________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
________________________
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 20012002
or
[ ]TRANSITION] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-14880
_________________________
LIONS GATE ENTERTAINMENT CORP.
(Exact name of registrant as specified in its charter)
BRITISH COLUMBIA, CANADA
(State or other (I.R.S. Employer jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
incorporation or
organization)
_________________________
Suite
SUITE 3123, Three Bentall CentreTHREE BENTALL CENTRE
595 Burrard Street
Vancouver, British ColumbiaBURRARD STREET
VANCOUVER, BRITISH COLUMBIA V7X 1J1
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (604) 609-6100
_________________________
Securities registered pursuant to Section 12(b) of the Act: None
Title of class Name of exchange on which registered
-------------------------------Act
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
-------------- ------------------------------------
Common Stock, without par value Toronto Stock Exchange
American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
_________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_[X] No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. __X__[ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of June 1, 2001July 2, 2002 was approximately $100$108 million.
As of June 1, 2001, 42,449,496July 2, 2002, 43,207,399 shares of the registrant's no par value
common stock were outstanding.
________________________________________________________________________DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A AND
RELATING TO ITS 2002 ANNUAL MEETING OF STOCKHOLDERS ARE INCORPORATED BY
REFERENCE INTO PART III.
TABLE OF CONTENTS
ITEM PAGE
PART I
1. BUSINESS......................................................... 4
2. PROPERTIES....................................................... 22
3. LEGAL PROCEEDINGS................................................ 23
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 23
PART II
5. MARKET OF REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.......................................................... 24
6. SELECTED FINANCIAL DATA.......................................... 26
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION..................... 30
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 41
ITEM PAGE
- ---- ----
PART I
1. BUSINESS ................................................................ 3
2. PROPERTIES .............................................................. 20
3. LEGAL PROCEEDINGS ....................................................... 21
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..................... 21
PART II
5. MARKET OF REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS .... 22
6. SELECTED FINANCIAL DATA ................................................. 24
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION .................................................... 27
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .............. 36
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............................. 37
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE .................................................... 38
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ...................... 39
11. EXECUTIVE COMPENSATION .................................................. 39
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .......... 39
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......................... 40
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ........ 40
1
FORWARD LOOKING STATEMENTS
AND SUPPLEMENTARY DATA...................... 42
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................. 42
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 42
11. EXECUTIVE COMPENSATION........................................... 46
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 51
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 52
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K......................................................... 53
Page 2
UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES
HEREIN TO "LIONS GATE,All statements, other than statements of historical fact, contained within this
report constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. In some cases you can identify
forward-looking statements by terms such as "may," "THE COMPANY,"intend," "WE,"might," "US,"will,"
AND "OUR"
REFER COLLECTIVELY TO LIONS GATE ENTERTAINMENT CORP. AND ITS
SUBSIDIARIES.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
THAT CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "MAY,"should," "WILL,"could," "SHOULD,"would," "EXPECT,"expect," "ANTICIPATE,"believe," "ESTIMATE,"estimate," OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER
VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. WE CAUTION YOU
THAT THE MATTERS SET FORTH UNDER "RISK FACTORS,"potential,"
CONSTITUTE
CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT
TO SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS."expect," "plan" or the negative of these terms, and similar expressions
intended to identify forward-looking statements.
These forward-looking statements reflect our current views with respect to
future events and are based on assumptions and are subject to risks and
uncertainties. Also, these forward-looking statements present our estimates and
assumptions only as of the date of this report. Except for our ongoing
obligation to disclose material information as required by federal securities
laws, we do not intend to update you concerning any future revisions to any
forward-looking statements to reflect events or circumstances occurring after
the date of this report.
Factors that could cause actual results to differ materially from those
expressed or implied by the forward-looking statements include, but are not
limited to, those described in "Risk Factors" or in the documents incorporated
by reference in this report.
CURRENCY AND EXCHANGE RATES
All dollar amounts set forth in this report are in Canadian dollars,
except where otherwise indicated. The following table sets forth (1) the rate of
exchange for the U.S.United States dollar, expressed in Canadian dollars, in effect
at the end of each period indicated; (2) the average exchange rate for such
period, based on the rate in effect on the last day of each month during such
period; and (3) the high and low exchange rates during such period, in each case
based on the noon buying rate in New York City for cable transfers in Canadian
dollars as certified for customs purposes by the Federal Reserve Bank of New
York.
Fiscal Year Ending March 31,
----------------------------------------------------------------------
2002 2001 2000 1999 1998
1997
---- ---- ---- ---- -------------- ---------- ---------- ---------- ----------
Rate at end of period $1.5784 $1.4828 $1.5092 $1.4180 $1.3835$ 1.5958 $ 1.5784 $ 1.4828 $ 1.5092 $ 1.4180
Average rate during period 1.5650 1.5041 1.4790 1.5086 1.4060
1.3634
High rate 1.6128 1.5784 1.5140 1.5770 1.4637
1.3835
Low rate 1.5102 1.4515 1.4470 1.4175 1.3705 1.3310
On June 1, 2001,July 2, 2002, the noon buying rate in New York City for cable
transfer in Canadian dollars as certified for customs purposes by the Federal
Reserve Bank of New York was Canadian $1.5324 =$1.5263= US$1.00.
Page 32
PART I
ITEM 1. BUSINESS.
OVERVIEW
Lions Gate Entertainment Corp. ("Lions Gate", "Company", "we", "us" or
"our") is an integrated North American entertainment company. We develop,
produce and distribute a broad range of motion picture, television and other
filmed entertainment content through our operating divisions (Motion Pictures,
Television, Animation and Studio Facilities and
CineGate)Facilities) as well as our CinemaNow Inc.
("CinemaNow") digital media platform. We have the following divisions and
partners:
obusinesses:
- Motion Pictures, which includes Production and Theatrical, Video,
Television and International Distribution;
o- Television, which includes One-Hour Drama Series, Television
Movies, Non FictionNon-Fiction Programming and International Distribution;
o- Animation, which includes an interest in CineGroupe Corporation
("CineGroupe"), a producer and distributor of animated feature
films and television programming;
o- Studio FacilitiesOperations, which includes Lions Gate Studios ("LG
Studios") and leased facilities at Eagle Creek Studios;
o a joint venture with CineGate Production Management Services
2001 Inc. ("CineGate"), a Canadian production services company;
o- a 63% interest in CinemaNow, a video on demand distributor of
feature films over the Internet; and
o- a 45% interest in Mandalay Pictures, LLC ("Mandalay"), a U.S.-basedUnited
States-based producer of class-A motion pictures.
Our registered office and principal executive offices are located at
Suite 3123, Three Bentall Centre, 595 Burrard Street, P.O. Box 49139, Vancouver,
British Columbia, V7X 1J1.
BACKGROUND OF THE COMPANY
On May 26, 1986, IMI Computer Corp. ("IMI"), a British Columbia
company, incorporated under the Company Act (British Columbia). IMI underwent
name changes in 1987 and 1994, and on November 18, 1996, changed its name to
Beringer Gold Corp.
On April 28, 1997, Lions Gate Entertainment Corp., ("Old Lions Gate"),
incorporated under the Canada Business Corporations Act using the name 3369382
Canada Limited. Old Lions Gate amended its articles on July 3, 1997, to change
its name to Lions Gate Entertainment Corp. and on September 24, 1997, continued
under the Company Act (British Columbia).
On November 13, 1997, Old Lions Gate and Beringer Gold Corp., merged
under the Company Act (British Columbia) to form Lions Gate Entertainment Corp.
Page 4
On November 13, 1997 our shares began trading on The Toronto Stock
Exchange and on November 17, 1998 our shares began trading on the American Stock
Exchange under the symbol "LGF."
3
On November 12, 1998 we reverse split our Common Sharescommon shares from 500
million Common Sharescommon shares to 250 million Common Sharescommon shares and increased the authorized
number of Common Shares, as
consolidated,common shares to 500 million.
On December 21, 1999 we issued a total of 13,000 5.25% convertible,
non-voting, redeemable Series A preferred shares. These preferred shares are
entitled to cumulative dividends, as and when declared by the Board of Directors
at a rate of 5.25% of the offering price per annum, payable semi-annually on the
last day of March and September of each year. At our option, the dividend may be
paid in cash or additional preferred shares. The preferred shareholders, as a
class, have rights related to the election of between one and three directors,
depending on the number of preferred shares outstanding.
On October 13, 2000 we issued a total of 10 Series B preferred shares.
Holders of these shares have the right to elect one member of the Board of
Directors of the Company, which can only be Mark Amin.
RECENT DEVELOPMENTS
Since our incorporation in April 1997, we have pursued a
strategy of acquiring and integrating existing companies in the
entertainment business. To this end, we have made several
important acquisitions and have raised equity capital to pursue
our acquisition and development strategies.
In September 2000 we entered into a joint venture with
Cinegate Holdings Inc. to provide services to CineGate, which
provides management services to Canadian limited partnerships
utilizing the Film or Video Production Services Tax Credit and
the Canadian Federal Tax Act to finance productions in Canada.
On September 27, 2000 we arranged a US$200 million revolving
credit facility with a syndicate of global financial
institutions. J.P. Morgan Securities and Dresdner Kleinwort
Wasserstein Securities LLC arranged the five-year financing
commitment. J.P. Morgan Securities is the Administrative Agent,
Dresdner Bank AG is the Syndication Agent, and National Bank of
Canada is the Canadian Facility Agent.
On October 13, 2000 we acquired Trimark Holdings, Inc
("Trimark") by the issuance of 10,229,836 common shares and the
payment of approximately US$22 million in cash and US$4 million
of acquisition costs. Trimark is a worldwide distributor of
entertainment software that primarily distributes feature films
in the domestic home video and theatrical markets and licenses
distribution rights to motion pictures for international markets.
On November 27, 2000 we acquired the 50% remaining interest
in Sterling Home Entertainment (referred to as "Studio Home
Entertainment"). The total consideration of US$2.8 million for
the acquisition consisted of cash consideration of US$2.0
million, forgiveness of an account receivable of US$0.7 million
and US$0.1 million of acquisition costs.
On December 5, 2000 CinemaNow received financing of
US$5.3 million from Microsoft Corp., Blockbuster, Inc., Kuwait
Investment Projects Co. ("Kipco") and others.
Page 5
On April 1, 2001 we acquired a 75% equity interest in
Christal Films Distribution Inc. ("Christal Films"), an
independent producer and distributor of French and English
language feature films, by providing working capital.
We continue to integrate our existing operations and to
seek out other acquisition opportunities to complement our
growing entertainment operations.
INDUSTRY BACKGROUND
THE FEATURE FILM INDUSTRY
The feature film industry encompasses the development, production and
exhibitiondistribution of feature-length motion pictures and their subsequent distribution
in the home video, television and other ancillary markets. The major studios
dominate the industry, some of which have divisions that are promoted as
"independent" distributors of motion pictures, including Universal Pictures,
Warner Bros. (including Turner Pictures, New Line Cinema and Castle Rock Entertainment),
Twentieth Century Fox, Sony Pictures Entertainment (including Columbia Pictures
and Columbia Tristar Motion Picture Group), Paramount Pictures, The Walt Disney
Company (including Buena Vista Pictures, Touchstone Pictures and Miramax Film
Corp.) and Metro-Goldwyn-Mayer Inc. (including MGM Pictures and United Artists
Pictures Inc., Orion
Pictures Corporation and Goldwyn Entertainment Company)Inc). In recent years, however, true "independent" motion picture
production and distribution companies have played an important role in the
production of motion pictures for the worldwide feature film market.
INDEPENDENT FEATURE FILM PRODUCTION AND FINANCING.Independent Feature Film Production and Financing. Generally,
independent production companies do not have access to the extensive capital
required to make big budget motion pictures, such as the "blockbuster" product
produced by the major studios. They also do not have the capital necessary to
maintain the substantial overhead that is typical of such studios' operations.
Independent producers target their product at specialized markets and usually
produce motion pictures with budgets of less than US$2520 million. Generally,
independent producers do not maintain significant infrastructure. They instead
hire only creative and other production personnel and retain the other elements
required for development, pre-
production,pre-production, principal photography and
post-production activities on a project-by-project basis. Also, independent
production companies typically finance their production activities from bank
loans, pre-sales, equity offerings, co-productions and joint ventures rather
than out of operating cash flow. They generally complete financing of an
independent motion picture prior to commencement of principal photography to
minimize risk of loss.
INDEPENDENT FEATURE FILM DISTRIBUTION.Independent Feature Film Distribution. Motion picture distribution
encompasses the exploitation of motion pictures in theatres and in markets, such
as the home video, pay-per-view, pay television, free television and ancillary
markets, such as hotels, airlines and streaming films on the Internet.
Independent producers do not typically have distribution capabilities and rely
instead on pre-sales to North American and international distributors.distributors as well as
equity financing. Generally, the local distributor will acquire distribution
rights for a motion picture in one or more of the aforementioned distribution
channels from an independent producer. The local distributor
4
will agree to advance the producer a non-refundable minimum guarantee. The local
distributor will then generally receive a distribution fee of between 20% and
35% of receipts, while the producer will receive a portion of gross receipts in
excess of the distribution fees, distribution expenses and monies retained by
exhibitors. The local distributor and theatrical exhibitor generally will enter
into an arrangement providing for the exhibitor's payment to the distributor of
a percentage (generally 40% to 50%) of the box-office receipts for the
exhibition period, depending upon the success of the motion picture.
Page 6
THE TELEVISION INDUSTRY
The North American television industry serves the largest broadcast
market in the world, with a population of nearly 300 million people and more
than 120 million homes. Historically, the North American market has been the
source of the major portion of the revenues earned by television producers.
However, the broadcasting and cable television markets outside North America
have grown in the last decade through the privatization of broadcasting systems,
the proliferation of broadcast licenses and the introduction of sophisticated
delivery technology, such as cable and satellite transmission systems. This
growth has led to a higher proportion of revenues from international markets.
Generally, a production company will license the right to broadcast a
program to a combination of United States, Canadian and international
broadcasters, including free television and cable networks or individual
television stations in the first run syndication market. After the initial
network, cable licensing or first run syndication period, the production company
will make the program available for further commercial exploitation on cable
and/or in syndication.
NORTH AMERICAN MARKETS.North American Markets. In North America, programming is delivered to
the end user through free television networks, cable channels and networks,
individual television stations and satellite delivery services. The following
table identifies some of the specific delivery mediums available in the United
States and Canada:
Medium Channels in the Channels in Canada
United States
-------------- ---------------------- --------------------
Free
Medium Channels in the United States Channels in Canada
- ------ ----------------------------- ------------------
Broadcast television networks NBC, CBS, ABC, Fox, PBS, PAXTV, UPN CBC, CTV, the Global Television
and The WB Network and CHUM
Basic Cable USA Network, Lifetime, ABC Family Bravo, Canal D, A&E, YTV,
Channel, TNT, F/X, Hallmark and TBS Showcase and Family Channel
Pay Cable HBO, Showtime, Starz/Encore Movie Central, TMN and the
television and PBS Global Television
networks Network
Broadcast PAXTV, UPN and The WB
networks
Cable HBO, Showtime, USA TMN, Super
Ecran
Network, Lifetime, SuperChannel,
Fox Family Channel, Canal D and
TNT, F/X, Odyssey and Showcase
TBS
Independent commercial television stations often purchase programming
from syndicators, including major studios and companies such as Pearson
Television and King World Productions, in exchange for advertising time. This
practice is known as barter syndication. Pay-per-view television allows cable
television subscribers to purchase individual programs, including recently
released motion pictures and live sporting, music or other events, on a "per
use" basis. The program distributor, the pay-per-view operator and the cable
system operator typically divide the subscriber fees.
Each major free television network in the United States and Canada
currently schedules approximately 22 hours of programming in prime time (from 8
p.m. to 11 p.m. Monday to Saturday, and 7 p.m. to 11 p.m. on Sunday) each week.
United States and Canadian network prime time programming generates the highest
license fees and generally consists of a mix of
5
television movies, mini-
series,mini-series, non-fiction/reality, half-hour comedy and
hour-length drama or action/adventure series. In recent years, the market share
of the free television networks in the United States has fallen significantly
due, in large part, to the expansion of other networks, cable channels and the
development of a first run syndication market.
INTERNATIONAL MARKETS.International Markets. The development of new television broadcasting
systems outside of North America has sparked the growth of the worldwide
television industry. These broadcasting systems represent significant new
sources of revenue for television producers. European television is the most
striking example of this growth. Over the last 15 years, governments in Europe
have encouraged a major expansion of the public and private broadcasting sector.
For example, Germany and France have each
Page 7
added six television services in the
last 15 years, and the United Kingdom has added four. This process is just
beginning in the former East Bloc countries and in Japan, Southeast Asia and
Australia. The East Bloc countries represent a potential market of more than 300
million people, with Japan, Southeast Asia and Australia representing an even
greater combined market. Other factors contributing to the growth of the
worldwide television industry include the introduction of direct broadcast
satellite services and pay television, increased cable penetration and the
growth of home video. Most foreign broadcasters seek out both indigenous
programming, to satisfy the local content regulations of their broadcast
licenses, and international programming largely from North America to appeal to
a wide audience.
CANADA'S ROLE IN THE TELEVISION AND FEATURE FILM INDUSTRY
Over the past several years, the Canadian film and television
production industry has grown and matured, and at present, it
represents an
approximately a $3 billion annual business. At the same time as the Canadian
domestic industry has matured, Canada has become a leading location for
internationally originated productions. Over the past few years, U.S. studios,
television networks and cable services have increasingly produced in Canada,
attracted by the low Canadian dollar, first-class Canadian casts, crews,
locations and facilities and government support for the industry. U.S. companies
with a strong presence in Canada include:
o- major U.S. studios, such as Paramount, The Walt Disney Company,
Universal Pictures and Columbia Tri-Star;
o- U.S. networks, such as ABC, NBC, CBS, Fox and PAXTV;
o- cable services, such as Showtime, TNT, Disney Channel and HBO; and
o- film companies, such as The Hearst Corporation and Saban
Entertainment, Inc.Corporation.
European and Asian film companies have also found Canada to be an
attractive location and have often been able to access Canada's numerous
international film and television co-production treaties. Of Canada's ten
provinces and three territories, the provinces of British Columbia, Ontario and
Quebec are most actively involved in the television and motion picture
production industries, and many other provinces are actively soliciting this
business.
BUSINESS OF THE COMPANY
We produce, distribute and market feature-length films, television
series and mini-series, and television movies, from initial creative development
through principal photography, post-
production,post-production, distribution and ancillary
sales.
6
MOTION PICTURES
We develop and produce theatrical motion picture projects through three
separate production entities-Lionsentities - Lions Gate Films, Christal Films and Mandalay.
We operate theseThese production units are operated independently with separate management
teams, which provide distinct creative talents and perspectives. Independent
operation results in greater diversity within our overall release slate. We
produce quality films in the low to mid-budget range through Lions Gate Films
and Christal Films and produce class-A feature films in the US$15 million to
US$75 million range through Mandalay.
Page 8
FILM PRODUCTIONFilm Production
We produce and distribute English and French-language films generally
budgeted at US$20 million or less. In fiscal 2001,2002, we produced or co-producedcompleted principle
photography on seven productions and delivered twoeleven films, and in fiscal 2000,2001,
we produced or co-producedcompleted principle photography on ten productions and delivered five films.one film. We
are expanding our production and co-production of feature films. Our current
strategic plan calls for the production or co-
productionco-production of ten to twenty
features annually. In fiscal 20022003, we anticipate our theatrical releases to
include the following:
o FRAILTY, Bill Paxton's directorial debut, which stars- Frailty - released April 12, 2002, starring Bill Paxton and
MathewMatthew McConaughey;
o THE CAT'S MEOW, from award-winning director Peter
Bogdanovich, which stars Kirsten Dunst, Jennifer Tilly,
Eddie Izzard, Edward Herrmann- Rules of Attraction - starring James Vanderbeek, Jessica Biel and
Cary Elwes;
o THE WASH,Shannyn Sossamon;
- Confidence - starring Dr. DreEd Burns, Dustin Hoffman, Andy Garcia and
Snoop DoggRachel Weitz;
- Shattered Glass - starring Hayden Christensen and writtenGreg Kinnear;
and
directed by DJ Pooh, the creator of the number-one- Hittin' It - an urban box office film Friday; and
o MONSTERS BALL, starring Billy Bob Thornton, Heath Ledger
and Halle Berry.
DISTRIBUTIONcomedy.
Distribution
We also actively distribute feature films for theatrical, television
and home video audiences worldwide. In addition to distributing films that we
produce or co-produce, we also acquire distribution rights and licenses for
feature films produced by others.
THEATRICAL DISTRIBUTION.Theatrical Distribution. We distribute major motion pictures
theatrically in North America in English, French and other languages and have
been responsible for the release of such prominent films as Monsters Ball,
Dogma, American Psycho, The Red Violin, Shadow of the Vampire, Big Kahuna,Amores Perros,
Gods and Monsters Affliction, Amores
Perros and Elvis Gratton II-Miracle in Memphis. Our releases -Affliction. In fiscal 2002 Christal Films has distributed
the following prominent films; Le Placard, Les Boys 3 and Le Collectionneur. Les
Boys, Les Boys 2 and Les Boys II -3 are the highest grossing films in Quebec
history, and video sales of these films have also set
records.
HOME VIDEO DISTRIBUTION.history.
Home Video Distribution. Lions Gate Home Entertainment has three U.S.two United
States video distribution labels - Trimark Home Video Avalanche Home Entertainment and Studio Home
Entertainment. In addition to exploitingWe exploit our own films such as Monsters Ball, The Wash and
Frailty and we also distribute our acquired theatrical releases such as O, State
Property and Lantana. In addition we have been able to acquire high quality,
star-driven films that, while not on par with a wide theatrical release, are
exploitable from a video and ancillary media perspective. These films include Million Dollar
Hotel with Mel Gibson, Dwight Yoakam's South of Heaven, West of
Hell, Legionnaire with Jean-Claude Van Damme, Storm of the
Century byperspective such as Stephen KingKing's
Rose Red and the creature feature Komodo.
We have an agreement with Universal Studios Home Video
for the licensing of select Lions Gate theatrical releases for
distribution in the United States as well as pay-per-view and
non-theatrical rights.Larry Clark's Bully.
7
We distribute to the rental market using direct distribution and
revenue share output arrangements with Blockbuster, Hollywood Entertainment
Corporation, Movie Gallery, Inc. and Rentrak Corporation.
We distribute or sell directly to mass merchandisers, such as Wal-Mart
Stores Inc., Costco Wholesale Corporation, Target Corporation, Best Buy Co.
Inc., and others who buy large volumes of our videos and DVDs to sell directly
to the consumer.
In Canada, we release our titles to the home video market through our
own labels and currently through a distribution arrangement with Columbia
TriStar Home Video which will expire during the current fiscal year. In Canada
we have entered into a distribution overhead sharing arrangement with TVA
International.
Pay and through our own label, Avalanche Home Entertainment.
Page 9
PAY AND FREE TELEVISION DISTRIBUTION.Free Television Distribution. We exploit a library
ofcurrently have more than 1,500250
titles in active distribution in the domestic cable, free and pay television
markets.
We have an output deal with HBO expiring December 31,
2001, for our theatrical releases. The deal grants the network
exclusive pay-television rights to our line-up.
INTERNATIONAL DISTRIBUTION.International Distribution. We license our own productions and
productions acquired from third parties to the international marketplace on a
territory-by-territory basis. We currently have approximately 55175 films in
active international distribution.
CLASS-A FEATURE FILM PRODUCTION
MANDALAY.Class-A Feature Film Production
Mandalay. Mandalay is a co-venture with Tigerstripes, a company
controlled by Peter Guber. Mandalay develops and produces Class A-level feature
length motion pictures with budgets ranging from US$15 to US$75 million.
Mandalay is accounted for byusing the equity method and not on a consolidated basis.method.
In November 1999, Mandalay released its first feature film production -
Sleepy Hollow starring Johnny Depp and Christina Ricci. The film was nominated
for three Academy Awards and received an Oscar for Art Direction from the
Academy of Motion Picture Arts and Sciences. It grossed in excess of US$100
million in each of the North American and international markets.
ENEMY AT THE GATESbox offices.
Enemy at the Gates starring Jude Law, Joseph Fiennes, Ed Harris and
Rachel WeissWeitz was released in North America on March 16, 2001. As of June 1, 2001, itIt has grossed in
excess of US$75 million worldwide. Mandalay has scheduledreleased The Score, an action
suspense thriller starring Robert DeNiro, Marlon Brando, Ed Norton and Angela
Bassett, for release in July 2001. Servicing
Sarah,The Score has grossed in excess of $115 million
worldwide. Serving Sara, a romantic dramacomedy starring MathewMatthew Perry and Elizabeth
Hurley, will be released on August 23, 2002. Principal photography on Beyond
Borders, a worldwide epic film starring Angelina Jolie and Clive Owen, has been
completed and is currently in post-production with an anticipated
releaseexpected to be released in early 2002. Other2003. Numerous other projects
currentlyare in development
include Beyond Borders, Kung Fu Theatre and End Game.
FINANCING, PRODUCTION AND DISTRIBUTION AGREEMENT WITH
PARAMOUNT.various stages of development.
Mandalay entered into a long-term, multi-picture
financing,has recently terminated its production and distribution
agreement witharrangement at Paramount, pursuant to which Paramount will market and distribute Mandalay's
feature films worldwide, exceptits output agreements in the United Kingdom, Italy,
Germany, France, Japan, Spain, Australia and Greece. In these
territories, companies with which Mandalay's executives have hadGreece all expired at the end of
2001. Mandalay has also been experiencing recurring losses over the past several
years. Given the above factors, Mandalay has re-evaluated its business plan.
Although Paramount made an offer to renew the Mandalay deal, the fundamental
change in the foreign marketplace for films on an output basis requires that the
domestic rights bear a previous relationship will handle distribution. These foreign
distributors include Constantin Film Gmbh & Co. Verleigh KG,
Nippon Herald Films Inc., Tri-Pictures S.A., Medusa Film SPA,
Village Roadshow Netherlands B.V., Le Studio Canal Plus and
Pathe. Together with Paramount, they contribute approximately
85% to 90%greater burden of the costcost. Therefore, Mandalay has
concluded that, in order to maximize the opportunities to produce films and to
protect the downside while maintaining the upside potential, it is best served
by primarily relying on major studios to finance 100% of its production costs by
being independent of any one major studio and is embarking on an independent
program of placing films at different major studios or entering into a first
look
8
agreement with one studio. Accordingly, Mandalay has revised its business plan
with the film program objectives of making two to three pictures each film produced byyear with
100% studio financing and at least one picture each year with independent
financing.
At March 31, 2002 we have committed to a plan to divest our ownership
interest in Mandalay. Given the factors described above, the investment in
Mandalay has been written down to an amount that approximates its fair value at
that date. Refer to additional information included in Item 7 - "Management's
Discussion and make significant contributions to overhead costs. The Paramount
agreement also provides Mandalay with rights to "put" film
projects to Paramount in certain circumstances.Analysis of Financial Condition and Results of Operations".
TELEVISION
One-Hour Drama Series. In addition,
it gives Paramount a limited reciprocal put, with Mandalay
obligated to distribute the resulting films in its territories.
Other features of the Paramount agreement include a sharing
between Paramount and Mandalay of worldwide merchandising
rights and a provision providing Mandalay with office space
on the Paramount studio lot to use as executive and motion
picture production offices.
Although significant financial risks relating to the
production, completion and release of Mandalay's film projects
remain,fiscal 2002, we expect that Mandalay's distribution arrangements with
Paramount and the foreign distributors will lower our economic
risk profile for these film projects and result in a more
consistent and varied flow of motion pictures with decreased
capital requirements from Mandalay.
Page 10
TELEVISION
ONE-HOUR DRAMA SERIES. We are currently in production ofdelivered the second 22
episode season on twenty-two episodes of Mysterious Ways, which is broadcast on PAXTV in the United
States and CTV in Canada. NBC has broadcast thirteen episodes of the first seasonCanada and has ordered eight additional episodes from season two. In
July 2001, we anticipate startingis distributed by Columbia Tristar internationally.
We have completed production on the first
thirteen13 episodes of No Boundaries, an adventure
reality show for The WB and CanWest Global. We have presold twenty-twoare completing 22 episodes of
Tracker, a sci-fi fugitive drama, sold to the competitive first run syndication
market in the United States and to Telemunchen in Germany and anticipate startingas well as several
international broadcasters. We are in production in July 2001. In
February 2001 we completed a one hour pilot and a subsequent one
houron 22 episodes of the show of Dead
Zone, a series based on Stephen King's novels.
It has been announced asnovels for USA Network which premiered on
June 16, 2002. We have also recently completed a mid-season replacementpilot for UPN,Hooters Sports
Challenge for Fox Sports Network and we are currently negotiating the terms of the UPN sale with the
network and our partner Paramount International Television.
TELEVISION MOVIES.The Game for MTV.
Television Movies. We are actively involved in the development,
acquisition, production and distribution of television productions in the
movie-of-the-week and mini-series formats. We produced the Linda McCartney Story for CBS that
aired in May 2000. We have recently completed principal
photography on The Pilot's Wife, a
two-hour television movie for CBS starring Christine Lahti and Campbell Scott
based on the best-selling novel by Anita Shreve, which aired in April and Attack onwas
the Queen,highest rated two-hour movie of the week this season and Superfire, a
two-hour suspense thriller for TBS starring Rob Estes and
Joe Lando. Superfire, a three-hour television movie about smokejumpers battling an inferno in the Oregon
backcountry, forwhich aired in April on ABC starring D.B. Sweeney,Sweeney. We also produced
Counterstrike to be aired later this year for TBS, starring Rob Estes and Joe
Lando about two brothers trying to rescue the President who is currently in post-production.taken hostage
aboard the QEII during a summit meeting. In addition to the television movies
already completed or nearing completion, we have approximately eight projects, representing
an aggregate of 1822 hours of
television movie programming in development with U.S. broadcasters and cable
companies.
NON-FICTION PROGRAMMING.Non-Fiction Programming. Termite Art Productions ("Termite Art"), a Television division, has
created a number of documentary and reality-based programs for such notable clients as theall
five Discovery Network, Travel Channel,Networks, Bravo, Court TV, MTV, The Learning Channel, PBS,VH1, A&E and The History Channel,
The Health Channelas well as CBS, Fox and Fox Prime Time.UPN. Over the last few years, Termite Art has produced
When Chefs AttackGood Times Go Bad and Busted on the Job for UPN, theFox, Great Streets for PBS,
Amazing Animal Videos series for Animal Planet, Incredible Vacation VideosHi Tech History for the TravelDiscovery
Channel, and Ripley's Believe It or Not for TBS, It's
Burlesque! for A&E and assorted other non-fiction programming.TBS. In addition to distributing
Termite Art programs to the domestic and international markets, we acquire third
party productions for distribution.
ANIMATED MOTION PICTURE AND TELEVISION PRODUCTION
In addition to our live-action film and television productions, we are
also involved in animation and interactive production through our partner CineGroupe located
in Montreal.
CineGroupe develops and produces animated and live-action television
series and television movies and feature film product using 2D and 3D computer
generated imagery and traditional ink and paint techniques. CineGroupe has
produced more than 575 half-
hour800 half-hour animated episodes for television, including
such series as Galidor: Defenders of the Outer Dimension,
9
Sagwa, the Chinese Siamese Cat, Mega Babies, Wounchpounch andWhat's with Andy, Kids from Room 402, Big Wolf
on Campus and a made-for-television movie, Lion of Oz. During fiscal 2001,2002,
CineGroupe delivered 81.5113.5 half-hours of programming, including:
o 40- 26 half-hours of What's with Andy to ABC Family and Teletoon;
- 12 half-hours of Wounchpounch to Saban SINV and Radio-
Canada;
o 18Radio-Canada;
- 12 half-hours of Kids from Room 402 (Season 2)3) to FoxABC Family and
Teletoon;
o 7- 9 half-hours of Mega BabiesGalidor: Defenders of the Outer Dimension to Fox
FamilyKids and Teletoon;
Page 11
o 13.5YTV;
- 26.5 half hours of Sagwa, the Chinese Siamese Cat to PBS Kids and
TV Ontario;
and
o the made-for television movie Lion of Oz to Disney
Channel and Super Ecran.
Projects currently in production include:
o 26 half-hours of What's With Andy;
o 12 half-hours of Kids from Room 402 (Season 3) for Fox
Family and Teletoon;
o- the live action feature film Wilderness Station,The Edge of Madness, a co-
productionco-production
with Credo Entertainment that Lions Gate will distribute;
o 12- 21 half-hours of Wounchpounch;
o 26 hoursBig Wolf on Campus (Season 3) to ABC Family and
YTV; and
- 3 half-hours of Pig City, a co-production with Animakids of
France, to Fox Kids Europe and Teletoon.
CineGroupe has entered into an exclusive corporate sponsor agreement
with Kellogg Company for the series Sagwa, the Chinese Siamese Cat;Cat.
Projects currently in production include:
- 23 half-hours of Pig City;
- 17 half-hours of Galidor: Defenders of the Outer Dimension;
- the animation feature film Pinocchio 3001, a co-production with
Credo Entertainment that Lions Gate may distribute;
- 26 half-hours of Seriously Weird to ITV (UK) and o complimentary web activities for both Sagwa,YTV;
- 13 half-hours of Daft Planet to Teletoon; and
- 13 half-hours of Tripping the Chinese
Siamese CatRift to USA Network (Sci-Fi Channel)
and Mega Babies.CITY-TV in Canada.
In the coming years, CineGroupe plans to expand production volume and interactive production in
response to heightened international demand for animated product and plans to
build its library.
STUDIO OPERATIONS
Film and television production has increased dramatically over the past
five years in Canada. This increase can be attributed to:
o- close professional contacts between Canadian and U.S. studios,
independent producers, distributors and buyers, resulting from
Canada's geographic proximity to the United States and shared
North American values and interests;
o10
- lower production costs in Canada than in the United States and
other countries due, in part, to lower guild and union minimums;
o- the favourablefavorable exchange rate of the Canadian dollar;
o- government tax incentives;
o- the availability of location assistance to film and television
producers offered by many Canadian cities and several provinces;
o- a large number of highly trained and professional crews,
technicians and production personnel;
o- intensive training for Canadian directors, writers and producers
provided by the Canadian Film Centre;
o- flexible trade unions that insist upon less onerous requirements
than their U.S.United States counterparts; and
o- Canada's wide ranging topography (3,400 miles from coast to coast)
and small population (approximately 27 million people) that make
Canada ideally suited for location shooting. Page 12
(Urban centers such
as Toronto, Vancouver and Montreal have been disguised as London,
Paris, New York and Chicago.)
We have benefited through our ownership in LG Studios and a lease on
the Eagle Creek Studios from the high demand for sound stages and production
office space created by this increase in production
through our ownership in LG Studios and a lease on the Eagle
Creek Studios.production. Occupying nearly 14 acres
in North Vancouver, British Columbia, LG Studios is one of the largest film and
television studio complexes in Canada. Although the majority of its revenues are
generated from the rental of its sound stages, production offices, construction
mills and storage facilities to independent film and television producers, LG
Studios is host to a number of long-term industry tenants, such as:
o William F. White Limited, Canada's largest supplier of
cinematic lighting, power and grip equipment;
o- Pinewood Sound, a supplier of audio post-production services;
o- Sim Video Productions, Ltd., a supplier of cameras and
post-production editing equipment;
o- the local union of one of the major film and entertainment
industry craft guilds; and
o- various production companies.
Studio capacity usage is consistently above 90%. Current studio
productions include Lions Gate's one hour drama series
Mysterious Ways, the James Cameron television series Dark Angel
and Universal PicturesNew Line's feature film 24 Hours.
LG Studios' industry tenants complement each other in
providing a broad range of productionWillard, Warner Bros.'s feature
Dreamcatchers and post-production
services to the independent producers who regularly make use
of LG Studios' facilities. These facilities consist of seven
state-of-the-art sound stages, ranging from 11,000 to 20,500
square feet in area, and over 130,000 square feet of production,
office and support space, including a state of the art mixing
theatre. We anticipate building our eighth stage, a second
20,500 square foot stage, at LG Studios this fiscal year.
