Lugang Culture (601599): Reply To The Working Letter On Supervision Of Performance Commitment Changes

Stock Code: 601599 stock abbreviation: Lugang culture Announcement No.: 2020-089

Reply of Jiangsu Lugang Culture Co., Ltd. on supervision of performance commitment changes

The board of directors and all directors of the company guarantee that there are no false records, misleading statements or major omissions in the contents of this announcement, and shall bear individual and joint liabilities for the authenticity, accuracy and completeness of the contents.

Jiangsu Lugang Culture Co., Ltd. (hereinafter referred to as "the company" or the "listed company") received the "regulatory working letter on changes of performance commitment of Jiangsu Lugang Culture Co., Ltd. (szgh [2020] No. 2613) (hereinafter referred to as" regulatory working letter ") issued by Shanghai Stock Exchange on November 4, 2020. According to the requirements of the regulatory working letter, the company, together with relevant personnel, has carefully analyzed the issues raised in the regulatory working letter one by one, and the reply to the relevant questions is as follows:

Question 1. The company announced that because Tianyi film and television did not fulfill its commitment performance in 2019, the company, Xinyu shangshanruoshui and Wu Yi agreed to set 2021-2025 as the profit compensation period, and the over completed performance during the profit compensation period is used to make up for the outstanding accumulated net profit difference between 2017 and 2019. Please further explain the specific amount, calculation method and payment period of compensation for the performance of the listed company to be paid by the counterparties according to the original transaction arrangement.

reply:

On November 6, 2017, the listed company, Xinyu shangshanruoshui Asset Management Co., Ltd. (hereinafter referred to as "Xinyu shangshanruoshui") and Wu Yi signed the equity transfer agreement on Zhejiang Tianyi film and Television Co., Ltd. (hereinafter referred to as "equity transfer agreement"). The transaction price of the listed company's acquisition of 45% equity of Tianyi film and television is determined to be 395 million yuan. Xinyu shangshanruoshui and Wu Yi (hereinafter referred to as the "supplementary obligors") promise that the audited net profits of Tianyi film and television in 2017, 2018 and 2019 will be no less than 100 million yuan, 120 million yuan and 150 million yuan respectively. According to the audit, the net profits of Tianyi film and television in 2017, 2018 and 2019 were 132.2237 million yuan, 99.0902 million yuan and - 95.7891 million yuan, respectively, totaling 135.5248 million yuan. Therefore, the difference between the total net profit actually completed and the total net profit committed from 2017 to 2019 is RMB 234.4752 million.

According to the equity transfer agreement, the amount of cash to be compensated by the supplementary obligors in 2019 = (the amount of accumulated profit commitment up to 2019 - the accumulated net profit realized up to 2019) × each year during the profit compensation period

The total amount of profit commitment (i.e. 370 million yuan) × 870 million yuan. Therefore, according to the agreement, the supplementary obligors need to pay 551 million yuan of performance compensation to the listed companies.

The compensation amount of Lugang shall be calculated in cash from the end of the profit compensation period in 2019 according to the compensation amount required by the profit compensation agreement.

After the issuance of the audit report of the listed company in 2019, due to the inability of the compensation obligor to repay the performance compensation, the listed company has been actively negotiating with the compensation obligor for various solutions since the disclosure of the annual report. The company has mentioned in page 36 of the 2019 annual report and the subsequent information disclosure of the announcement on the holding of the 2019 annual performance presentation meeting on June 18, 2020. Wu Yi's performance compensation is under negotiation with the company. After many times of communication and demonstration, the current compensation scheme was finally determined and the relevant supplementary agreement was signed.

Problem 2. The company announced that Xinyu shangshanruoshui and Wu Yi promised that Tianyi film and television would have an average net profit of no less than 30 million yuan from 2021 to 2025, and that the part of more than 30 million yuan per year from 2021 would be used to compensate the unrealized promised profits in 2017-2019. Please further explain the basis, rationality and realizability of determining the profit commitment amount of each period in the revised profit compensation scheme.

reply:

1. Determination basis and rationality of profit commitment amount of each period in the revised profit compensation scheme

Under the background of major changes in the film and television industry environment, advertising revenue of the terminal platform has fallen, the purchase intention and price of drama show a downward trend, and the price of single episode of TV series has dropped significantly compared with that before 2018, which leads to a large decline in the profitability of current film and television programs, and the film and television industry has been unable to maintain its original profitability.

At the same time, after the blowout development of the film and television industry, the arrival of regulatory policies makes the industry gradually return to rationality. In recent two years, the film and television industry has entered an era of adjustment and rectification, and it will take time for the industry to get out of the trough. Therefore, the profitability of the film and television industry in the next few years cannot return to the level of previous years, and the profit space will be greatly compressed.

