Alliance Atlantis' "Fund" demystified.

Alliance Atlantis Communications is perhaps best known as a Canadian broadcaster and as a supplier of the procedural crime franchise CSI. But one of the more interesting and currently volatile aspects of its business lies within its movie distribution department.

In 2003, Alliance Atlantis realigned its film distribution department and spun it off" to form the Movie Distribution Income Fund (MDIF), a new publicly traded vehicle. Today, MDIF, known as the "Fund," brings in a C$23 million annual revenue for Alliance.

In 2003 MDIF bought a 49 percent interest in the Motion Picture Distribution Group LP (then the largest distributor of motion pictures in Canada), while Alliance acquired the remaining 51 percent.

Today, MDIF activities are not confined to Canada, with additional business units in the U.K. (Momentum Pictures) and Spain (Aurum Producciones). In 2004, various business ventures in Canada represented 70 percent of the Fund's total revenue; the U.K.'s Momentum Pictures represented 18 percent and Spain's Aurum Producciones accounted for 12 percent of total annual revenue.

The Fund isn't just about buying movies and licensing them to theaters. Films are also distributed through video and DVD sales and are licensed to TV broadcasters. In 2004, theatrical releases represented 18 percent of the Fund's total revenue; DVDs represented 63 percent; television accounted for 6 percent; and the theatrical film business (five Canadian theaters) contributed three percent to the total yearly revenue. Though theatrical sales have been low in the first quarter of 2005 (just as in 2004), the Fund has managed to compensate for the loss with strong DVD sales.

At the annual general meeting of the Fund, president and CO0 of Motion Picture Distribution (MPD), Patrice Theroux, described another source of income on which the company depends: "A key part of our story is our library of thousands of hours of movies," he said. "We are constantly looking for ways to build the library and consider ourselves innovators in exploiting it." He continued, "Many of our catalog titles continue to generate significant revenue in DVD. Films like Reservoir Dogs and Terminator 2, which were released more than 10 years ago, continue to sell, on average, more than $175,000 per quarter on DVD."

In 2004, the MDIF released 100 motion pictures in theaters and 200 DVDs. Among the biggest hits were the theatrical releases of Fahrenheit 9/11 and The Notebook in Canada, the theatrical release of Eternal Sunshine of the Spotless Mind in Canada and the U.K., and distribution of The Passion of the Christ in Spain.

Last year, revenue for the MDIF reached $523 million, up 27 percent from the previous year. At year-end, the Fund had a net debt of $11 million, compared to $25 million the previous year.

In Canada, the Fund's operations include key Canadian subsidiaries Odeon Films and its sister company, Vivafilm--the number one film distributor in Quebec--which deals with French-language product and traditionally releases 10 indigenous French-language titles per year. The Fund also owns five Alliance Atlantis Cinemas throughout Canada. The company has Canadian output deals with Miramax, New Line Cinema and Focus Features. Last year (2004) represented the fourth out of five years in which the company finished number one at the box office in Canada, with a market share of 18 percent. The Fund's home entertainment joint venture with Universal helped it achieve a 23 percent market share in home video in 2004. The company was also the first distributor in Canada to sign VoD deals with domestic cable companies. "Based on its growth over the past two years, consumers seem to agree [that VoDs have tremendous opportunity], and we expect VoDs to quickly become a very important revenue stream," said Theroux.

Overall, however, despite the seemingly booming business in Canada, the percentage of total revenue from MDIF domestic activities was down by 12 percent from 2003 to 2004.

However, the reason for a lower percentage of Canadian-based revenue may not be a sign of waning activity in Canada, but, rather, proof of the growing presence of the Fund in the rest of the world. The Fund's U.K. arm--Momentum Pictures has grown significantly in the recent past. During the first quarter of 2005 alone, Momentum increased its revenue by 13 percent, thanks to the theatrical release of Racing, Stripes and solid sales of CSI: Miami DVDs. Momentum also licenses films to TV broadcasters in the U.K. At the general meeting, Theroux explained, "In the U.K., we secured significant television package sales to Channel 4 and lucrative sales for four of our titles to BSkyB." He continued: "These films will receive license fees on par with the major studios, which is highly unusual among independent distributors." Because of this business model, "television revenues were up significantly in the first quarter of 2005," Theroux said.

The Fund made its first foray into continental Europe in 2004, with the acquisition of leading independent distributor Aurum Producciones. Though executives admit the integration of Aurum took longer than originally anticipated, it was, according to Theroux, well worth the wait: "Aurum represents a solid platform in a very attractive market. It has strong local relationships, it has unique consumer supply agreements with Spain's broadcasters and, most importantly, it has a high-quality library of approximately 400 titles." He continued, "By sharing our international expertise and contacts, we are creating synergies that a stand-alone independent could never achieve." Aurum has recently signed a DVD sub-distribution arrangement with Paramount. And in terms of the business of broadcasting to which Theroux referred, under the supervision of the Fund, Aurum is the only independent distributor with multi-picture, multi-year television supply arrangements with Spain's largest free-TV broadcaster, Antena 3, and its only pay-TV channel, Sogecable.

But changes are afoot at the Fund; in a matter of months an entirely new structure may be in place, as Alliance Atlantis has publicly announced plans to sell off its majority stake in the Fund, and thus, put an end to its movie distribution business. But according to execs at Alliance's annual meeting, the company is willing to wait for the right price. In a speech to shareholders in June, David Lazzarato, chief financial officer at Alliance Atlantis said, "We would consider opportunities to crystallize the value of our 51 percent holding in the Motion Picture Distribution business. As we have said, this decision will be financial as opposed to strategic," he assured. "We currently receive approximately $23 million of cash distributions annually and that represents an annual yield of approximately 11 percent, so there is no urgency to divest. Our objective here is to secure an appropriate value and, therefore, timing is not an issue."

The company structure could change even more in the near future, as it has shown interest in buying the 35 cinemas which Canadian cinema owner Cineplex Galaxy will be forced to sell once it completes its buyout of larger rival Famous Players later this year.

In terms of the future, Wiggins had humble, yet optimistic, predictions: "2005 will not be a record year, but we expect it will be a solid year ... both financially and operationally." Theroux was a bit more specific: "Over the next three quarters we expect to release more than 75 films theatrically in Canada, 10 in the U.K. and 10 in Spain. We also plan to release more than 80 titles on DVD in Canada, 75 in the U.K. and 10 in Spain." And when it comes to the company's most recent territory, Wiggins predicted that they will "complete the systems and process integration of Aurum in Spain. We are converting Aurum's systems to mirror those currently used in both Canada and the U.K." He mentioned that a new financial director has been hired to handle the territory. "We are conforming all of Aurum's processes to be in line with the rest of the company," Wiggins said.