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Lions Gate Entertainment Corp. has rid itself of its most troubling asset, selling its minority stake in Mandalay Pictures LLC for $10-million (U.S.).

Lions Gate, a Vancouver film and TV producer and distributor, said yesterday it has received about $6.5-million in cash from Mandalay principals Peter Guber and Paul Schaeffer. The remaining $3.5-million will be paid in a series of disbursements over the next two years.

Under the terms of the 1998 investment deal struck between Lions Gate chairman Frank Giustra and movie mogul Mr. Guber, the company paid $50-million for a 45-per-cent stake in Mandalay but was required to absorb 100 per cent of the producer's non-operating cash losses.

The agreement has been an obstacle to Lions Gate's earnings growth.

Mandalay was expected to churn out 20 movies over five years but has produced only four films with mixed success: Sleepy Hollow, Enemy at the Gates, The Score and Serving Sara. Lions Gate wrote down its interest in Mandalay to $10-million earlier this year.

"Mandalay ultimately did not fit into our core business . . . it wasn't contributing obviously to our bottom line," said Jon Feltheimer, Lions Gate chief executive officer, in a conference call yesterday. "We just felt this was the appropriate time to continue to clean up the company. So cash is king and we've got some cash."

News of the Mandalay sale preceded better-than-expected second-quarter results for Lions Gate. For the three months ended Sept. 30, the company reported profit of $300,000 or 1 cent a share on revenue of $77.8-million compared with a loss of $800,000 or 2 cents on $59.7-million a year earlier.

Mr. Feltheimer attributed the "darn good quarter" to the company's strategy of producing films with limited financial risk but great upside potential. For example, Monster's Ball,a racial love story that won a best actress Oscar for Halle Berry this spring, cost Lions Gate about $33.1-million to produce and market. To date, the film has grossed about $59-million in sales, earning Lions Gate about $26-million in profit.

The strategy is not fool-proof. Last month, the company's sexual thriller The Rules of Attraction was greeted with poor reviews and dismal ticket sales. Lions Gate expects to report a loss of about $2-million on the estimated $10-million film.

Nevertheless, the success of Monster's Ball has won Lions Gate some attention in Hollywood. The company is increasing film production and has a number of projects in the works with some high-profile talent, including Robert De Niro and Dustin Hoffman. TV operations are improving too. The company has an interest in the popular supernatural series The Dead Zone and Sagwa: The Chinese Siamese Cat, an animated children's show.

Improvements have yet to register with the investment community. On New York's American Stock Exchange, home to the majority of Lions Gate's trading, the stock has traded in the $2 range for much of the past year. Class A common shares fell 5 cents yesterday to close at $2.01.

"You look at the stock and, if you've ever seen a heart monitor, it looks like a flat-line," said James Devlin of Raymond James and Associates in Uniondale, N.Y. The broker's institutional clients own more than three million shares. "It's befuddling to say the least. I think the company has an excellent future."

A number of issues, including the company's dual-class share structure and $56.9-million in debt, are limiting share price growth, said David Brenner, an analyst at New York brokerage Arnhold and S. Bleichroeder Inc.

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