In addition to the current industry reasons, the future development of Tianyi film and television is also bearing a greater pressure of capital costs. As of September 30, 2020, the outstanding loan principal and interest provided by the listed company to Tianyi film and Television Co., Ltd

1.081 billion yuan. According to the agreement, the future Tianyi film and television company will bear more than 60 million yuan of interest each year. The specific loan details are as follows:

As of September 30, 2020, the total interest of the above loans is 178 million.

At the same time, Tianyi film and television will need additional financing for subsequent shooting of new plays, and the financial expenses paid will be further increased. Therefore, considering the development prospect of the industry and the debt burden of Tianyi film and television, Xinyu Shangshan is as good as water, and Wu Yi promises to:

"The average audited net profit of Tianyi film and television from 2021 to 2025 is no less than 30 million yuan. Since 2021, the part of more than 30 million yuan per year will be used to compensate the unrealized commitment profit in 2017-2019".

The new board of directors and management of Lugang culture will fully learn from the experience and lessons of the management of the listed companies in the previous stage, fully consider the current situation of the film and television industry and the company, standardize the corporate governance and actively look for innovative breakthroughs, do a solid job in sorting out the film and television assets, effectively ensure the control of business risks, improve the operation quality of listed companies, and improve the return of shareholders of listed companies.

2. The realizability of profit commitment amount in each period in the revised profit compensation scheme

This year and next, the film and television works to be shot in the Tianyi film and television reserve project include: War theme network drama "winter and lion" (to be launched by the end of 2020), urban theme network drama "dear father" (to be launched in March 2021), military TV drama "iron and steel torrent" (to be launched in the second quarter of 2021), and historical drama "Cao Cao" (to be opened in the second half of 2021) He also plans to participate in the war themed movie "ice and snow Changjin Lake" (bona film and television)

The main controller has been started in October 2020). The company has rich reserves of film and TV drama projects, with a large quantity and excellent quality. For example, Lanxin Grand Theater (Saturday), 19th Bureau, angry machine gun, 18th floor hotel, thunder rose, dear mother, Songhua River and other projects are also planned to start in the next five years. With the gradual recovery of the film and television industry, the company is rich The project reserve will be fully released in the future, which will bring more profit points and related income for the company in the future, and realize the unification of social and economic benefits in the future.

Through this further cooperation with Wu Yi, Tianyi film and television will strive to revitalize the company's existing assets and maximize economic benefits. In the next five years, with the support of Zhejiang cultural investment and strengthening the risk control of Tianyi film and TV, Tianyi will create more masterpieces to repay the support of shareholders. Therefore, it is feasible to realize the promised profits of each period in the next five years by integrating the existing projects and the projects to be auctioned.

Question 3. The company shall demonstrate the main consideration and rationality of this performance commitment change, whether the reasons for the change are sufficient, and whether the scheme after the change is conducive to protecting the interests of listed companies or other investors.

reply:

1. Combined with the specific business situation of Tianyi film and television, this paper demonstrates the main consideration and rationality of this performance commitment change, and whether the reasons for the change are sufficient?

(1) Major changes have taken place in the film and television industry compared with the restructuring in 2017

Affected by the increasingly strict supervision of the film and television industry, especially since the tax problem broke out in the film and television industry at the end of 2018, the prosperity of the film and television industry has declined significantly, and the prices of the upstream and downstream of the industry chain have gradually returned to rationality. With the slowdown of domestic economic growth and the impact of network platform, the advertising revenue of TV stations has fallen, and the willingness and price of TV dramas are on the decline.

In 2020, due to the adverse impact of the new crown pneumonia epidemic, the film and television industry, once again suffered a greater impact. According to the statistics of public information, from January to June 2020, nearly 13000 film and television companies in China were cancelled, more than half of the number of surviving companies by the end of 2019. Under the influence of the epidemic, some projects were delayed or their startup progress slowed down, and the industry environment further deteriorated.

In this context, since 2017, most of the listed companies in the film and television industry have experienced asset impairment, income and profit decline, and the whole industry is in a downturn

Therefore, the current film and television industry environment has undergone deep adjustment and industry reshuffle compared with the 45% equity acquisition of Tianyi film and television by Listed Companies in 2017.

(2) The listed companies need to strengthen cooperation with Wu Yi in order to make Tianyi film and TV revitalize

As of September 30, 2020, due to the impact of major changes in the film and television industry environment, as of September 30, 2020, Tianyi film and television had an unaudited balance of accounts receivable of 737.3 million yuan, total assets of 833.13 million yuan, accounts payable to listed companies of 1081 million yuan, net assets of - 572.87 million yuan, and asset liability ratio of 168.76%; from January to September of 2020, the unaudited operating income was - 590.67 million yuan, and the financial expenses were 6, 6.63 million yuan, net profit of - 855.19 million yuan. The poor management of the film and television industry is faced with the risk of bankruptcy. With the change of the actual controller of the listed company, in the future, Tianyi film and television needs to revitalize the existing assets, gradually repay the debt to the listed company, and restore the vitality of the company. Based on the above considerations, the listed companies intend to strengthen the cooperation with Wu Yi.