LG Studios owns its own telephone system and rental
furniture and can therefore provide a fully operational
production office to independent producers in a timely manner.
LG Studios' office space has film set facade exteriors suitable
for filming, including commercial and residential districts, a
courthouse and a small-town main street. Producers can also
take advantage of a variety of filming locations situated in
close proximity to the studio complex, including mountain and
ocean settings, ethnic neighbourhoods and downtown cityscapes.MGM television pilot Dead Like Me.
We expect to have continued high occupancy rates for both our studios
and offices for the next year. We have entered into a five-yearan operating lease with
Eagle Creek Studios in Burnaby, British Columbia. Eagle Creek Studios has two
17,000 square foot sound stages with accompanying office space. Its current
tenant is the Warner Bros. feature film Insomnia. The addition of Eagle Creek Studios increases LG Studios'
sound stage inventory to nine.ten. We have also entered into a revenue sharesharing
equipment supply contract with William F. White Limited for equipment on the
stages.
CINEGATE
Through a joint venture with CineGate, we provide services
to a production services company that facilitates the production
of feature length films and television programs in Canada.
CineGate
Page 1311
provides management services to Canadian limited partnerships
utilizing the Film or Video Production Services Tax Credit and
the Canadian Federal Tax Act to fund productions in Canada.
CINEMANOW
We are involved in video-on-demand distribution over the Internet
through our majority ownership in CinemaNow. CinemaNow is accounted for by the
equity method not on a consolidated
basis, because we do not have the ability to control the strategic
operating, investing and financing policies of CinemaNow as a consequence of our
inability to elect a majority of the board of directors of CinemaNow.
CinemaNow distributes feature films on demand over the Internet and is
currently delivering over 22.5 million streams to over 500,0001.2 million users per
month via its website, www.cinemanow.com.
CinemaNow currently streams and downloads over 250350 feature length
films, using the Windows Media Player as its viewing platform. CinemaNow's fee
based, on demand selections are securely streamed using Microsoft's Digital
Rights Management and iBeam Broadcasting's
proprietary platform.Management. CinemaNow controls exclusive Internet distribution rights to
over 1,000nearly 2,000 films from 100 licensors including partnerships with Lions Gate,
Allied Artists Entertainment Group, Inc., Tai Seng Video Marketing and Salvation
film libraries. CinemaNow makes select CinemaNow movies available through
syndication partners including Hollywood.comWindowsMedia.com and WindowsMedia.com.numerous international
distribution partnerships. In December 2000, CinemaNow closed its series B round
of financing led by Microsoft and included Blockbuster and Kipco.
After the series B financingAt March 31, 2002 we own 63%fully provided for our investment in CinemaNow.
Refer to additional information included in Item 7 "Management's Discussion and
Analysis of CinemaNow.Financial Condition and Results of Operations".
INTELLECTUAL PROPERTY
We are currently using the trademarks "TRIMARK HOME VIDEO" in
connection with our domestic home video distribution, "LIONS GATE FILMS" and
"TRIMARK PICTURES" in connection with films distributed domestically and
licensed internationally and "LIONS GATE TELEVISION" and "TRIMARK TELEVISION" in
connection with licenses to free, pay and cable television. The trademarks
"LIONS GATE ENTERTAINMENT,"ENTERTAINMENT", "LIONS GATE PICTURES" and "TRIMARK PICTURES" have
been registered with the Commissioner of Patents and Trademarks.Trademarks in the United
States. Additionally we have registered the trademark "TRIMARK ULTRA SPORTS"
which is used in connection with our extreme sports video releases. We regard
our trademarks as valuable assets and believe that our trademarks are an
important factor in marketing our products.
Copyright protection is a serious problem in the video cassette and DVD
distribution industry because of the ease with which cassettes and DVDs may be
duplicated. In the past, certain countries permitted video pirating to such an
extent that we did not consider these markets viable for distribution. Our
management believes the problem to be less critical at the present time. We and
other video distributors have initiated legal actions to enforce copyright
protection when necessary.
COMPETITION
Television and motion picture production and distribution are highly
competitive businesses. We face competition from companies within the
entertainment business and from alternative forms of leisure entertainment, such
as travel, sporting events, outdoor recreation and other cultural activities. We
compete with the major studios, numerous independent motion picture and
television production companies, television networks and pay television systems
for the acquisition of literary and film properties, the services of performing
artists, directors,
12
producers and other creative and technical personnel and production financing.
In addition, our motion pictures compete for audience acceptance and exhibition
outlets with motion pictures produced and distributed by other companies. As a
result, the success of any of our motion pictures is dependent not only on the
quality and acceptance of a particular Page 14
picture, but also on the quality and
acceptance of other competing motion pictures released into the marketplace at
or near the same time.
EMPLOYEES
As of June 1, 20013, 2002 we had approximately 250253 full-time and 2513 part-time
regular employees in our worldwide operations and CineGroupe has a further 265300
full-time and 7510 part-time regular employees. We also hire additional employees
on a picture-by-
picturepicture-by-picture basis in connection with the production of our motion
pictures and television programming. We believe that our employee and labour
relations are good.
None of our full timefull-time employees are members of unions.
Many film and television productions employ members of a number of
unions, including without limitation the International Alliance of Theatrical and Stage Employees
and Teamsters. A strike by one or more of the unions that provide personnel
essential to the production of motion pictures or television programs could
delay or halt our ongoing production activities. Such a halt or delay, depending
on the length of time involved, could cause delay or interruption in our release
of new motion pictures and television programs and thereby could adversely
affect our cash flow and revenues. Our revenues from motion pictures and
television product in our library should not be affected and may partially
offset the effects of a strike to the extent, if any, that television exhibitors
buy more library product to compensate for interruption in their first-run
programming.
GOVERNMENT INCENTIVES AND REGULATION
GOVERNMENT FINANCIAL SUPPORT.Government Financial Support. The Canadian Film Development
Corporation, also known as Telefilm Canada, provides financial assistance in the
form of equity investments, interest free and low interest loans, development
and interim financing. Canadian film and television productions that have
significant Canadian creative, artistic and technical content and that meet
certain published criteria qualify for such financial assistance. Telefilm
Canada's provincial counterparts in Quebec, Ontario, Manitoba, Saskatchewan,
British Columbia, Prince Edward Island, New Brunswick and Nova Scotia also
provide financial support to qualifying Canadian content productions. In 1996,
the federal government established the Canada Television and Cable Production
Fund (now operating as the CTF), a government-cable industry partnership that
combined the former Cable Production Fund, Telefilm Canada's Canadian Broadcast
Program Development Fund and a $100 million contribution from the Department of
Canadian Heritage to form an approximately $200$230 million per year television
funding initiative.
"CANADIAN-CONTENT" PRODUCTIONS."Canadian-Content" Productions. Canadian conventional television
broadcasters and cablespecialty and pay television services generally pay higher
license fees for television programs that meet the "Canadian content" criteria
established by the Canadian Radio-TelevisionRadio-television and Telecommunications Commission
("CRTC"), the Canadian counterpart to the U.S. Federal Communications
Commission. The CRTC has broad jurisdiction over Canadian domestic communications.
Since 1968communications companies
carrying on broadcasting undertakings in Canada.
Broadcasting undertakings, including specialty television network licensees,services,
have been and continue to be, licensed and regulated by the CRTC pursuant to the
Broadcasting Act (Canada) and to the applicable regulations thereunder, the
policies and decisions of the CRTC as issued from time to time and the
conditions and expectations established in the license for each
13
undertaking. Under the Broadcasting Act, the CRTC is responsible for regulating
and supervising all aspects of the Canadian broadcasting system with a view to
ensuring compliance with certain broadcasting policy objectives set out in the
Broadcasting Act. The CRTC is empowered, for example, under the Broadcasting Act
to issue Page 15
licenses to eligible entities to operatecarry on specialty television
networks.programming services. In addition, the CRTC also imposes restrictions on the
transfer of ownership and control of all licensed broadcasting undertakings,
including television network
licenses.programming services.
The Canadian independent television program production industry is
assisted by the CRTC requirement that each licensed Canadian over-the-air private broadcasterconventional, pay
and specialty television service must broadcast certain minimum amounts of
Canadian content programming. Such rules and regulations mandating the broadcast
of Canadian content programs enable Canadian producers and distributors to make
sales to Canadian broadcasters that might otherwise have been made by
non-Canadian producers and distributors.
Canadian independent television producers are further assisted by the
CRTC rule permitting simultaneous substitution in certain circumstances.
Simultaneous substitution enables a Canadian broadcasterconventional television broadcasters
to require Canadian cable and direct-to-home ("DTH") satellite operators to
delete the signal of a U.S. television broadcaster and to replace those signals
with the signals of the Canadian broadcaster, including its Canadian television
commercials, when the Canadian broadcaster is broadcasting the same program at
the same time as the U.S. broadcaster.broadcaster (more recently, further rules for
non-simultaneous substitution have been extended to DTH operators.) The
substitution ensures that CanadiansCanadian cable and DTH subscribers are exposed to the
Canadian broadcasters' commercials. This result isresults in higher commercial revenues
to Canadian broadcasters in general and enhances their financial capacity to
license programs.
TAX CREDITS.Tax Credits. The federal government provides a refundable tax credit
for eligible Canadian-content film or video productions produced by qualified
taxable Canadian corporations. The federal tax credit is for a maximum amount of
approximately 12% of the total production costs of an eligible production costs.production. The
federal Canadian-content tax credits have been joined by Canadian-content tax
credit programs in most provinces ranging from 9.6% to 22.5%.
The federal government "production services" tax credit for eligible
film and television productions produced in Canada, but which do not otherwise
qualify as Canadian content is equal to 11% of qualifying Canadian labor
expenditures. Assuming that Canadian labor expenditures generally represent
approximately 50% of the total production budget, the federal production
services tax credit will net applicants approximately 5.5% of total production
costs. Most provincial governments have also introduced refundable production
services tax credit programs at a rate ranging from 5.5% to 17.5% of eligible
production costs.
CO-PRODUCTION TREATIES.Co-Production Treaties. Canada is a party to film and/or television
co-production treaties with over 50 countries, which enables co-productions to
qualify as local content and thus be eligible for government assistance and
financing in more than one country, which reduces the cost of production. The
most active relationship has traditionally been with France, but recently the
United Kingdom has become a close second in volume of production.
For financial information about our operating segmentsgovernment incentives for each of
the last three fiscal years, refer to "Notes to the Consolidated Financial Statements Note 21. Segment Information."
Forconsolidated financial information about the results for our
geographic areas for each of the last three fiscal years, refer
to "Notes to the Consolidated Financial Statements Note 21.
Segment Information."
Pagestatements note
16 - Government Assistance.
14
RISK FACTORS
FAILURE TO COMBINE THE OPERATIONS OF RECENT ACQUISITIONS AND MANAGE FUTURE GROWTH MAY ADVERSELY AFFECT OUR BUSINESS.
FAILURE TO INTEGRATE OUR DIVERSE OPERATIONS MAY ADVERSELY
AFFECT OUR BUSINESS. We have acquired several entities over the
last few years. While most of these companies have previously
operated in their respective fields, we face the problems
inherent in combining their different operations. Any failure
by us to do so could have an adverse effect on our potential
profitability.
RAPID GROWTH MAY STRAIN OUR RESOURCES.Rapid Growth May Strain Our Resources. We are experiencing a period of
rapid growth that could place a significant strain on our resources. If our
management is unable to manage growth effectively, then our operations could be
adversely affected. We are currently in the process of implementing appropriate
structures to deal with future growth, including management information systems
and internal and external communication systems. However, there can be no
assurance that we will be able to achieve our growth as planned, increase our
work force or implement new systems to manage our anticipated growth, and any
failure to do so could have a material adverse effect on our business, results
of operations and financial condition.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FUNDING TO MEET
OUR REQUIREMENTS.We May Not Be Able to Obtain Additional Funding to Meet Our
Requirements. Our ability to maintain and expand our development, production and
distribution of feature films and television series and to cover our general and
administrative expenses depends upon our ability to obtain financing through
equity financing, debt financing (including credit facilities) or the sale or
syndication of some or all of our interests in certain projects or other assets.
If our access to existing credit facilities is not available, and if other
funding does not become available, there could be a material adverse effect on
our business.
OUR SUCCESS DEPENDS ON EXTERNAL FACTORS IN THE FILM AND TELEVISION INDUSTRY.
OUR SUCCESS DEPENDS ON THE UNPREDICTABLE COMMERCIAL SUCCESS
OF FILMS AND TELEVISION PROGRAMS.Our Success Depends On the Unpredictable Commercial Success of Films
and Television Programs. Operating in the television and feature filmsfilm industries
involves a substantial degree of risk. Each television program and feature film
is an individual artistic work, and unpredictable audience reactions primarily
determine commercial success. The commercial success of a television program or
a feature film also depends upon the quality and acceptance of other competing
programs or feature films released into the marketplace at or near the same
time, critical reviews, the availability of alternative forms of entertainment
and leisure activities, general economic conditions and other tangible and
intangible factors, all of which are subject to change and cannot be predicted
with certainty. Our success will depend on the experience and judgment of our
management to select and develop new investment and production opportunities.
There can be no assurance that our television programs and feature films will
obtain favorable ratings or reviews or that broadcasters will license the rights
to broadcast any of our television programs in development or renew licenses to
broadcast programs currently produced by our predecessors. Even if licenses to
broadcast our television programming are renewed, the popularity of a particular
program and its ratings may diminish over time.
WE FACE SUBSTANTIAL CAPITAL REQUIREMENTS AND FINANCIAL
RISKS.We Face Substantial Capital Requirements and Financial Risks. The
production, completion and distribution of television programs and feature films
require a significant amount of capital. Although we intend to continue to
reduce the risks of our financial involvement in the production costs of our
productions through financial assistance from broadcasters, distributors,
government and industry programs and studios, there can be no assurance that we
will continue to successfully implement such arrangements or that we would not
be subject to substantial financial risks relating to the production, completion
and release of future television programs and feature films. In addition, a
significant amount Page 17
of time may elapse between our expenditure of funds and the
receipt of revenues from our television programs or feature films.
BUDGET OVERRUNS MAY ADVERSELY AFFECT OUR BUSINESS.Budget Overruns May Adversely Affect Our Business. Actual motion
picture costs may exceed their budget, sometimes significantly, although
television program costs typically do not. Risks such as labor disputes, death
or disability of star performers, rapid high technology changes relating to
special effects or other aspects of production, shortages of necessary
equipment,
15
damage to film negatives, master tapes and recordings or adverse weather
conditions may cause cost overruns and delay or frustrate completion of a
production. If a film incurs substantial budget overruns, we may have to seek
additional financing from outside sources to complete production of a television
program or motion picture. No assurance can be given as to the availability of
such financing on terms acceptable to us. In addition, if a film incurs
substantial budget overruns, there can be no assurance that such costs will be
recouped, which could have a significant impact on our business, results of
operations or financial condition.
DISTRIBUTORS' FAILURE TO PROMOTE OUR PROGRAMS MAY ADVERSELY
AFFECT OUR BUSINESS.Distributors' Failure to Promote Our Programs May Adversely Affect Our
Business. Decisions regarding the timing of release and promotional support of
our television programs, feature films and related products are important in
determining the success of a particular television program, feature film or
related product. As with most production companies, for our product distributed
by others we do not control the timing and manner in which our distributors
distribute our television programs or feature films. Although our distributors
have a financial interest in the success of any such television programs or
feature films, any decision by our distributors not to distribute or promote one
of our television programs, feature films or related products or to promote
competitors' programs, feature films or related products to a greater extent
than it promotes ours could have a material adverse affect on our business,
results of operations or financial condition.
WE FACE COMPETITION.
OUR LACK OF DIVERSIFICATION MAY MAKE US VULNERABLE TO
OVERSUPPLIES IN THE MARKET.Our Lack of Diversification May Make Us Vulnerable to Oversupplies in
the Market. Most of the major U.S. studios are part of large diversified
corporate groups with a variety of other operations, including television
networks and cable channels, which can provide both means of distributing their
products and stable sources of earnings that offset fluctuations in the
financial performance of their motion picture and television operations. The
number of films released by our competitors, particularly the major U.S. film
studios, in any given period may create an oversupply of product in the market,
and that may reduce our share of gross box-office admissions and make it more
difficult for our films to succeed.
WE MAY NOT HAVE ACCESS TO THE LIMITED NUMBER OF PRIME TIME
SLOTS FOR TELEVISION PROGRAMMING.We May Not Have Access to the Limited Number of Prime Time Slots for
Television Programming. We compete for television network time slots with a
variety of companies that produce television programming. The number of prime
time slots remains limited, even though the total number of outlets for
television programming has increased over the last decade. As a result, there is
intense competition for these prime time slots. In addition, television networks
are now producing more programs internally, and thus possibly reducing such
networks' demand for programming from other parties. There can be no assurance
that we will be able to compete successfully against current or future
competitors.
TECHNOLOGICAL ADVANCES MAY REDUCE DEMAND FOR FILMS AND
TELEVISION PROGRAMS.Technological Advances May Reduce Demand for Films and Television
Programs. The entertainment industry in general, and the motion picture industry
in particular, are continuing to undergo significant changes, primarily due to
technological developments. Because of this rapid growth of technology, shifting
consumer tastes and the popularity and availability of other forms of
entertainment, it is impossible to predict the overall effect these factors will
have on the potential revenue from and profitability of feature-length motion
pictures and television programming.
Page 18
WE ARE REQUIRED TO MAKE ESTIMATES AND ASSUMPTIONS WHEN REPORTING OUR FILM
OPERATING RESULTS AND ACTUAL RESULTS MAY DIFFER.
OUR OPERATING RESULTS DEPEND ON PRODUCT COSTS, PUBLIC TASTES
AND PROMOTION SUCCESS.Our Operating Results Depend on Product Costs, Public Tastes and
Promotion Success. We expect to generate a substantial majority of our future
revenue from the development and
16
production of feature films and television programs. Our future revenues will
depend upon the timing and the level of market acceptance of our television
programs and feature films, as well as upon the cost to produce, distribute and
promote these programs and feature films. The revenues derived from the
production of a television program or feature film depend primarily on the
television program's or feature film's acceptance by the public, which cannot be
predicted and doesdo not necessarily bear a direct correlation to the production
costs incurred. The commercial success of a television program or a feature film
also depends upon promotion and marketing and certain other factors.
Accordingly, our revenues are, and will continue to be, extremely difficult to
forecast.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.Our Operating Results May Fluctuate Significantly. We expect that our
future operating results will fluctuate significantly as a result of, among
other factors:
o- the timing of domestic and international releases of current and
future television programs or feature films we produce;
o- the success of our television programs or feature films;
o- the timing of the release of related products into their
respective markets;
o- the costs to distribute and promote the television programs and
feature films;
o- the success of our distributors in marketing our television
programs and feature films;
o- the timing of receipt of proceeds generated by the television
programs and feature films from distributors;
o- the introduction of new television programs and feature films by
our current and future competitors;
o- the timing and magnitude of operating expenses and capital
expenditures;
o- the level of unreimbursed production costs in excess of budgeted
maximum amounts;
o- the timing of the recognition of advertising costs for accounting
purposes under SoP 00-2; and
o- general economic conditions, including continued slowdown in
advertiser spending.
As a result, we believe that our results of operations may fluctuate
significantly, and it is possible that our operating results could be below the
expectations of equity research analysts and investors.
WE MAY OVERSTATE OR UNDERSTATE OUR TOTAL REVENUES AND COSTS
BECAUSE OF ENTERTAINMENT ACCOUNTING POLICIES.Revenues and Costs Recognized in Certain Periods May be Overstated or
Understated Due to Estimates Inherent in the Application of Entertainment
Accounting Policies. In preparing our financial statements in accordance with
Canadian generally accepted accounting principles, we follow the guidance issued
by the American Institute of Certified Public Accountants for Accounting by
Producers or Distributors of Films contained in Statement of Position 00-2 ("SoP
00-2"). Under SoP 00-2, we recognize revenue on films at the later of the
following Page 19
dates: when films are delivered, or access to the film is available to
the customer; when the license period begins; and when the film is
unconditionally available to the customers. In addition, the fee ismust be
determinable and when collection ismust be reasonably assured. As a result, our
expected cash flows
17
may not necessarily relate to the revenue recognized in a given period. We
capitalize costs of producing and developing films and television episodes.programs.
Capitalized costs include costs of film rights and screenplays, direct costs of
production, interest and production overhead. We amortize those costs using the
film-forecast-computationindividual film-forecast method, which involves estimating
unrecognized ultimate revenues of
each film. We revise our ultimate revenue estimates on a quarterly basis. The
cost of film prints is deferred and charged to expense on a straight-line basis
over the period of theatrical release. We also estimate participation and
residual costs each period, which may vary from the actual paid participation
and residual costs. We assess the valuation of our films on a quarterly basis.
When events or changes in circumstances indicate that the fair value of a film
is less than its unamortized film costs, we write down the film to fair value.
Fair value of a film is determined using the discounted cash flow approach based
on our estimate of the most likely cash flows and an appropriate discount rate.
As a result of uncertainties in these estimation processes, actual results may
vary from the estimates.
OUR SUCCESS DEPENDS ON OUR PERSONNEL.
Loss of Key Personnel May Adversely Affect Our Business. Our success
depends to a significant extent on the performance of a number of our senior
management personnel and other key employees of Lions Gate and our affiliates.
In particular, we will depend on the services of such personnel as Jon
Feltheimer, Tom Ortenberg, Peter Block, Mike Paseornek, Kevin Beggs, Marni
Wieshofer, Michael Burns, James Keegan, Andre Link and Jacques Pettigrew. The
loss of the services of key persons could have a material adverse effect on the Company'sour
business, operating results and financial condition.
WE MAY FACE CHANGES IN REGULATORY ENVIRONMENT.
FAILURE TO MEET CANADIAN PROGRAMMING RESTRICTIONS MAY
DECREASE THE TIME SLOTS AND INCENTIVE PROGRAMS AVAILABLE TO US.Failure to Meet Canadian Programming Restrictions May Decrease the Time
Slots and Incentive Programs Available to Us. Canadian broadcasters and cable,
pay television and pay-per-view television services are typically required, as a
condition of their license, to broadcast significant minimum amounts of
programming, including prime time, with Canadian content programs. The CRTC
enforces compliance with these requirements, and failure to comply can result in
fines or the loss of license. The CRTC has issued detailed criteria that must be
met for a television production to qualify as a "Canadian program." The criteria
require, among other things, that Canadians perform financial and creative
functions. If our productions cease to qualify as Canadian programs under the
regulations and policies of the CRTC, we may find it more difficult to secure
time slots in Canada for our productions. In addition, if our productions cease
to meet minimum Canadian content requirements, we may be unable to access
various federal and provincial film and television incentive programs, including
refundable tax credits, as discussed below. WeThere could havebe an adverse impact on
our business, operations and financial condition if any change in the policies
of Canada or the provinces in connection with their incentive programs occurs.
WE MAY LOSE INVESTMENT FUNDS AND TAX CREDITS IF WE FAIL TO
FOLLOW CANADIAN STATUTORY REQUIREMENTS.We May Lose Investment Funds and Tax Credits if We Fail to Follow
Canadian Statutory Requirements. Certain programs produced by us will be
contractually required to be "Canadian content" programs in accordance with the
requirements established from time to time by the CRTC, the Canadian
Audio-Visual Certification Office, the Income Tax Act (Canada) and the
regulations thereunder. In the event a program does not qualify under the
applicable requirements, we would be in default of our commitments made in
connection with such contracts. Such default could result in reduction or the
elimination of license fees from the Canadian broadcasters, reduced or
even noeliminated government incentives and/or future ineligibility for Canadian
government incentive programs.
18
The Canadian federal government and a number of its provincial
counterparts have established refundable tax credit programs based on eligible
labor expenditures of qualifying production entities. We expect that
Page 20
certain
film and television productions we will produce will incorporate such refundable
tax credits as elements of production financing. If such productions do not
ultimately qualify for anticipated refundable tax credits, the relevant
production may require additional funds for completion, which may not be
available from other sources.
For our film and television productions to continue to qualify for
several refundable tax credits, we must remain Canadian-controlled pursuant to
the Investment Canada Act, among other statutory requirements. If we cease to be
Canadian-
controlledCanadian-controlled under the Investment Canada Act, we would no longer qualify
or be entitled to access such refundable tax credits and other Canadian
government and private film industry incentives which are restricted to
Canadian-controlled corporations, including the ability to produce under
Canada's official co-production treaties with other countries. Such a change in
status would also negatively affect our eligibility to retain the benefit of
refundable tax credits and other incentives arising prior to a change of
control. There are currently no transfer restrictions on our Common Stock as a
class, and we accordingly may not be able to prevent a change of control. In
addition, certain provincial refundable tax credits require that the applicable
applicant be provincially-controlled. If any of our affiliates that accesses or
intends to access such credits ceases to be provincially controlled, we would no
longer be entitled to access the applicable provincial refundable tax credit.
WE FACE INHERENT INTERNATIONAL TRADE RISKS THAT MAY HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS.
We distribute motion picture and television productions in foreign
countries and derive a significant percentage of our revenues from sources
outside the U.S.United States and Canada. As a result, our business is subject to
certain risks inherent in international trade, many of which are beyond our
control. These risks include:
o- changes in local regulatory requirements;
o- changes in the laws and policies affecting trade;
o- investment and taxes (including laws and policies relating to the
repatriation of funds and to withholding taxes);
o- differing degrees of protection for intellectual property;
o- instability of foreign economies and governments; and
o- cultural barriers.
These factors can adversely affect our business and results of operations.
OUR REVENUES AND OPERATING MARGINS ARE VULNERABLE TO CURRENCY FLUCTUATIONS.
We cannot accurately predict the impact of future exchange rate
fluctuations between the Canadian dollar and the U.S. dollar or other foreign
currencies on revenues and operating margins, and fluctuations could have a
material adverse effect on our business, financial condition and results of
operations.
In
addition,Our principal currency exposure is between Canadian and exchange control regulations imposed byU.S. dollars,
although this exposure is mitigated through the structuring of the US$200
million revolving credit facility as a
19
US$25 million Canadian dollar facility and a US$175 million U.S. dollar credit
facility. Each facility is borrowed and repaid in the respective country of
origin, in whichlocal currency.
From time to time we may experience currency exposure on distribution
and production revenues and expenses from foreign countries. From time to time
we may enter into financial derivative contracts to hedge such exposure. We have
no intention of entering into derivative contracts other than to hedge a
production is exploited may also adversely
affect our ability to repatriate to Canada funds arising in
connection with our foreign operations.
Page 21
specific financial risk.
PROTECTING AND DEFENDING AGAINST INTELLECTUAL PROPERTY CLAIMS MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our ability to compete depends, in part, upon successful protection of
our proprietary property. We protect proprietary and intellectual property
rights to our productions through available copyright and trademark laws and
licensing and distribution arrangements with reputable international companies
in specific territories and media for limited durations. Despite these
precautions, existing copyright and trademark laws afford only limited practical
protection in certain jurisdictions. We distribute our products in other
jurisdictions in which there is no copyright and trademark protection. As a
result, it may be possible for unauthorized third parties to copy and distribute
our productions or certain portions or applications of our intended productions.
In addition, litigation may be necessary in the future to enforce
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement or invalidity. Any such litigation could result in
substantial costs and the diversion of resources and could have a material
adverse effect on our business, operating results or financial condition. From
time to time, we may also receive notice of claims of infringement of other
parties' proprietary rights. There can be no assurance that infringement or
invalidity claims will not materially adversely affect our business, financial
condition or results of operations. Regardless of the validity or the success of
the assertion of claims, we could incur significant costs and diversion of
resources in defending against claims, which could have a material adverse
effect on our business, financial condition or results of operations.
ITEM 2. PROPERTIES.
Our corporate head office is located at Suite 3123, Three Bentall
Centre, 595 Burrard Street, Vancouver, British Columbia and occupies
approximately 5,401600 square feet of space under a lease agreement that expires on April 30, 2002.month to month agreement. Our
Canadian operations and financial personnel are located in leased space of 7,8006,000
square feet expiring in 2006 and 1,800 square feet expiring in 2002 in Toronto,
Ontario and U.S.United States corporate executives and operations, including
CinemaNow, are located in leased space of 35,000 square feet expiring in 2009 in
Los Angeles,Marina del Rey, California.
Christal Films' office is located in Ville St. Laurent,the borough of Westmount,
Montreal, Quebec, and occupies approximately 15,00011,000 square feet under a lease
agreement expiring in August 2001.2007. Christal Films leases
on a monthly basis a further 5,000 square feet of
space in St. Laurent for storage facilities.facilities on a monthly basis.
CineGroupe operates from two leased premises in Montreal, Quebec totalling
approximately 70,000 square feet, the leases for
which expire in 2006 and2006. They also
hashave a 1,280 square feetfoot office in Los Angeles which lease expires Octoberin 2003.
The LG Studios complex is located at 555 Brooksbank Avenue, North
Vancouver, British Columbia. LG Studios' facilities occupy an approximately
14-acre site in a landscaped, park-like
20
setting. The land on which the facilities are situated is owned by LG Studios
and is subject to mortgages under fourfive separate term loans. Loans in the amount
of approximately $8.3$7.8 million and $9.2$8.6 million mature in AprilMay 2003 and JulyJune 2003,
respectively. LoansTwo loans in the amount of approximately $2.6$2.4 million mature in
OctoberSeptember 2005. The final term loan is in the amount of $1.7 million and matures
in May 2007. We have a five-year operating lease for 50,000 square feet with
Eagle Creek Studios in Burnaby, British Columbia expiring in 2005.
Termite Art has leased office space totalling approximately 10,00011,000
square feet in Studio City, California which expires on
August 1, 2001.
Page 22
in 2004.
In July 2002 Mandalay occupies space onmoved from the Paramount Studios lot into office
space in Los Angeles pursuant to the Paramount Agreement. See "Business -
Financing, Production and Distribution Agreement with Paramount."Angeles.
We believe that our current facilities are adequate to conduct our
business operations for the foreseeable future. We believe that we will be able
to renew these leases on similar terms upon expiration. If we cannot renew, we
believe that we could find other suitable premises without any material adverse
impact on our operations.
ITEM 3. LEGAL PROCEEDINGS.
We know of no actual, threatened or pending legal proceedings to which
we or any of our subsidiaries is a party which are material or potentially
material, either individually or in the aggregate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2001.
Page 232002.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Our Common Stock is listed on the Toronto Stock Exchange (the "TSE")
and the American Stock Exchange ("AMEX") and trades under the symbol "LGF."
TORONTO STOCK EXCHANGE
The following table sets forth the range of high and low closing sale
prices for our Common Stock, as reported by the TSE, for our two most recent
fiscal years:
High Low
------ ---------- ---
Year ended March 31, 20002001
First Quarter.................... $5.50 $2.85Quarter $ 5.25 $ 3.05
Second Quarter................... 3.00 2.20Quarter 4.99 2.70
Third Quarter.................... 3.65 2.50Quarter 4.00 2.00
Fourth Quarter................... 6.90 3.40Quarter 4.10 2.75
Year ended March 31, 20012002
First Quarter.................... 5.25 3.05Quarter 4.35 2.50
Second Quarter................... 4.99 2.70Quarter 4.24 3.25
Third Quarter.................... 4.00 2.00Quarter 4.10 2.61
Fourth Quarter................... 4.10 2.75Quarter 4.05 3.20
AMERICAN STOCK EXCHANGE
The following table sets forth the range of high and low closing sale
prices for our Common Stock, as reported by AMEX in U.S. dollars, for our two
most recent fiscal years:
High Low
------ ---------- ---
Year ended March 31, 20002001
First Quarter....................US$Quarter US$ 3.75 US$1.94 2.00
Second Quarter................... 2.06 1.50Quarter 3.06 2.00
Third Quarter.................... 2.56 1.63Quarter 2.69 1.31
Fourth Quarter................... 4.94 2.31Quarter 2.75 1.75
Year ended March 31, 20012002
First Quarter.................... 3.75Quarter 2.90 1.59
Second Quarter 2.74 1.95
Third Quarter 2.57 1.75
Fourth Quarter 2.65 2.00
Second Quarter................... 3.06 2.00
Third Quarter.................... 2.69 1.31
Fourth Quarter................... 2.75 1.75
HOLDERS
As of June 1, 2001,July 2, 2002, there were 42,449,49643,207,399 shares issued and outstanding
and 395377 registered holders of our Common Stock as confirmed by our transfer
agent.
DIVIDEND POLICY
We have not paid any dividends on our outstanding common shares since
our inception and do not anticipate doing so in the foreseeable future. The
declaration of dividends on our common shares is within the discretion of our
Board of Directors and is restricted by the revolving credit facility and will
depend upon the assessment of, among other things, our earnings, financial
requirements and operating and financial condition. At the present time, Page 24our
22
our
anticipated capital requirements are such that it intendswe intend to follow a policy of
retaining earnings in order to finance further development of our business.
We are limited in our ability to pay dividends on our common shares by
limitations under the Company Act (British Columbia) relating to the sufficiency
of profits from which dividends may be paid. We are also limited in our ability
to pay cash dividends on common shares by our revolving credit facility pursuant
to a negative covenant.
The Series A preferred shares are entitled to cumulative dividends, as
and when declared by the Board of Directors at a rate of 5.25% of the offering
price per annum, payable semi-
annuallysemi-annually on the last day of March and September of
each year. At our option, the dividend may be paid in cash or additional
preferred shares. We declared, and on September 30, 2000 and
March 31, 2001 respectively, paid in U.S. dollars, a
cash dividend of US$817,000 or US$66.94 per share and on March 31, 2002 we
declared and paid, in kind, a dividend of US$773,600 or US$66.94 per share by
the issue of 273 preferred shares and cash payments of US$77,450 (2001 - cash
dividends of US$817,000 or US$66.94 per share ($1.2 million or
$99.08 per share)were paid in US dollars on each of
September 30, 2000 and US$817,000 or US$66.94 per share ($1.3
million or $105.51 per share). (2000 - US$406,000 or US$33.29
per share, $591,000 or $48.40 per share).
RECENT SALES OF UNREGISTERED SECURITIES
On March 7, 2001, we issued 600,000 unregistered shares of
our Common Stock to Peter Strauss pursuant to a Settlement and
Partial Release Agreement dated March 6, 2001. Mr. Strauss has
served as President of LG Pictures, International Movie Group,
Inc. and The Movie Group since June 30, 1998. Subsequent to the
commencement of such employment, we became involved in a dispute
with Mr. Strauss. As part of the Settlement and Partial Release
Agreement, pursuant to which we and Mr. Strauss settled and
resolved all claims against each other, we agreed to issue Mr.
Strauss 600,000 shares of our Common Stock. The issuance was
exempt from registration under Section 4(2) of the Securities Act
of 1933 as amended, as a sale of securities not involving a
public offering.31, 2001).
TAXATION
The following is a general summary of certain Canadian income tax
consequences to U.S.United States Holders (who deal at arm's length with the
Company) of the purchase, ownership and disposition of Common Shares. For the
purposes of this discussion, a "U.S. Holder" means a holder of Common Shares who
(1) for the purposes of the Income Tax Act (Canada) is not, has not, and will
not be resident in Canada at any time while he or she holds Common Shares, (2)
at all relevant times is a resident of the United States under the Canada-United
States Income Tax Convention (1980) (the "Convention"), and (3) does not and
will not use or be deemed to use the Common Shares in carrying on a business in
Canada. This summary does not apply to U.S. Holders who are insurers. Such U.S.
Holders should seek tax advice from their advisors. An actual or prospective
investor that is a U.S.United States limited liability company in some circumstances
may not be considered to be a resident of the United States for the purposes of
the Convention and therefore may not be entitled to benefits thereunder.
