Alliance Atlantis Communications Inc.

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Alliance Atlantis Communications Inc.

121 Bloor Street East, Suite 1500
Toronto, Ontario M4W 3M5
Canada
Telephone: (416) 967-1174
Fax: (416) 960-0971
Web site: http://www.allianceatlantis.com

Public Company
Incorporated: 1985 as Alliance Communications Corporation
Employees: 650
Sales: C$771.6 million (US$498.64 million)(2000)
Stock Exchanges: NASDAQ Toronto
Ticker Symbols: AAC.A; AAC.B; AACB
NAIC: 512130 Cinemas; 513120 Television Broadcasting; 513210 Pay and Specialty Television; 512110 Motion Picture and Video Production; 512120 Motion Picture and Video Distribution

Alliance Atlantis Communications Inc. is a leading broadcaster, creator, and distributor of filmed entertainment and also has significant ownership interests in eight Canadian specialty television networks. The company’s principal business activities are conducted through three operating units: Broadcast, Motion Pictures, and Television. Headquartered in Toronto, Alliance Atlantis operates offices in Los Angeles, Montreal, Edmonton, London, Sydney, and Shannon. The company was created in 1998 by a merger of Canada’s two largest film and TV production companies: Atlantis Communications and Alliance Communications.

History of Atlantis Communications

In 1978, Michael MacMillan, a film studies graduate of Queen’s University in Ontario, founded Atlantis Communications with three friends and combined financial resources of $300. The fledgling company focused on producing short films for industrial clients as well as for general entertainment purposes. Despite a difficult climate for Canadian entertainment companies during this time, Atlantis survived. Like many Canadian film and television production companies, it sometimes lived project to project, relying on government grants. In 1983, MacMillan produced a live-action short film, Boys and Girls, based on a short story by a Canadian author, and the film received an Academy Award. Thereafter, the company’s fortunes increased.

By the beginning of the 1990s, the entertainment industry in Canada had matured, consisting of larger, vertically integrated companies that conducted their own production, distribution, and financing operations. Atlantis had grown and matured at the same time, acquiring considerable financial assets, including studios, real estate, film and television libraries, and rights to other productions. By the 1990s, Atlantis, still headed by MacMillan, had produced for all the major Canadian broadcasters and U.S. networks and had also built an international presence, with offices in Amsterdam, Sydney, and Los Angeles. An estimated 30 percent of Atlantis’s business at the time was in foreign markets.

The expanding global market for programming along with advances in technology had made entertainment a truly global industry with much growth potential. Joint productions between foreign entertainment companies were becoming popular, especially for Atlantis, given the concurrent cutbacks in Canadian government funding for such projects. In 1993, the Atlantis television production subsidiary, Atlantis Films Ltd, by then one of Canada’s top ranked production houses, sold a minority interest of its shares to American-based E.C. Television, a division of Interpublic Groups of Cos. Inc. Interpublic was one of the world’s largest advertising organizations, bringing a broad scope of major advertising clients to the deal. MacMillan told journalists from the Globe & Mail in May 1993 that the minority interest was significant in terms of strategic benefits and capitalization. “It positions us for substantial growth and we’re very happy,” he noted.

In 1995, following a period of steady growth, Atlantis experienced a year of diminished profit. The company restructured in an effort to save millions of dollars in annual overhead. The declining profits were also attributed to delayed production schedules and the cancellation of the company’s science fiction TekWar television series on the USA Network. MacMillan predicted that the company would return to normal by year’s end and that the outlook for 1996 was good.

History of Alliance Communications

The history of Alliance Communications can be traced to 1972, when two men from Vancouver, Robert Lantos and Victor Loewy, began an enterprise that would eventually become Canada’s largest film company. Graduates of McGill University, Lantos and Loewy started Vivafilm, a film distribution company, acquiring the rights to the soft-core porn spoof Flesh Gordon among others. With the rights to the John Waters cult film Pink Flamingos, Lantos and Loewy next opened an art-house theater, the Rembrandt, in Vancouver, where the Waters film played for months on end, attracting that city’s “hippie” culture. Moreover, by the mid-1970s, the pair had moved into the production business as well. In the early years, as Katherine Monk of the Vancouver Sun described it in a June 1999 article, these two “swinging entrepreneurs … had no idea what they were doing, but it worked.”

Eventually, the Rembrandt venture began losing money, and Lantos and Loewy refocused on producing and distributing movies. Lantos’s first feature movie was the 1978 In Praise of Older Women. In a difficult economic climate for filmmakers, the entrepreneur scraped together the funding for the movie. Following this, he produced several steamy, low-budget movies starring his first wife.