(3) The supplementary obligor is unable to repay the performance compensation

Xinyu shangshanruoshui and Wu Yi received a total transfer price of 395 million yuan through the transfer of 45% equity of Tianyi film and television. However, according to the equity transfer agreement, Xinyu shangshanruoshui used all the above funds to purchase the shares of the listed company through Wu Yi, and promised to lock it until June 30, 2022, that is, it has not been disposed of so far. Wu Yi's use of the equity transfer funds to purchase shares of the listed company is as follows:

Since 2018, the listed companies have also been in a tight situation in terms of funds, which can not provide more financial support for Tianyi film and television. Therefore, Wu Yi pledged the above shares to Zhangjiagang Business Department of Guosheng securities in the form of share pledge (at present, it is lower than the closing line and warning line, facing the risk of closing position), and part of the capital is lent to Tianyi film and television without interest to support its development. At the same time, up to now, the market value of the above shares has been seriously shrunk, and Xinyu shangshanruoshui and Wu Yi have suffered huge losses. Therefore, Xinyu Shangshan Ruoshui and Wu Yi have no ability to pay huge performance compensation.

(4) Wu Yi is an important figure in the company's film and television business

Tianyi film and television was founded in 2006, which was funded by Huayi Brothers, Wu Yi and Kang Honglei. In the 14 years accompanied by Tianyi film and television, Wu Yi created "soldier assault", "my commander, my regiment" and "Gong"

Many excellent works such as "Xun", "better life", "decisive court" and so on, have achieved good market reputation.

Wu Yi has won the national top ten producers, the title of "excellent film and television workers" in the first capital, and the gold oak Award "gold medal producer" award in the Asian Film and Television Festival of the United States. His films and TV plays have won the "five one project" excellent work Award, Golden Eagle Award, flying sky award, Magnolia Award, etc. It is generally acknowledged that the themes of his plays are military drama, family drama and so on. At present, the company's reserve projects "Cao Cao", "winter and lion" and other masterpieces are in preparation. As a senior professional in the film and television industry, Wu Yi is necessary to participate in the operation of Tianyi film and television, which is more conducive to Tianyi film and television to get rid of the current operating difficulties, so as to protect the value of the remaining investment of listed companies.

2. The scheme after the change of performance commitment is conducive to protecting the interests of listed companies or other investors

Because shangshanruoshui and Wu Yi are unable to compensate the listed companies, if the listed companies take the means of mandatory demand or prosecution to demand from Xinyu shangshanruoshui and Wu Yi, it will not only be difficult to recover the compensation, but also will inevitably lead to the situation that the relevant TV plays in which Wu Yi is the producer cannot be broadcast, the receivables can not be recovered, and the TV plays that have been invested in shooting are uncompleted The listed companies, the majority of investors and Wu Yi have caused irreparable heavy losses.

After negotiation with shangshanruoshui and Wu Yi, shangshanruoshui and Wu Yi proposed to replace the original commitment with a new commitment. This change of commitment has been deliberated and approved at the third meeting of the sixth board of directors and the third meeting of the sixth board of supervisors. The independent directors have expressed their opinions and need to be deliberated and approved by the general meeting of shareholders. The listed company will provide online voting to shareholders, and promise that relevant parties and related parties will avoid voting. Therefore, the signing of the supplementary agreement is in line with the provisions of the regulatory guidelines for listed companies No. 4 - commitment and performance of actual controllers, shareholders, related parties, purchasers and listed companies of listed companies.

In order to ensure the realization of the profit promised in this supplementary agreement, Tianyi film and television will start shooting a number of film and television plays this year and next. The benefits of the above projects will be gradually released in the next year. At the same time, Tianyi film and television will strive to revitalize the company's existing assets to maximize economic benefits. With the support of Zhejiang cultural investment and strengthening the risk control of Tianyi film and television, Tianyi film and television will create more masterpieces to repay the support of shareholders.

In addition, according to the agreement signed this time, all parties agree that if the profit commitment is not fulfilled during the profit compensation period, the compensation obligors Xinyu shangshanruoshui and Wu Yi shall perform the compensation obligations and responsibilities to the listed company. Within 3 months after the issuance of the audit report in 2025, the compensation obligor will calculate the amount of cash to be compensated according to the method (the amount of cash to be compensated in the profit compensation period = 384.48 million yuan - the accumulated net profit realized from 2021 to 2025) and compensate the listed company.

Therefore, due to major changes in the film and television industry environment, listed companies do not support Tianyi film and television funds

This supplementary agreement is formulated by the listed company through active consultation with Xinyu shangshanruoshui and Wu Yi. The scheme after the change of performance commitment is conducive to protecting the interests of listed companies or other investors.

Jiangsu Lugang Culture Co., Ltd

November 10, 2002