This summary is not intended to be, and should not be construed to be,
legal or tax advice to any prospective investor and no representation with
respect to the tax consequences to any particular investor is made. The summary
does not address any aspect of any provincial, state or local tax laws or the
tax laws of any jurisdiction other than Canada or the tax considerations
applicable to non-U.S. Holders. Accordingly, prospective investors should
consult with their own tax advisors for advice with respect to the income tax
consequences to them having regard to their own particular circumstances,
including any consequences of an investment in Common Shares arising under any
provincial, state or local tax laws or the tax laws of any jurisdiction other
than Canada.
Page 25
This summary is based upon the current provisions of the Income Tax Act
(Canada), the regulations thereunder and the proposed amendments thereto
publicly announced by the Department of Finance, Canada prior to the date
hereof. It does not otherwise take into account or anticipate any changes in
law, whether by legislative, governmental or judicial action.
The following summary applies only to U.S. Holders who hold their
Common Shares as capital property. In general, Common Shares will be considered
capital property of a holder where the holder is neither a trader nor dealer in
securities, does not hold the Common Shares in the course of carrying on a
business and is not engaged in an adventure in the nature of trade in respect
thereof. This summary does not apply to holders who are "financial institutions"
within the meaning of the mark-to-market rules contained in the Income Tax Act
(Canada).
23
Amounts in respect of Common Shares paid or credited or deemed to be
paid or credited as, on account or in lieu of payment of, or in satisfaction of,
dividends to a shareholder who is not a resident of Canada within the meaning of
the Income Tax Act (Canada) will generally be subject to Canadian non-resident
withholding tax. Such withholding tax is levied at a basic rate of 25% which may
be reduced pursuant to the terms of an applicable tax treaty between Canada and
the country of residence of the non-resident. Under the Convention, the rate of
Canadian non-resident withholding tax on the gross amount of dividends beneficially ownedreceived
by a U.S. Holder is generally 15%. However, where such beneficial owner is a
company which owns at least 10% of the voting stock of the Company, the rate of
such withholding is 5%.
A purchase of Common Shares by the Company (other than by a purchase in
the open market in the manner in which shares are normally purchased by a member
of the public) will give rise to a deemed dividend equal to the amount paid by
the Company on the purchase in excess of the paid-up capital of such shares,
determined in accordance with the Income Tax Act (Canada). Any such dividend
deemed to have been received by a person not resident in Canada will be subject
to non-resident withholding tax as described above. The amount of any such
deemed dividend will reduce the proceeds of disposition to a holder of Common
Shares for purposes of computing the amount of the holder's capital gain or loss
arising on the disposition.
A U.S. Holder will generally not be subject to tax under the Income Tax
Act (Canada) in respect of any capital gain arising on a disposition of Common
Shares (including on a purchase by the Company) unless at the time of
disposition such shares constitute taxable Canadian property of the holder for
purposes of the Income Tax Act (Canada) and such holder is not entitled to
relief under an applicable tax treaty. If the Common Shares are listed on a
prescribed stock exchange at the time they are disposed of, they will generally
not constitute taxable Canadian property of a U.S. Holder unless, at any time
during the five year period immediately preceding the disposition of the Common
Shares, the U.S. Holder, persons with whom he or she does not deal at arm's
length, or the U.S. Holder together with non-arm's length persons, had an
interest in or option in respect of 25% or more of the issued shares of any
class of the capital stock of the Company. In any event, under the Convention,
gains derived by a U.S. Holder from the disposition of Common Shares will
generally not be subject to tax in Canada unless the value of the Company's
shares is derived principally from real or certain other immovable property
situated in Canada.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the Financial Statementsconsolidated financial statements and the Notesnotes thereto and
Item 9,7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations." The consolidated statementstatements of operations data and balance sheetother
operating data set forth below have been derived from and are qualified by
reference to the Page 26
Consolidated Financial Statementsaudited consolidated financial statements and Notesnotes thereto for the year
ended March 31, 2001, which have been audited by
PriceWaterhouseCoopers, LLP,
included elsewhere herein. Historical results are not necessarily indicative of
the results of operations which may be expected in the future. See "Currency and
Exchange Rates" for historical exchange rate information.
The consolidated financial statements of the Company have been prepared
in accordance with Canadian generally accepted accounting principles ("GAAP")
and, except as noted, the financial data set forth below is presented in
accordance with Canadian GAAP. These principles differ in some respects from
United States GAAP. For a description of the principal differences between
Canadian GAAP and United States GAAP, see Note 25,note 21, "Reconciliation to United
States GAAP" in the Notes to the Consolidated Financial Statements.
Page 2724
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
Fiscal Years Ended March 31,
----------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(all amounts in thousands of Canadian dollars, except per share information)
Fiscal Years Ended March 31,
------------------------------------------
2001 2000 1999 1998
--------- --------- --------- ---------amounts)
STATEMENTS OF OPERATIONS DATA:
In accordance with Canadian GAAP:
Revenue........................... $282,226 $271,251 $118,297REVENUES $ 426,582 $ 282,226 $ 271,251 $ 118,297 $ 64,149
--------- --------- --------- --------- ---------
EXPENSES:
Direct Operating Expenses.........operating 250,335 156,420 222,875 92,931 49,175
Distribution and marketing 119,362 51,776 -- -- --
General and administration 54,272 37,710 31,388 23,555 10,337
Amortization 7,129 8,565 6,875 5,279 1,781
Severance and relocation costs -- -- 1,698 -- --
--------- --------- --------- --------- Gross Profit...................... 125,806 48,376 25,366 14,974---------
Total expenses 431,098 254,471 262,836 121,765 61,293
--------- --------- --------- --------- Other Expenses
Distribution and marketing
costs.......................... 51,776 - - -
General and administrative...... 37,710 31,388 23,555 10,337
Amortization.................... 9,887 7,074 5,279 1,781
Interest........................ 10,283 4,466---------
OPERATING INCOME (LOSS) (4,516) 27,755 8,415 (3,468) 2,856
--------- --------- --------- --------- ---------
OTHER EXPENSES:
Interest 15,386 11,605 4,665 3,655 951
Non-controlling interest........Minority interests 1,911 881 1,308 612 1,019
Severance and restructuring
costs......................... - 1,698Unusual losses 2,115 -- -- 1,647 ---
--------- --------- --------- --------- 110,537 45,934 34,748 14,088---------
Total other expenses 19,412 12,486 5,973 5,914 1,970
--------- --------- --------- --------- Income (Loss) Before Undernoted---------
INCOME (LOSS) BEFORE UNDERNOTED (23,928) 15,269 2,442 (9,382) 886
Gain on dilution of investment
in a subsidiary............... - -subsidiary 3,375 -- -- 839 ---
--------- --------- --------- --------- Income (Loss) Before Income
Taxes and Equity Interests....---------
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY
INTERESTS (20,553) 15,269 2,442 (8,543) 886
Income taxes....................taxes 503 (3,292) 2,000 304 1,439
--------- --------- --------- --------- Income (Loss) Before Equity
Interest......................---------
INCOME (LOSS) BEFORE EQUITY INTEREST (21,056) 18,561 442 (8,847) (553)
EquityWrite-down and equity interest in
loss of
Mandalay Pictures, LLC........ (8,298)Investments subject to significant influence (52,506) (9,833) (5,894) (5,449) ---
Other equity interests.......... (1,535)interests -- -- 159 140 ---
--------- --------- --------- --------- Net Income (Loss) for the Year..---------
NET INCOME (LOSS) (73,562) 8,728 (5,293) (14,156) (553)
Dividends paid on Series A preferred shares........................shares (2,492) (2,497) (591) - --- --
Accretion on Series A preferred shares........................shares (3,271) (3,115) (727) - -
Adjusted Deficit, Beginning of
Year.......................... (83,016) (14,709) (553) --- --
--------- --------- --------- --------- Deficit, End of Year............ $(79,900) $(21,320) $(14,709) $---------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS (79,325) 3,116 6,611 (14,156) (553)
========= ========= ========= =========
Basic and Diluted Income
(Loss) Per Common Share.......--------- --------- --------- --------- ---------
BASIC AND DILUTED INCOME
(LOSS) PER COMMON SHARE (1.86) $ 0.09 $ (0.22) $ (0.58)(1.05) $ (0.04)
========= ========= ========= =========
Deficit, Beginning of Year........ $(21,320) $(14,709) $ (553) $ -
Effect of change in accounting
policy.......................... (61,696) - - -(.10)
--------- --------- --------- --------- Adjusted Deficit, Beginning of
Year............................ $(83,016) $(14,709) $ (553) $ -
========= ========= ========= =========---------
In accordance with U.S. GAAP:
Revenue......................... $264,047Revenues $ 345,313 $ 264,047 $247,264 $114,377$ 114,377 $ 56,942
========= ========= ========= =========
Net Loss for the Year........... $(28,805)Year (71,832) $ (50,217) $ (2,424) $(25,697)$ (25,697) $ (1,435)
========= ========= ========= =========
Basic and Diluted Loss Per
Common Share..............Share (1.78) $ (0.99)(1.50) $ (0.11) $ (0.11)(1.05) $ (1.05) $ (0.10)
========= ========= ========= =========
Page 2825
CONSOLIDATED BALANCE SHEETS
(all amounts in thousands of Canadian dollars)
At March 31,
------------------------------------------
2001 2000 1999 1998
--------- --------- --------- ---------
In accordance with Canadian GAAP
Assets
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 42,753 36,196 30,665 24,575 28,320
OTHER OPERATING DATA:
Cash flow from (used in)
operating activities (95,012) (51,334) (42,652) (31,730) 42,040
Cash flow from (used in)
financing activities 85,810 82,436 42,079 51,303 (158,012)
Cash flow from (used in)
investing activities 11,093 (45,053) (6,398) (118,153) 125,036
BALANCE SHEET DATA:
Cash and equivalents............. $cash equivalents 10,587 10,485 $ 19,283 $ 26,254 $ 9,064
Accounts receivable.............. 183,787receivable 186,428 173,112 107,344 60,673 47,816
Investment in films and
television programs............. 228,349programs 288,310 224,115 128,375 88,949 56,305
Long term investments... ........ 77,230 64,058 72,932 71,048
Capital assets................... 44,212 44,505 40,691 38,757
Goodwill, net of accumulated
amortization.................... 34,924 29,163 31,636 27,207
Other assets..................... 15,233 8,960 6,029 317
Future income taxes.............. - 285 448 -
--------- --------- --------- ---------
$594,220 $401,973 $327,612 $250,514
========= ========= ========= =========
LiabilitiesTotal assets 607,600 583,545 401,973 327,612 250,514
Bank loans.......................loans 229,141 159,765 13,936 $ 12,185 15,581
Accounts payable and accrued
liabilities..................... 123,370 74,965 44,668 26,441
Production and distribution
loans...........................loans 38,167 24,045 41,838 48,415 30,227
Long-term debt...................debt 75,565 65,987 40,607 41,145 27,414
Deferred revenue................. 22,283 19,269 10,780 4,999
Future income taxes.............. 757 - - 1,255
Non-controlling interest......... 1,224 4,944 3,635 646
--------- --------- --------- ---------
397,431 195,559 160,828 106,563
Shareholders' Equity
Capital stock.................... 266,523 226,290 177,068 144,524
Deficit.......................... (79,900) (21,320) (14,709) (553)
Cumulative translation
adjustments..................... 10,166 1,444 4,425 (20)
--------- --------- --------- ---------equity 120,194 196,789 206,414 166,784 143,951
--------- --------- --------- ---------
$594,220 $401,973 $327,612 $250,514
========= ========= ========= =========
In accordance with U.S. GAAP:
Total assets...................... $599,170 $395,219 $318,089 $263,621
========= ========= ========= =========
Page 2926
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The following discussion and analysis for the years ended
March 31, 2001, 2000 and 1999 should be read in conjunction with
the Consolidated Financial Statements and the notes to the
Consolidated Financial Statements included in this report.
The functional currency of our business, defined as the
economic environment in which we primarily generate and expend
cash, is the Canadian dollar and United States dollar for the
Canadian and United States-based businesses respectively. In
accordance with generally accepted accounting principles in both
Canada and the United States, the financial statements of United
States-based subsidiaries are translated for consolidation
purposes using current exchange rates, with translation
adjustments accumulated in a separate component of shareholders'
equity.OPERATIONS.
We develop, produce and distribute a targeted range of film and
television content in North America and around the world. To reflect our core
businesses, this discussion focuses on Motion Pictures, Television, Animation
and Studio Facilities and CineGate.Facilities. Please also refer to the tableinformation in note 17 to the
consolidated financial statements.
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and the related notes thereto
included in this Form 10-K. The consolidated financial statements have been
prepared in accordance with Canadian Generally Accepted Accounting Principles
("GAAP"). The material differences between the accounting policies used by Lions
Gate under Canadian GAAP and U.S. GAAP are disclosed in note 21 to the
consolidated financial statements. Certain reclassifications have been made in
the fiscal 2001 and 2000 consolidated financial statements to conform to the
fiscal 2002 presentation, as described in note 2(u).
The functional currency of our business, defined as the economic
environment in which we primarily generate and expend cash, is the Canadian
dollar and U.S. dollar for the Canadian and U.S.-based businesses, respectively.
In June 2000,accordance with generally accepted accounting principles in both Canada and
the Accounting Standards Executive CommitteeU.S., the financial statements of the American InstituteU.S.-based subsidiaries are translated for
consolidation purposes using current exchange rates, with translation
adjustments accumulated as a separate component of Certified Public Accountants issued
SoP 00-2. SoP 00-2 establishes new accounting standards for
producers or distributorsshareholders' equity.
On April 1, 2001, we adopted Statement of films, including changes in revenue
recognition and accounting for exploitation costs, including
advertising and marketing expenses. Additionally, in June 2000,
the Financial Accounting
Standards Board ("FASB"SFAS") issued
Statement 139 ("133 "Accounting for Derivative Instruments and Hedging
Activities", where the provisions of SFAS 139")133 are applicable under Canadian
GAAP. SFAS 133 requires that rescindedall derivative instruments be reported on the
balance sheet at fair value and establishes criteria for the designation and
effectiveness of hedging relationships. The cumulative effect of adopting SFAS
53 "Financial
Reporting by Producers and Distributors of Motion Picture Films."
Companies that were previously subject133 was not material to the requirementsconsolidated financial statements.
On July 10, 2001, a subsidiary of SFAS 53 must now complythe Company completed an equity
financing with SoP 00-2. Wea third party for $14.0 million. The gain on dilution of the
Company's investment was $3.4 million (net of income taxes of $nil) and resulted
in a decrease of $0.2 million in goodwill.
In November 2001, the Canadian Institute of Chartered Accountants
("CICA") released Handbook Section 3062, "Goodwill and Other Intangible Assets",
to be applied by companies for fiscal years beginning on or after January 1,
2002. Early adoption was permitted for companies with their fiscal year
beginning on or after April 1, 2001, provided the first interim period financial
statements had not been previously issued. The Company elected to adopt SoP
00-2 early and, as a result, recorded a one-time after-tax
adjustment to opening retained earnings atearly-adopt
CICA 3062 on April 1, 2000 of $58.9
million (including $5.5 million relating to Mandalay)2001. Under CICA 3062, goodwill is no longer amortized but
is reviewed annually, or more frequently if impairment indicators arise, for
the
initial adoption of SoP 00-2.
The new rules require that advertising costs be expensed as
incurred as opposed to the old rules, which generally allowed
advertising costs to be capitalized as part of film costs, and
amortized using the "individual film forecasts" method. All
other exploitation costs, including marketing costs, must also
now be expensed as incurred. Due to the significant advertising
and other exploitation costs incurred in the early stages of a
film's release, we anticipate that the new rules will
significantly impact its results of operations for the
foreseeable future. For example, in the financial quarter where
we release a film theatrically it is likely that significant
losses would be realized on that film. In subsequent financial
quarters when the film is released into other media, such as
video and television, it is likely that a significantly favorable
gross margin would be recorded on that film. In the current
year, "pre-SoP" EBITDA wouldimpairment, unless certain criteria have been approximately $46.2
million, a $9.9 million difference, compared to "post-SoP" EBITDA
of $36.3 million. A significant portion of the decline due to
the SoP adjustment relates to the allocation of the fair value of
Trimark's library on acquisition under the SoP and advertising
costs relating to the fiscal 2001 theatrical releases of American
Psycho and Shadow of the Vampire. The $9.9 million decrease in
EBITDA equates to a decrease in net income of $5.9 million or
$0.16 per share.
Advertising and other exploitation costs expensed in the
year are now separately disclosed in the Consolidated Statements
of Operations and Deficits as "distribution and marketing costs."
Additionally, under SFAS 53, we classified additions to films
costs as an investing activity in the Consolidated Statement of
Cash Flows, which must now be disclosed as an operating activity
in the Consolidated Statement of Cash Flows.
Page 30
In September 2000, we announced that we had entered into a
joint venture with Cinegate Holdings Inc. to provide services to
CineGate. CineGate provides management services to Canadian
limited partnerships using the Film or Video Production Services
Tax Credit and the Canadian Federal Tax Act to finance production
in Canada.
We also elected early adoption ofmet. CICA Handbook Section 3465
- - Income Taxes - which3062 is similar, in many
respects, to FAS 109SFAS 142, "Goodwill and Other Intangible Assets", under U.S. GAAP.
A onetime adjustmentGoodwill is required to opening retained
earningsbe tested for impairment between the annual tests if an
event occurs or circumstances change that more-likely-than-not reduce the fair
value of a reporting unit below its carrying value. Notes 2(c) and 6 to the
consolidated financial statements include additional information relating to the
net carrying value of goodwill and the proforma effect of the adoption of CICA
3062 on the prior years' consolidated statements of operations.
27
On December 20, 2001, we acquired the remaining 50% interest in Eaton
Entertainment LLC for $0.2 million. Additionally, we recorded an unusual loss of
$1.3 million relating to the non-continuing assets acquired in the transaction.
CinemaNow is a leader in the IP-delivered video-on-demand market. It is
licensing its proprietary Patch-Bay(TM) technology around the world, and is
growing its audience of users and subscribers. However, since it hasn't
completed its current efforts to raise capital, has experienced recurring losses
and cannot demonstrate with reasonable certainty that it has twelve months of
cash to fund operations, we are required by Canadian and U.S. GAAP to reassess
the carrying value of our investment in CinemaNow. The write-down of the
investment of $21.0 million, which had no impact on the fiscal 2002 cash flows,
was expensed, as a component of write-down and equity interests in investments
subject to significant influence, in the consolidated statement of operations.
With the authority granted by the Board of Directors, prior to the
close of the fourth quarter, management committed to a plan to divest its
ownership interest in Mandalay. The investment in Mandalay was written down to
its estimated fair value of $15.9 million at March 31, 2002. The fair value of
Mandalay takes into account the expiration and non-renewal of Mandalay's
international output agreements on December 31, 2001 and the pending expiration
of its production and distribution agreement with Paramount Pictures Corp. in
fiscal 2003, and is supported by cash expected to be received from Mandalay in
the next 12 to 24 months. The write-down of the investment of $17.0 million,
which had no impact on the fiscal 2002 cash flows, was expensed, as a component
of write-down and equity interests in investments subject to significant
influence, in the consolidated statement of operations.
OVERVIEW
It should be noted that due to the retroactive adoption without
restatement of CICA 3062 on April 1, 2001 and SoP 00-2 and CICA 3465 on April 1,
2000, of $2.7 million was recordedall as described in note 2(r)2(c) to the consolidated financial statements.
In September 2000, we announced we had closed a US$200
million five-year revolving credit facility arranged by J.P.
Morgan Securities, agented by Chase Manhattan Bankstatements,
the operating results in a syndicate
of fifteen nationally and internationally significant banks.
Dresdner Bank AG acted as Syndication Agent and National Bank of
Canada acted as the Canadian Facility Agent.
In October 2000, we announced we had completed the
acquisition of Trimark. The total consideration of US$49.6
million consisted of cash consideration of US$22.0 million,
10.2 million Lions Gate common shares with an estimated fair
value of US$23.6 million and US$4.0 million of acquisition
costs. The acquisition was accounted for as a purchase, with
the results of Trimark consolidated from October 13, 2000 onwards.
The transaction generated goodwill of $8.5 million. We have
successfully integrated Trimark into our operations and the
synergies are expected to exceed the projected US$7 million in
annual costs savings.
As part of the reorganization of our operations as a result
of the acquisition of Trimark the New York office was closed in
January 2001 and the Toronto office was downsized in March 2001.
In November 2000, we acquired the 50% remaining third party
interest in Sterling Home Entertainment (referred to as "Studio
Home Entertainment"). The total consideration of US$2.8 million
consisted of cash consideration of US$2.0 million, forgiveness of
an account receivable of US$0.7 million and US$0.1 million of
acquisition costs. The acquisition gave us access to 100% of the
Studio Home Entertainment library that consists of many
significant straight-to-video titles including Legionnaire,
Letters From a Killer, Murder of Crows, and New Rose Hotel, as
well as distribution rights to the top-selling Komodo.
In December 2000, CinemaNow, our Internet video on demand
business, acquired with Trimark, announced the completion of a
second round of preferred share financing consisting of 5.3
million shares for US$4.5 million. Significant participants in
this round of financing included Blockbuster, Microsoft and
private venture funds. This transaction resulted in a dilution
of our interest from 77.2% to 63%.
OVERVIEW
Including the non-cash equity interestseach year in the operating
losses of Mandalay and CinemaNow, totaling $9.8 millionthree-year period ended March 31, 2002
are not comparable.
Net loss as disclosed in the Consolidated Statementsconsolidated statements of Operations and
Deficits, net incomeoperations for
the year ended March 31, 20012002 was $73.6 million, representing a loss of $1.86
per share (after giving effect to the Series A preferred share dividends and
accretion on the Series A preferred shares) on 42.8 million weighted average
common shares outstanding compared to net income of $8.7 million or $0.09 per
share (including(after giving effect to the Series A preferred share dividends and
accretion on the Series A preferred shares) on 36.2 million weighted average
commonscommon shares outstanding compared tofor the year ended March 31, 2001 and a net loss of
$5.3 million or $0.22 per share (including(after giving effect to the Series A preferred
share dividends and accretion on the Series A preferred shares) on 30.7 million
weighted average common shares outstanding for the year ended March 31, 20002000.
Before write-down and a netequity interests in investments subject to
significant influence (Mandalay and CinemaNow), the loss of $14.2 million or $0.58 per share on 24.6
million weighted average common shares outstanding for the year ended
March 31, 1999. Our $8.32002 of $21.1 million (2000-$5.9 million)
non-cash equity interestcompared to net income of $18.6 million in the loss of Mandalay is comprised
of 100% of the operating losses of Mandalay for the year of
$6.4 million, plus
Page 31
amortization of previously capitalized pre-operating period
costs of $1.9 million. Our $1.5 million non-cash equity
interest in the loss of CinemaNow comprises 66.9% of the
non-cash operating losses of CinemaNow for the period
October 13, 2000 to March 31, 2001 of $1.2 million, plus
amortization of goodwill amounting to $0.3 million, which
arose at the time of the purchase of Trimark.
Excluding the non-cash equity interests in the operating
losses of Mandalay and CinemaNow, we generated earnings for the
year ended March 31, 2001 of $18.6 million, an improvement of
$18.2 million compared to the equivalent earnings amount ofand $0.4 million in the year ended March 31, 20002000.
EBITDA (defined as earnings before interest, provision for income
taxes, amortization, minority interests, unusual losses, write-down and a lossequity
interests in investments subject to significant influence) of $8.8$2.6 million in the year ended March 31, 1999. These results are
equivalent to earnings per share of $0.32 in fiscal 2001, loss per
share of $0.02 in fiscal 2000 and a loss per share of $0.35 in
fiscal 1999, all other things being equal.
Excluding the adoption of SoP 00-2, net income for
the year ended March 31, 2001 would have been $14.62002 has decreased $33.7 million or $0.25 per
share (including the Series A preferred share dividends and
accretion on the Series A preferred shares).
EBITDA (defined as earnings before interest, provisions for
income taxes, amortization, non-controlling interests, equity
interests in losses and severance and relocation costs) of92.8% compared to
$36.3 million for the year ended March 31, 2001, haswhich had increased $19.3
million or 113.5% compared to $17.0 million for the year ended March 31, 2000 and increased $34.5 million or more than twenty-
fold compared2000.
28
While management considers EBITDA to $1.8 million for the year ended March 31, 1999.
EBITDAbe an important measure of comparative
operating performance, it should be considered in addition to, but not as a
substitute for, operating income, net income and other measures of financial
performance reported in accordance with generally
accepted accounting principles.GAAP. EBITDA does not reflect cash
available to fund cash requirements. Not all companies calculate EBITDA in the
same manner and the measure as presented may not be comparable to
similarly-titled measures presented by other companies.
RESULTS OF OPERATIONS
FISCAL 2002 COMPARED TO FISCAL 2001
Revenues in fiscal 2002 of $426.6 million increased $144.4 million or
51.2% compared to $282.2 million in fiscal 2001.
Revenues increased significantly in all businesses in the current year.
Motion Pictures fiscal 2002 revenue of $251.3 million increased $77.4
million or 44.5% compared to $173.9 million in fiscal 2001. The increase is due
primarily to the integration of Trimark in the current year compared to the
inclusion of Trimark's post-acquisition revenue for the period October 13, 2000
to March 31, 2001 of $50.3 million in fiscal 2001. Theatrical revenue of $43.6
million increased $23.8 million or 120.2% compared to $19.8 million in the prior
year. Significant theatrical releases in the current year included: Monster's
Ball with revenue of $11.8 million, "O", with revenue of $8.3 million and The
Wash, with revenue of $5.0 million. Other significant theatrical releases
included: Amores Perros, Les Boys 3, Lantana and Songcatcher. Video revenue of
$154.5 million increased $55.7 million or 56.4% in the current year compared to
$98.8 million in the prior year. Significant video releases in the current year
included: "O", which was released on video on February 19, 2002 and earned
revenue in excess of $22 million in the last six weeks of the current fiscal
year, The Wash with video revenue in excess of $10 million and Shadow of the
Vampire with video revenue in excess of $5 million. Video library revenue also
increased significantly year-over-year. International revenues were relatively
consistent year-over-year, while television revenue from motion pictures
decreased $5.6 million in fiscal 2002 to $12.7 million due to the timing of the
availability of the television windows.
Television production revenue of $110.7 million increased by $39.2
million or 54.8% from $71.5 million in the prior year, due primarily to the
increased number of hours delivered in the current year in all television
divisions. In the current year, 48 hours of one-hour drama series were
delivered, contributing revenue of $53.5 million. Deliveries in the current year
included: 22 episodes of "Mysterious Ways" to PAXTV, NBC (eight of 22 episodes),
CTV in Canada and Columbia Tristar internationally; 14 episodes of "Tracker" to
the US syndication market, Chum TV in Canada, Telemunchen in Germany and other
international broadcasters; eight episodes of "No Boundaries" to WB Network in
the U.S., CanWest Global in Canada and international broadcasters; two episodes
of "Dead Zone" to UPN in the U.S. and Paramount internationally; and two
episodes of "Iron Chef" to UPN in the U.S., City TV and Alliance Atlantis in
Canada and international broadcasters. In the prior year, 29 hours of one-hour
drama series were delivered for revenue of $44.5 million. Television movies
contributed revenue of $31.3 million in the current year. Current year
deliveries included: "Superfire" to ABC and international broadcasters; "The
Pilot's Wife" to CBS in the U.S. and international broadcasters; and "Attack on
the Queen" to TBS in the U.S. and international broadcasters. In the prior year,
one television movie was delivered to international territories. In the current
year, Termite Art contributed revenue of $23.5 million on the delivery of 78.5
hours of non-fiction programming including 25.5 hours of "Amazing Animal Videos"
to Animal Planet, 13 hours of "Incredible Vacation Videos" to Travel Channel;
6.5 hours of "Wild Rescues" to Animal Planet and five hours of "MTV Video
29
Party". In the prior year, Termite Art delivered 68.5 hours of non-fiction
programming for revenue of $18.4 million. Under Canadian GAAP, tax credits
earned are included in revenue. Under U.S. GAAP, tax credits earned are recorded
as an offset to income tax expense. In fiscal 2002, $28.0 million of tax credits
earned were included in revenue.
In Animation, CineGroupe's revenue of $55.6 million increased $25.9
million or 87.2% compared to $29.7 million in the prior year. The increase was
primarily due to increased deliveries in the current year. In the current year,
a total of 110.5 half-hours of television programming were delivered (compared
to 81.5 half-hours in the prior year) including: 26.5 half-hours of "Sagwa, the
Chinese Siamese Cat" to PBS in the U.S. and TVO in Canada; 26 half-hours of
"What's With Andy" to ABC Family in the U.S. and Teletoon in Canada; 21
half-hours of "Big Wolf on Campus" to ABC Family in the U.S. and YTV in Canada;
12 half-hours of "Wunchpunch" to Radio Canada and Saban internationally; 12
half-hours of "Kids From Room 402" to ABC Family in the U.S. and Teletoon and
TQS in Canada; and nine half-hours of "Galidor - Defender of the Outer
Dimension" to Fox Kids and Lego in the U.S. and YTV in Canada. In addition, the
feature film Wilderness Station was delivered to distribution partners around
the world. Library revenue of $4.7 million, interactive revenue of $1.0 million
and service and other revenue of $0.1 million were earned in the current year,
compared to $1.2 million, $0.8 million and $1.3 million respectively in the
prior year.
Studio Facilities revenue of $6.6 million increased $1.1 million or
20.0% compared to $5.5 million in the prior year due primarily to an improvement
in occupancy levels and revenues generated from additional services now offered
at the studios including lighting, equipment and furniture rentals. Stage and
office occupancy levels averaged 96% and 94% respectively for the year compared
to 94% and 85% respectively in the prior year.
CineGate earned commission revenue of $2.3 million in the current year
on approximately $270.0 million of production financing arranged through the
Cinegate joint venture compared to revenue of $1.6 million earned in the prior
year. CineGate ceased operations in fiscal 2002 upon the rescission of the tax
shelter business by the Canadian government.
Direct operating expenses of $250.3 million for the year ended March
31, 2002 were 58.7% of revenue, compared to direct operating expenses of $156.4
million, which were 55.4% of revenue in the prior year. Direct operating
expenses as a percentage of revenue increased in the current year primarily due
to the loss recognized on the delivery of the 14 episodes of "Tracker", the
impact of the significant theatrical and video revenues on "O" - a distribution
service deal with 15% fees, and the softening of the European marketplace, which
has resulted in increased provisions for bad debts. In the current year, we
increased our provision for doubtful accounts by $11.8 million (including $2.5
million relating to KirchMedia) and wrote off or cancelled contracts directly
against revenue totaling $3.0 million. Excluding tax credits receivable, the
provision for doubtful accounts at March 31, 2002 represents 10.3% of accounts
receivable, compared to 4.5% at March 31, 2001.
Distribution and marketing costs (also known as "P&A") of $119.4
million more than doubled, increasing $67.6 million or 130.5% compared to $51.8
million in the prior year. P&A increased year-over-year primarily due to the
advertising expenditures on the more significant theatrical and video releases
in the current year. Theatrical P&A in the current year of $53.1 million
compares to $32.8 million in the prior year. Video P&A of $64.7 million compared
to $17.4 million in the prior year due to the significant increase in video
activity and video releases being brought "in-house". Revenues earned on videos
released through our Universal output deal, which expires on August 31, 2002,
are recorded net of distribution and marketing expenses.
30
In the current year, our most significant video releases, "O" and The Wash, were
released directly by Lions Gate, outside of the Universal output deal.
General and administrative expenses of $54.3 million increased $16.6
million or 44.0% compared to $37.7 million in the prior year. In Motion
Pictures, general and administrative expenses increased $7.9 million or 34.3% to
$30.9 million from $23.0 million in the prior year primarily as a result of a
full year of combined operations with Trimark and the growth of the production
and theatrical and video distribution businesses. Television general and
administrative expenses of $5.4 million were virtually unchanged year-over-year.
Animation general and administrative expenses increased $1.3 million or 46.4% to
$4.1 million from $2.8 million in the prior year due to the creation of an
international sales department and increased head count at the corporate head
office. General and administrative expenses in corporate of $13.6 million
increased $7.4 million or 119.4% from $6.2 million primarily due to increased
headcount as a result of growth in corporate administration and support
functions.
Amortization of $7.1 million decreased $1.5 million or 17.4% from $8.6
million in the prior year due primarily to a decrease in goodwill amortization
of $2.7 million year-over-year as a result of the adoption of CICA 3062
partially offset by increased amortization of capital assets of $1.6 million,
primarily in Animation, pertaining to the acquisition of animation and technical
services equipment financed through capital leases.
Year-over-year interest expense of $15.4 million increased by $3.8
million or 32.8% from $11.6 million in the prior year due to borrowings related
to the purchase of Trimark and increased production and acquisition activity and
bank charges related to bank facilities, partially offset by decreased interest
rates.
Unusual losses of $2.1 million recorded in the current year related to
a $1.3 million loss recorded on the acquisition of the remaining 50% of Eaton
Entertainment, LLC, a $0.6 million loss on disposal related to the demolition of
an existing structure to provide room to build a new 20,500 square foot sound
stage at Lions Gate Studios and the write-off of capital assets relating to the
downsizing of certain offices.
The fiscal 2002 provision for income taxes of $0.5 million consists of
a $2.0 million provision for income taxes, partially offset by the recognition
of the benefits of income tax losses of $1.5 million. At March 31, 2002, we have
Canadian non-capital losses of approximately $45.4 million available to reduce
Canadian income taxes carried forward for seven years and US$38.1 million
(Cdn$60.7 million) for U.S. income tax losses carried forward for fifteen to
twenty years.
In July 2001, Mandalay theatrically released its third feature film,
The Score, a US$83 million-budgeted action suspense thriller, starring Robert
DeNiro, Edward Norton, Marlon Brando and Angela Bassett and directed by Frank
Oz. The worldwide box office on The Score was approximately US$115 million
(Cdn$180 million). Serving Sara, a US$40 million-budgeted romantic comedy
starring Matthew Perry and Elizabeth Hurley is expected to be released in
August, 2002. Principal photography was recently completed on the US$90
million-budgeted Beyond Borders, starring Angelina Jolie and Clive Owen,
directed by Martin Campbell. Beyond Borders is expected to be released in early
2003. In the current year we received cash of $8.4 million from Mandalay as a
return on our investment which was recorded as an offset to investments subject
to significant influence on our consolidated balance sheet. The $28.0 million
write-down in Mandalay, recorded in the fourth quarter, was included in
write-down and equity interest in investments subject to significant influence.
The $1.8 million equity interest in the loss of CinemaNow represents
63% of the operating losses of CinemaNow for the nine months ended December 31,
2001 compared to $1.5
31
million in the year ended March 31, 2001. The $21.0 million write-down in
CinemaNow, recorded in the fourth quarter, was included in write-down and equity
interest in investments subject to significant influence.
Our consolidated financial statements have been prepared in accordance
with Canadian GAAP. The material differences between the accounting policies
used by us under Canadian GAAP and U.S. GAAP are disclosed in note 21 to the
consolidated financial statements.
Under U.S. GAAP the net loss for the year ended March 31, 2002 was
$71.8 million. The loss under U.S. GAAP is less than under Canadian GAAP due
primarily to the add back of the amortization of pre-operating costs relating to
Mandalay and our television one-hour series business, as described in notes
21(a) and 21(b).
FISCAL 2001 COMPARED TO FISCAL 2000
Revenue in fiscal 2001 of $282.2 million increased $10.9 million or
4.0% compared to $271.3 million in fiscal 2000.
Revenue in fiscal 2001 increased significantly in Motion Pictures and
was down slightly in Television and Animation due to the timing of deliveries.
Motion Pictures revenue in fiscal 2001 revenue of $173.9 million increased
$34.9$27.0 million or 18.4% compared to $146.9 million in fiscal 2000. The increase
iswas due primarily to the inclusion of Trimark's post-acquisition revenue for the
period October 13, 2000 to March 31, 2001 of $50.3 million, partially offset by
decreased revenue in Lions Gate Films of $23.3 million year-over-
year.year-over-year. In Lions
Gate Films, the majority of the year over yearyear-over-year decrease was in theatrical
distribution. In fiscal 2000, Dogma (a theatrical distribution service deal)
contributed theatrical revenue of close to $20.0 million and to a large extent
explains the decrease in fiscal 2001. The Dogma service deal generated fees of
15%, which put negative pressure onincreased the prior year's
gross margin.fiscal 2000 direct operating expenses as a percentage
of revenue. Significant theatrical releases in the current
yearfiscal 2001 included: American
Psycho; Shadow of the Vampire; and Big Kahuna. Significant video releases in
the current yearfiscal 2001 included: American Psycho; Big Kahuna; and Million Dollar Hotel.
