of the company’s first year in business, a loss of $397,000 U.S. dollars on revenues of $42.2 million was reported. Lions Gate’s stock also had fallen to a low of $1.40 a share. The annual loss was far from unexpected for a brand new company, but the slipping share price was bothersome, as it reduced the company’s ability to make acquisitions. Purchase of an American reality-based television company, Termite Art Productions, could only be made with the issuance of three convertible promissory notes, rather than a stock swap, because of the low price. The $2.75 million deal brought Lions Gate the maker of a wide spectrum of programs that ranged from History Channel documentaries to tabloid-style fare like “Busted on the Job.”

Concern about the low share price finally led Giustra to call a shareholder meeting for October 30, where a vote was made to list Lions Gate on the American Stock Exchange. A two-for-one stock consolidation was effected to bring the share price up to the AMEX minimum. It was hoped that the greater exposure of an AMEX listing would boost the stock’s value.

Company Perspectives:

Lions Gate is an ideal platform for launching rapid and exciting growth in the independent filmed entertainment world. We are a nimble and entrepreneurial young company that will opportunistically target and consolidate fresh assets, grow our core businesses and become the first new independent mini-major in years. Instead of competing directly with the major studios, we intend to capitalize on the competitive vacuum in the mini-major arena by creating edgy, provocative and distinctively independent content in our films, television programming and new media initiatives.

In January of 1999 the company named Roman Doroniuk, formerly with competitor Alliance Communications, to the posts of president and chief operating officer. Giustra remained Lions Gate Entertainment’s CEO and chairman. Meanwhile, Lions Gate Films was scoring kudos for the films Affliction and Gods and Monsters, which were now in theaters, while hockey comedy Les Boys 2 was breaking box office records in French Canada. Cine-Groupe also signed a deal to produce 26 half-hour episodes of a cartoon series called Mega Babies, to premiere on Fox Family TV in the fall of 1999. The previous year Fox Family had purchased a 20 percent stake in Cine-Groupe. A new infusion of $16.5 million also was received when 5.4 million shares of Lions Gate stock were sold on a “bought-deal” basis.

In March, the company received its first Academy Awards when James Coburn won an Oscar for best supporting actor in Affliction and Gods and Monsters was honored for Bill Condon’s adapted screenplay. Lions Gate had reportedly spent $500,000 in a public relations campaign to promote the two films, which were nominated for a total of five awards.

Controversy over American Psycho continued to mount in Toronto, where scenes for the movie were being shot. Several antiviolence and victim’s rights groups were protesting the film’s production, although city officials ultimately issued a permit allowing location shooting. Many Canadians were up in arms about the project because notorious Ontario sex killer Paul Bernardo was found to have a copy of the book at his bedside.

More New Projects in 1999

In April 1999 the company moved its financial operations to Toronto, where new president Doroniuk’s offices were located. Giustra and the corporate headquarters remained in Vancouver. New projects on which company divisions were working included TV movies The First Daughter and The Linda McCartney Story, TV series Hope Island and Cliffhangers, and animated feature Heavy Metal 2000, produced for Columbia Tri-Star.

When the company released its figures for the second fiscal year, it reported losses of $9.3 million on revenues of $78.3 million. The studio and film divisions were the healthiest, with video sales to the United States via new subsidiary Avalanche Films and half-owned Sterling Home Entertainment particularly strong. The biggest chunk of red ink was attributable to the investment in Mandalay Pictures. Because of “accounting rules,” in the words of President Doroniuk, Lions Gate was picking up 100 percent of Mandalay’s losses. In the summer the company put its 13.8-acre Vancouver studio complex up for sale. The asking price was $28 million, but there were no immediate takers. The company’s television division also had been restructured to emphasize hour-long non-network series over the production of more financially risky network shows. Its association with Guber’s Mandalay Television had been terminated.