In 1985, Lantos and Loewy combined their production and distribution ventures as Alliance Communications Corporation, which would focus on television and motion picture production. Lantos later recalled the impetus for the move in a 1998 article in the Ottawa Citizen: “I wanted to have some real infrastructure, I wanted to have a business. I wanted to hold my head up high when I walked around the Cannes Film Festival or dealt with the Hollywood companies. … Something in my nature rebels at being a supplicant. And back when I started, if you were a Canadian in this business you were a supplicant by definition. The plan was that… there would be a point in time that I would pass it on to others and I would go back to telling stories.”

Throughout the late 1980s and early 1990s, Alliance broadened its scope and geographical reach, adding to its offerings Canadian theatrical distribution, international television and theatrical distribution, financing services for the television and motion pictures industries, broadcasting and animations, and movie publishing, merchandising and licensing. Also during this time, Lantos has produced many significant movies including The Sweet Hereafter and Black Robe, along with such popular TV fare as Due South and E.N.G.

By the mid-1990s, Alliance was Canada’s largest film and television producer. Influenced by the same financial and global trends as Atlantis had been at that time, Alliance sold a stake to investment dealer Wood Gundy Ltd., and industry analysts speculated that the company would soon go public. Lantos also fueled speculation by saying that consolidation in the Canadian television and film industry was inevitable if Canadian companies hoped to compete internationally.

The 1998 Merger

In July 1998, at a press conference in Toronto, it was announced that Canada’s two leading film and television companies, Alliance Communications and Atlantis Communications, would merge. Under terms of the deal, Alliance actually acquired Atlantis, and rechristened the company Alliance Atlantis Communications. Together, the companies were Canada’s largest film and television company and ranked sixth worldwide in terms of size and revenues.

Lantos, whom journalists described Lantos as colorful, mercurial, and “a flamboyant mogul,” left his executive role (retaining the title of chairman emeritus), to focus on making movies. Lantos’s long-time friend and colleague, Loewy, remained with Alliance Atlantis as head of feature film distribution. MacMillan, described as “quiet and methodical,” assumed the roles of CEO and chairman of the new company.

Armed with a $12 million severance package, Lantos went on to form a new company, Serendipity Point Films, which struck an exclusive agreement with Alliance Atlantis to produce feature films for at least three years.

When MacMillan took charge of the company, large-budget productions were clearly the way of the future. Alliance had already achieved international renown as the producer of the Oscar-nominated film The Sweet Hereafter, while Atlantis’s dominance in the Canadian television industry was established, with the company owning and operating several specialty cable tv channels, despite industry predictions that specialty channels could not survive in the Canadian market.

The year following the merger was dedicated to restructuring and reorganization. There were financial challenges connected with bringing the large companies, formerly competitors, together as one. Some 150 jobs were eliminated in the process, while North American offices were consolidated.

Company Perspectives:

Alliance Atlantis Communications Inc. is a leading creator, producer, distributor and broadcaster of filmed entertainment with significant ownership interests in seven Canadian specialty television networks. The Company’s principal business activities are conducted through three operating groups: Television, Motion Pictures and Broadcasting.

In the first quarter of 1998, Atlantic Alliance realized a 48 percent increase in profits, which it attributed to the strong performance of Equicap, their high-margin tax-shelter financing business, as well as high box office receipts from the movie Austin Powers: The Spy Who Shagged Me, for which Atlantic Alliance owned distribution rights. By year’s end, although the company realized a profit of US$25 million before extraordinary items, the company ultimately reported a loss of $27.3 million, given the $81.4 million charge related to the merger along with Lantos’s $12 million severance package.

Stock prices fluctuated during this time. Can West Global Communications purchased a 20 percent interest in the company’s outstanding stock, triggering speculation as to whether Can West wanted to take over the company. In response, company executives boosted their holdings of the voting stock. Uncertainties also triggered some investor anxiety, resulting a drop in the value of shares.

Despite financial setbacks, the first year was an active one operationally. The company distributed the widely popular films Austin Powers: The Spy Who Shagged Me and Blair Witch Project. Its television division created a successful kids’show on U.S. television called I was a Sixth Grade Alien, and Peter O’Toole won an Emmy for his work in Alliance’s Joan of Arc miniseries.

Moreover, the company worked to expand its presence in the cinema business, purchasing Festival Cinemas, a Vancouver-based art-house chain. In a partnership deal with Famous Players, the subsidiary Alliance Atlantic Cinemas, chaired by Victor Loewy, planned to open five new theaters in markets across Canada by the end of 2000. To Alliance Atlantis, the chain represented the potential for higher gross margins for each of Loewy’s own films, as well as a guaranteed screen in each major market. Such vertical integration would allow the company to create, control, distribute, and exhibit, ensuring that all profits would go to the company.