Television and international sales revenuerevenues were relatively consistent year-over year.
Trimark contributed video revenue of approximately $30.0 million, international
sales revenue of approximately $14.0 million and television revenue of
approximately $7.0 million.million in fiscal 2001. Significant revenue generators for
Trimark included Shriek, Saturday Night Live "Best of" comedy series, and Held
Up.
Television production revenue in fiscal 2001 of $71.5 million decreased
by $10.3 million or 12.6% from $81.8 million in the prior year,fiscal 2000, due primarily to
fewer television movie deliveries partially offset by increased deliveries in
Page 32
Termite Art. Trimark contributed Television revenue of $3.7 million. In the current year,fiscal
2001, the one-hour drama series business contributed revenue of $44.5 million.
Deliveries in the current year includedfiscal 2001 included: 22 episodes of Mysterious Ways"Mysterious Ways" to PAX TV,PAXTV,
NBC (13 of 22 episodes), CTV and Columbia TristarTristar; and 7seven episodes of Higher Ground"Higher
Ground" to Fox Family, WIC and Paramount. In the prior year,fiscal 2000, 37 hours of one-hour
drama series were delivered for revenue of $46.0 million. Termite Art
contributed revenue of $18.4 million in the current yearfiscal 2001 on the delivery of 68.5
hours of non-fiction programming includingincluding: 6.5 hours of Incredible"Incredible Vacation
VideosVideos" to Travel Channel; 6.5 hours of After
Midnight"After Midnight" to Discovery; 6six hours
of VH1 ConfidentialConfidential" to VH1; 5five hours of MTV"MTV Video Party;Party"; and 4four hours of
Great Streets"Great Streets" to PBS. In addition, producersproducer fees were earned on the delivery
of 19 episodes of Ripley's"Ripley's Believe It Or NotNot" to UPN. In the prior
year,fiscal 2001, Termite
Art delivered 35 hours of proprietary programming and 12 hours of Ripley's
Believe It or Not for total revenue of $11.3 million. The first Avalanche
project, The Void, was delivered to international territories in the current yearfiscal 2001 and
32
producer fees were earned on four productions. In the prior
year,fiscal 2000, four television
movies were delivered for revenue of $24.3 million. Under Canadian GAAP, tax credits earned are included in
revenue. Under U.S. GAAP, tax credits earned are recorded as an
offset to income tax expense. In fiscal 2001, $18.2
million of tax credits earned were included in revenue.
In Animation, CineGroupe's fiscal 2001 revenue of $29.7 million
decreased $5.9 million or 16.6% compared to $35.6 million in the
prior year.fiscal 2000. The
decrease was due to the timing of deliveries - several episodes were not
available for delivery at March 31, 2001 and were subsequently delivered in the
first quarter of fiscal 2002. In the current yearfiscal 2001 a total of 81.5 half-hours of
television programming were delivered -including: 40 half-hours of Wunchpunch"Wunchpunch"
to Radio Canada and Saban,Saban; 18 half-hours of Kids"Kids From Room 402402" to TQS and Fox
Family,Family; 13.5 half-hours of Sagwa,"Sagwa, the Chinese Siamese CatCat" to PBS and TVOTVO; and
7seven half-hours of Mega Babies"Mega Babies" to Teletoon and Fox, as well as the television
movie Lion"Lion of OzOz" to Disney Channel and TMN. Library revenue of $1.2 million,
interactive revenue of $0.8 million and service and other revenue of $1.3
million waswere earned in the current year.fiscal 2001.
Studio Facilities fiscal 2001 revenue of $5.5 million decreased $1.5
million or 21.4% from the prior year'scompared to fiscal 2000 revenue of $7.0 million due to the
elimination on financial statement consolidation of $1.5 million of intercompany
revenue earned from ourLions Gate productions filmed at ourthe Studio Facilities.
Stage and office occupancy levels averaged 94% and 85% respectively for the yearin fiscal
2001 compared to 96% and 92% respectively in the prior year.fiscal 2002.
Since commencing CineGate operations in September 2000, Lions Gate has
earned commission revenue of $1.6 million on approximately $270.0 million of
production financing arranged through the Cinegate joint venture. An additional $200.0 million
of production financing is expectedventure to be completed in the first
quarter of fiscal 2002.
Gross profit for the year ended March 31,
2001.
Direct operating expenses of $156.4 million in fiscal 2001 was $125.8
million with a 44.6% gross margin,were 55.4%
of revenue, compared to gross profitdirect operating expenses of $48.4$222.9 million with a gross marginin fiscal
2000, which were 82.2% of 17.8% in the prior year.
Gross profit increased $77.4 million while the gross margin
increased 26.8 percentage points year-over-year.revenue. The primary reason for the increasedecrease
year-over-year is due to the adoption of SoP 00-2 whereby advertisering expenses are nowat the beginning of fiscal
2001. Commencing in fiscal 2001, distribution and marketing expense was
disclosed as a
component of other expensesseparately rather than as a component of gross
profit. In addition, the gross margin by business improved
year-over-yeardirect operating expenses in
all businesses, with the exception of
Studio Facilities, which decreased primarily due to the
revenue elimination relating to our productions.
The most significant influence on the gross margin compared
to the prior year was in Motion Pictures, where the gross margin
of 28.1% earned in the current year exceeded the gross margin of
18.7% earned in the prior year by 9.4 percentage points. The
majority of the increase is due to the contribution of the Trimark
library post acquisition, which accounts for 5.1% of the increase
and favorable gross margins earned on library sales during the
year, partially offset by the net impact of the adoption of SoP
00-2 of $8.3 million.
Page 33
Television's gross margin of 17.1% compares favorably to the
prior year's gross margin of 9.2%. Gross margin improvement can
be attributed partially to the elimination of intercompany studio
costs (see above) which contributed to a favorable gross margin
achieved on Mysterious Ways, partially offset by the net impact
of the adoption of SoP 00-2 of $2.5 million.
The gross margin in Animation improved to 28.4% in the
current year from 24.9% in the prior year as in the prior year
the gross margin was negatively impacted by the delivery of the
feature film Heavy Metal, which generated a gross margin of
approximately 15% compared to animation television series, which
typically generate gross margins in the 25% to 30% range. In
addition, CineGroupe recognized a favorable SoP adjustment in the
year of $0.7 million.
Cinegate revenues are at a 100% gross margin due to the
nature of the services provided, and did not exist in the prior
year.
Other expenses, which consist primarily of distribution and
marketing costs of $51.8 million andfiscal 2000.
Fiscal 2001 general and administrative expenses of $37.7 million
increased $58.1$6.3 million or 185.0%
over other20.0% compared to fiscal 2000 general and
administrative expenses in the prior year of $45.9$31.4 million.
In prior years, distribution and marketing costs were expensed
as a component of gross profit. In Motion Pictures, general and
administrative expenses increased $6.8 million or 42.0% to $23.0 million from
$16.2 million in the prior year primarily as a result of combining operations
with Trimark in the current yearfiscal 2001 and the growth of the production and video
distribution businesses.businesses in that year. General and administrative expenses in
corporate increased primarily due to increased salaries and benefits expenses.
General and administrative expenses decreased in Television as a result of cost
savings initiatives and remained relatively consistent year-over-year in
Animation and Studio Facilities.
Year-over-year interest expense increased by $5.4$6.9 million due to
borrowings related to the purchase of Trimark and increased production and
acquisition activity and bank charges related to bank facilities.
Goodwill arising on the Trimark acquisition contributed to an increase
in amortization in fiscal 2001 of $2.8$1.7 million.
Partially offsetting these
increases, in the prior year $1.6 million of severance and
relocation costs were expensed, which did not exist in the
current year.
On March 16,The fiscal 2001 Mandalay delivered its second feature
film, Enemy at the Gates starring Jude Law, Joseph Feinnes, Ed
Harris and Rachel Weicz, directed by internationally-acclaimed
director Jean Jacques Annaud and filmed in Germany. Enemy at the
Gates generated a domestic box office in excess of US$50 million
and has performed well overseas. Mandalay's investment in Enemy
at the Gates is not significant and Mandalay expects it to
generate a favorable cash return. Mandalay's next release is The
Score, an action suspense thriller, starring Robert DeNiro,
Edward Norton, Marlon Brando and Angela Basset and directed by
Frank Oz, filmed in Montreal. The Score is expected to be
released theatrically in the U.S. in July 2001. Principal
photography was recently completed on Servicing Sarah, a romantic
comedy starring Matthew Perry and Elizabeth Hurley. Servicing
Sarah is expected to be released next winter. Other Mandalay
projects currently in development include: Beyond Borders, Kung
Fu Theatre and End Game. The non-cash equity interest in the
loss of Mandalay consistsconsisted of operating
losses of $6.4 million and amortization of previously deferred pre-operating
costs of $1.9 million.
We regularly investigate opportunities that would
enable us to realize the value added to our investmentThe fiscal 2001 equity interest in Mandalay.
Other equity interests consistsCinemaNow consisted primarily of our
66.9% non-cash equity interest in CinemaNow'sof operating losslosses of $1.2 million and amortization of goodwill of $0.3
million.
33
In the current year,fiscal 2001, we recognized the benefit of previously unrecognized
income tax loss carry forwardscarry-forwards of approximately $5.5 million. At March 31, 2001,
we havehad Canadian non-capital losses of approximately $52.8 million available to
reduce Canadian income taxes carried forward for seven years and US$21.3 million
for U.S. income tax losses carried forward for twenty years.
Page 34
Our consolidated financial statements have been prepared in
accordance with Canadian GAAP. The material differences between
the accounting policies used by us under Canadian GAAP and U.S.
GAAP are disclosed in note 25 to the financial statements.
Under U.S. GAAP the net loss was $50.2 million (2000
- - $2.4 million net loss; 1999 - $25.7 million net loss). The
U.S. GAAP net loss per share in the current year including the
equity interest in the non-cash operating loss of Mandalay, the
accounting change and dividends and accretion relating to the
preferred shares issued in the current year would have been $1.50
(2000 - $0.11).million. In the year ended March
31, 2001 the earnings under U.S. GAAP arewere lower than under Canadian GAAP due
primarily to the recognition of the opening SoP 00-2 adjustment as a reduction
in net income under U.S. GAAP.
FISCAL 2000 COMPARED TO FISCAL 1999
RevenueLIQUIDITY AND CAPITAL RESOURCES
Cash flows used in fiscal 2000 of $271.3 million, increased $153.0
million or 129% compared to $118.3 million in fiscal 1999.
Revenue increased significantly in all businesses. The most
significant year-over-year percentage increase was in Television
where revenue of $81.8 million increased $69.3 million or more
than 5-fold over the prior year's revenue of $12.5 million. The
one-hour series business, which did not existoperating activities in the prior year contributed revenue in excess of $46 million. Fiscal 2000
deliveries included: 15 hours of the drama series Higher Ground
to Paramount, Fox Family and WIC; and 22 hours of the one hour
drama series Hope Island to Paramount, PAX and Showcase
Television. Television movie revenue of $24.3 million increased
$22.9 million over fiscal 1999 revenue of $1.4 million as the
prior year's revenue consisted of producer fees and revenue
participations compared to license fees earned on proprietary
productions delivered in the current year. Television movies
delivered in fiscal 2000 included Final Run to CBS, King of the
World to ABC, Shutterspeed to TNT and First Daughter to TBS. 47
hours of non-fiction programmingended March 31, 2002
were delivered in fiscal 2000 by
Termite Art including 13 hours of Wild Rescues to Discovery and
12 hours of Ripley's Believe It or Not. Under Canadian GAAP, tax
credits earned are included in revenue. Under U.S. GAAP, tax
credits earned are recorded as an offset to income tax expense.
In fiscal 2000, $24.0 million of tax credits earned were included
in revenue.
In Motion Pictures, revenue of $146.9 million also increased
$69.3 million, or 89.3% on a percentage basis, over the prior
year's revenue of $77.6 million. In Lions Gate Films revenue in
all divisions increased year-over-year. The most significant
increases were in theatrical distribution where revenue increased
$24.5 million or 213% to $36.0$95.0 million compared to $11.5cash flows used in operating activities of $51.3
million in the prior year ended March 31, 2001 and video distribution where revenue increased
$24.0 million or 61.5% to $63 million compared to $39.0$42.7 million in the prior year. Significant theatrical releases in fiscal
2000 included: Dogma and Red Violin (Oscar winner for Best
Original Score) in the U.S. and Elvis Gratton in Canada.
Significant video releases in fiscal 2000 included: Affliction;
Gods and Monsters; Red Violin and Dinner Game. The most
significant production in fiscal 2000 was American Psycho, which
was delivered in several international territories prior to March
31, 2000. American Psycho was released theatrically in North
America on April 14 and achieved North American box office in
excess of US$15 million. Revenue generated in North America and
the majority of the international territories was recognized in
fiscal 2001.
In Animation, CineGroupe's revenue of $35.6 million
increased $13.6 million or 61.8% over the prior year's revenue of
$22.0 million. This increase occurred despite the fact that
CineGroupe delivered 79 half-hours of animation programming in
fiscal 2000 compared to 135 half-hours in the prior year. Fiscal
2000 deliveries included: 22 half-hours of Kids From Room 402 to
Fox Family; 20 half-hours of Jim Bouton to Radio Canada and
Television France (TF1); 19 half-hours of Mega Babies and 14 half-
Page 35
hours of Bad Dog to Fox Family and Teletoon and the feature film
Heavy Metal. The fiscal 2000 revenue per half-hour was
significantly increased by the delivery of Heavy Metal which was
distributed by Columbia Tristar in the U.S. and Lions Gate Films
in Canada. In addition, the prior year's deliveries included 44
half-hours of Funamble, which had a relatively low average revenue
per half hour, and several co-productions.
Studio Facilities revenue of $7.0 million increased $800,000
or 13% over the prior year's revenue of $6.2 million. This was
due in part to the opening of a seventh sound stage in September
1999. Stage and office occupancy levels averaged 96% and 92%
respectively for the year.
Gross profit for the year ended
March 31, 2000, was $48.4
million with a 17.8% gross margin compared to gross profit of
$25.4 million with a 21.4% gross margin in fiscal 1999. Gross
profit increased $23.0 million or 91% and the gross margin
decreased 3.67 percentage points compared to the prior year.
The most significant influence on the gross margin compared
to the prior year was in Television where the gross margin came
in at 9.2% in fiscal 2000 compared to 20.4% in the prior year.
In the prior year, a significant portion of Television revenue
consisted of producer-for-hire fees and revenue participations
relating to television movies, not proprietary productions. As
noted in fiscal 1999's Management Discussion and Analysis, as a
result of our strategy to concentrate on proprietary productions
rather than earning producer-for-hire fees only, Television
revenue was expected to increase going forward, however, it would
not be possible to maintain a gross margin for the Television
business at the rate that was enjoyed in fiscal 1999. We
expected the ongoing gross margin for this business to be in the
11% to 12% range in the short term. We were in the process of
expanding its international television distribution capabilities
and expected that the Television gross margin would improve in
the future when we were able to more accurately assess
international sales risk.
The gross margins in the other businesses were essentially
flat, except that Motion Pictures gross margin increased from
17.3% in 1999 to 18.7% in fiscal 2000all primarily due to growththe net increase in
the video distribution business and a reduction in the required
provision for investment in film.
Other expenses of $45.9 million increased $11.2 million or
32.2% over other expensesfilms and
television programs in fiscal 1999 of $34.72002 (increased $69.0 million primarily due to an increase in general and administrative
expenses of $7.8 million year-over-year. Approximately half of
the year-over-year increase in general and administrative
expenses was in Motion Pictures where general and administrative
expenses increased $4.2 million to $16.2 millionnet in fiscal 2000
compared to $12.02002,
$54.8 million in the prior year. This increase was
due to the significant growth experienced in all divisions of
Lions Gate Films. Television general and administrative expenses
increased $3.9 million over the prior year. However, excluding
$4.6 million of capitalized costsnet in fiscal 1999 relating to the
pre-operating period of the one hour series business that
otherwise would have been classified as general2001 and administrative expenses, general and administrative expenses on a
gross basis in Television decreased year-over-year. Animation
general and administrative expenses increased $0.7$40.5 million over
fiscal 1999 due to head count increases as a result of the
creation of the new media department and the opening of offices
in Toronto and Los Angeles. Corporate overhead decreased $1
million year-over-year due to the consolidation of administrative
functions and cost saving initiatives instituted at head office.
Severance and relocation costs recordednet in fiscal 2000 primarily
related to severance for several senior executives compared to
severance and relocation costs recorded in fiscal 1999 that
related to severance and relocation associated with the
centralizing of certain head office functions in Toronto.
Overall, as a percentage of revenue, general and administrative
expenses decreased to 11.6% of revenue in fiscal 2000 compared to
19.9% in fiscal 1999.
Page 36
In fiscal 2000 Mandalay delivered its first feature film,
Sleepy Hollow starring Johnny Depp and Christina Ricci. Sleepy
Hollow generated North American box office and foreign box office
each in excess of US$100 million and was nominated for three
Academy Awards. In March 2000 Sleepy Hollow won the Oscar for
Art Direction.
The fiscal 2000 provision for income taxes consisted of a
$1.7 million provision at CineGroupe and a $0.3 million tax
provision at LG Studios. In fiscal 1999, the tax recovery was
due primarily to the benefit of approximately $3.6 million of
losses arising in the U.S. operations and at corporate, which
were not tax effected. At March 31, 2000 we had income tax
losses in excess of $13.8 million available to reduce future
income taxes payable. Income tax losses can be carried forward
seven years in Canada and twenty years in the U.S.
In fiscal 2000 the financial statements were restated to be
in compliance with Item 18 of Form 20-F, which includes full U.S.
GAAP disclosure not required under Item 17, the basis of previous
filings. This change was required due to the filing requirements
of an F-4 registration statement in the U.S. in connection with
the Trimark acquisition. Comparative amounts for the year ended
March 31, 1999 were restated to conform to Item 18 disclosure.
Under U.S. GAAP the fiscal 2000 net earnings excluding the
equity interest in the non-cash operating loss of Mandalay would
have been $3.5 million (1999 - $20.4 million net loss)2000). The U.S.
GAAP net earnings per share in fiscal 2000 including the equity
interest in the non-cash operating loss of Mandalay and dividends
and accretion relating to the preferred shares issued in the
current year would have been $0.11. This represented a
significant improvement over the prior year's loss per share of
$1.05.
In fiscal 2000 the net loss under U.S. GAAP was lower than
the net loss under Canadian GAAP due to the reversal of the
amortization of deferred pre-operating costs under Canadian GAAP,
which were expensed under U.S. GAAPCash
flows from financing activities in the year ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Earnings before interest, provision for income taxes,
deprecation, amortization, minority interest2002 were $85.8
million compared to cash flows from financing activities of $82.4 million in the
year ended March 31, 2001 and equity interests
("EBITDA") before severance$42.1 million in the year ended March 31, 2000,
due primarily to the increase in bank loans and relocation costs more than
doublednet proceeds from production and
distribution loans. Cash flows from investing activities of $11.1 million in the
current year is due to $36.3the $14.0 million third party investment in a subsidiary
and $8.4 million received from $17.0Mandalay partially offset by additions to
animation and studios property and equipment of $12.0 million. In fiscal 2001,
the majority of the $45.1 million use of cash in investing activities was due to
the acquisition of Trimark and in fiscal 2000 and
increased more than twenty-two-fold from $1.8the entire $6.4 million in fiscal
1999.
Cash flows from operating activities before working capital
decreased $2.0 million or 6.3% to negative $29.7 million in
fiscal 2001 from negative $31.7 million in fiscal 2000 and
decreased $2.8 million or 9.7% to negative $31.7 million in
fiscal 2000 from negative $28.9 million in fiscal 1999, all
primarilyuse of
cash was due to the increased investment in filmspurchase of property and television
programs.
Working capital (defined as cash and equivalents, accounts
receivable and investment in films and television programs less
bank loans and accounts payable and accrued liabilities) as at
March 31, 2001 of $139.5 million decreased $26.6 million from
$166.1 million at March 31, 2000 and increased $47.1 million over
working capital of $119.0 million at March 31, 1999. Working
capital as of March 31, 2001, excluding the effects of the
adoption of SoP 00-2, would have been $149.4 million, a decrease
of $16.7 million compared to working capital of $166.1 million at
March 31, 2000. The decrease in working capital from fiscal 2001
to fiscal 2000 is primarily the result of incremental financing
relating to the Trimark acquisition and, in addition, at March
31, 2001 there are several significant productions in work-in-
progress which we expect to be delivered in the first and second
quarters of fiscal 2002.
Page 37
equipment.
Our liquidity and capital resources were provided during the year ended
March 31, 20002002 principally through cash generated from operations, a US$200
million (Cdn$318.8 million) "borrowing base" revolving credit facility with J.P.
Morgan Securities which closed in September 2000, and German tax shelter
financing, which has been made available to us on several productions including
Frailty, Cat's Meow, Liberty Stands Still and I Fought the Law, which were all
scheduled
fordelivered in fiscal 2002 delivery.2002. The credit facility is securedlimited by our borrowing base,
which includes certain accounts receivable and "library" credits, which is projectedcredits. Management
projects that the difference between the borrowing base and the amount borrowed
over the next four quarters to allow
forwill be positive resulting in excess borrowing
base excesses.capacity. In FebruaryDecember 2001, we completed athe third party valuation of our borrowing base
films and television programs library. Trimark completed a third partylibrary was updated as at September 30, 2001. In
accordance with the valuation of its
library in August 2000.methods used, the borrowing base excludes
unreleased theatrical projects at September 30, 2001 such as Monster's Ball, The
Wash and Frailty. At March 31, 20012002, the borrowing base assets totaled US$120.1 million.152.1
million (Cdn$242.5 million).
The nature of our business is such that significant initial
expenditures are required to produce and acquire films and television programs,
while revenues from these films and television programs are earned over an
extended period of time after their completion andor acquisition. As our operations
grow, itsour financing requirements are expected to grow.grow and management projects
the continued use of cash in operating activities and therefore we are dependent
on continued access to external sources of financing. We believe that cash flow
from operations, cash on hand, credit lines available and tax shelter financing
available will be adequate to meet known operational cash requirements for the
foreseeable future, including the funding of future film and television
production, film rights acquisitions, and theatrical and video release
schedules. We monitor our cash flow, interest coverage, liquidity, capital base
and debt-to-total capital ratios with the long-term goal of maintaining our
creditworthiness.
At March 31, 2001 our subsidiaries have entered into
unconditional purchase obligations relating to the purchase of
motion picture rights for future delivery and to pay advances to
producers amounting to approximately $39.1 million that are
payable over the next twelve months (2000 - $10.2 million). One
of our subsidiaries has provided guarantees up to a maximum of
$6.8 million (2000 - $2.1 million) for bank loans used to finance
productions costs of unrelated production companies.34
Our current financing strategy is to finance substantially with equity
at the corporate level and to leverage investment in film and television
programs through operating credit facilities and single-purpose production
financing. We usually obtain financing commitments, including, in some cases,
funds from government incentive programs and foreign distribution commitments to
cover, on average, at least 70% of the budgeted hardthird-party costs of a project
before commencing production.
AtOur 5.25% convertible, non-voting redeemable Series A Preferred Shares
are entitled to cumulative dividends, as and when declared by the Board of
Directors, payable semi-annually on the last day of March and September of each
year. We have the option of paying such dividends either in cash or additional
preferred shares. We paid the March 31, 2001, we had total net debt, consisting of bank
loans, production and distribution loans, and long-term debt net
of cash and short-term deposits, of $239.3 million (2000 - $77.1
million). Our net debt to equity ratio at March 31, 2001 of
1.21:1.0 (0.93:1.00 excluding the effect of the one-time non-cash
opening retained earnings adjustments) compares to 0.37:1.00 a
year earlier. The increase2002 dividend in the net debt to equity ratio is
due to the significant ramping up of feature film production, the
financing of the Trimark acquisition and the debt assumed as a
result of the Trimark acquisition. At March 31, 2001 we had
drawn US$97.4 million ($153.5 million) of our US$200.0 million
revolving operating credit facility.
Bank loans consist of a five-year revolving credit facility
and demand loans bearing interest at rates not exceeding Canadian
prime plus 4.0%. Production loans consist of bank demand loans
bearing interest at various rates between Canadian prime and
9.25%. The distribution loan, a revolving credit facility of
US$10 million bearing interest at U.S. prime, was repaid in the
current year. Long-term debt consists primarily of mortgages on
the Studio Facility at interest rates ranging from 6.63% to
7.51%, convertible promissory notes bearing interest at a rate of
6% and non-interest bearing sales guarantees with respect to the
German tax shelter financings. For the year ended March 31, 2001
the weighted average interest rates on bank loans and productions
loans were 8.06% and 8.18% respectively (2000 - 9.02% and 8.34%
respectively).
Page 38
additional preferred
shares. We do not pay and do not intend to pay, and are restricted from paying
by our revolving credit facility, dividends on common shares, giving
consideration to our business strategy and investment opportunities. We believe
it to be in the best interest of shareholders to invest all available cash in
the expansion of our business.
InCRITICAL ACCOUNTING POLICIES
We believe that the current year we paid dividends
totaling $2.5 millionapplication of the following accounting policies,
which are important to our financial position and results of operations,
requires significant judgments and estimates on the convertible preferred shares issuedpart of management. For a
summary of all of our accounting policies, including the accounting policies
discussed below, see note 2 to the consolidated financial statements.
We accrue for video returns and allowances in the prior year.
RISKS AND UNCERTAINTIESfinancial statements
based on previous returns and allowances history on a title-by-title basis in
each of the video businesses. There may be differences between actual returns
and allowances and our historical experience.
We capitalize costs of production, including financing costs, and
distribution to investment in films and television programs. These costs are
amortized to direct operating expenses in accordance with SoP 00-
2. Under SoP 00-2, costs incurred in connection with an
individual film or television program, including production and
financing costs, are capitalized to investment in film and
television programs.00-2. These costs
are stated at the lower of unamortized film or television program costs andor fair
value. These costs for an individual film or television program are amortized in
the proportion that current period actual revenue
realized relatesrevenues bear to management's
estimates of the total revenue expected to be received from such film or
television program over a period not to exceed ten years from the date of
delivery. As a result, if revenue estimates change with respect to a film or
television program, we may be required to write down all or a portion of the
unamortized costs of such film or television program. No assurance can be given
that unfavorable changes to revenue estimates will not occur, resultingwhich may result
in significant write
downswrite-downs affecting our results of operations and financial
condition.
We currently finance a portion of our production budgets
from third parties, from Canadian government agencies and
incentive programs as well as international sources in the case
of our co-productions, and from German tax shelter arrangements.
There can be no assurance that third party financing, government
incentive programs and German tax shelter arrangements will not
be reduced, amended or eliminated. Any change in these programs
may have an adverse impact on our financial
condition.
Revenue is driven by audience acceptance of a film or television
program, which represents a response not only to artistic merits but also to
critics' reviews, marketing and the competitive market for entertainment,
general economic conditions, and other intangible factors, all of which can
change rapidly. Actual production costs may exceed budgets. Risk of laborlabour
disputes, disability of a star performer, rapid changes in production
technology, shortage of necessary equipment and locations or adverse weather
conditions may cause cost overruns. We generally maintain insurance policies
("completion bonds" and "essential elements insurance" on key talent),
mitigating certain of these risks.
Profitability depends on revenue and on the cost to acquire
or produce a film or television program and the amount spent on
the prints and advertising campaign used to promote it. Results
of operations for any period are significantly dependent on the
timing and number of films or television programs produced. Our
operating results may fluctuate materially from period to period,
and the results for any one period are not necessarily indicative
of results for future periods.
Our five-year revolving operating credit facilities are
either alternate base rate loans or Eurodollar loans as we may
request. Significant increases in the base interest rates could
have an unfavorable impact on us, and vice versa.
A significant portion of our revenue and expenses are in
U.S. dollars, and, are therefore subject to fluctuation in
exchange rates. Significant fluctuations in exchange rates may
have a favorable or unfavorable impact on our results of
operation.
Page 39
CURRENCY RISK MANAGEMENT
Additionally, as part of itsour overall risk management program, we
evaluate and manage our exposure to changes in interest rates and currency
exchange risks on an ongoing basis. In the current year we entered into foreign
currency contracts to hedge foreign currency risk on two productions.one
35
television production. These forward exchange contracts do not subject us to
risk from exchange rate movements because gains and losses on the contracts
offset losses and gains on the transactions being hedged. No collateral or other
security was pledged as security to support these financial instruments. Other
hedges and derivative financial instruments maywill be used in the future, within
guidelines approved or to be approved by the Board of Directors for counterparty
exposure, limits and hedging practices, in order to manage our interest rate and
currency exposure. TheWe have no intention of entering into financial derivative
contracts, other than to hedge a specific financial risk.
Our principal currency exposure is between Canadian and U.S. dollars,
although this exposure has been significantly mitigated inthrough the current year. Ourstructuring
of the US$200 million revolving credit facility is structured as two separate facilities - a US$25 million Canadian
dollar facility and a US$175 million U.S. dollar credit facility. Each facility
is borrowed and repaid in the respective country of origin, in local currency.
From time to time there will be currency exposure on
distribution revenue from foreign, principally European
countries. We do not intend to enter into financial derivative
contracts, other than to hedge its financial risks.
OUTLOOK
We are a fully integrated independent entertainment company
with film and television production, worldwide distribution
capabilities and studio facilities. Management's long-term
strategy is to expand film, television and animation libraries
and increase its production slate and distribution reach to
become the first new independent mini-major in years. The
following growth pillars will fuel this expansion:
o Diversified content - We have a reputation for producing and
distributing independent, edgy, sophisticated films;
o North American distribution network - We are the only
Canadian company that distributes class-A theatrical and video
titles in the U.S.;
o International television product - We produce one-hour drama
series and non-fiction programming for the international
marketplace;
o Merger and acquisition strategy - We propose to acquire high
quality film and television assets, such as Trimark, that
complement our existing assets;
o Additional strategic partners; and
o New complementary businesses - We received approval from the
CRTC for a Canadian English language digital specialty channel -
Jackpot TV - with third parties (a game and gaming channel).
We believe that the success we have achieved in producing
and distributing high quality product, and in raising the
necessary capital, positions us to achieve our growth objectives.
Page 40
ITEM 7A. QUANTITIVEQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risks relating to our operations result primarily from changes
in interest rates and changes in foreign currency exchange rates. Our exposure
to interest rate risk results from the financial debt instruments that arise
from transactions entered into during the normal course of business.
DEBT.Debt. We are exposed to cash flow risk due to changes in market
interest rates related to our outstanding debt. For example, our credit
facilities and some of our long-term debt bears interest on borrowings
outstanding at various time intervals and at market rates based on either the
Canadian prime rate or the U.S. prime rate, plus a margin ranging from 1.2%0.47% to
4.0%. Our principal risk with respect to our long-term debt is changes in these
market rates.
The table below presents principal cash flowsdebt repayments and related weighted
average interest rates for our credit facilities and long-term debt obligations
at March 31, 20012002 by expected maturity date.
Expected Maturity Date
-------------------------------------------------------------------
2001 2002----------------------
Year ending March 31,
---------------------
2003 2004 2005 2006 2007
---- ---- ---- ---- ----
(amounts in thousands)
BANK LOANS:
Variable (1) -- -- -- $222,961 --
Variable (2) $ 6,180 -- -- -- --
LONG-TERM DEBT:
Fixed (3) $ 1,160 $ 32,257 $ 146 $ 2,052 --
Fixed (4) -- $ 31,628 -- -- --
Fixed (5) $ 1,894 $ 1,852 $ 924 -- --
Variable (6) $ 30,384 $ 9,250 $ 456 -- --
- --------------
(1) Revolving credit facilities which expire September 25, 2005. Average
variable interest rate on principal of $37,103 equal to Canadian prime plus
1.5% and average variable interest rate on principal of $185,858 equal to
U.S. prime plus 1.5%.
(2) Line of credit due July 31, 2002 at Canadian prime plus 1% and demand loans
at Canadian prime plus 0% - 4%.
36
(3) Fixed interest rate equal to 6.43%.
(4) Non interest-bearing. US$19.8 million.
(5) Fixed interest rate equal to 10.8%.
(6) Average variable interest rate equal to Canadian prime plus 1.4%.
Commitments. The table below presents future commitments under
contractual obligations and commercial commitments at March 31, 2002 by expected
maturity date.
Expected Maturity Date
----------------------
Year ending
March 31, 2003 2004 2005 2006 2007
- --------- ---- ---- ---- ---- ----
(Amounts in thousands)
Credit Facilities:
Variable(1)Operating Leases $ 40,858
Variable(2) $118,907
Long-term Debt:
Fixed (3)4,481 $3,864 $3,365 $2,411 $1,780
Employment Contracts $ 38,277 $2,665 $1,156 $32,249 $143 $2,064
Fixed (4)6,284 $3,611 -- -- --
Unconditional
purchase obligations $26,805 $5,117 -- -- --
Distribution and
marketing commitments $ 25,560 $25,560
Variable (5)7,793 -- -- -- --
Production guarantee $ 26,195 $24,211 $751 $486 $405 $114
- -------------------
(1) Variable interest rate equal to Canadian Prime Plus 4.0%.
(2) Variable interest rate equal to U.S. Prime plus 1.2%. US$75.4 million.
(3) Fixed interest rate equal to 6%.
(4) Non interest-bearing. US$16.2 million.
(5) Variable interest rate equal to Canadian Prime plus 1.4%.159 -- -- -- --
Corporate guarantee $ 500 -- -- -- --
FOREIGN CURRENCY.Foreign Currency. We incur certain operating and production costs in
foreign currencies and are subject to market risks resulting from fluctuations
in foreign currency exchange rates. In certain instances, we enter into foreign
currency exchange contracts in order to reduce exposure to changes in foreign
currency exchange rates that affect the value of our firm commitments and
certain anticipated foreign currency cash flows. We currently intend to continue
to enter into such contracts to hedge against future material foreign currency
exchange rate risks.
We have entered into foreign exchange contracts to hedge future
production expenses denominated in Canadian, Australian and New Zealand dollars.
Gains and losses on the foreign exchange contracts are capitalized and recorded
as production costs when the gains and losses are realized. At March 31, 2001,
the Company2002,
we had contracts to sell $7.0US$10.1 million in exchange for 10.4Cdn$16.3 million New Zealand dollars over a
period of threenine months at a weighted average exchange rate of Cdn$0.671.5952. During the
year, we completed foreign exchange contracts denominated in Australian and New
Zealand dollars. The net loss resulting from the completed contracts amount to
sell $3.5 million in exchange for 4.4 million Australian
Dollars over a period of three months at a weighted average
exchange rate of Cdn$0.79.$nil. These contracts are entered into with a major financial institution. We
are exposed to credit loss in the event of nonperformance by the counterparty,
which is limited to the cost of replacing the contracts, at current market
rates. We do not require collateral or other security to support these
contracts. Unrecognized gains at March 31, 20012002 amounted to $0.5Cdn$0.5 million.
Page 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Auditors' Report and our Consolidated Financial Statements and
Notes thereto appear in a separate section of this report (beginning on page 5744
following Part IV). The index to our Consolidated Financial Statements is
included in Item 14.
37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
WePricewaterhouseCoopers LLP ("PwC") were our auditors for the fiscal
year ended March 31, 2001 and had been our auditors since November 1997. On July
29, 2001, the Board of Directors, upon the recommendation of the Audit Committee
and the Company's senior management, requested the resignation of PwC as the
Company's auditors effective as of July 24, 2001.
