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Penalty payment widens losses at Alliance Atlantis

11/25/2002

Toronto, - Another penalty payment to Robert Lantos's film company for an uncompleted movie project eroded a sharp increase in revenue at Alliance Atlantis Communications Inc., causing a bigger loss in the film and TV company's fiscal second quarter.

Alliance Atlantis (TSX:AAC.A, AAC.B) said Monday it made a second non-fulfilment payment this year -- this time for $2.4 million -- for failing to produce a project by Lantos's Serendipity Point Projects Inc.

Serendipity also received $3 million in the first quarter as compensation under a 1998 agreement.

Lantos headed Alliance Communications before the merger that created Alliance Atlantis in September 1998. After the merger, Lantos stayed on for three years to produce a slate of films for Alliance and took the honorary title of chairman emeritus.

The maximum remaining payment if Alliance chooses not to finance another Serendipity project is $1.1 million, Rita Middleton, Alliance's acting chief financial officer, said in a conference call.

"Thereafter, the company's production financing obligations pursuant to this 1998 agreement will be zero," Middleton said.

Under terms of the 1998 deal, Serendipity has the right to put forward $100 million worth of motion picture projects to Alliance until September 2024, Middleton said.

Alliance has the option to finance and distribute the projects or decline to do so and instead pay a production non-fulfilment payment equal to 10 per cent of the budget of the proposed project.

Including the penalty payment, the loss for the quarter ended Sept. 30 amounted to $3.9 million, or nine cents a share, and compared with a loss of $1.1 million or three cents per share a year earlier.

Revenue totalled $252.2 million, up 14 per cent from $221.5 million a year ago.

Other special items that affected earnings included a $2.1-million one-time charge for the sale of U8TV assets, higher interest charges and a pretax foreign-exchange loss of $10 million, up from $9 million a year ago.

Although the company posted a loss, Alliance Atlantis said its earnings before interest payments, taxes, depreciation and amortization (EBITDA) rose 15 per cent to $40.5 million.

"We are very pleased with the strength of our performance this quarter and, in particular, the exceptional growth in revenues and EBITDA generated by both the broadcast and motion picture distribution groups," Michael MacMillan, chairman and chief executive, said in a release.

The company has three core operating groups: broadcast, motion picture distribution and entertainment.

Revenues at the broadcast group, which includes specialty TV channels such as Showcase Television, Life Network, HGTV Canada, History Television and The Food Network, among others, rose 27 per cent to $36.6 million as ad revenue jumped 68 per cent.

"The No.1 factor (for the higher ad revenue) is that ratings have continued to grow. Year over year, they're up about 25 per cent," MacMillan said on the conference call.

He also said the company expects operating losses from its developing specialty and digital channels to be between $13 million and $15 million for its full fiscal year, which is within the range of analysts' expectations.

The company is also aiming to be cash-flow positive by the end of 2024 and have lower debt.

At its motion picture distribution group, revenue rose 51 per cent to $120 million as the division released popular movies including Austin Powers in Goldmember, and Spy Kids II.

In the current third quarter, Alliance is expecting strong results from the December release of the second Lord of the Rings film, The Two Towers, and from Chicago, a movie version of the Broadway play.

Alliance's entertainment group saw a decline in revenues to $90.3 million, from $106.2 million, after the company cut back the number of hours it produced to 47 from 77 a year ago as part of a plan to boost margins and cut production costs.

However, its CSI: Crime Scene Investigation series continued to perform strongly, as did its new addition, CSI: Miami.

For the six-month period, net earnings fell to $5.8 million or 14 cents a share, from $13.1 million or 36 cents per share a year earlier.

Alliance's class-B shares fell one cent to $15.99 in trading Monday on the Toronto stock market.

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