In May 1999, Alliance Atlantis launched the New Media Division, the role of which was to cross-promote the various assets—including motion pictures, television production, television distribution, and cable specialty channels—as well as to lead the new media strategy and to develop products for the Internet.

In August of that year, Alliance Atlantis sold 20 percent stake in the company to the German distributor Kimowelt Medien for US$130 million or $21 a share. Under the terms of the agreement, Kimowelt also acquired 50 percent of Alliance Atlantis’s U.K. motion picture distribution. Alliance Atlantic expected the deal would give the company increased access to bigger projects with greater commercial potential, and would lead to a partnership becoming the leader in the United Kingdom. The proceeds from the sale were used to fund future growth and to repay short-term debts.

2000 and Beyond

The year 2000 was one of growth and acquisitions. Karen Palmer observed, in an article for the Vancouver Sun, that “Alliance Atlantis is starting to pump up its filmmaking sector, aggressively pursuing international partnerships to produce bigger-budget feature-length projects.” In July, the company purchased Great North Communications Ltd. of Edmonton, regarded as Canada’s leading producer of factual and documentary programming. In September, Alliance Atlantic Communications was accepted as a full member in the North American Broadcasters Association (NABA), giving the company a position on that entity’s board of directors.

November 2000 brought the company’s entrance to online broadcasting. U8TV, the broadcasting Web site, promised 100 percent Canadian content and plugged the launch of a “reality-based” show called The Lofters, which featured live broadcasting of eight people living together in a loft in downtown Toronto. The Lofters launched on January 9, 2001.

Motion picture operations remained strong, the largest independent distributor in Canada, with a market share of 15 percent of all films distributed in Canada. Additionally, the unit was the exclusive distributor in Canada of motion pictures from Miramax Films, New Line Cinema, Destination Films, October Films, Artisan Films, and Fine Line Features. Alliance Atlantis Cinemas had 29 screens in seven locations including Toronto, Vancouver, Victoria, and Calgary. By early 2002, the company planned to open an additional 25 screens in five cities. The television department had 12,500 hours of programming in its catalogue, with some 80 percent of its license revenue generated outside of Canada. In fiscal 2000, the unit generated approximately 270 hours of programming on a slate of 14 series sold in over 200 countries. Given the company’s history, its alliances, and its strategic partners, it appeared likely that Alliance Atlantis was well positioned for continued growth in scope and profits.

Key Dates:

1978:: Michael MacMillan and friends found Atlantis Communications.
1983:: Atlantis film Boys and Girls, wins an Academy Award in the short film category.
1985:: Robert Lantos and Victor Loewy found Alliance Communications.
1993:: Alliance goes public.
1997:: Alliance’s Television Division receives five Emmy awards and a Golden Globe award.
1998:: Alliance Communications and Atlantis Communications merge to form Atlantis Alliance.
2000:: Company becomes a board member of the North American Broadcasting Association (NABA); launches online broadcasting with Internet venture, U8TV.
2001:: Company receives seven Golden Globe nominations.

Principal Subsidiaries

Alliance (1991) Distribution Inc.; Alliance Distributing Corp.; Alliance Entertainment Holdings Inc.; Alliance Entertainment U.S.A., Inc.; Alliance Equicap Corp.; Alliance Europe Inc.; Alliance Film Holdings No. 1 Inc.; Alliance Film Holdings No. 2 Inc.; Alliance Hungary Inc.; Alliance International France Ltd.; Alliance International Releasing Corp.; Alliance International Releasing Ireland Ltd.; Alliance Production Services Corp.; Alliance Productions (1993) Ltd.; Alliance Productions Ltd.; Alliance Releasing (1994) Corp.; Amalgamated Moviecorps Inc.; Citadel Entertainment, LLC; Counterstrike Television, Inc.; Johnny Mnemonic Distribution Ltd.; Le Monde Entertainment Sales Corp.; Screenventures International Inc.; True Love Productions I Inc.; True Love Productions II Inc.; Turning April (Canada) Ltd.; U.R. Film Services Ltd.; Western Sky Productions Ltd.; ZigZag Graphics; Atlantis Alliance Cinemas; Showcase Television (99%); Alliance National Productions Inc. (75%); Partisan Music Productions Inc. (75%); Johnny Mnemonic Productions Inc. (66%); Showcase Television Inc. (55%).