PwC's reports on the consolidated financial statements for fiscal years
ended March 31, 2001 and 2000 did not contain an adverse opinion, disclaimer of
opinion, or qualification or modification as to uncertainty, audit scope or
accounting principles. In addition, there were no disagreements within the
meaning of Item 304(a)(1)(iv) of the Securities and Exchange Commission
Regulation S-K for the fiscal years ended March 31, 2001 and 2000 and the
interim period ending July 29, 2001.
PwC has advised the Company and the Audit Committee of the following
matters under Item 304(a)(1)(v):
1. The Company does not presently have nothingprocedures that are effective in
ensuring that the information relevant to international sales revenue
recognition is collected and reported to ensure that the timing of certain
revenue recognition is appropriate.
2. A number of material adjustments recorded by management were
identified by the auditors during the audit. The auditors advised that while
internal controls over systems were adequate, lack of timely monitoring controls
over systems output and accounting entries, such as reconciliations of account
balances, analysis and review of transactions, balances and adjustments, may
have contributed to the number of adjustments. The auditors have advised that
they were not able to determine whether the matters raised were related solely
to significant events that occurred during the year ended March 31, 2001 as the
auditors were dismissed upon completion of the audit for the year ended March
31, 2001.
3. The Company should undertake additional training and support of its
accounting employees and management to ensure employees and management are able
to fulfill their assigned functions.
In response to PwC's comment 1, the Company continues to monitor its
international sales revenue recognition practices in light of the Company's
ongoing development.
In response to PwC's comment 2, the Company notes again that PwC
advised the Audit Committee at the conclusion of its audit that the internal
controls at the Company were adequate, however, management acknowledges that
certain processes could be improved upon. The Company is committed to a strong
internal control environment and related processes.
In response to PwC's comment 3, the Company notes that in fiscal 2001
it had grown substantially and as the Company continues to grow, it will
continue to hire and train staff to support the accounting function.
The Company has filed PwC's letter to the SEC and Canadian commissions
as an Exhibit to its Report on Form 8-K/A filed September 4, 2001.
38
The Board of Directors hired Ernst & Young LLP to replace PwC as the
Company's independent auditors effective August 18, 2001.
PwC has reissued for inclusion in this report their audit report on our
consolidated financial statements as of March 31, 2001 and for each of the two
years in the period then ended. In connection with providing that updated
report, we have agreed to indemnify PwC for the payment of all unrecovered third
party legal costs and expenses incurred in PwC's successful defense of any legal
action or proceeding that arises as a result of PwC's previous audit report on
our past financial statements in the filing of this report with the SEC.
However, this indemnification provision will be void, and any advanced funds
will be returned to us, if a court, after adjudication, finds PwC liable for
professional malpractice.
Insofar as indemnification for liabilities arising under this item.the U.S.
federal securities laws may be permitted to PwC, we have been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in U.S. federal securities laws and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by us of expenses incurred or paid by PwC in the successful defense
of any action, suit or proceeding) is asserted by PwC, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in the U.S. federal
securities laws and will be governed by the final adjudication of such issue.
PART III
The information required by Items 10, 11, 12 and 13 of Part III of this
annual report on Form 10-K is incorporated by reference from and will be
contained in our definitive proxy statement for our annual meeting of
stockholders to be filed with the SEC by July 29, 2002 except as set forth under
Item 12 below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below is certain information concerning the
directors, executive officers and key employees of the Company.
Name and Place of Residence Position (1) Age (2)
- ------------------------------- ------------------------------ -------
Mark Amin...................... Vice Chairman and Director 51
Los Angeles, California
Bill Boersma................... Vice President of Finance 43
Los Angeles, California
Michael Burns.................. Vice Chairman and Director 42
Los Angeles, California
Drew Craig..................... Director 43
Calgary, Alberta
John Dellaverson............... Executive Vice President 55
Los Angeles, California
Jon Feltheimer................. CEO and Director 50
Los Angeles, California
Frank Giustra (4).............. Chairman and Director 43
West Vancouver, British Columbia
Joe Houssian................... Director 52
West Vancouver, British Columbia
Gordon Keep.................... Senior Vice President and Director 44
Vancouver, British Columbia
Herbert Kloiber................ Director 54
Munich, Germany
Howard Knight(3) (4)........... Director 59
Stamford, Connecticut
Morley Koffman (3)(5).......... Director 71
Vancouver, British Columbia
Patrick Lavelle................ Director 62
Toronto, Ontario
Wayne Levin.................... Executive Vice President, Legal & 38
Los Angeles, California Business Affairs
Andre Link..................... President and Director 69
Montreal, Quebec
Page 42
Harald Ludwig (4).............. Director 47
West Vancouver, British Columbia
James Nicol (5)................ Director 47
Aurora, Ontario
G. Scott Paterson(3)(5)........ Director 37
Toronto, Ontario
Julie Rennie................... Secretary 34
Vancouver, British Columbia
Marni Wieshofer................ Chief Financial Officer 38
Los Angeles, California
Cami Winikoff.................. Executive Vice President 38
Los Angeles, California
______________________________
(1) The term of office of each director concludes at the
Company's next annual general meeting of shareholders, unless
the director's office is earlier vacated in accordance with
the articles of the Company. Each officer serves at the
pleasure of the Board of Directors.
(2) As of June 1, 2001.
(3) Member of Audit Committee.
(4) Member of Compensation Committee.
(5) Member of Corporate Governance Committee.
MARK AMIN. Mr. Amin has been our Vice Chairman since
October 2000. From 1984 to October 2000, Mr. Amin served as
Chief Executive Officer or Chairman of Trimark, which he founded.
Mr. Amin became a director in October 2000.
BILL BOERSMA. Mr. Boersma has been our Vice President of
Finance since November 2000. From April 1995 to November 2000,
Mr. Boersma served as Controller or Division Controller of AMC
Film Marketing, a motion picture exhibitor.
MICHAEL BURNS. Mr. Burns has been our Vice Chairman since
March 2000. From 1991 to March 2000, Mr. Burns served as
Managing Director and Head of Prudential Securities Inc.'s Los
Angeles Investment Banking Office. Mr. Burns became a director
in August 1999.
DREW CRAIG. Mr. Craig became a director in September 2000.
Mr. Craig has served as President of Craig Broadcast Systems
Inc., a broadcasting company, since September 1997 and prior
thereto was a Vice President since 1985.
JOHN DELLAVERSON. Mr. Dellaverson has been our Executive
Vice President since April 2000. Prior to joining us, Mr.
Dellaverson was a partner, Loeb & Loeb LLP, a law firm based in
Los Angeles, CA. Mr. Dellaverson, who is currently Of Counsel,
has practiced at Loeb & Loeb since 1981.
JON FELTHEIMER. Mr. Feltheimer has been our Chief Executive
Officer since March 2000. From 1997 to 1999, Mr. Feltheimer
served as Executive Vice President of Sony Pictures Entertainment.
From 1995 to 1997, Mr. Feltheimer served as President of Columbia
Tri-Star Television Group. Mr. Feltheimer became a director in
January 2000.
Page 43
FRANK GIUSTRA. Mr. Giustra has been our Chairman since
April 1997. From 1995 to December 1996, Mr. Giustra served as
Chairman and Chief Executive Officer of Yorkton Securities Inc.,
an investment banking firm ("Yorkton"). Mr. Giustra became a
director in April 1997.
JOE HOUSSIAN. Mr. Houssian has been a director since
October 2000. Mr. Houssian has been Chairman, President & Chief
Executive Officer of Intrawest Corporation, a developer and
operator of mountain resorts, since 1975.
GORDON KEEP. Mr. Keep has been our Senior Vice President
since October 1997. From 1987 to October 1997, Mr. Keep served
as Vice President, Corporate Finance of Yorkton. Mr. Keep has
been a director since June 2000.
HERBERT KLOIBER. Mr. Kloiber has been a director since
January 2000. Mr. Kloiber has served as Managing Director of
Tele-Muchen Group, an integrated media company, since 1977.
HOWARD KNIGHT. Mr. Knight has been a director since January
2000. Mr. Knight has served as Executive Vice Chairman of SBS
Broadcasting SA, a European commercial television and radio
broadcasting company, since February 2001, having previously served
as Chief Operating Officer since January 1998 and as Vice Chairman
since September 1996.
MORLEY KOFFMAN. Mr. Koffman has been a director since
November 1997. Mr. Koffman is a partner with the law firm of
Koffman Kalef, where he has practiced since 1993.
PATRICK LAVELLE. Mr. Lavelle has been a director since
October 2000. Mr. Lavelle has been Chairman and a director of
Export Development Corporation, a commercial financial
institution, since December 1997. From 1994 to December 1997,
Mr. Lavelle served as Chairman of the Business Development Bank
of Canada.
WAYNE LEVIN. Mr. Levin as been our Executive Vice
President, Legal and Business Affairs since November 2000. From
September 1996 to November 2000 Mr. Levin was General Counsel or
Vice President for Trimark Pictures, Inc. and from 1991 to
September 1996 was Senior Partner of the Law Offices of Wayne
Levin.
ANDRE LINK. Mr. Link has been our President since April
2000. Since 1962 Mr. Link has been Chief Executive Officer of LG
Films. Mr. Link has been a director since November 1997.
HARALD LUDWIG. Mr. Ludwig has been a director since
November 1997. Since 1985 Mr. Ludwig has served as President of
Macluan Capital Corporation, a leverage buy-out company.
JAMES NICOL. Mr. Nicol has been a director since August
1999. Mr. Nicol has been President and Chief Operating Officer
of Magna International, an automotive parts manufacturer, since
February 2001. From May 1998 to February 2001, Mr. Nicol served
as Vice Chairman of Magna International. From February 1994 to
July 1998, Mr. Nicol was Chairman and Chief Executive Officer of
TRIAM Automotive, Inc., an automotive parts manufacturer.
G. SCOTT PATERSON. Mr. Paterson has been a director since
November 1997. Mr. Paterson has served as Chairman and Chief
Executive Officer of Yorkton since October 1998. From May 1997 to
October 1998, Mr. Paterson served as President of Yorkton.
From May 1995 to May 1997, Mr. Paterson served as Executive Vice
President of Yorkton.
Page 44
JULIE RENNIE. Ms. Rennie has been our Executive Assistant
since April 1997. From January 1996 to April 1997, Ms Rennie was
Executive Assistant at Yorkton.
MARNI WIESHOFER. Ms. Wieshofer as been our Chief Financial
Officer since April 1999. From February 1999 to April 1999, Ms.
Wieshofer was our Vice President, Finance. From October 1995 to
January 1999, Ms. Wieshofer served as Vice President, Finance of
Alliance Atlantis Communications, an entertainment company.
CAMI WINIKOFF. Ms. Winikoff has been our Executive Vice
President since November 2000. From 1990 to November 2000, Ms.
Winikoff was a Senior Vice President, Executive Vice President
and Vice President of Production of Trimark.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF
1934
While Lions Gate was a foreign private issuer our officers,
directors and ten percent beneficial owners were exempt from
Section 16 of the Securities Exchange Act of 1934. Before the
end of fiscal 2001, we became a domestic issuer. The following
individuals filed a Form 3 later than the tenth day after we
became a domestic issuer: Mark Amin, Bill Boersma, Michael Burns,
Drew Craig, John Dellaverson, Jon Feltheimer, Frank Giustra, Joe
Houssian, Gordon Keep, Herbert Kloiber, Howard Knight, Morley
Koffman, Patrick Lavelle, Wayne Levin, Andre Link, Harald Ludwig,
James Nicol, G. Scott Paterson, Julie Rennie, Marni Wieshofer and
Cami Winikoff.
Page 45
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes the compensation paid or
accrued to our Chief Executive Officer and our four most highly
compensated executive officers, other than the Chief Executive
Officer, who served as executive officers and whose salary plus
bonus exceeded $100,000 (the "Named Executive Officers"). The
position identified in the table for each person is their current
position with us unless we indicate otherwise.
SUMMARY COMPENSATION TABLE
Long Term
Officer Annual Compensation Compensation(1)
- ----------------- ---------------------------- ---------------
Name and Position Year Salary Bonus Other Securities
($) ($) Annual Underlying
Compen- Options
sation (#)
($)
- ----------------- ---- ------- ------- ------- -----------
Jon Feltheimer, 2001 846,000 376,000 9,289 1,000,000
Chief Executive 2000 65,077 125,333 1,321 1,375,000
Officer (2)(3) 1999 - - - -
Michael Burns, 2001 752,000 520,384 - -
Vice Chairman 2000 62,667 125,333 6,072 1,425,000
(2)(4) 1999 - - - -
Marni Wieshofer, 2001 382,333 37,600 - 75,000
Chief Financial 2000 175,555 - - -
Officer (5) 1999 29,167 - - 100,000
John Dellaverson, 2001 376,000 - - 100,000
Executive Vice 2000 17,113 37,600 - -
President (2)(6) 1999 - - - -
Gordon Keep, 2001 312,500 74,950 - 75,000
Senior Vice 2000 285,115 - 4,957 -
President 1999 255,000 - 2,131 100,000
(1) The Company has not granted any Restricted Stock Awards,
SARs or LTIPs to any of the Named Executive Officers.
(2) The named executive officer is compensated in U.S. dollars.
The figures presented are converted to Canadian dollars at a rate
of 1.504 Canadian dollars per U.S. dollar.
(3) Mr. Feltheimer was appointed CEO on March 21, 2000.
(4) Mr. Burns was appointed Vice Chairman on March 21, 2000.
(5) Ms. Wieshofer was compensated in Canadian and U.S. dollars.
The figures presented are converted to Canadian dollars at a rate
of 1.504 Canadian dollars per U.S. dollar.
(6) Mr. Dellaverson was appointed Executive Vice President on
April 28, 2000.
Page 46
STOCK OPTION GRANTS.
The following table provides details regarding stock option
grants to our Named Executive Officers in fiscal 2001 pursuant to
our Employees' and Directors' Equity Incentive Plan ("the Plan").
Option Grants - Last Fiscal Year (1)
Potential Realizable Value
Number of % of Total Exercise at Assumed Annual Rates
Securities Options Price of Stock Price
Underlying Granted to Per Appreciation for Option
Options Employees in Share Expiration Term
Name Granted (#) Fiscal Year (US$) Date 5%(US$) 10%(US$)
- ----------------- ------------ ------------ --------- ---------- ----------- -----------
Jon Feltheimer 1,000,000(2) 25.3% 3.00 2/26/06 - 543,122
Marni Wieshofer 75,000 1.9% 2.55 8/15/05 36,088 95,622
John Dellaverson 100,000 2.5% 2.55 8/15/05 48,117 127,496
Gordon Keep 75,000 1.9% 2.55 8/15/05 36,088 95,622
_________________
(1) We did not grant any SARs in fiscal 2001 to any of the Named Executive Officers.
(2) A portion of these options are subject to shareholder approval to increase the size
of the Plan.
OPTION EXERCISES AND HOLDINGS.
The following table provides information for the Named
Executive Officers concerning options they exercised during
fiscal 2001 and unexercised options that they held at the end of
fiscal 2001.
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
Securities Number of Securities
on Value Underlying Unexercised Value of Unexercised In-the-
Exercise Realized Options at FY-End Money Options at FY-End
Name (#) ($) Exercisable/Unexercisable(#) Exercisable/Unexercisable($)
- ---------------- -------- -------- ---------------------------- ----------------------------
Jon Feltheimer - - 125,000 2,250,000 -
Michael Burns - - 141,666 1,283,334 -
Marni Wieshofer - - 66,666 108,334 -
John Dellaverson - - 100,000 - -
Gordon Keep - - 125,000 50,000 -
COMPENSATION OF DIRECTORS
Persons elected at our annual general meetings as directors
and who hold no executive office with us or any of our affiliates
are entitled to receive an annual retainer of $5,000 and a
further retainer of $2,500 if such director acts as a chairman of
a committee of directors. Also, each non-executive director is
entitled to receive a fee of $500 per meeting of the directors or
any committee thereof, and to be reimbursed for reasonable fees
and expenses incurred in connection with their service as
directors. During the last fiscal year, nine directors received
the annual retainer. Non-employee directors are granted options
to purchase 50,000 common shares when they join the Board of
Directors. In fiscal 2001
Page 47
we granted options to purchase 250,000 common shares to persons who
served as directors during that period pursuant to our Plan.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-
CONTROL ARRANGEMENTS
During the fiscal year ended March 31, 2001 we were a party
to an employment agreement with each of the Named Executive
Officers.
JON FELTHEIMER. We entered into an employment agreement
with Mr. Feltheimer effective January 1, 2001, which provides
that he will serve as Chief Executive Officer for an initial term
that ends March 31, 2004. Mr. Feltheimer's annual base salary
under his agreement is US$750,000. Mr. Feltheimer is also
entitled to an annual discretionary bonus determined by the Board
of Directors. In addition, Mr. Feltheimer will receive a stock
price bonus of US$1,000,000 if our share price exceeds US$6.00
for any consecutive six months during the term. If he terminates
his employment for "Good Reason," which includes a change of
control, he will be entitled to continue to receive his annual
salary and all other benefits for the remainder of the employment
agreement. Upon a change of control, 50% of his unvested options
vest immediately if the share price is below US$4.00 and 100% of
his options vest immediately if the share price exceeds US$4.00.
MICHAEL BURNS. Mr. Burns's employment agreement has
expired. We currently have an oral agreement with Mr. Burns that
entitles him to receive an annual base salary of US$300,000 and a
bonus based on potential investment banking fees earned in excess
of US$300,000. We are currently negotiating in good faith with
Mr. Burns and expect to sign a written agreement with him that
formalizes our oral agreement.
MARNI WIESHOFER. We have entered into an employment
agreement with Ms. Wieshofer effective August 26, 2000, which
provides that she will serve as Chief Financial Officer for an
initial term that ends August 26, 2003. Ms. Wieshofer's annual
base salary under her agreement is US$310,000. If a change of
control occurs all of her options will vest immediately.
JOHN DELLAVERSON. We have entered into an employment
agreement with Mr. Dellaverson effective April 1, 2001, which
provides that he will serve as Executive Vice President for an
initial term that ends April 1, 2003. Mr. Dellaverson's annual
base salary under his agreement is US$300,000. Mr. Dellaverson
is also entitled to a bonus of 20% of any amount that the
CineGate joint venture's net income exceeds US$1.5 million. Mr.
Dellaverson's contract has no change of control provisions and if
terminated without cause he is entitled to continue to receive
his salary and benefits.
GORDON KEEP. We have entered into an employment agreement
with Mr. Keep effective October 1, 2000, which provides that he
will serve as Senior Vice President for an initial term that ends
September 30, 2001. We have an option to renew for a subsequent
year. Mr. Keep's annual base salary under his agreement is
$325,000. Mr. Keep is also entitled to an annual discretionary
bonus determined by the Board of Directors. If a change of
control occurs all of his options will vest immediately.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This section of this report will not be deemed incorporated
by reference of any general statement incorporating by reference
this report in any filing under the Securities Act of 1933 or
under the Securities Exchange Act of 1934, except to the extent
that we specifically incorporate this information by reference,
and will not otherwise be deemed filed under such Acts.
Page 48
The Compensation Committee consists of Messrs. Giustra,
Knight and Ludwig, each of whom is a non-employee director. The
Compensation Committee determines the Chief Executive Officer's
salary and the equity awards for all executive officers under the
Plan. Our executive compensation program is designed to attract,
retain and motivate the senior executive talent required to
ensure our success. The program also aims to support the
creation of shareholder value and ensure that pay is consistent
with performance.
BASE SALARY. In fiscal 2001 the Compensation Committee
negotiated an employment agreement with Mr. Feltheimer, our Chief
Executive Officer. For more information, see "Employment
Contracts, Termination of Employment and Change-in-Control
Arrangements." In determining his compensation, the Compensation
Committee considered Mr. Feltheimer's experience and
responsibilities, as well as other subjective factors. Mr.
Feltheimer established the base compensation paid to our
executives in fiscal 2001 based on each executive's experience,
responsibilities and other subjective factors.
EQUITY BASED COMPENSATION. We established the Plan in order
to award equity-based incentives to our employees and directors.
The Compensation Committee believes in linking long-term
incentives to an increase in stock value as it awards stock
options at the fair market value or higher on the date of grant
that vest over time. The Compensation Committee believes that
stock ownership in the Company is a valuable incentive to
executives that (1) aligns their interests with the interests of
shareholders as a whole, (2) encourages them to manage the
Company in a way that seeks to maximize its long-term
profitability, and (3) encourages them to remain an employee of
the Company. Generally, the Plan requires vesting over a three
year period. Some options are also subject to market price
targets prior to vesting.
The Compensation Committee may consider other forms of
compensation, both short-term and long-term, in addition to those
described above.
THE DEDUCTIBILITY OF EXECUTIVE COMPENSATION. Section 162(m)
of the Internal Revenue Code does not permit us to deduct cash
compensation in excess of US$1 million paid to the Chief
Executive Officer and the four other most highly compensated
executive officers during any taxable year, unless such
compensation meets certain requirements. We believe that the
Plan complies with the rules under Section 162(m) for treatment
as performance based compensation, allowing us to fully deduct
compensation paid to executives under the Plan.
COMPENSATION COMMITTEE
Frank Giustra
Howard Knight
Harald Ludwig
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Giustra served as a member of the Compensation Committee
during fiscal 2001 and was formerly our Chief Executive Officer.
Mr. Giustra's tenure as Chief Executive Officer ended on March
21, 2000. No member of our Compensation Committee has a
relationship that would constitute an interlocking relationship
with executive officers or directors of another entity.
STOCK PRICE PERFORMANCE GRAPH
The following graph compares our cumulative total
shareholder return with those of the TSE 300 Total Return Index
and the TSE Cable and Entertainment Total Return Index for the
period commencing November 17, 1997 (the first day of trading of
the common shares on the Toronto Stock Exchange) and ending March
31, 2001. All values assume that $100 was invested on November
13, 1997 in our
Page 49
Common Stock and each applicable index and all dividends were
reinvested. Note: We caution that the stock price performance shown
in the graph below should not be considered indicative of potential
future stock price performance.
This section of this report will not be deemed incorporated
by reference of any general statement incorporating by reference
this report in any filing under the Securities Act of 1933 or
under the Securities Exchange Act of 1934, except to the extent
that we specifically incorporate this information by reference,
and will not otherwise be deemed filed under such Acts.
[PERFORMANCE GRAPH APPEARS HERE]
Company/Index 11/17/97 3/31/98 3/31/99 3/31/00 3/31/01
- ----------------------------- -------- ------- ------- ------- -------
Lions Gate Entertainment $100 $ 81 $ 53 $ 54 $ 31
TSE 300 Total Return Index 100 117 104 151 123
TSE Cable & Ent. Total Return 100 123 221 272 208
Page 50
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table presents certain information about
beneficial ownershipEquity Compensation Plan Information
As of our Common Stock as of June 1, 2001, by
(1) each person (or group of affiliated persons) who is known by
us to own beneficially more than 5% of our Common Stock, (2) each
director, each officer named on the Executive Officer
Compensation Table and (3) all directors and executive officers
as a group. Except as indicated in the footnotes to this table,
the persons named in the table have sole voting and investment
power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws,
where applicable.March 31, 2002
Name of Beneficial Owner (1)
Plan Category Number of Shares Percentsecurities to be Weighted-average exercise Number of Total
- ------------------------------------------- ---------------- ----------------securities remaining
issued upon exercise of price of outstanding available for future issuance
outstanding options, options, warrants and under equity compensation
warrants and rights rights plans (excluding securities
reflected in column (a))
------------- -------------------------- ------------------------- ------------------------------
(a) (b) (c)
-------------------------- ------------------------- ------------------------------
Capital Research and Management Company.... 2,879,280 4.4 %
Fidelity Management and Research Company... 4,250,000 6.5
Mark Amin.................................. 3,533,104 (2) 5.4
Michael Burns.............................. 693,304 (3) 1.1
Drew Craig................................. 16,667 (4) *
John Dellaverson........................... 445,000 (5) *
Jon Feltheimer............................. 464,188 (6) *
Frank Giustra.............................. 3,307,401 (7) 5.1
Joe Houssian............................... 16,667 (8) *
Gordon Keep................................ 233,878 (9) *
Herbert Kloiber............................ 178,033 (10) *
Howard Knight.............................. 33,333 (11) *
Morley Koffman............................. 55,000 (12) *
Patrick Lavelle............................ 17,667 (13) *
Andre Link................................. 1,369,831 (14) 2.1
Harald Ludwig.............................. 241,000 (15) *
James Nicol................................ 41,133 (16) *
G. Scott Paterson.......................... 200,000 (17) *
Marni Wieshofer............................ 66,667 (18) *
All executive officers and directors as
a group (21 persons)..................... 11,005,547 16.8
__________________________
* Less than 1%
(1) The address for the listed beneficial owners are as follows:
for Capital Research and Management Company 333 South Hope St.,
Los Angeles, California 90071; for Fidelity Management and
Research Company 82 Devonshire St., Boston, Massachusetts 02109-
3614; for each other listed individual c/o the Company, Suite
3123, Three Bentall Centre, 595 Burrard Street, Vancouver,
British Columbia, V7X 1J1.
(2) Includes 125,000 shares subject to options exercisable on or
before July 31, 2001.
(3) Includes (a) 141,667 shares subject to options exercisable
on or before July 31, 2001, (b) 262,650 shares from the possible
conversion of the Series A preferred shares and (c) 43,987 shares
from warrants exercisable into shares.
(4) Includes 16,667 shares subject to options exercisable on or
before July 31, 2001.
(5) Includes 100,000 shares subject to options exercisable on or
before July 31, 2001.
Page 51
Equity compensation plans
approved by shareholders 6,768,162 $4.44 1,163,088
-------------------------- ------------------------- ------------------------------
Equity compensation plans not
approved by shareholders - - -
-------------------------- ------------------------- ------------------------------
Total 6,768,162 - 1,163,088
-------------------------- ------------------------- ------------------------------
39
(6) Includes (a) 125,000 shares subject to options exercisable
on or before July 31, 2001, (b) 265,200 shares from the possible
conversion of the Series A preferred shares and (c) 43,988 from
warrants exercisable into shares.
(7) Includes (a) 250,000 shares subject to options exercisable
on or before July 31, 2001 and (b) 500,000 common shares not
beneficially owned by him but for which he retains voting
control.
(8) Includes 16,667 shares subject to options exercisable on or
before July 31, 2001.
(9) Includes (a) 125,000 shares subject to options exercisable
on or before July 31, 2001, (b) 24,691 shares from the possible
conversion of a debenture, (c) 23,115 shares from the conversion
of a debenture owned by his spouse, and (d) 53,000 shares held by
his spouse. Mr. Keep disclaims beneficial ownership of the
23,115 shares from the debentures and the 53,000 shares held by
his spouse.
(10) Includes 33,333 shares subject to options exercisable
on or before July 31, 2001.
(11) Includes 33,333 shares subject to options exercisable
on or before July 31, 2001.
(12) Includes 50,000 shares subject to options exercisable
on or before July 31, 2001.
(13) Includes (a) 16,667 shares subject to options
exercisable on or before July 31, 2001 and (b) 1,000 shares held
by his spouse. Mr. Lavelle disclaims beneficial ownership of the
1,000 shares held by his spouse.
(14) Includes (a) 100,000 shares subject to options
exercisable on or before July 31, 2001 and (b) 1,269,831 shares
held by Cinepix Inc., which is 50% owned by Mr. Link.
(15) Includes 50,000 shares subject to options exercisable
on or before July 31, 2001.
(16) Includes (a) 33,333 shares subject to options
exercisable on or before July 31, 2001 and (b) 1,800 shares held
by his children. Mr. Nicol disclaims beneficial ownership of the
1,800 shares held by his children.
(17) Includes 50,000 shares subject to options exercisable
on or before July 31, 2001.
(18) Includes 66,667 shares subject to options exercisable
on or before July 31, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Jon Feltheimer, our Chief Executive Officer, and Michael
Burns, our Vice Chairman, each hold convertible preferred stock
and options to purchase common stock of CinemaNow, a majority
owned Trimark subsidiary, and have served on its Board of
Directors since February 2000. Each of Mr. Feltheimer and Mr.
Burns owns approximately 2% of the outstanding convertible
preferred stock, and the options they own, which vest over a
three year term commencing March 1, 2000, are exercisable for
less than 1% of the common stock of CinemaNow.
Mark Amin, our Vice chairman, who was Chairman and Chief
Executive Officer of Trimark, entered into a three-year
employment agreement with us, which became effective on
consummation of the merger with Trimark. The Agreement provides
for, among other things, an annual salary of US$500,000, a
forgiveness of a loan by Trimark in the amount of approximately
US$795,000, a grant of stock options to purchase up to 1,360,000
shares of Lions Gate Common Stock, and Mr. Amin's election to
Lions Gate's board.
Michael Burns, our Vice Chairman, owns approximately a 40%
interest in Ignite, LLC, which has entered into an agreement
with us dated February 15, 2001. We have agreed to terminate the
"first look" agreement and this agreement provides that Ignite
would be paid a producer's fee and 15% of our Adjusted Gross
Receipts for any project produced by us and developed through a
development fund financed by Ignite, LLC.
Except as disclosed herein, none of our directors or
officers, or affiliates of such persons, has or has had any
material interest, direct or indirect, in any transaction since
the commencement of our last completed fiscal year, or in any
proposed transaction, which in either such case has materially
affected or will materially affect us or any of our subsidiaries.
We are not aware of any conflicts of interest or other risks
associated with any of the above transactions.
Page 52
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS
Other than routine indebtedness as that term is defined in
applicable Canadian provincial securities legislation, none of
our directors or executive officers, or associates or affiliates
of any such directors or executive officers, are or have been
indebted to us since the beginning of our last completed fiscal
year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
The financial statements listed on the accompanying Index to
Financial Statements are filed as part of this report at pages 5744
to 108.91.
2. Exhibits
The exhibits listed on the accompanying Index to Exhibits are
filed as part of this report at pages 11192 to 188.94.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended March
31, 2001.
Page 532002.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LIONS GATE ENTERTAINMENT CORP.
DATE: July 24, 2001 By: /s/ Frank Giustra
--------------------------------
LIONS GATE ENTERTAINMENT CORP.
DATE: July 15, 2002 By: /s/ FRANK GIUSTRA
----------------------------------
Frank Giustra
Chairman and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
We the undersigned directors and officers of Lions Gate Entertainment
Corp. hereby constitute and appoint Frank Giustra and Jon Feltheimer, or either
of them, our true and lawful attorneys and agents, with full power of
substitution and resubstitution, to do any and all acts and things in our name
and behalf in our capacities as directors and officers and to execute any and
all instruments for us and in our names in the capacities indicated below, that
said attorneys and agents, or either of them, may deem necessary or advisable to
enable said corporation to comply with the Securities and Exchange Act of 1934,
as amended, any rules, regulations, and requirements of the Securities and
Exchange Commission, in connection with this report, including specifically, but
not limited to, power and authority to sign for us or any of us in our names and
in the capacities indicated below, any and all amendments and supplements to
this report, and we hereby ratify and confirm all that the said attorneys and
agents, or any of them, shall do or cause to be done by virtue hereof.
Signatures Title Date
/s/ Mark Amin Vice Chairman and July 24, 2001
------------------- Director
Mark Amin
/s/ Bill Boersma Vice President of July 24, 2001
------------------- Finance
Bill Boersma
/s/ Michael Burns Vice Chairman and July 24, 2001
------------------- Director
Michael Burns
/s/ Drew Craig Director July 24, 2001
-------------------
Signatures Title Date
---------- ----- ----
/s/ MARK AMIN Vice Chairman and Director July 15, 2002
- ------------------------------
Mark Amin
/s/ THOMAS AUGSBERGER Director July 15, 2002
- ------------------------------
Thomas Augsberger
/s/ MICHAEL BURNS Vice Chairman and Director July 15, 2002
- ------------------------------
Michael Burns
/s/ DREW CRAIG Director July 15, 2002
- ------------------------------
Drew Craig
/s/ ARTHUR EVRENSEL Director July 15, 2002
- ------------------------------
Arthur Evrensel
/s/ JON FELTHEIMER Chief Executive Officer and Director July 15, 2002
- ------------------------------ (Principal Executive Officer)
Jon Feltheimer
Chief Executive Officer July 24, 2001
------------------- and Director
Jon Feltheimer
/s/ Joe Houssian Director July 24, 2001
-------------------
Joe Houssian
/s/ Gordon Keep Senior Vice President July 24, 2001
------------------- and Director
Gordon Keep
Page 54
41
/s/ Herbert Kloiber Director July 24, 2001
-------------------
Herbert Kloiber
/s/ Howard Knight Director July 24, 2001
-------------------
Howard Knight
/s/ Morley Koffman Director July 24, 2001
-------------------
Morley Koffman
/s/ Patrick Lavelle Director July 24, 2001
-------------------
Patrick Lavelle
/s/ Andre Link President and Director July 24, 2001
-------------------
Andre Link
/s/ Harald Ludwig Director July 24, 2001
-------------------
Harald Ludwig
/s/ James Nicol Director July 24, 2001
-------------------
James Nicol
/s/ G. Scott Paterson Director July 24, 2001
-------------------
G. Scott Paterson
/s/ Marni Wieshofer Chief Financial Officer July 24, 2001
-------------------
Marni Wieshofer
Page 55
/s/ DOUGLAS M. HOLTBY Director July 15, 2002
- ------------------------------
Douglas M. Holtby
/s/ JOE HOUSSIAN Director July 15, 2002
- ------------------------------
Joe Houssian
/s/ GORDON KEEP Senior Vice President, Secretary and July 15, 2002
- ------------------------------ Director
Gordon Keep
/s/ HOWARD KNIGHT Director July 15, 2002
- ------------------------------
Howard Knight
/s/ MORLEY KOFFMAN Director July 15, 2002
- ------------------------------
Morley Koffman
/s/ PATRICK LAVELLE Director July 15, 2002
- ------------------------------
Patrick Lavelle
/s/ ANDRE LINK President and Director July 15, 2002
- ------------------------------
Andre Link
/s/ HARALD LUDWIG Director July 15, 2002
- ------------------------------
Harald Ludwig
/s/ G. SCOTT PATERSON Director July 15, 2002
- ------------------------------
G. Scott Paterson
/s/ E. DUFF SCOTT Director July 15, 2002
- ------------------------------
E. Duff Scott
/s/ HARRY SLOAN Director July 15, 2002
- ------------------------------
Harry Sloan
/s/ MARNI WIESHOFER Chief Financial Officer July 15, 2002
- ------------------------------ (Principal Accounting and Financial
Marni Wieshofer Officer)
42
INDEX TO FINANCIAL STATEMENTS
Page
Description of Financial Statement Number
- -------------------------------------------------------------------- ------
Auditors' Report 57
Lions Gate Entertainment Corp. Consolidated Balance Sheets 59
Lions Gate Entertainment Corp. Consolidated Statements of
Operations and Deficit 60
Lions Gate Entertainment Corp. Consolidated Statements of
Cash Flows 61
Lions Gate Entertainment Corp. Notes to the Consolidated
Financial Statements 62
Report of Independent Accountants 97
Mandalay Pictures, LLC Consolidated Balance Sheets 98
Mandalay Pictures, LLC Consolidated Statements of Operations 99
Mandalay Pictures, LLC Consolidated Statement of Changes in
Members' Equity 100
Mandalay Pictures, LLC Consolidated Statements of Cash Flows 101
Mandalay Pictures, LLC Notes to Consolidated Financial Statements 102
Page 56
Page
Description of Financial Statement Number
- ---------------------------------- ------
Report of Independent Auditors..................................................... 44
Lions Gate Entertainment Corp. Consolidated Balance Sheets......................... 45
Lions Gate Entertainment Corp. Consolidated Statements of Operations............... 46
Lions Gate Entertainment Corp. Consolidated Statements of Shareholders' Equity..... 47
Lions Gate Entertainment Corp. Consolidated Statements of Cash Flows............... 48
Lions Gate Entertainment Corp. Notes to the Consolidated Financial Statements...... 49-79
Report of Independent Auditors..................................................... 80
Mandalay Pictures, LLC Consolidated Balance Sheets................................. 81
Mandalay Pictures, LLC Consolidated Statements of Operations....................... 82
Mandalay Pictures, LLC Consolidated Statement of Changes in Members' Equity........ 83
Mandalay Pictures, LLC Consolidated Statements of Cash Flows....................... 84
Mandalay Pictures, LLC Notes to Consolidated Financial Statements.................. 85-91
43
AUDITORS' REPORT OF INDEPENDENT AUDITORS
To the Shareholders of Lions Gate Entertainment Corp.