In the summer Lions Gate scored a hit in theaters when the Canadian-produced drama The Red Violin took in nearly $10 million on the art-house circuit. The Samuel Jackson-starring film was made by a French- and English-Canadian team and was financed and shot internationally. In the fall the company announced two more major deals. Lions Gate Television was to produce a miniseries based on author Dean Koontz’s novel Sole Survivor, and Lions Gate Films would distribute a new low-budget film starring and co-produced by Kevin Spacey entitled The Big Kahuna. Spacey reportedly took Lions Gate’s $1.5 million offer over several larger ones because he was impressed with the company’s track record and its marketing savvy.

Late in the year Lions Gate was seeking still more capital, arranging for a $13.4 million line of credit and filing a prelimi-nary prospectus to sell $30 million in preferred stock shares and common stock purchase warrants. In December the first release from Mandalay Pictures also reached theater screens. Sleepy Hollow, directed by Tim Burton, grossed $30 million in its opening weekend despite mixed reviews. Lions Gate also began distributing Dogma, which was directed by Kevin Smith and was the company’s widest release to date. The film grossed $8.7 million on its opening weekend, and it was expected to earn triple that amount over time. Dogma was another controversial project, a satire of Catholicism whose distribution had been switched from Disney-owned Miramax to Lions Gate because of the subject matter.

In January 2000 yet another influx of cash was obtained, this time $33.1 million from a group of investors that included Microsoft co-founder Paul Allen, former Sony executive Jon Feltheimer, German broadcasting company Tele-Munchen, and SBS Broadcasting SA. The money was earmarked to fund more acquisitions.

Giustra Steps Down in 2000

The new financing was quickly followed by dramatic management shifts at the company, Jon Feltheimer took over Giustra’s job as CEO, with the founder retaining only his board chairman duties. A short time later President Doroniuk made his own exit, apparently frustrated at having been passed over for Giustra’s job. While the dust was clearing, Lions Gate took home its third and fourth Oscars when The Red Violin garnered a statuette for best original score and Sleepy Hollow won for art direction.

Quickly grabbing the reins, industry vet Feltheimer announced an increase in filmmaking activity, with 15 movies budgeted at $5 to $20 million to be made annually. In addition, the Avalanche video subsidiary would soon start production on several $1 million genre films to help expand its catalog. Acquisition of another independent film company and a film library were also on Lions Gate’s agenda. In June the company accomplished the latter, purchasing low-budget film and video distributor Trimark for an estimated $50 million in stock and cash, plus assumption of $36 million in debt. The ten-year-old company specialized in action and genre films and had a 650-title library. Trimark also owned a web site, CinemaNow, which offered broadband streaming capabilities. Lions Gate was expected to begin featuring its own product on the site, which showcased independent films, some available exclusively over the Internet.

Key Dates:

1997:: Lions Gate formed; purchases Cinepix, North Shore Studios, and Mandalay TV.
1998:: Deal signed to co-fund Mandalay feature films; stock added to AMEX.
1999:: First Oscars for Affliction and Gods and Monsters; Dogma and Red Violin released.
2000:: Founder Frank Giustra steps down as CEO; purchase of Trimark Holdings.

After only three short years in business, Lions Gate Entertainment had seen many changes and was still growing rapidly. The company was expanding on its strengths as a producer and distributor of independent films, while at the same time growing its home video and television production divisions. Lions Gate’s long-term prospects were still somewhat hazy, but much effort was being made to establish it as a permanent part of the movie industry landscape.

Principal Subsidiaries

Avalanche Films; Cinepix Animation, Inc.; Cinepix Films, Inc.; LG Pictures, Inc.; Lions Gate Entertainment Inc.; Lions Gate Films Corp.; Lions Gate Films Inc.; Lions Gate Media Corp.; Lions Gate Media Inc.; Lions Gate Television; Trimark Holdings; Distribution International Cine-Groupe J.P. Inc. (56%); Sterling Home Entertainment (50%).

Principal Competitors

Alliance Atlantis Communications, Inc.; Artisan Entertainment, Inc.; Bertelsmann AG; DreamWorks SKG; Metro-Goldwyn-Mayer, Inc.; The News Corporation Ltd.; Overseas Filmgroup, Inc.; Sony Pictures Entertainment; Time Warner, Inc.; Unapix Entertainment, Inc.; Universal Studios, Inc.; Viacom, Inc.; The Walt Disney Company.