We have audited the accompanying consolidated balance sheetssheet of Lions
Gate Entertainment Corp. as atof March 31, 20012002 and 2000 and the related consolidated
statements of operations, deficitshareholders' equity, and cash flows for each of the years
in the three-year period ended March 31, 2001.year then
ended. These consolidated financial statements are the responsibility of the company'sCompany's
management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.audit. We did not audit the financial statements of
CineGroupe Corporation, a consolidated subsidiary (see note 21 (m)) which
statements reflect total assets of $84.4 million as of March 31, 2002, and total
revenues of $55.5 million for the year then ended. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to data included for CineGroupe Corporation, is based
solely on the report of the other auditors. The financial statements of Lions
Gate Entertainment Corp. for the years ended March 31, 2001 and 2000 were
audited by other auditors, whose report dated June 22, 2001 expressed an
unqualified opinion on those statements.
We conducted our auditsaudit in accordance with Canadian and United Statesauditing standards generally
accepted auditing standards.in the United States. Those standards require that we plan and perform
anthe audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, these consolidatedbased on our audit and the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of the
company asLions Gate Entertainment Corp.
at March 31, 2001 and 20002002, and the results of its operations and its cash flows for each of the
yearsyear then ended, in the
three-year period ended March 31, 2001 in accordanceconformity with Canadianaccounting principles generally accepted accounting principles.in
Canada.
/s/ PricewaterhouseCoopersERNST & YOUNG LLP
Chartered Accountants
Toronto, Ontario
June 22, 2001 [Except for Note 27(b) which is atLos Angeles, California
July 10, 2001]
Page 571, 2002
44
Comments by Auditor for U.S. Readers on Canada-U.S. Reporting
Difference
In the United States, reporting standards for auditors require the
addition of an explanatory paragraph (following the opinion paragraph)
when there is a change in accounting principles that has a material
effect on the comparability of the Company's consolidated financial
statements, such as the changes described in Note 2(r) to the
consolidated financial statements. Our report to the shareholders
dated June 22, 2001 [except for Note 27(b) which is at July 10, 2001]
is expressed in accordance with Canadian reporting standards, which do
not require a reference to such a change in accounting principles in
the auditor's report when the change is properly accounted for and
adequately disclosed in the financial statements.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Ontario
June 22, 2001
Page 58
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31, 2001 AND MARCH 31, 2000
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
AUDITED AUDITED
--------------------
MARMARCH 31, Mar2002 March 31, 2001 2000
$ $
ASSETS
Restricted cash $ 1,125 $ --
Cash and cash equivalents 10,587 10,485 19,283
Accounts receivable, (note 3) 183,787 107,344net of reserve for video returns of $9,387
(2001 - $10,675) and provision for doubtful accounts of $17,931
(2001 - $6,141) 186,428 173,112
Investment in films and television programs (note 4) 228,349 128,375
Long term investments (note 5)288,310 224,115
Investments subject to significant influence 15,942 77,230
64,058
Capital assets (note 6)Property and equipment 50,582 44,212 44,505
Goodwill, net of accumulated amortization of $8,184$8,093
(2001 - $8,184) 38,816 34,924 29,163
(2000 - $5,476)
Other assets (note 7) 15,233 8,96015,067 19,467
Future income taxes (note 18) - 285
---------------------
594,220 401,973
=====================743 --
--------- ---------
$ 607,600 $ 583,545
========= =========
LIABILITIES
Bank loans (note 9)$ 229,141 $ 159,765 13,936
Accounts payable and accrued liabilities (note 10) 123,370 74,96582,224 76,297
Accrued participations and residuals costs 26,760 36,398
Production and distribution loans (note 11)38,167 24,045 41,838
Long-term debt (note 12)75,565 65,987 40,607
Deferred revenue 22,029 22,283 19,269
Future income taxes (note 18)-- 757
-
Non-controlling interestMinority interests 13,520 1,224
4,944
---------------------
397,431 195,559
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 22)--------- ---------
487,406 386,756
========= =========
Commitments and Contingencies
SHAREHOLDERS' EQUITY
CapitalPreferred shares, 200,000,000 shares authorized, issued in
series, including 1,000,000 series A (11,830 and 12,205
shares issued and outstanding) and 10 series B (10 and 10
shares issued and outstanding) (liquidation preference $30,167) 45,002 43,538
Common stock, (note 13) 266,523 226,290no par value, 500,000,000 shares authorized,
43,231,921 and 42,296,838 issued and outstanding 226,130 222,985
Deficit (159,225) (79,900) (21,320)
Cumulative translation adjustments (note 25)8,287 10,166
1,444
------------------------------ ---------
120,194 196,789
206,414
---------------------
594,220 401,973
=====================
The accompanying notes form an integral part of these consolidated financial statements.--------- ---------
$ 607,600 $ 583,545
========= =========
Page 59SEE ACCOMPANYING NOTES.
45
Lions Gate Entertainment Corp.
Consolidated Statements of Operations and Deficit
For the Years Ended March 31, 2001, March 31, 2000 and March 31, 1999LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
Year Year
YEAR ENDED Year Ended Year Ended
Ended
MarchMARCH 31, March 312002 March 31, 2001 March 31, 2000 1999
$ $ $
REVENUEREVENUES $ 426,582 $ 282,226 $ 271,251
118,297
DIRECT OPERATING EXPENSES--------- --------- ---------
EXPENSES:
Direct operating 250,335 156,420 222,875 92,931
- -----------------------------------------------------------------------
Gross Profit 125,806 48,376 25,366
- -----------------------------------------------------------------------
OTHER EXPENSES
Distribution and marketing costs119,362 51,776 - ---
General and administration 54,272 37,710 31,388
23,555
Amortization (note 15) 9,887 7,074 5,279
Interest (note 16) 10,283 4,466 3,655
Non-controlling interest 881 1,308 6127,129 8,565 6,875
Severance and relocation costs -- -- 1,698
--------- --------- ---------
Total expenses 431,098 254,471 262,836
--------- --------- ---------
OPERATING INCOME (LOSS) (4,516) 27,755 8,415
--------- --------- ---------
OTHER EXPENSES:
Interest on debt initially incurred for a term of
more than one year (net of interest income of $0.4
million (2001-$0.6 million; 2000 - 1,698 1,647
- -----------------------------------------------------------------------
110,537 45,934 34,748
- -----------------------------------------------------------------------$0.5 million) 15,386 11,605 4,665
Minority interests 1,911 881 1,308
Unusual losses 2,115 -- --
--------- --------- ---------
Total other expenses 19,412 12,486 5,973
--------- --------- ---------
INCOME (LOSS) BEFORE UNDERNOTED (23,928) 15,269 2,442 (9,382)
Gain on dilution of investment in a
Subsidiary (note 17) - - (839)
- -----------------------------------------------------------------------subsidiary 3,375 -- --
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY INTERESTS (20,553) 15,269 2,442
(8,543)
Income taxes (note 18)503 (3,292) 2,000
304
- -------------------------------------------------------------------------------- --------- ---------
INCOME (LOSS) BEFORE EQUITY INTERESTS (21,056) 18,561 442
(8,847)
EquityWrite-down and equity interest in loss of Mandalay
Pictures, LLC (note 5) (8,298)investments subject
to significant influence (52,506) (9,833) (5,894) (5,449)
Other equity interest (note 5) (1,535)interests -- -- 159
140
- -------------------------------------------------------------------------------- --------- ---------
NET INCOME (LOSS) FOR THE YEAR(73,562) 8,728 (5,293)
(14,156)
Dividends paid on Series A preferred Sharesshares (2,492) (2,497) (591) -
Accretion on Series A preferred Shares (note 2(n))shares (3,271) (3,115) (727)
-
ADJUSTED DEFICIT, BEGINNING OF
YEAR (83,016) (14,709) (553)
- -----------------------------------------------------------------------
DEFICIT END OF YEAR $(79,900) $(21,320) $(14,709)
- -------------------------------------------------------------------------------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (79,325) $ 3,116 $ (6,611)
========= ========= =========
BASIC AND DILUTED INCOME (LOSS)
PER COMMON SHARE (note 19) $0.09 $(0.22) $(0.58)
- -----------------------------------------------------------------------$ (1.86) $ 0.09 $ (0.22)
========= ========= =========
SEE ACCOMPANYING NOTES.
46
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
CUMULATIVE
SERIES A PREFERRED SERIES B PREFERRED TRANSLATION
COMMON STOCK SHARES SHARES DEFICIT BEGINNING OF YEAR $(21,320) $(14,709) $(553)
EFFECT OF CHANGES IN ACCOUNTING
POLICIES (NOTE 2(r))ADJUSTMENTS TOTAL
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
Balance at March 31,
1999 30,607,418 $ 177,068 -- $ -- -- $ -- $ (14,709) $ 4,425 $ 166,784
Public offering 13,000 42,711 42,711
5,525,000 warrants
issued in
conjunction with
public offering -- 5,659 5,659
Conversion of Series
A preferred shares 795,000 2,446 (795) (2,446) --
Exercise of stock
options 58,333 239 239
Net income (loss)
available to common
shareholders (6,611) (6,611)
Accretion of Series
A preferred shares -- 613 613
Series B preferred
shares 10 -- --
Foreign currency
translation
adjustment (2,981) (2,981)
---------- --------- ------ -------- -------- -------- ---------- -------- ---------
Balance at March 31,
2000 31,460,751 185,412 12,205 40,878 10 -- (21,320) 1,444 206,414
Effect of adoption
of accounting
pronouncements (61,696) - -
- -----------------------------------------------------------------------
ADJUSTED DEFICIT, BEGINNING OF $(83,016) $(14,709) $(553)
YEAR
- -----------------------------------------------------------------------(61,696)
Issued upon
acquisition of
subsidiary 10,229,837 34,976 34,976
Issued pursuant to a
settlement agreement
with employee 600,000 2,250 2,250
Exercise of stock
options 6,250 14 14
Stock options
granted in
conjunction with
acquisition of a
subsidiary -- 333 333
Net income (loss)
available to common
shareholders 3,116 3,116
Accretion of Series
A preferred shares -- 2,660 2,660
Foreign currency
translation
adjustment 8,722 8,722
---------- --------- ------ -------- -------- -------- ---------- -------- ---------
Balance at March 31,
2001 42,296,838 222,985 12,205 43,538 10 -- (79,900) 10,166 196,789
Conversion of Series
A preferred shares 648,000 2,398 (648) (2,398) --
Exercise of stock
options 87,083 214 214
Issued pursuant to
share bonus plan 200,000 533 533
Stock dividends 273 1,110 1,110
Net income (loss)
available to common
shareholders (79,325) (79,325)
Accretion of Series
A preferred shares -- 2,752 2,752
Foreign currency
translation
adjustments (1,879) (1,879)
---------- --------- ------ -------- -------- -------- ---------- -------- ---------
Balance March 31,
2002 43,231,921 $ 226,130 11,830 $ 45,002 10 $ -- $ (159,225) $ 8,287 $ 120,194
========== ========= ====== ======== ======== ======== ========== ======== =========
The accompanying notes form an integral part of these
consolidated financial statements.
Page 60SEE ACCOMPANYING NOTES.
47
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2001, MARCH 31, 2000 AND MARCH 31, 1999
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
Year YearYEAR ENDED Year Ended Year Ended
Ended
MarMARCH 31, Mar 31, Mar2002 March 31, 2001 March 31, 2000 1999
$ $ $
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss) for the period$ (73,562) $ 8,728 $ (5,293) (14,156)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Amortization of capital assetsproperty and equipment 4,873 3,309 2,584 2,081
Amortization of goodwill -- 2,708 2,473 2,145
Write-off of projects in development 1,294 1,586 856 1,053
Amortization of pre-operating costs 962 962 -962
Amortization of deferred financing costs 1,842 1,322 199 -
Amortization of films and television programs 247,618 153,797 220,423 90,667
Gain on dilution of investment in a subsidiary - - (839)
Non-controlling interest(3,375) -- --
Unusual losses 2,115 -- --
Minority interests 1,911 881 1,308
612Write-down and equity interest in investments subject to
significant influence 52,506 9,833 5,894
Other equity interest 1,535-- -- (159)
(140)
Equity interestChanges in lossoperating assets and liabilities, excluding the effects of
Mandalay Pictures, LLC 8,298 5,894 5,449acquisitions:
Accounts receivable (5,314) (15,412) (46,671)
Increase in investment in films and television programs (212,820)(316,591) (208,586) (260,905) (115,770)
- ----------------------------------------------------------------------------------------
(29,694) (31,658) (28,898)
CHANGES IN ASSETS AND LIABILITIES, EXCLUDING THE EFFECTS
OF ACQUISITIONS:
Accounts receivable (26,087) (46,671) (11,140)
Other assets (3,812)673 (8,046) (3,272) (5,084)
Future income taxes (1,266) (4,708) 163 (1,703)
Accounts payable and accrued liabilities 11,685 30,297 14,1741,251 (7,279) 14,888
Accrued participations and residuals costs (9,638) 8,289 15,409
Deferred revenue (311) 1,282 8,489
921
- ---------------------------------------------------------------------------------------------------- ------------ ------------
(95,012) (51,334) (42,652)
(31,730)
- ---------------------------------------------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
IssueIssuance of capital stock 215 14 48,495 28,965
Dividends paid on Series A preferred shares (1,382) (2,497) (591)
-
Financing fees (1,976) (6,876) (461)
-
Increase (decrease) in bank loans 66,870 86,368 2,200
(4,965)
Increase in restricted cash (1,125) -- --
Proceeds from production and distribution loans 44,228 13,880 35,900 38,189
Repayment of production and distribution loans (30,202) (32,661) (42,477)
(20,457)
Increase inProceeds from long-term debt 14,116 26,792 3,162 14,744
Repayment of long-term debt (4,934) (2,584) (4,149)
(5,173)
- ---------------------------------------------------------------------------------------------------- ------------ ------------
85,810 82,436 42,079
51,303
- ---------------------------------------------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Non-controllingMinority investment in subsidiary - - 3,000
Investment14,000 -- --
Cash received from investment in Mandalay Pictures, LLC - - (338)8,394 -- --
Acquisition of International Movie Group,Eaton Entertainment, LLC, net of cash acquired - - (880)
Acquisition of Termite Art Productions, net of
cash acquired - - (165)745 -- --
Acquisition of Sterling Home Entertainment, LLC, net of cash
acquired -- (3,168) - ---
Acquisition of Trimark Holdings Inc. -- (39,370) - -
Redemption of capital stock - - (25)--
Purchase of capital assetsproperty and equipment (12,046) (2,515) (6,398)
(3,975)
- ---------------------------------------------------------------------------------------------------- ------------ ------------
11,093 (45,053) (6,398)
(2,383)
- ---------------------------------------------------------------------------------------------------- ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,891 (13,951) (6,971) 17,190
FOREIGN EXCHANGE EFFECT ON CASH (1,789) 5,153 --
CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD 19,283 26,254 9,064
- ----------------------------------------------------------------------------------------
CASH AND EQUIVALENTS-END OF PERIODYEAR 10,485 19,283 26,254
========================================================================================------------ ------------ ------------
CASH AND CASH EQUIVALENTS-END OF YEAR $ 10,587 $ 10,485 $ 19,283
============ ============ ============
The accompanying notes form an integral part of these
consolidated financial statements.
Page 61SEE ACCOMPANYING NOTES.
48
1. NATURE OF OPERATIONS
Lions Gate Entertainment Corp. ("the Company" or "Lions Gate") is a fully
integrated entertainment company engaged in the development, production and
distribution of feature films, television series, television movies and
mini-series, non-fiction programming and animated programming, as well as
the management of Canadian-based studio facilities and management services
provided to Canadian limited partnerships. As an independent distribution
company, the Company also acquires distribution rights from a wide variety
of studios, production companies and independent producers.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in Canada ("Canadian GAAP")
which conforms, in all material respects, with the accounting principles
generally accepted in the United States ("U.S. GAAP"), except as described
in note 25.21. The Canadian dollar and the U.S. dollar are the functional
currencies of the Company's Canadian and U.S. based businesses,
respectively. These consolidated financial statements are expressed in
Canadian dollars, with the translation of financial statements of
individual entities in accordance with note 2(m)2(o).
The Company's normal operating cycle is longer than one
year, and accordingly, the Company has not presented a
classified balance sheet. Details of amounts realizable or
payable after more than one year are set out in these notes
to the financial statements.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of Lions Gate
Entertainment Corp. ("the Company" or "Lions Gate") include the accounts of
Lions Gate and all of its subsidiary companies,majority-owned and controlled subsidiaries, with
a provision for non-controllingminority interests, and the Company's proportionate share
of assets, liabilities, revenues and expenses of jointly controlled
companies. The Company controls itsa subsidiary companiescompany through a combination
of existing voting interests and an ability to exercise various rights
under certain shareholder agreements and debentures to acquire common
shares.
(c) ACCOUNTING CHANGES
GOODWILL-
On November 1, 2001, the Canadian Institute of Chartered Accountants
("CICA") released Section 3062, "Goodwill and Other Intangible Assets", to
be applied by companies for fiscal years beginning on or after January 1,
2002. Early adoption was permitted for companies with their fiscal year
beginning on or after April 1, 2001, provided the first interim period
financial statements had not been previously issued. The Company elected to
early-adopt CICA 3062 on April 1, 2001. Under CICA 3062, goodwill is no
longer amortized but is reviewed annually, or more frequently if impairment
indicators arise, for impairment, unless certain criteria have been met,
and is similar, in many respects, to Statement of Financial Accounting
Standards ("SFAS") 142, "Goodwill and Other Intangible Assets", under U.S.
GAAP. In accordance with the adoption provisions of CICA 3062, goodwill is
required to be tested for impairment on the date of adoption. Under SFAS
142 goodwill is required to be tested for impairment within six months of
adoption, as of the beginning of the year. At April 1, 2001 and September
30, 2001, it was determined that the fair value of each of the reporting
units was in excess of its carrying value including goodwill and,
therefore, no further work was required and an impairment loss was not
required. Goodwill is required to be tested for impairment between the
annual tests if an event occurs or circumstances change that
more-likely-than-not reduce the fair value of a reporting unit below its
carrying value. The amortization provisions of CICA 3062 apply to goodwill
and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, the
amortization and impairment provisions of CICA 3062 are effective upon
adoption of CICA 3062. (Refer to note 1(k) for additional information.)
49
ACCOUNTING FOR FILMS AND TELEVISION PROGRAMS-
In June 2000, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 00-2
"Accounting by Producers or Distributors of Films" ("SoP 00-2"). SoP 00-2
establishes new accounting standards for producers or distributors of
films, including changes in revenue recognition, capitalization and
amortization of costs of acquiring films and television programs and
accounting for exploitation costs, including advertising and marketing
expenses. The Company elected early adoption of SoP 00-2 and retroactively
adopted SoP 00-2 effective as of April 1, 2000. The Company also elected to
adopt SoP 00-2 for Canadian GAAP purposes. The prior years' financial
statements were not restated, as the effect of the new policy on the prior
periods was deemed not reasonably determinable. Accordingly, opening
accumulated deficit for the year ended March 31, 2001 was reduced to
reflect the cumulative effect of the accounting change in the amount of
$58.9 million (net of income taxes of $2.2 million). The principal changes
as a result of applying SoP 00-2 are as follows:
Advertising and marketing costs, which were previously capitalized to
investment in films and television programs and amortized using the
individual film forecasts method, are now expensed the first time the
advertising takes place.
The capitalization of production costs for episodic television series is
limited to revenue that has been contracted for on an episode-by-episode
basis until such time as the criteria for recognizing secondary market
revenues are met.
The effect of the change on the income statement for the year ended March
31, 2001 was an increase in net income of approximately $5.4 million. The
effect of the change on the balance sheet accounts at March 31, 2000 was to
reduce investment in films and television programs relating to advertising
costs, the capitalization of production costs for episodic television
series and media holdbacks by $19.9 million, $34.8 million and $6.4
million, respectively.
ACCOUNTING FOR INCOME TAXES-
In December 1997, the CICA released Section 3465, "Income Taxes", to be
applied by companies for fiscal years beginning on or after January 1,
2000. The standard requires recognition of future income tax assets and
liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns, and is similar,
in many respects, to SFAS 109, "Accounting for Income Taxes" under U.S.
GAAP. Future income taxes are provided for using the liability method. The
Company retroactively adopted Section 3465 effective as of April 1, 2000,
without restatement of prior years' financial statements. Prior to adopting
the new standard, the Company used the deferral method of accounting for
income taxes. The application of Section 3465 resulted in increasing future
income tax liabilities by $2.7 million as at April 1, 2000 with an
equivalent charge to accumulated deficit. The effect of the change on the
income statement for the year ended March 31, 2001 was an increase in the
tax recovery of $5.5 million due to the benefit recognized of previously
unrecognized income tax assets, where realization is judged
"more-likely-than-not" in accordance with Section 3465 whereas previously
realization had to be based on the concept of "virtual certainty."
EARNINGS PER SHARE-
In December 2000, the Canadian Institute of Chartered Accountants released
revised Section 3500, "Earnings per share". The revised standard requires
the use of the treasury stock method for calculating diluted earnings per
share, consistent with US GAAP. Previously, fully diluted earnings per
share were calculated using the imputed interest method. The Company
adopted the new standard for its fiscal 2001 financial statements. The
revised
50
section did not impact previously reported losses per share, as there were
no significant potentially dilutive common share equivalents outstanding.
(d) REVENUE RECOGNITION
Revenue from the sale or licensing of films and television programs is
recognized upon meeting all recognition requirements of SoP 00-2. Revenue
from the theatrical release of motion pictures is recognized at the time of
exhibition based on the Company's participation in box office receipts.
Revenue from the sale of videocassettes and digital video disks ("DVDs") in
the retail market, net of an allowance for estimated returns, is recognized
on the later of shipment to the customer or "street date" (when it is
available for sale by the customer). Under revenue sharing arrangements,
rental revenue is recognized when the Company has persuasive evidence
of an arrangement, such as a contract that irrevocably transfers
the rightsis entitled to a licensee, for example, the production has been
completed, the contractual delivery arrangements have been
satisfied, such as actual physical delivery or the granting of
access to a lab, for example, the licensing period has commenced,
the fee is fixed or determinable, and collectibility is reasonably
assured.receipts. For
multiple media rights contracts with a fee for a single film or television
program where the contract provides for media holdbacks, the fee is
allocated to the various media based on management's assessment of the
relative fair value of the rights to exploit each media and is recognized
as each holdback is released. For multiple-title contracts with a fee, the
fee is allocated on a title-by-title basis, based on management's
assessment of the relative fair value of each title.
RevenueRevenues from television licensing are recognized when the theatrical release of motion picturesfeature film or
television program is recognized at the time of exhibition based on the Company's
participation in box office receipts provided that all of the
other conditions in the first paragraph are met.
Revenue from the sale of video cassettes and digital video
disks ("DVDs") in the retail market is recognized on
deliveryavailable to the customer provided that all of the other
conditions in the first paragraph are met. Appropriate
provision is madelicensee for product returns and rebates. Rental
revenue is recognized
Page 62
when the Company is entitled to receipts provided that all
of the other conditions in the first paragraph are met.telecast.
Rental revenue from short-term operating leases of studio facilities is
recognized over the term of the lease.
Revenues from the sale or licensing of multi-media software,
under a contract that irrevocably transfers the software to
a customer or the rights to the software to a licensee, is
recognized when delivery has occurred, the price is fixed or
determinable and collection is reasonably assured. Appropriate
provision is made for product returns.
The Company earns fees from management services provided to Canadian
limited partnerships, whose purpose is to assist in the financing of films
produced in Canada, thatwhich are recognized as revenue when the financing is
completed.
Advances presently due pursuant to an arrangement or cashCash payments received are recorded as deferred revenue until all the
conditions of revenue recognition have been met.
(d)(e) RESTRICTED CASH
Restricted cash represents an amount on deposit with a financial
institution that is contractually designated for the repayment of a
specific bank loan.
(f) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid debt investments
with original maturities of ninety days or less when purchased.
(e)(g) INVESTMENT IN FILMS AND TELEVISION PROGRAMS
Investment in films and television programs includes the unamortized costs
of completed films and television programs which have been produced by the
Company or for which the Company has acquired distribution rights, an
acquired library, films and television programs in progress and projects in
development. For films and television programs produced by the Company,
these capitalized costs include all production and financing costs,
capitalized interest and overhead. For acquired films and television
programs, these capitalized costs consist of minimum guarantee payments to
acquire the distribution rights.
Costs of acquiring and producing films and television programs are
capitalized and amortized using the individual
film-forecastindividual-film-forecast-computation
method, whereby capitalized costs are amortized and ultimate participation
and residual costs are accrued in the proportion that current revenue bears
to management's estimate of ultimate revenue expected to be
51
recognized from the exploitation, exhibition or sale of the films or
television programs. ForThe acquired titles, these capitalized
costs consistfilm library is being amortized over a
period of minimum guarantee payments to the producer
to acquire the distribution rights. Fortwenty years.
Investment in films and television programs produced byis stated at the Company, these
capitalized costs include all productionlower of
amortized cost or estimated fair value on an individual film basis. The
valuation of investment in films and financing costs
incurred during productiontelevision programs is reviewed on a
title-by-title basis, when an event or change in circumstances indicate
that are expected to benefit
future periods and be recovered from estimatedthe fair value of a film or television program is less than its
unamortized cost. The fair value of the film or television program is
determined using management's future revenue net of estimated future liabilities. For
episodic television series, until estimates of secondary
market revenue can be established, capitalized costs for each
episode produced are limited toand a discounted
cash flow approach. Additional amortization is recorded in the amount by
which the unamortized costs exceed the estimated fair value of the film or
television program. Estimates of future revenue contracted
for each episode. Costsinvolve measurement
uncertainty and it is therefore possible that reductions in excessthe carrying
value of this limitation are expensedinvestment in films and television programs may be required as incurreda
consequence of changes in management's future revenue estimates. The
potential effect of future changes in management's future revenue estimates
on an episode-by-episode basis.net income has not been disclosed in these consolidated financial
statements as the amount is not readily determinable.
Films and television programs in progress represents the
accumulated costs of uncompleted films and television programs
that are being produced by the Company. Projects in development include costs of acquiring
film rights to books, stage plays or original screenplays and costs to
adapt such projects. Such costs are capitalized and, upon commencement of
production, are transferred to production costs. Projects in development
are written off at the earlier of the date determined not to be recoverable
or when projects under development are abandoned, andor three years from the
date of the initial investment.
For films other than episodic television series, ultimate
revenue includes estimates over a period not to exceed ten
years following the date of initial release. For episodic
television series, ultimate revenue includes estimates of
revenue over a period not to exceed ten years from the date
of delivery
Page 63
of the first episode or, if still in production, five years
from the date of delivery of the most recent episode, if later.
For previously released films or television programs acquired
as part of a library, ultimate revenue includes estimates over
a period not to exceed twenty years from the date of acquisition.
Revenue estimates are prepared on a title-by-title basis and
are reviewed periodically based on current market
conditions. For films, revenue estimates include box office
receipts, sale of video cassettes and DVDs, rental revenue
generated by video cassettes and DVDs, sale of television
broadcasting rights and licensing of film rights to third
parties. For television programs, revenue estimates include
principally license rights to broadcast television programs
in development or rights to renew licenses for episodic
television programs in subsequent seasons. For episodic
television series, ultimate revenue includes estimates of
secondary market revenue for produced episodes when the
Company can demonstrate through its experience or industry
norms that the number of episodes already produced, plus
those for which a firm commitment exists and the Company
expects to deliver, can be licensed successfully in the
secondary market. Estimates of future revenue involve
measurement uncertainty and it is therefore possible that
reductions in the carrying value of investment in films and
television programs may be required as a consequence of
changes in management's future revenue estimates. In the
current year, the effect of changes in management's future
revenue estimates increased net income by $2.9 million and
basic income per common share by $0.08.
The valuation of investment in films and television
programs, including acquired film libraries, is reviewed on
a title-by-title basis, when an event or change in
circumstances indicate that the fair value of a film or
television program is less than its unamortized cost. The
fair value of the film or television program is determined
using management's future revenue estimates and a
discounted cash flow approach. A write-down is
recorded equivalent to the amount by which the unamortized
costs exceed the estimated fair value of the film or
television program.
(f)(h) PRINTS, ADVERTISING AND MARKETING EXPENSES
The cost of film prints is deferred underincluded in investment in films and television
programs and charged to expense on a straight-line basis over the period of
theatrical release.
The costs of advertising and marketing expenses are expensed as incurred.
(g) LONG-TERMthe first time
the advertising takes place. At March 31, 2002, $2.7 million of capitalized
advertising and marketing costs were included in other assets.
(i) INVESTMENTS SUBJECT TO SIGNIFICANT INFLUENCE
Investments in companies over which the companyCompany can exercise significant
influence are accounted for using the equity method. The Company's
long-term investments subject to significant influence are periodically reviewed to
determine whether there has been a loss in value that is other than a
temporary decline. Estimates of net future cash flows on an undiscounted
basis are used to assess whether there is a loss in value.
(h) CAPITAL ASSETS
Capital assets are(j) PROPERTY AND EQUIPMENT
Property and equipment is carried at cost less accumulated amortization.
Amortization is provided for using the following rates and methods:
Buildings 25 years straight-line
Computer equipment and software 2-4 years straight-line and 30%
declining balance
Automobile 30% declining balance
Furniture and equipment 10 years straight-line and 20%-
30% declining balance
Leasehold improvements over
Buildings 25 years straight-line
Computer equipment and software 2-4 years straight-line and 30% declining balance
Automobiles 30% declining balance
Furniture and equipment 10 years straight-line and 20%-30% declining balance
Leasehold improvements Over the lease term or the useful life, whichever is shorter
Equipment under capital lease is amortized using the above rates.
Page 64
Costs incurred to develop internal use software during the
application development stage are capitalized.
The Company periodically reviews and evaluates the recoverability of
capital assets.property and equipment. Where applicable, estimates of net future cash
flows, on an undiscounted basis,
52
are calculated based on future revenue estimates, if appropriate and where
deemed necessary, a reduction in the carrying amount would beis recorded.
(i)(k) GOODWILL
Goodwill which is the excess of the purchase price of the
Company's interest in subsidiaries overassessed for impairment at least annually or if an event occurs
or circumstances change that more-likely-than-not reduce the fair value of
a reporting unit below its carrying value. The Company completed impairment
tests required under CICA 3062 at April 1, 2001 and under SFAS 142 at
September 30, 2001 and determined that the underlying identifiable assets and liabilities at
acquisition, is amortized using the straight-line method
over periods ranging from five to twenty years.
An assessmentrecognition of the carrying value of goodwill is
undertakenimpairment losses
was not necessary, as described in response to any change in conditions that might
trigger impairment. These conditions might include an
unfavourable change in one or more of the elements giving
rise to goodwill, a change in the likelihood of occurrence
of an assumed event that was a significant factor in setting
the acquisition price, or a significant deterioration in the
financial condition of an acquired business. The impairment
assessment involves the determination of the expected
undiscounted future cash flows of the related business,
including applicable interest and other financing costs, and
comparison to the carrying amount of goodwill. Any shortfall
identified by this assessment would be charged against
earnings in the period in which the impairment is determined
to have occurred.
(j)note 6.
(l) PRE-OPERATING PERIOD COSTS
Pre-operating period costs related to the period before commencement of
commercial operations of new businesses are deferred and amortized on a
straight-line basis over a period not to exceed five years commencing once
the pre-
operatingpre-operating period has ended.
(k)(m) INCOME TAXES
The Company recognizes future income tax assets and liabilities for the
expected future income tax consequences of transactions that have been
included in the financial statements or income tax returns. Future income
taxes are provided for using the liability method. Under the liability
method, future income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities.
Future income tax assets, after deducting valuation allowances, are
recognized to the extent that it is more
likely than notmore-likely-than-not that they will be
realized in the foreseeable future. Future income tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
at the date of substantive enactment.
(l) Government Assistance(n) GOVERNMENT ASSISTANCE
The Company has access to several government programs that are designed to
assist film and television production and distribution in Canada.
Federal and provincial refundable income tax credits earned with respect to
production expenditures are included in revenue in accordance with the
Company's revenue recognition policy for completed films and television
programs. Federal and provincial refundable income tax credits are
considered earned when the qualifying expenditures have been incurred
provided that there is reasonable assurance that the credits will be
realized.
Page 65
realized (see note 16).
Amounts received with respect to the acquisition of distribution rights are
recorded as a reduction of investment in films and television programs.
Amounts received are repayable on a title-by-title basis once the title has
achieved cash break-even to the extent of profit earned on that title.
There are no fixed repayment terms, no interest payments and no claims on
any assets of the Company or for the recovery of the amount invested, other
than those that might be repayable out of future distribution revenue
attached to the film rights. To the extent an individual film does not
perform to pre-agreed levels, no amounts are repayable by the Company.
Government assistance toward operatingdistribution and marketing expenses is
recorded as a reduction of those expenses.
(m)53
(o) FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities denominated in currencies other than
Canadian dollars are translated at exchange rates in effect at the balance
sheet date. Resulting translation gains and losses are included in the
determination of earnings.
For self-sustaining subsidiaries and the investment in
Mandalay Pictures,Foreign subsidiary assets and liabilities in foreign currencies are
translated into Canadian dollars at the exchange rate in effect at the
balance sheet date. RevenueForeign subsidiary revenue and expense items are
translated at the average rate of exchange for the year. Gains or losses
arising on the translation of the accounts of self-sustainingforeign subsidiaries
and the investment in Mandalay Pictures are
included in cumulative translation adjustments, a separate component of
shareholders' equity.
For integrated subsidiaries, monetary assets and liabilities
denominated in foreign currencies are translated into
Canadian dollars at the exchange rates in effect at the
balance sheet date. Non-monetary items are translated at
historical exchange rates. Revenue and expense items are
translated at the average rates of exchange for the year,
with the exception of amortization, which is translated at
historical rates. Gains or losses arising on the
translation of the accounts of integrated subsidiaries are
included in the determination of net income.
Effective April 1, 2000 the Company classified its U.S. operations as
self-sustaining following a significant change in the economic status of
these operations, including a restructuring of certain operating entities
and the ability to self-finance certain operations.
A loan in the amount of
US$20.4 million (Cdn$32.2 million) from a U.S. subsidiary
company to the Canadian parent company, has been treated as
a hedge of the net investment in self-sustaining U.S.
subsidiaries.
(n) SERIES A PREFERRED SHARES
The Company's Series A preferred shares have been included
in shareholders' equity since the terms of the instrument do
not provide a probable contractual obligation under which
the Company would be required to transfer cash or other
financial instruments to the holders under terms that would
be potentially unfavourable to the Company.
The difference between the initial fair value of the basic
preferred shares of US$25.9 million (Cdn$37.5 million), and
the redemption price of US$34.8 million (Cdn$50.5 million),
amounting to US$8.9 million (Cdn$13.0 million), is being
accreted to shareholders' equity on a straight-line basis
over the five-year period from the date of issuance to the
first available redemption date.
The basic preferred shares and conversion feature are
presented on a combined basis within shareholders' equity.
Page 66
Costs amounting to $2.4 million incurred on the issuance of
the preferred shares and share purchase warrants have been
deferred and are being amortized over a five-year period to
the first redemption date of the preferred shares.
(o)(p) DEBT FINANCING COSTS
Amounts incurred in connection with obtaining debt financing are deferred
and amortized, as a component of interest expense, over the term to
maturity of the related debt obligation using the effective rate method.
(p)obligation.
(q) RESEARCH AND DEVELOPMENT
Research and development expenses incurred relating to multimedia products
and other interactive software are expensed until all of the following
criteria are met: the product is clearly defined and the costs attributable
thereto can be identified; the technical feasibility of the product as
demonstrated by a working model has been established; a decision has been
made to produce and market, or use, the product; the future market for the
product is clearly defined; and adequate resources exist, or are expected
to be available, to complete the project. All expenses incurred after
technological feasibility is established are capitalized to investment in
film and will be amortized against future revenues generated from the sale
of the resulting products.
(q)products; such capitalized amounts are not significant.
(r) STOCK-BASED COMPENSATION PLAN
The Company has a stock-based compensation plan, which is described in Note 13(e)note
11(c). No compensation expense is recognized for this plan when stock or
stock options are issued to employees of the Company, its subsidiaries and
equity investees. Consideration paid by employees on exercise of stock
options or purchase of stock is credited to share capital.
(r) ACCOUNTING CHANGES
ACCOUNTING FOR FILMS AND TELEVISION PROGRAMS-
In June 2000, the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants
issued Statement of Position 00-2 "Accounting by Producers
or Distributors of Films" ("SoP 00-2"). SoP 00-2
establishes new accounting standards for producers or
distributors of films, including changes in revenue
recognition, capitalization and amortization of costs of
acquiring films and television programs and accounting for
exploitation costs, including advertising and marketing
expenses. The Company elected early adoption of SoP 00-2
and retroactively adopted SoP 00-2 effective as of
April 1, 2000. Prior years' financial statements have
not been restated, as the effect of the new policy on
prior periods was deemed not reasonably determinable.
Accordingly, opening retained earnings for the year
ended March 31, 2001 was reduced to reflect the cumulative
effect of the accounting change in the amount of $58.9
million (net of income taxes of $2.2 million). The
principal changes as a result of applying SoP 00-2 are
as follows:
Cash outflows incurred to acquire and produce films and
television programs, which were previously presented under
investing activities in the consolidated statement of cash
flows, are presented under cash flows from operating
activities.
Advertising and marketing costs, which were previously
capitalized to investment in film and television programs
and amortized using the individual film forecasts
method, are now expensed as incurred. This change resulted
in a reduction of investment in films and television
programs of $19.9 million.
The capitalization of production costs for episodic
television series is limited to contracted-for revenue on an
episode-by-episode basis until the criteria for recognizing
secondary market revenues are met. This change resulted in
a reduction of investment in films and television programs
of $34.8 million.
Page 67
Revenue relating to multiple media contracts for a single
film or television program where the contract provides for
media holdbacks where the holdback had not yet been released
resulted in a reduction of investment in films and
television programs of $6.4 million.
The effect of the change on the income statement for the
year ended March 31, 2001 was an increase in net income
of approximately $5.4 million.
ACCOUNTING FOR INCOME TAXES-
In December 1997, the Canadian Institute of Chartered Accountants
released Section 3465, "Income Taxes", to be applied by companies
for fiscal years beginning on or after January 1, 2000. The
standard requires recognition of future income tax assets and
liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns,
and is similar, in many respects, to Statement of Financial
Accounting Standards No.109, "Accounting for Income Taxes"
(SFAS 109) under US GAAP. Future income taxes are provided for
using the liability method. The Company retroactively adopted
Section 3465 effective as of April 1, 2000, without restatement
of prior years. Prior to adopting the new standard, the Company
used the deferral method of accounting for income taxes. The
application of Section 3465 resulted in increasing future
income tax liabilities by $2.7 million as at April 1, 2000
with an equivalent charge to retained earnings. The effect
of the change on the income statement for the year ended
March 31, 2001 was an increase in the tax recovery of $5.5 million
due to benefit recognized of previously unrecognized income tax
assets, where realization is judged "more likely than not" in
accordance with Section 3465 whereas previously realization had to
be based on the concept of "virtual certainty."
EARNINGS PER SHARE-
In December 2000, the Canadian Institute of Chartered
Accountants released revised Section 3500, "Earnings per
share". The revised standard requires the use of the
treasury stock method for calculating diluted earnings per
share, consistent with US GAAP. Previously, fully diluted
earnings per share was calculated using the imputed interest
method. The Company adopted the new standard for its fiscal
2001 financial statements. The revised section did not
impact previously reported losses per share, as there were
no potentially dilutive common shares outstanding.
(t)(s) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses
during the reporting period. The most significant estimates made by
management in the preparation of the financial statements include: futurerelate to
ultimate revenue projectionsand costs for investment in films and television programs;
provisions for doubtful debts to reflect credit risk
exposures; valuation allowances and impairment assessments
of various assets including investment in films and
television programs, capital assets, long-term investments
and goodwill. Actualprograms.
Future results could differ from thosesuch estimates.
(t) RECENT ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES-
On April 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities", as amended in June 2000 by SFAS 138
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities", where the provisions of SFAS 133 were applicable under
Canadian GAAP, which requires companies to recognize all derivatives as
either assets or liabilities in the balance sheet and measure such
instruments at
54
fair value. The adoption of these standards did not have a material impact
on the Company's consolidated financial statements.
(u) RECLASSIFICATIONS
Certain amounts presented in prior years have been reclassified to conform
to the current year's presentation.
3. ACCOUNTS RECEIVABLE
2001 2000
Trade accounts receivable, net $145,864 $75,891
Government assistance 35,927 27,720
Other 1,996 3,733
- -------------------------------------------------------------
$183,787 $107,344
- -------------------------------------------------------------
Page 68
The provision for doubtful accounts included in trade
accounts receivable at March 31, 2001 was $6.1 million
(2000 - $2.5 million).
4. INVESTMENT IN FILMS AND TELEVISION PROGRAMS
MARCH 31, March 31,
2002 2001 2000
THEATRICAL
FILMS
Released, net of accumulated amortization $58,378 $21,620$107,041 $ 68,706
Completed and not released 15,381 --
Acquired library, net of accumulated amortization 77,827 -61,225 63,265
In progress 8,617 30,690 49,834
In development 3,066 4,972
1,008
- -------------------------------------------------------------------------
171,867 72,462
- -------------------------------------------------------------------------
NON-THEATRICAL FILMS AND
DIRECT-TO-TELEVISION-------- --------
195,330 167,633
-------- --------
TELEVISION PROGRAMS
Released, net of accumulated amortization 60,727 24,343
26,421Completed and not released 2,938 --
In progress 24,763 27,221 26,907
In development 4,552 4,918
2,585
- --------------------------------------------------------------------------------- --------
92,980 56,482
55,913
- -------------------------------------------------------------------------
$228,349 $128,375
- --------------------------------------------------------------------------------- --------
$288,310 $224,115
======== ========
The Company earns revenue from certain productions that have been fully
amortized and are not reflected on the balance sheet.
During the year ended March 31, 2001 the Company recorded
provisions totaling $3.0 million to reduce the carrying
amounts of certain investments in films and television
programs to their fair values as a consequence of a decrease
in management's future revenue estimates.
The Company expects that 84%approximately 48% of completed and released films and
television programs, and distribution rights acquired,
net of accumulated amortization will be amortized
during the one year period ending March 31, 2003, and approximately 55% of
accrued participants' share will be paid during the one year period ending
March 31, 2003.
Additionally, the Company expects approximately 85% of completed and
released films and television programs, net of accumulated amortization
will be amortized during the three year period ending March 31, 2004.2005.
The remaining life of the acquired film library as at March 31, 2002 is
18.5 years.
Interest capitalized relating to productions during the year ended March
31, 2002 amounted to $4.6 million (2001 - $2.2 million; 2000 - $3.6
million).
4. INVESTMENTS SUBJECT TO SIGNIFICANT INFLUENCE
MANDALAY PICTURES, LLC ("MANDALAY")-
With the authority granted by the Board of Directors, prior to the close of
the fourth quarter of fiscal 2002, management committed to a plan to divest
its ownership interest in Mandalay. Mandalay was written down to its
estimated fair value at March 31, 2002 of $15.9 million taking into account
the expiration and non-renewal of Mandalay's international output
agreements on December 31, 2001 and the pending expiration of its
production and distribution agreement with Paramount Pictures Corp. in
fiscal 2003. Such estimated fair
55
value is 19.5 years.
5. LONG-TERM INVESTMENTSsupported by cash expected to be received from Mandalay in the
next one or two fiscal periods. The resulting write-down of $17.0 million
is included as a component of write-down and equity interest in investments
subject to significant influence. The Company's investment in Mandalay Pictures is
comprised of a 45% common stock interest, and a 100% interest in preferred
stock with a stated value of US$50.0 million. The Company
recordsLions Gate recorded 100% of
the operating losses of Mandalay Picturesto March 31, 2002, as equity interestit was the sole
funder of Mandalay. The Company received US$2.5 million (Cdn$4.0 million)
on December 19, 2001, and US$2.9 million (Cdn$4.6 million) on March 19,
2002 from Mandalay, which amounts were recorded as reductions in the loss of Mandalay Pictures, LLC.
Included in the carrying amount of the
Company's investment in Mandalay Pictures are pre-operating costs of $8.2 million
(2000 - $10.1 million) net of amortization of $4.4 million
(2000 - $2.5 million) and costs incurred totaling $2.5
million that were directly related to the acquisition of the
investment. These pre-operatingMandalay. Pre-operating costs, incurred in fiscal
1998 and fiscal 1999, arewere being amortized on a straight-line basis over seventeen fiscal quarters,of $0.5
million per quarter, and amortization of $1.9 million (2000to March 31, 2002
(2001 - $1.9 million) is also included in the write-down and equity
interest in loss of Mandalay Pictures.
Page 69
investments subject to significant influence.
Summarized financial information of Mandalay Pictures is as follows:follows (all amounts in
thousands of Canadian dollars):
MARCH 31, March 31,
2002 2001
ASSETS
Restricted cash $ 21,757 $ 33,336
Cash and cash equivalents 7,719 25,399
Accounts receivable 25,850 45,879
Other receivables -- 24,000
Film inventory 138,290 209,849
Due from (to) affiliates 68 (52)
Other assets 62 180
-------- ---------
193,746 338,591
-------- ---------
LIABILITIES
Accounts payable and accrued expenses 6,983 1,380
Accrued participations and residuals 22,108 15,522
Production and bank loans 75,613 151,659
Contractual obligations 10,914 57,653
Deferred revenue 49,973 65,032
-------- ---------
165,591 291,246
-------- ---------
NET ASSETS $ 28,155 $ 47,345
======== =========
YEAR ENDED Year ended Year ended
MARCH 31, March 31, March 31,
2002 2001 2000
ASSETS
Cash and equivalents $25,399 $19,193
Restricted cash 33,336 46,400
Accounts receivable 70,426 10,710
Investment in films 221,664 72,558
Other assets 13 980
- ---------------------------------------------------------------------
350,838 149,841
- ---------------------------------------------------------------------
LIABILITIES
Accounts payable and accrued liabilities 13,990 15,517
Production and bank loans 151,659 48,349
Contractual obligations 56,510 23,440
Deferred revenue 81,336 7,401
- ---------------------------------------------------------------------
303,495 94,707
- ---------------------------------------------------------------------
NET ASSETS $47,343 $55,134
- ---------------------------------------------------------------------
2001 2000 1999
Revenue $89,646 $139,301 $ -
Direct operating124,727 $ 64,179 $ 128,053
Operating expenses 89,311 140,706 1,406
Gross income (loss) 335 (1,405) (1,406)
Indirect operating$(131,998) $(64,536) $(129,458)
General and administration expenses 9,327 6,272 15,016
Interest income 2,679 3,708 4,033
- ---------------------------------------------------------------------
NET LOSS FOR THE YEAR $(6,313) $(3,969) $(12,389)
- ---------------------------------------------------------------------$(6,294) $(8,677) $(6,128)
Net loss $(10,941) $(6,312) $(3,988)
56
Mandalay Pictures is considered a non-taxable entity.partnership for income tax purposes and
contractually, Lions Gate is entitled to access the tax losses of Mandalay.
Accordingly, allthe tax effects attributable to the operationsoperating losses of
Mandalay are included directly in the Company's tax provision.
Mandalay Pictures adopted, on a retroactive basis, SoP 00-2 effective as of April 1,
2000 on a basis consistent with the Company's adoption of accounting
changes as explained in note 2(r)2(c). The cumulative adjustment made to the
net equity of Mandalay Pictures on April 1, 2000 was $5.5 million, net of the
benefit of income tax losses attributable to the Company of $nil.
CINEMANOW, INC. ("CINEMANOW")-
During the quarter ended March 31, 2002, CinemaNow advised the Company of
its inability to generate sufficient cash flows from operations to sustain
its operations over the next twelve months, without raising additional
capital. Given the uncertain economic climate and CinemaNow's recurring
losses there can be no assurance that further financing will be forthcoming
and as a result, the Company wrote down its investment in CinemaNow to
$nil. The write-off of the investment in CinemaNow of $21.0 million is
disclosed in the statement of operations as a component of write-down and
equity interest in investments subject to significant influence. The
Company's investment in CinemaNow is comprised of a 90.1% common stock
interest, representing a 63% voting interestand economic interests after taking into
account the voting rights held by the holders of preferred shares. The
investment in CinemaNow iswas accounted for using the equity method becauseas the
Company doesdid not have the ability to control the strategic operating,
investing and financing policiesdecisions of CinemaNow as a consequence of the
Company's inability to elect the majority of the board of directors of
CinemaNow.
The company'sPrior to the write-off, the Company's investment in CinemaNow consistsconsisted of
its 63% share of the economic and voting interests, recorded at the
estimated fair value at the time of the Trimark acquisition of $23.6
million. The Company's carrying value in CinemaNow includes
63%million, net of the losses of CinemaNow sinceincurred between October 13, 2000.2000
and December 31, 2001. The difference between the net carrying amount of
the assets and liabilities of CinemaNow at the date of acquisition and the
fair value of the investment washad been allocated as follows:
Page 70
Identifiable assets acquired:
Investment in films and television programs $3,496
Capital assets$ 3,496
Property and equipment 14,682
Goodwill 5,366
Other assets 7
--------------------------------------------------------------
Net assets acquired:-------
$23,551
=======
Investment in films and television programs will be
amortized on a straight-line basis over a period of twenty
years, beginning with the commencement of commercial
operations of the website.
Capital assets, representing the estimated fair value of the
CinemaNow website and film streaming technology and goodwill
arising in the consolidated financial statements of Lions
Gate is amortized on a straight-line basis over a period of
five years, beginning with the commencement of commercial
operations of the website and from the date of acquisition
of Trimark, respectively.
6. CAPITAL ASSETS57
5. PROPERTY AND EQUIPMENT
MARCH 31, March 31,
2002 2001
ACCUMULATED Accumulated
Net BookCOST AMORTIZATION Cost Amortization Value
Land $14,500held for leasing purposes $ - $14,50014,500 $ -- $ 14,500 $ --
Buildings held for leasing purposes 24,033 2,992 22,692 2,418
20,274
Leasehold improvements 1,527 513 1,301 474 827
Furniture and equipment 6,369 3,458 5,892 2,733
3,159
AutomobileAutomobiles 49 36 38 35 3
Computer equipment and software 10,031 3,895 7,138 2,510 4,628
Equipment under capital leases 6,612 1,645 1,197 376
821
- -----------------------------------------------------------------------
$52,758 $8,546 $44,212
- -------------------------------------------------------------------------------- ----------- --------- -----------
$ 63,121 12,539 $ 52,758 8,546
--------- ----------- --------- -----------
NET BOOK VALUE $ 50,582 $ 44,212
========= =========== ========= ===========
6. GOODWILL
The net carrying value of goodwill recorded through acquisitions is $38.8
million as at March 31, 2002. Effective April 1, 2001, the Company adopted
CICA 3062, which is similar, in many respects, to SFAS 142. This asset will
be assessed for impairment at least annually or upon an adverse change in
operations. Prior to the adoption of CICA 3062 the assets were amortized
using the straight-line method over periods ranging from five to twenty
years. The following is the pro forma effect had the years ended March 31,
2001 and 2000 been subject to CICA 3062:
YEAR ENDED Year ended Year ended
MARCH 31, 2002 March 31, 2001 March 31, 2000
Accumulated Net Book
Cost Amortization Value
Land $14,500Reported net income (loss) $ - $14,500
Buildings 22,782 1,376 21,406
Leasehold improvements 1,574 430 1,144
Furniture and equipment 5,447 2,162 3,285
Automobile 38 33 5
Computer equipment and software 4,959 1,300 3,659
Equipment under capital leases 684 178 506
- -----------------------------------------------------------------------
$49,984 $5,479 $44,505
- -----------------------------------------------------------------------(73,562) $ 8,728 $ (5,293)
Amortization -- 2,708 2,473
---------- ---------- ----------
Adjusted net income (loss) $ (73,562) $ 11,436 $ (2,820)
========== ========== ==========
Reported net income (loss)
per share $ (1.86) $ 0.09 $ (0.22)
Amortization per share $ 0.00 $ 0.07 $ 0.08
---------- ---------- ----------
Adjusted net income (loss)
per share $ (1.86) $ 0.16 $ (0.14)
========== ========== ==========
Buildings represent studio production property held by Lions
Gate Studios. Lions Gate Studios rents sound stages, office
and related support space to tenants that produce or support
the production of feature films, television series and
movies and commercials. Tenancies vary from a few days
to five years depending on the nature of the project and
tenant. Lions Gate Studios also provides other services
including rental of furniture, telephones and equipment.
Page 71
7. OTHER ASSETS
2001 2000
Deferred financing costs $ 7,786 $2,425
Pre-operating costs 3,012 3,835
Other 4,435 2,700
- ----------------------------------------------------------------
$15,233 $8,960
- ----------------------------------------------------------------
8. Jointly Controlled Companies
As at March 31, 2001, the Company holds a 50% investment in
Eaton Entertainment,JOINT VENTURES
EATON HOME ENTERTAINMENT, LLC ("Eaton"EATON") under a joint venture
arrangement.-
On September 30, 1999 the Company acquired an additional 16.67% interest
bringing its total ownership in Eaton at that date to 50%, and resulting in
Eaton becoming a jointly controlled company. SinceUnder the agreement the
partner's cumulative share of earnings up to September 30, 1999 was paid
out in cash. This amounted to $0.2 million and was paid directly from
Eaton. Between September 30, 1999 and December 20, 2001 the Company
has
accounted for its
58
investment in Eaton using the proportionate consolidation method. Prior to
September 30, 1999, the Company held a 33.33% interest in Eaton and
accounted for the investment using the equity method.
On December 20, 2001 the Company acquired the remaining 50% interest in
Eaton for total consideration of $0.2 million, and discontinued the
separate operations of Eaton. The Company held a 50% investmentrecorded an unusual loss of $1.3
million relating to the non-continuing assets acquired in Sterling Home
Entertainmentthe transaction.
STERLING HOME ENTERTAINMENT, LLC ("Sterling"STERLING") under a joint venture
arrangement until-
On November 27, 2000, at which time the Company acquired the remaining 50% interest in
Sterling (see note 14)for total consideration of US$2.8 million (Cdn$4.2 million). Summarized financial information regardingThe
acquisition was accounted for as a purchase, with the incremental 50% of
the results of the acquired company consolidated from November 27, 2000
onwards. Goodwill arising on the acquisition amounted to $0.1 million.
Prior to November 27, 2000 the Company had accounted for its investment in
Sterling using the proportionate consolidation method.
The Company's interests in jointly controlled companies is as follows:
2001 2000 1999
Assets $3,999 $7,705 $9,584
Liabilities (3) 4,558 8,511
Revenue 4,820 15,079 9,685
Direct operatingshare of the assets, liabilities, revenues, expenses, 3,586 10,783 6,209
Net income (loss) for the year (258) 2,251 1,073
Cash flows from operating activities 963 1,147 2,810
Cash flows from financing activities (518) (2,181) 1,449
Cash flows from investing activities (204) 1,797 (2,920)
- ----------------------------------------------------------------------
Net cash flows $ 241 $763 1,339
- ----------------------------------------------------------------------
The summarized financial information above includes net
losses related to Sterling of $429,000 (2000 - net earnings
of $1.8 million, 1999 - net earnings of $1.1 million) and net
income related to Eatonand cash flows of $0.2 million (2000 - $0.5
million, 1999 - $nil).
9.the joint ventures has not been disclosed as the
amounts are not significant.
8. BANK LOANS
2001 2000
Bank loans $159,765 $13,936
- ---------------------------------------------------------------------
Bank loans consist ofThe Company has a US$175 million (Cdn $279.0 million) (2001 - US$175
million (Cdn $275.9 million)) U.S. dollar-denominated revolving five-year credit
facilities,
anfacility, a US$25 million (Cdn$39.4 million) (2001 - US$25 million (Cdn
$39.4 million)) Canadian dollar-denominated revolving credit facility, a
$2.0 million (2001 - $2 million) operating line of credit and $5.0 million
(2001 $4.5 million) in demand loans, and bear
interest at ratesloans.
As at March 31, 2001 not exceeding Canadian2002, a total of US$139.9 million (Cdn$222.9 million) (2001
- US$97.4 million (Cdn $153.5 million)) was drawn on the revolving credit
facilities. The revolving credit facilities expire on September 25, 2005.
The U.S. dollar-denominated revolving credit facility bears interest at
U.S. prime plus 4%. Amounts due on demand and within one year
totaled $4.5 million(4.75 % at March 31, 2001.2002) plus 1.5% or LIBOR (weighted average
of 1.86 % at March 31, 2002) plus 2.5% and the Canadian dollar-denominated
revolving credit facility bears interest at Canadian prime (3.75% at March
31, 2002) plus 1.5% or Bankers Acceptances (weighted average of 2.12 % at
March 31, 2002) plus 2.5%. The availability of funds under the revolving
credit facilities is limited by the borrowing base, which is calculated on
a monthly basis. The borrowing base assets at March 31, 2002 totaled
US$152.1 million (Cdn$242.5 million) (2001 - US$ 120.1 million (Cdn $189.3
million)). The Company is required to pay a monthly commitment fee of
0.375% on the total revolving credit facilities of US$200.0 million less
the total amount drawn. Right, title and interest in and to all personal
property of Lions Gate Entertainment Corp. and Lions Gate Entertainment
Inc. is providedbeing pledged as security for the revolving five-year
credit facilities. The
Page 72
revolving credit facilities restrict the Company from paying cash dividends
on its common shares.
The operating line of credit of a subsidiary expires on July 31, 2002 and
bears interest at Canadian prime plus 1%. Management of the subsidiary
expects the facility to be extended. As at March 31, 2002, $1.2 million
(2001 - $1.7 million) was drawn on the operating line of credit. The
carrying value of certain accounts receivable, investment in films and
television programs and capital assets totaling $5.8$3.0 million at March 31,
20012002 (2001 - $5.8 million) is providedbeing pledged as security for the operating
line of credit.
59
Demand loans in the amount of $1.1 million bear interest at Canadian prime,
$0.3 million bear interest at Canadian prime plus 2% and $3.6 million bear
interest at Canadian prime plus 4%. Certain accounts receivable, andguarantees
from shareholders of a subsidiary in the amount of $1.6 million, a
corporate guarantee provided by Lions Gate Entertainment Corp. in the
amount of $0.5 million (2001 - $1.5 million), and restricted cash in the
amount of $1.1 million are provided as security for the demand loans.
The Company has credit facilities available of US$200.0
million (Cdn$315.3 million) and Cdn $2.0 million as at March
31, 2001 (2000 - Cdn$22.0 million), expiring September 25,
2005 and July 31, 2001 respectively. The availability of
funds under the US$200 million credit facility is limited
by the borrowing base, which is calculated on a monthly
basis. The borrowing base assets at March 31, 2001 totaled
US$120.1 million (Cdn$189.3 million). As at March 31, 2001,
US$97.4 million (Cdn$153.5 million) and $1.7 million was
drawn on the facilities. The Company is required to pay a
monthly commitment fee of 0.50% on the US$200.0 million less
the amount drawn where this amount is less than US$100.0
million, or 0.375% on the US$200.0 million less the amount
drawn, where this amount is equal to or exceeds US$100.0
million.
The weighted average interest rate on bank loans at March 31, 20012002 was
8.06% (20005.18% (2001 - 9.02%, 19998.06%; 2000 - 8.75%9.02%).
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2001 2000
Trade accounts payable $55,608 $18,037
Accrued liabilities 15,007 13,937
Accrued participation costs 36,398 28,109
Minimum guarantees 8,127 7,425
Other 8,230 7,457
- ---------------------------------------------------------------
$123,370 $74,965
- ---------------------------------------------------------------
11. PRODUCTION AND DISTRIBUTION LOANS
2001 2000
Production Loans (a) $24,045 $32,095
Distribution Loan (b) - 9,743
- ---------------------------------------------------------------
$24,045 $41,838
- ---------------------------------------------------------------
(a)9. PRODUCTION LOANS
Production loans consist of bank demand loans bearing interest at various
rates between Canadian prime and 9.25%. Rights to certain films and
television programs, a floating charge on certain book debts, certain film
rights, and certain tangible assets and an assignment of all expected
future revenue from exploitation of certain films and television programs
have been provided as collateral. The carrying value of investment in films
and television programs relating to these motion pictures was $22.3$49.6 million
at March 31, 2001.2002 (2001 - $22.3 million). Federal and Provincialprovincial film tax
credits receivable with a carrying value $25.0of $15.7 million at March 31, 2001,2002
(2001 - $25.0 million), accounts receivable in the amount of $2.1 million
at March 31, 2002 (2001 - $nil), guarantees from SODEC (Societe de
Developpement des Enterprises Culturelles), and general security agreements
are also provided as collateral for certain of the loans. Security agreements are also provided as collateral for
certain of the loans. Of the
outstanding amount, US$11.1 million (Cdn$17.7 million) (2001 - US$2.9
million (Cdn$4.6 million) (2000 - US$13.0 million; Cdn$18.9
million)) is repayable in USU.S. dollars.
The weighted average interest rate on production loans at March 31, 20012002
was 8.18% (20005.37% (2001 - 8.34%, 19998.18%; 2000 - 8.35%8.34%).
Page 7360
(b) DISTRIBUTION LOAN
The distribution loan consists of a US$10.0 million
revolving credit facility bearing interest at U.S. prime.
At March 31, 2001 US$nil was outstanding (2000 - US$6.7
million). The Company may draw up to US$3 million per
production in order to finance distribution costs. The
drawings are repayable from the receipts of each production
with final repayment due two years after the initial
drawdown. As consideration for providing the funding, the
lender will receive 5% of the net proceeds of each
production financed. The carrying value of investment
in films and television programs relating to these
productions amounting to $nil (2000 - Cdn$3.3 million; US$2.3
million) at March 31, 2001, has been provided as collateral.
The commitment period of this facility ends June 30, 2001.
The weighted average interest rate on the distribution loan
at March 31, 2001 was 9.0% (2000 - 9.0%, 1999 - 7.75%).
12.10. LONG-TERM DEBT
MARCH 31, March 31,
2002 2001 2000
Obligations under capital leases, bearing interest at 8.47% to 20.69%, $ 4,670 $ 491
due 2002fiscal 2003, 2004 and 2004,2005, with certain equipment provided as
collateral. $ 491 $ 485
Loans bearing interest at 5.75% to Canadian prime plus 2%, due in 1,005 1,613
fiscal 20022003 and 2005, with certain equipment provided as
collateral. 1,613 884
Promissory notes, bearing interest at 6.0%, due July 31, 2003. The 16,487 16,487
outstanding principal is convertible at the option of the holder
into common shares of the Company at $8.10 per share.
16,487 16,487
Loans bearing interest at Canadian prime plus 1.75%, due in 2001, 2003, and 21 33
2004, with guarantees from SDI (Societe de Developpement
Industriel de Quebec).
33 43
Loans bearing interest at 6.63%6.47% to 7.51%, due in Mayfiscal 2004, 2005 and July 2003 and September 2005,20,857 20,205
2008, with property, building and equipment with carrying values
of approximately $36.0 million provided as collateral.
20,205 21,216
Loans bearing interest at Canadian prime plus 1%, repayable on demand 897 1,057
and due October 2001fiscal 2003 and October
2004,fiscal 2005, with income tax credits
receivable up to $1.3 million provided as collateral. 1,057 449
Non-interest bearing convertible promissory note issued on the -- 541
acquisition of a Company subsidiary, Termite
Art Productions, repayable as US$0.3 million
(Cdn$0.5 million) (2000 - US$0.7 million, Cdn$1.0
million), due in August 2001. The outstanding principal
is convertible at the option of the holder into common
shares of the Company at $6.50 per share. 541 1,043subsidiary.
Non-interest bearing sales guarantees, repayable as US$16.219.8 million (Cdn$25.631,628 25,560
(2001 US$16.2 million), due October 2003fiscal 2004 and February 2004. 25,560 -
- -----------------------------------------------------------------------------
$ 65,987 $ 40,607
- -----------------------------------------------------------------------------2005.
------- -------
$75,565 $65,987
======= =======
Page 74
Required principal payments on long-term debt during
future fiscal years are as follows:
2002 $3,061
2003 1,906
2004 58,296
2005 547
2006 2,177
$65,987
Minimum future payments required under capital leases total
$0.6 million (2000 - $0.5 million), including interest of
$0.1 million (2000 - $0.1 million) and are due $0.3
million in 2002, $0.2 million in 2003 and $0.1 million in
2004.
Non interest-bearing sales guarantees representsrepresent amounts due under
production financing arrangements whereby the Company has contracted with a
third party and the third party has financed 100% of the production budgets
for certain films, and in turn the Company retains the worldwide
distribution rights for a period of at least twenty-five years. The Company
has guaranteed to repay minimum amounts at the dates indicated. Under the
terms of the arrangement, the third party is entitled to participate in
future net revenue after deduction of certain specified items including,
without limitation, distribution fees payable to the Company and
distribution expenses paid by the Company. 13.A subsidiary of the Company was
out of compliance with one financial covenant under each of the $4.7
million obligations under capital leases and $0.9 million loans at March
31, 2002, for which waivers have been received.
11. CAPITAL STOCK
(a) AUTHORIZED CAPITAL STOCK
The authorized capital stock of the Company consists of 500
million common shares without par value and 200 million
preference shares, issuable in series, including 1 million
Series A preferred shares that were authorized in fiscal
2000 and 10 Series B preferred shares that were authorized
in fiscal 2001. The terms of the Series A and Series B
preferred shares are described in (c) and (d), respectively,
below.
(b) CONTINUITY OF CAPITAL STOCK
Continuity of issued and outstanding capital stock is as
follows:
Number Amount
COMMON SHARES:
Balance at March 31, 1998 23,326,209 $144,524
Issued upon exercise of warrants at $9.00
per share 345,834 3,113
Issued upon acquisition of subsidiary at
$5.30 per share 675,375 3,579
Normal course issuer bid (36,000) (128)
Public offering at $4.60 per share - less
issue costs of $0.9 million 6,256,000 25,786
Issued on exercise of stock options 40,000 194
- -------------------------------------------------------------------------------
Balance at March 31, 1999 30,607,418 177,068
Issued on conversion of series A preferred
shares 795,000 2,446
Issued on exercise of stock options 58,333 239
Balance at March 31, 2000 31,460,751 179,753
Issued upon acquisition of subsidiary - less
issue costs of US$0.5 million
(Cdn$0.8 million) 10,229,837 34,976
Issued pursuant to a settlement agreement
with an employee 600,000 2,250
Issued on exercise of stock options 6,250 14
- -------------------------------------------------------------------------------
Balance at March 31, 2001 42,296,838 216,993
- -------------------------------------------------------------------------------
Page 75
SERIES A PREFERRED SHARES:
Public offering in fiscal 2000 at US$2,250
per share 13,000 42,711
Accretion - 613
Conversion to common shares (note 13(c)) (795) (2,446)
- --------------------------------------------------------------------------------
Balance at March 31, 2000 12,205 40,878
Accretion - 2,660
- --------------------------------------------------------------------------------
Balance at March 31, 2001 12,205 43,538
- -------------------------------------------------------------------------------
SERIES B PREFERRED SHARES:
Issued pursuant to Trimark acquisition
(note 13(d)) 10 -
- -------------------------------------------------------------------------------
Balance at March 31, 2001 10 -
- --------------------------------------------------------------------------------
STOCK OPTIONS:
Granted in conjunction with acquisition of subsidiary - 333
- --------------------------------------------------------------------------------
Balance at March 31, 2001 - 333
- -------------------------------------------------------------------------------
COMPENSATION WARRANTS:
Issued during fiscal 1999 380,800 -
- --------------------------------------------------------------------------------
Balance at March 31, 2000 380,800 -
Expired during the year (380,800) -
- --------------------------------------------------------------------------------
Balance at March 31, 2001 - -
- --------------------------------------------------------------------------------
SHARE PURCHASE WARRANTS:
Issued in fiscal 2000 in conjunction with public
offering at US$0.706 per warrant 5,525,000 5,659
- --------------------------------------------------------------------------------
Balance at March 31, 2001 and 2000 5,525,000 5,659
- --------------------------------------------------------------------------------
Total capital stock at March 31, 2001 $266,523
- --------------------------------------------------------------------------------
Each compensation warrant entitled the holder to purchase
one common share at a price of $5.25. The warrants expired
on September 2, 2000.
Each share purchase warrant entitles the holder to purchase
one common share at a price of US$5.00. The warrants expire
on January 1, 2004, and are not transferable except with the
consent of the Company.
(c) SERIES A PREFERRED SHARES AND SHARE WARRANTS
On December 21, 1999, the Company issued 13,000 units at a price of
US$2,550 per unit. Each unit consisted of one 5.25% convertible, non-voting
(except for the right to elect between one and three directors, depending
on the number of preferred shares outstanding) redeemable Series A
preferred sharesshare and 425 detachable common share purchase warrants.warrants (for a
total of 5,525,000 common share purchase warrants). The net proceeds received
on the offering waswere allocated as follows: common share purchase warrants
were valued at fair
61
value, using the Black-Scholes option pricing model, of US$0.706 per
warrant or US$3.9 million (Cdn$5.7 million) (which have been included in
common stock in the consolidated statements of equity); conversion features
were valued at fair value, using the Black-Scholes option pricing model, of
US$3.4 million (Cdn$4.9 million); and the basic preferred shares were
valued at the residual value of $US25.9US$25.9 million (Cdn$37.5 million). The
basic preferred shares and the conversion option are presented on a
combined basis in note
(b) above.
Page 76
the consolidated statements of equity. The preferred
shares are entitled to cumulative dividends, as and when declared by the
Board, payable semi-annually on the last day of March and September of each
year. The Company may pay the dividends in cash or additional preferred
shares. During the year,On September 30, 2001, the Company declared and paid cash dividends
of US$1.60.8 million or US$133.8866.94 per share (Cdn$2.51.3 million or Cdn$201.35103.10 per
share). On March 31, 2002 the Company declared dividends of US$0.8 million
or US$66.94 per share (Cdn$1.2 million or Cdn$106.72 per share) , which
were paid in cash and additional preferred shares. The Company issued 273
preferred shares with a value of US$0.7 million. The number of shares to be
issued was calculated by using the semi-annual dividend rate of 2.625%
multiplied by the number of outstanding preferred shares at March 31, 2002,
less applicable withholding taxes. The withholding taxes and fractional
shares were paid in cash of US$0.1 million. The preferred shares have a
liquidation preference entitling the holderseach holder to receive an amount equal to the
US$2,550 per share plus the cumulative amount of all dividends accrued and
unpaid. The holdersEach holder of the preferred shares may convert all, but not less
than all, of the preferred shares at any time into common shares at a rate
of 1,000 common shares for each preferred share, subject to certain
anti-dilution adjustments. During the yearyears ended March 31, 2002, and 2000,
648 and 795 preferred shares were converted.converted, respectively. On or after
January 1, 2003, the Company may convert the preferred shares, in whole or
in part, to common shares on the same terms as the holders, subject to
certain conditions.
The Company may redeem the preferred shares, in whole or part, on or after
January 1, 2005 for a cash payment of 105% of the stated value of US$2,550
per share plus accrued and unpaid dividends up to the date of redemption. A
holder has a right to require redemption of all, but not less than all, of
the preferred shares, for a cash payment of 100% of the stated value of
US$2,550 per share in the event that the composition of the boardBoard of
directorsDirectors ceases to be in compliance with certain provisions relating to
the nomination and election of up to three directors. Management believes
the occurrence of such an event is remote.
The difference between the initial carrying value of the preferred shares
of US$25.9 million (Cdn$37.5 million) and the redemption price of US$34.8
million (Cdn$50.5 million) is being accreted as a charge to retained earningsaccumulated
deficit over the five-year period from the date of issuance to the first
available redemption date.
(d)The Company's Series A preferred shares have been included in shareholders'
equity as the terms of the instrument do not provide a probable contractual
obligation under which the Company would be required to transfer cash or
other financial instruments to the holders under terms that would be
potentially unfavourable to the Company.
Each share purchase warrant entitles the holder to purchase one common
share at a price of US$5.00. The warrants expire on January 1, 2004, and
are not transferable except with the consent of the Company.
(b) SERIES B PREFERRED SHARES
As a condition of the purchase of Trimark,a subsidiary, on October 13, 2000, the
Company issued 10ten shares at US$10 per share.share to the principal shareholder
of Trimark. The shares are nontransferable and are not entitled to
dividends. The shares are nonvoting except that the holder, who was a
principal of Trimark,the subsidiary acquired, has the right to elect himself to the
62
Board of Directors. The shares are redeemable by the Company if certain
events occur. The shares have a liquidation preference equal to the stated
value of US$10 per share.
(e) Stock-Based Compensation Plan(c) STOCK-BASED COMPENSATION PLAN
The shareholders have approved an Employees' and Directors' Equity
Incentive Plan (the "Plan") that provides for the issue of up to 7.68.0
million common shares of the Company to eligible employees, directors and
service providers of the Company and its affiliates. Of the 7.68.0 million
common shares allocated for issuance, up to a maximum of 250,000 common
shares may be issued as discretionary bonuses in accordance with the terms
of a share bonus plan. As of March 31, 2001,2002, no shares have been issued
under the share bonus plan. The Board of Directors approved an additional
1.4 million options to be issued outside of the Plan to a certain principal
of Trimarka subsidiary upon acquisition of that subsidiary. These shares were
issued in fiscal 2001 and are included in the company.total number of share options
granted and outstanding at March 31, 2002.
The Plan authorizes the granting of options to purchase shares of the
Company's common stock at an option price at least equal to the weighted
average price of the shares for the five trading days prior to the grant.
The options generally vest with the recipient within three years of grant,
and have a maximum term of 5five years.
Page 77
On November 13, 2001 the Board of Directors of the Company resolved that
750,000 options, granted to certain officers of the Company, to purchase
shares of the Company's common stock be revised to entitle the holders to
receive cash only and not common shares. The amount of cash received will
be equal to the amount that the twenty day average trading price prior to
the exercise notice date exceeds the option price of US$5.00 multiplied by
the number of options exercised. These revised options are not considered
part of the Plan.
Changes in share options granted and outstanding for fiscal 1999, 2000, 2001 and
20012002 were as follows:
Number of Weighted
Shares Average
Exercise
PriceWEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
Outstanding at March 31, 1998 2,963,800 $8.20
Granted to December 14, 1998 842,250 8.16
Forfeited to December 14, 1998 (687,505) 8.10
Expired to December 14, 1998 (46,300) 11.33
- --------------------------------------------------------------------------
Outstanding at December 14, 1998 3,072,245 8.14
- --------------------------------------------------------------------------
Outstanding at December 14, 1998 after repricing 3,072,245 5.62
Granted to March 31, 1999 601,250 4.99
Exercised to March 31, 1999 (40,000) 4.85
Forfeited to March 31, 1999 (187,373) 8.10
Expired to March 31, 1999 (33,332) 5.31
- --------------------------------------------------------------------------
Outstanding at March 31, 1999 3,412,790 $ 5.51
Granted to March 31, 2000 1,157,500 5.81
Exercised to March 31, 2000 (58,333) 4.09
Forfeited to March 31, 2000 (575,213) 6.64
Expired to March 31, 2000 (167,081) 5.39
- ----------------------------------------------------------------------------------- ----------
Outstanding at March 31, 2000 3,769,663 5.46
Granted to March 31, 2001 5,887,334 4.35
Exercised to March 31, 2001 (6,250) 2.30
Forfeited to March 31, 2001 (149,501) 4.69
Expired to March 31, 2001 (605,829) 5.08
- ----------------------------------------------------------------------------------- ----------
Outstanding at March 31, 2001 8,895,417 $4.82
- --------------------------------------------------------------------------4.82
Granted 1,000,498 4.36
Exercised (87,083) 2.41
Forfeited (979,839) 7.28
Expired (660,831) 5.22
--------- ----------
Outstanding at March 31, 2002 8,168,162 $ 4.50
========= ==========
On December 14, 1998, the shareholders approved the
repricing of all but 395,831 outstanding options on that
date to $5.25 per common share.63
Outstanding and exercisable options at March 31, 20012002 were as follows:
Weighted average
remaining contractual
Price Range life of outstanding options Outstanding ExercisableWEIGHTED AVERAGE
REMAINING CONTRACTUAL
LIFE OF OUTSTANDING
PRICE RANGE OPTIONS OUTSTANDING EXERCISABLE
$2.30 to $2.55 3.35 years 216,250 119,5812.34 Years 120,000 79,998
$4.00 to $5.50 3.76 years 7,479,167 3,092,664
$6.31 to $8.10 3.82 years 1,200,000 50,0002.80 Years 7,648,162 2,965,644
$6.38 3.19 Years 400,000 -
-------------------------------------------------------------------------------
3.76 years 8,895,417 3,262,245---------- --------- ---------
2.81 Years 8,168,162 3,045,642
========== ========= =========
12. ACQUISITIONS
TRIMARK HOLDINGS INC. (TRIMARK") - -------------------------------------------------------------------------------
The Company has a commitment to grant options for 362,998
common shares at an exercise price of US$3.00, which are not
exercisable, until such time as shareholder approval has
been granted. Shareholder approval will be sought at the
Company's annual general meeting in September 2001.
14. Acquisitions
(a) On November 27, 2000, the Company acquired the remaining
50% interest in Sterling for total consideration of US$2.8
million (Cdn$4.2 million), consisting of US$2.0 million
(Cdn$3.1 million)
Page 78
of cash, forgiveness of an account receivable of US$0.7 million
(Cdn$1.0 million) and acquisition expenses of US$0.1 million
(Cdn$0.1 million). The acquisition was accounted for as a purchase,
with the incremental 50% of the results of the acquired company
consolidated from November 27, 2000 onwards. Goodwill arising on
the acquisition amounting to $0.1 million is being amortized over
a period of five years.
Identifiable assets acquired:
Cash and equivalents $2,492
Accounts receivable 914
Investment in films and television programs 2,837
Other 31
-----------------------------------------------------
6,274
-----------------------------------------------------
Liabilities assumed:
Accounts payable and accrued liabilities 2,186
Other 4
-----------------------------------------------------
2,190
-----------------------------------------------------
Net assets acquired: $4,084
-----------------------------------------------------
(b)
On October 13, 2000, the Company acquired the shares of Trimark Holdings, Inc. for total
consideration of US$49.6 million (Cdn$75.1 million) consisting of US$22.0
million (Cdn$33.3 million) cash, 10,229,837 common shares with a fair value
of US$23.6 million (Cdn$35.7 million) and acquisition costs of US$4.0
million (Cdn$6.1 million). These costs include: amounts
totaling US$1.1 million (Cdn $1.7 million) paid to lawyers,
accountants and other consultants; amounts totaling US$0.7 million
(Cdn$1.1 million) relating to the closure of offices and facilities
not required in the Company's operations after the acquisition;
involuntary termination benefits totaling US$1.7 million (Cdn$2.6
million) payable to certain employees terminated under a
reorganization plan contemplated at the time of acquisition
and various other amounts totaling US$0.5 million (Cdn$0.8 million).
At March 31, 2001 there were no significant actions remaining to
be performed to complete the restructuring plan, and2002 the remaining liabilities
under the planrestructuring costs totaled $2.9$1.0 million. The acquisition was
accounted for as a purchase, with the results of operations of the acquired
company consolidated from October 13, 2000 onwards. Goodwill arising on the
acquisition amountingamounted to US $8.5 million is being amortized over(Cdn$12.7 million). In fiscal 2002
the allocation of the fair value of the consideration was amended resulting
in a period of twenty years.
Identifiable assets acquired:
Accounts receivable $31,215
Investmentdecrease in investment in films and television programs, 87,139
Investmentan increase
in CinemaNow 23,551
Capital assets 400
Other assets 1,728
------------------------------------------------------
144,033
------------------------------------------------------
Page 79
Liabilities assumed:
Bank loans 57,127
Accountsgoodwill and a decrease in accounts payable 23,309
Deferred revenue 814
Future income taxes 1,170
------------------------------------------------------
82,420
------------------------------------------------------
Net assets acquired: 61,613
Previously unrecognized income tax
assetsand accrued liabilities of
the Company 4,600
------------------------------------------------------
$66,213
------------------------------------------------------
(c) On September 30, 1999, the Company acquired an additional
16.67% interest in Eaton by way of a membership interest
repurchase agreement with the third partner. Under the
agreement the partner's cumulative share of earnings up to
September 30, 1999 was paid out in cash. This amounted to
$0.2$5.4 million, $2.4 million and was paid directly from Eaton. The Company's
total ownership in Eaton is now 50% and is being accounted for
using the proportionate consolidation method after September
30, 1999.
(d) On June 30, 1998, the Company acquired the shares of
International Movie Group Inc., for total consideration of
$4.5$3.3 million consisting of $0.6 million cash and 675,375
common shares with a fair value of $3.6 million and
acquisition expenses of $0.3 million. The acquisition was
accounted for as a purchase, with results of operations of
the acquired company consolidated from June 30, 1998
onwards.
Identifiable assets acquired: $5,508
Liabilities assumed: 1,049
------------------------------------------------------
Net assets acquired: $4,459
------------------------------------------------------
(e) On August 28, 1998, the Company acquired the business
and net operating assets of Termite Art Productions, for
total consideration consisting of promissory notes with a
fair value of US$2.8 million (Cdn$4.0 million). The
acquisition was accounted for as a purchase, with results of
operations of the acquired business consolidated from August
28, 1998 onwards. Goodwill arising on the acquisition
amounting to $6.2 million is being amortized over a period
of ten years.
Identifiable assets acquired: $4,851
Liabilities assumed: 6,887
------------------------------------------------------
Net liabilities assumed: $(2,036)
------------------------------------------------------
(f)respectively.
Identifiable assets acquired:
Accounts receivable $ 31,115
Investment in films and television programs 81,696
Investment in CinemaNow 23,551
Property and equipment 400
Other assets 1,383
--------
138,145
--------
Liabilities assumed: 57,127
Bank loans 57,127
Accounts payable 19,999
Deferred revenue 613
Future income taxes 1,170
--------
78,909
--------
Net assets acquired: 59,236
Previously unrecognized income tax assets of
the Company 4,600
--------
$ 63,836
--------
The supplemental unaudited consolidated statement of operations presented
below illustrates the results of operations of the Company assuming the
acquisition of Trimark had occurred at the beginning of the period ended March
31, 2000:
Page 8064
March 31, March 31,
2001 2000
Unaudited Unaudited
Revenue $349,807 $407,960
REVENUE $ 349,807 $ 407,960
EXPENSES:
Direct operating expenses 269,649214,187 338,301
- ------------------------------------------------------------------
Gross profit 80,158 69,659
Other expensesDistribution and marketing 55,462 --
General and administration 54,288 49,656
Amortization 10,060 7,388
--------- ---------
Total expenses 333,997 395,345
--------- ---------
OPERATING INCOME 15,810 12,615
--------- ---------
OTHER EXPENSES:
Interest 14,726 7,229
Non-controlling interestMinority interests 881 1,308
Severance and relocation costs -Unusual losses -- 1,698
- ------------------------------------------------------------------
79,955 67,279
Earnings before income taxes--------- ---------
Total other expenses 15,607 10,235
--------- ---------
INCOME BEFORE INCOME TAXES AND EQUITY 203 2,380
Income taxes (2,190) 866
--------- ---------
INCOME BEFORE EQUITY INTERESTS 2,393 1,514
Equity interest in Mandalay Pictures 8,298 5,894
Equity interest in CinemaNow 2,006 --
Other equity interests 2,006-- (159)
- ------------------------------------------------------------------
Net loss for the year $(7,911) $(4,221)
- ------------------------------------------------------------------
Basic and diluted loss per common share $($0.37) $(0.18)
- --------------------------------------------------------------------------- ---------
NET LOSS $ (7,911) $ (4,221)
========= =========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.37) $ (0.18)
========= =========
15. Amortization
13. GAIN
On July 10, 2001, 2000 1999
Amortization of capital assets $3,309 $2,584 $2,081
Amortization of goodwill 2,708 2,473 2,145
Write-off of projects in development 1,586 856 1,053
Amortization of pre-operating costs 962 962 -
Amortization of deferred financing costs 1,322 199 -
- ------------------------------------------------------------------------
Total $9,887 $7,074 $5,279
- ------------------------------------------------------------------------
16. Interest
2001 2000 1999
Interest expense on long-term debt $6,030 $3,023 $3,520
Interest expense on bank loans 5,796 518 83
Interest income (1,543) (527) (527)
Other interest expense - 1,452 579
- -------------------------------------------------------------------------
$10,283 $4,466 $3,655
- -------------------------------------------------------------------------
Interest capitalized relating to productions during the year
ended March 31, 2001 amounted to $2.2 million (2000 - $3.6
million; 1999 - $3.0 million).
17. Gain
On June 23, 1998 a third party invested $3.0$14.0 million in a subsidiary of
the Company's animation partnerCompany to obtain a 20%35% interest. The gain on dilution of the Company's
investment was $0.8$3.4 million (net of income taxes of $nil) and resulted in a
decrease of $0.2 million in goodwill.
Page 81
18. Income Taxes14. INCOME TAXES
Income before income taxes and equity interests by tax jurisdiction is as
follows:
YEAR ENDED Year ended Year ended
MARCH 31, 2002 March 31, 2001 March 31, 2000
2001 2000 1999
Canada $5,356 $6,587 $(5,060)$ 15,681 $ 5,356 $ 6,587
United States (36,234) 9,913 (4,145)
(3,483)
- ---------------------------------------------------------------------------
$15,269 $2,442 $(8,543)
- ------------------------------------------------------------------------------------ --------- ---------
$ (20,553) $ 15,269 $ 2,442
========= ========= =========
65
The provision for (recovery of) income taxes is as follows:
YEAR ENDED Year ended Year ended
MARCH 31, 2002 March 31, 2001 March 31, 2000
2001 2000 1999
Current $2,239$ 2,003 $ 2,239 $1,510
$2,007
Future -(1,500) -- 490 (1,703)
Adjustments to opening future income tax
valuation allowances following change in
circumstances -- (5,531) - -
- ----------------------------------------------------------------------------
------- ------- ------
$ 503 $(3,292) $2,000
$304
- --------------------------------------------------------------------------
2001 2000 1999
Canada======= ======= ======
CANADA
Current $1,412$ 2,003 $ 1,412 $1,510
$2,007
Future --- -- 490
(1,703)
- --------------------------------------------------------------------------------- ------- ------
2,003 1,412 2,000
304
- --------------------------------------------------------------------------
United States------- ------- ------
UNITED STATES
Current -- 827 - ---
Future (1,500) (5,531) - -
- ----------------------------------------------------------------------------
------- ------- ------
(1,500) (4,704) - -
- ----------------------------------------------------------------------------
------- ------- ------
Total $ 503 $(3,292) $2,000
$304
- --------------------------------------------------------------------------======= ======= ======
The Company's provision for income tax expense differs from the provision
computed at statutory rates as follows:
YEAR ENDED Year ended Year ended
MARCH 31, 2002 March 31, 2001 March 31, 2000
2001 2000 1999
Income tax expense (recovery) computed at
Canadian combined federal and provincial
statutory rates $6,928 $1,088 $(3,896)$(31,686) $ 6,928 $ 1,088
Foreign and provincial operations subject
to different income tax rates 2,492 (606) (64) 1,322
Expenses not deductible for income tax
purposes 346 1,217 862
114Write-off of investments subject to
significant influence 15,898 -- --
Tax benefits received from Mandalay Pictures-- (6,041) - -
Release--
13,441
Increase (decrease) of valuation allowances 3,495 (5,531) (636)
2,122
Non-controlling interestMinority interests 753 317 584
279
Other (741) 424 166
363
------------------------------------------------------------------------------------- ------- --------
$ 503 $(3,292) $2,000 $304
-----------------------------------------------------------------------------$ 2,000
======== ======= ========
66
The Company has certain income tax loss carry-forwards, the benefits of
which have not yet been recognized and an estimated evaluation allowance
has been provided for in the financial statements. These lossesincome tax loss
carry-forwards amount to approximately $52.8$45.4 million for Canadian income
tax purposes, and US$21.338.1 million (Cdn$60.7 million) for U.S. income tax
purposes. The expiryexpiration dates of these losses, which are available to
reduce future taxable income in each country, are as follows:
Page 82
CANADA UNITED STATES
US$
Canada United States
Year ending March 31, 20022003 $ 2,600 US$ -
2003 1,900 -1,469 $ --
2004 2,6002,486 300
2005 300 -294 --
2006 14,800 -4,776 --
2007 4,200 -4,186 --
2008 26,400 -26,445 --
2009 5,742
2019 -- 7,900
2020 -- 11,600
2021 -- 1,500
2022 16,831
------- -------
$45,398 $38,131
======= =======
Following are the components of the Company's future income tax assets at
March 31, 2001. The fiscal 2000 comparative amounts
have been presented after reflecting the cumulative effect of
implementing the changes in accounting policies as described in
note 2(r).31:
MARCH 31, March 31,
2002 2001
2001 2000
CanadaCANADA
Assets
Net operating losses $18,100 $13,061$ 16,495 $ 18,100
Accounts payable 304 491304
Other assets 281 745
Valuation allowance (12,566) (15,353)
-------- --------
4,514 3,796
Liabilities
Investment in films and television programs - 6,210
Other assets 745 -
Valuation allowance (15,353) (17,437)
-----------------------------------------------------------------
3,796 2,325
Liabilities
Investment in film(3,046) (1,719)
Property and television programs (1,719) -
Capital assetsequipment (1,468) (2,077)
(2,758)
Other assets - (153)
------------------------------------------------------------------------- --------
Net - (586)
-----------------------------------------------------------------
Page 83Canada -- --
-------- --------
67
United States
UNITED STATES
Assets
Net operating losses $ 13,666 $ 7,304 5,775
Accounts payable 6,087 6,647
258Other assets 1,613 1,479
Investment in Mandalay 14,617 10,544
Valuation allowance (23,643) (6,441)
-------- --------
12,345 19,533
Liabilities
Investment in films and television programs - 4,717
Other assets 1,479 -
Investment in Mandalay 10,544 (6,703)
Valuation allowance (6,441) (17,072)
-----------------------------------------------------------------
19,533 381
Liabilities
Investment in film and television programs(2,497) (11,190) -
Investment in CinemaNow (9,100) -
Other assets - (381)
-----------------------------------------------------------------(9,100)
-------- --------
Net United States 743 (757)
-
-----------------------------------------------------------------
$(757) $(586)
------------------------------------------------------------------------- --------
Total $ 743 $ (757)
======== ========
Included under Canadian future income tax assets is an amount of
$0.6 million relating to part VI.1 tax on Series A preferred share
dividends, which is presented as an offset to the cost of the
dividends.
The Company has recorded a partial valuation allowance against its Canadian
future tax assets based on the extent to which it is not
more likely than notmore-likely-than-not that sufficient taxable income will be realized during
the carry-forward periods to utilize all the future tax assets. The
valuation allowances recorded against Canadian and United States future
income tax assets decreased by $4.5$2.8 million and decreasedincreased by $10.6$17.2 million,
respectively, during fiscal 2001.2002. Realization of the future tax benefit is
dependent upon many factors includingbased on the Company's ability to generate taxable income in the applicable
jurisdictions within the
loss-carry-forward periods.a one year period. It is reasonably possible that
changes in circumstances could occur in the future requiring a significant
adjustment to the amount of the valuation allowances against future income
tax assets.
The amount of unrecognized future income tax liability for temporary
differences related to the Company investments in United States
subsidiaries and its equity investee Mandalay, Pictures, which are not expected to
reverse in the foreseeable future, is $4.1 million (2001 - $4.0 million
(2000 - $nil)million).
Page 84
19. Income (Loss) per Share15. INCOME (LOSS) PER COMMON SHARE
YEAR ENDED Year ended Year ended
MARCH 31, 2002 March 31, 2001 March 31, 2000
2001 2000 1999
$ $ $Basic income (loss) per common share is
calculated as follows:
Numerator:
Net income (loss) $8,728 $(5,293) $(14,156)
Less:
Series A preferred share dividends (2,497) (591) -
Accretion on Series A preferred shares (3,115) (727) -
- ---------------------------------------------------------------------------
Income available (loss attributable) to common
shareholders $(79,325) $ 3,116 $(6,611) $(14,156)
- ---------------------------------------------------------------------------$ (6,611)
======== ======== ========
Denominator:
Weighted average common shares 36,196 30,665 24,575
outstanding
(number/'000s) - ---------------------------------------------------------------------------42,753 36,196 30,665
======== ======== ========
Basic and diluted income (loss) per share $0.09 $(0.22) $(0.58)
- ---------------------------------------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
Diluted income per share -
year ended March 31, 2001
Basic income per common share $3,116 36,196 $0.09
Effect of dilutive securities:
Termite promissory notes - 83 -
IMG acquisition notes - 43 -
- ------------------------------------------------------------------------------
Income available to common
shareholders and assumed conversions $3,116 36,322 $0.09
- ------------------------------------------------------------------------------$ (1.86) $ 0.09 $ (0.22)
======== ======== ========
68
Options to purchase 8,168,162 common shares (2001 - 8,895,417 common
shares, (20002000 - 3,769,663 common
shares, 1999 - 3,412,790 common shares) at an average price of $4.50 (2001
- $4.82, (20002000 - $5.46, 1999 - $5.51)$5.46) and share purchase warrants to purchase 5,525,000
common shares (2000(2001 - 5,525,000 common shares, 2000 - 5,525,000 common
shares) at an exercise price of US$5.00 (2000(2001 - $US US$5.00, 2000 - US$5.00)
were outstanding during the year but
were not included in the computation of diluted earnings per share because
the option's and share purchase warrants exercise prices were greater
than the average market price of the common shares during fiscal 2001.
12,205year. 11,830 Series A preferred share units
which are each convertible into 1,000 common shares for no additional
consideration were outstanding at March 31, 2001 (20002002 (2001 - 12,205 units).
Additionally, convertible promissory notes with a principal amount of $16.5
million were outstanding at March 31, 2001 (20002002 (2001 - $16.5 million, 1999million; 2000 -
$16.5 million). These notes are convertible into common shares at a price
of $8.10 per share. Under the "if converted" method of calculating diluted
earnings per share, the conversion ofshare purchase options, the share purchase
warrants, the Series A preferred shares and the convertible promissory
notes waswere anti-dilutive in each of the years presented and waswere not
reflected in diluted earnings per share.
Page 85
20. Government Assistance16. GOVERNMENT ASSISTANCE
Revenue includes tax credits earned totaling approximately $25.7 million
(2001 - $18.2 million (2000million; 2000 - $24.0 million; 1999million). Accounts receivable at March
31, 2002 includes $37.4 million with respect to government assistance (2001
- $3.9$35.9 million).
Investment in films and television programs as at March 31, 20012002 includes a
reduction of $13.3$3.7 million (2000 - $13.0
million; 1999 - $13.5 million) with respect to government assistance for
distributionacquisition of certain programs, which represents the gross assistance from inceptionmanagement's estimate of
the Company and its subsidiaries,future liability relating to government assistance, taking into
consideration future revenue estimates, net of repaid amounts. This
government assistance is repayable in whole or in part based on profits
generated by certain individual film and television programs, butand is
forgivable in the event that sufficient profits are ultimately not generated by the individual film and television programs.
Direct operatingprograms do
ultimately not generate sufficient profits.
Distribution and marketing expenses include a reduction of $0.1$1.3 million
(2000(2001 - $0.6 million and 1999$1.0 million; 2000 - $nil)$0.6) with respect to government assistance
towards print and advertising expenses.
The Company is subject to routine inquiries and review by Regulatory
authorities of its various incentive claims which have been received or are
receivable. Adjustments of claims, if any, as a result of such inquiries or
reviews, will be recorded at the time of such determination.
21. Segment Information17. SEGMENT INFORMATION
The Company has five reportable business segments: Motion Pictures;
Television; Animation; Studio Facilities; and CineGate. The Company's
reportable business segments as
follows:are strategic business units that offer
different products and services, and are managed separately.
Motion Pictures o Developmentconsists of the development and production of feature
films.
o Acquisitionfilms, acquisition of North American and worldwide distribution rights.
orights,
North American theatrical, video and television distribution of feature
films produced and acquired.
o Worldwideacquired and worldwide licensing of distribution rights
to feature films produced and acquired.
Television o Development,consists of the development, production and worldwide
distribution of television productions including television series,
television movies and mini-series and non-fiction programming.
Animation o Development,consists of the development, production and worldwide
distribution of animated and live action television series, television
movies and feature films.
69
Studio Facilities o Managementconsists of Canadian-based Studio facilities.management of an eight-soundstage studio
facility in Vancouver, Canada. Rental revenue is earned from soundstages,
office and other services such as furniture, telephones and lighting
equipment to tenants that produce or support the production of feature
films, television series, movies and commercials. Tenancies vary from a few
days to five years depending on the nature of the project and the tenant.
CineGate o Managementprovides management services to Canadian limited partnerships,
including accessing tax credits to finance productionsproduction in Canada. The Company evaluates performance based on revenue, gross
profit and EBITDA, definedCineGate
ceased operations in fiscal 2002 upon the recision of the tax shelter
business by the Canadian government.
Segmented information by business is as net earnings before interest,
income taxes, amortization, non-controlling interests,
equity interests and severance and relocation costs.
The Company's reportable segments are strategic business
units that offer different products and services, and are
managed separately. Senior operating management does not
review balance sheet
Page 86
information analyzed by operating segment, and accordingly
details of segment assets have not been presented.follows:
YEAR ENDED Year ended Year ended
MARCH 31, 2002 March 31, 2001 March 31, 2000
2001 2000 1999
RevenueRevenues
Motion Pictures $251,346 $173,941 $146,910
$77,608
Television 110,696 71,452 81,758
12,466
Animation 55,552 29,658 35,620
22,035
Studio Facilities 6,642 5,532 6,963
6,188
CineGate 2,346 1,643 - -
- -----------------------------------------------------------------------------
-------- -------- --------
$426,582 $282,226 $271,251
$118,297
- ---------------------------------------------------------------------------
Gross profit======== ======== ========
Direct operating expenses
Motion Pictures $100,320 $27,475 $13,446$103,287 $ 73,621 $119,435
Television 12,498 7,509 2,544101,072 58,954 74,249
Animation 8,436 8,881 5,45243,259 21,222 26,739
Studio Facilities 2,909 4,511 3,9242,717 2,623 2,452
CineGate 1,643 - -
- ---------------------------------------------------------------------------
$125,806 $48,376 $25,366
- ---------------------------------------------------------------------------
EBITDA-- -- --
-------- -------- --------
$250,335 $156,420 $222,875
======== ======== ========
Distribution and marketing
expenses
Motion Pictures $25,774 $11,291 $1,474$118,025 $ 51,512 $-
Television 6,841 (509) (1,532)948 264 --
Animation 5,658 6,286 3,528389 -- --
Studio Facilities 2,628 4,238 3,625-- -- --
CineGate 1,643 - -
- ---------------------------------------------------------------------------
$42,544 $21,306 $7,095
- ---------------------------------------------------------------------------
The reconciliation of total segment EBITDA to the Company's
total EBITDA is as follows:
2001 2000 1999
EBITDA of reportable segments $42,544 $21,306 $7,095
Head office general-- -- --
-------- -------- --------
$119,362 $ 51,776 $-
======== ======== =
General and administration expenses
Motion Pictures $ 30,859 $ 23,034 $ 16,184
Television 5,361 5,393 8,018
Animation 4,124 2,778 2,595
Studio Facilities 344 281 273
Corporate 13,584 6,224 4,318
5,284
--------------------------------------------------------------------------
$36,320 $16,988 $1,811
---------------------------------------------------------------------------------- -------- --------
$ 54,272 $ 37,710 $ 31,388
======== ======== ========
The reconciliation of total segment EBIDTA to the
Company's income before income taxes is as follows:
2001 2000 1999
Company's total EBITDA $36,320 $16,988 $1,811
Less:
Amortization (9,887) (7,074) (5,279)
Interest (10,283) (4,466) (3,655)
Non-controlling interest (881) (1,308) (612)
Severance and restructuring costs - (1,698) (1,647)
Gain on dilution of investment in
a subsidiary - - 839
- ------------------------------------------------------------------------------
$15,269 $2,442 $(8,543)
- ------------------------------------------------------------------------------
Page 8770
Revenue by geographic location, based on the location of the customers, is
as follows:
YEAR ENDED Year ended Year ended
MARCH 31, 2002 March 31, 2001 March 31, 2000
2001 2000 1999
Canada $57,223 $70,050 $41,687$ 79,701 $ 57,223 $ 70,050
United States 282,675 177,287 131,433
51,735
Other Foreignforeign 64,206 47,716 69,768
24,875
- ----------------------------------------------------------------------------------- -------- --------
$426,582 $282,226 $271,251
$118,297
- ---------------------------------------------------------------------------======== ======== ========
Assets by geographic location are as follows:
MARCH 31, March 31,
2002 2001
2001 2000
Canada $186,216 $334,713 $325,044
United States 259,507 76,929
- -----------------------------------------------------------------------------
$594,220 $401,973
- -----------------------------------------------------------------------------421,384 248,832
-------- --------
$607,600 $583,545
======== ========
22. Commitments18. COMMITMENTS AND CONTINGENCIES
(a) Future minimum annual commitments under contractual obligations
and Contingent Liabilities
(a) Minimum future payments under operating leasecommercial commitments as of March 31, 2002 are as follows:
2002 $2,471
2003 2,103
2004 1,952
2005 1,913
2006 1,900
Thereafter 3,272
(b) As at March 31, 2001, subsidiaries of the Company in the normal
course of business have entered into unconditional
2003 2004 2005 2006 2007 Thereafter Total
CONTRACTUAL
OBLIGATIONS:
Long-term debt $ 4,025 $66,233 $1,526 $2,052 $ -- $ 1,729 $ 75,565
Operating leases 4,481 3,864 3,365 2,411 1,780 2,549 18,450
Employment contracts 6,284 3,611 -- -- -- -- 9,895
Unconditional
purchase obligations 26,805 5,117 -- -- -- -- 31,922
Distribution and
marketing
commitments 7,793 -- -- -- -- -- 7,793
------- ------- ------ ------ ------ -------- --------
49,388 78,825 4,891 4,463 1,780 4,278 143,625
OTHER COMMERCIAL
COMMITMENTS:
Production guarantee 159 -- -- -- -- -- 159
Corporate guarantee 500 -- -- -- -- -- 500
------- ------- ------ ------ ------ -------- --------
$50,047 $78,825 $4,891 $4,463 $1,780 $ 4,278 $144,284
======= ======= ====== ====== ====== ======== ========
Unconditional purchase obligations relatingrelate to the purchase of film rights
for future delivery and to pay advances to producers amountingproducers.
71
Production guarantees relate to approximately
$41.1 million that are payable over the next twelve months
(2000 - $10.2 million).
(c) A subsidiary of the Company in the normal course of business
has provided guarantees up to a maximum of $6.8 million
(2000 - $2.1 million) for bank loans used to finance
production costs of unrelated production companies.
(d) Pre-salescompanies, which have been
provided by a subsidiary of the future revenue from certain television
series and motion pictures totaling $25.6 million (2000 -
$15.7 million) have been pledged as collateral against certain
accounts payable.
(e)Company in the normal course of business.
Corporate guarantee relates to a guarantee the Company has provided for a
demand loan to a subsidiary up to $500,000.
(b) The Company is from time to time involved in various claims, legal
proceedings and complaints arising in the ordinary course of business. The
Company does not believe that adverse decisions in any pending or
threatened proceedings, or any amount which the Company might be required
to pay by reason thereof, would have a material adverse effect on the
financial condition or future results of the Company.
23. Financial Instruments
(a) Fair Value(c) The following methods and assumptions were used to estimateCompany incurred rental expense of $4.1 million during the fair value of each class of financial instruments:
Page 88
Cash and short-term deposits-
The carrying amount approximates fair value because of the
short maturity of these instruments.
Bank loans, production and distribution loans and long-term
debt-
The fair value of the Company's bank loans, production and
distribution loans and long-term debt is estimated based on
the borrowing rates currently available to the Company for
loans with similar terms and average maturities.
Forward contracts-
The fair value of forward contracts is estimated using net
present value techniques, incorporating assumptions
including current market exchange rates and the time
value of money.
The estimated fair values of the Company's financial
instruments are as follows:
2001 2001 2000 2000
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and short-term deposits $ 10,485 $ 10,485 $ 19,283 $ 19,283
Bank loans $(159,765) $(159,765) $(13,936) $(13,936)
Production and distribution loans $ (24,045) $ (24,045) $(41,838) $(41,838)
Long-term debt $ (65,987) $ (66,511) $(40,607) $(39,479)
Forward contracts $ - $ 514 $ - $ -
(b) Credit Risk
The Company's maximum credit risk exposure arising in
relation to its financial assets is equivalent to their
carrying amounts atyear
ended March 31, 2001.2002 (2001- $3.0 million, 2000 - $1.9 million).
(d) The Company subleases two locations, which expire on January 31, 2003
and November 30, 2003. Sublease revenue of $1.4 million is expected to be
earned in fiscal 2003 and $0.4 million is expected to be earned in fiscal
2004.
19. FINANCIAL INSTRUMENTS
(a) CREDIT RISK
Accounts receivable includeincludes amounts receivable from Canadian governmental
agencies in connection with government assistance for productions as well
as amounts due from customers. Amounts receivable from governmental
agencies amounted to 19%20.0 % of total accounts receivable at March 31, 2001 (20002002
(2001 - 25.8%19.0%). Concentration of credit risk with the Company's customers
is considered to be limited due to the Company's customer base and the diversity of its
sales throughout the world. The Company performs ongoing credit evaluations
and maintains a provision for potential credit losses. The Company
generally does not require collateral for its trade accounts receivable.
(c) Interest Rate Risk
The Company's exposure to interest rate risk is summarized
as follows:
Cash and short-term deposits floating interest rate, see below
Accounts receivable non-interest bearing
Bank loans floating interest rate, see also note 9
Accounts payable and accrued liabilities non-interest bearing
Production and distribution loans floating interest rate, see also note 11
Long-term debt disclosed in note 12
Page 89
Cash and short-term deposits carry interest rates as follows:
Canadian dollar bank accounts prime minus 2.50%
US dollar bank accounts US base rate minus 4.25%
Short-term deposits fixed rate - 6.0%
(d) Forward Contracts(b) FORWARD CONTRACTS
The Company has entered into foreign exchange contracts to hedge future
production expenses denominated in Canadian, Australian and New Zealand
dollars. Gains and losses on the foreign exchange contracts are capitalized
and recorded as production costs when the gains and losses are realized. As
at March 31, 2001,2002, the Company had contracts to sell $7.0US$10.1 million in
exchange for 10.4Cdn$16.3 million New Zealand dollars over a period of threenine months at a weighted
average exchange rate of Cdn$0.671.5952. During the year, the Company completed
foreign exchange contracts denominated in Australian and New Zealand
dollars. The net loss resulting from the completed contracts amounted to
sell $3.5 million in exchange for
4.4 million Australian Dollars over a period of three months
at a weighted average exchange rate of Cdn$0.79.$nil. These contracts are entered into with a major financial institution.institution
as counterparty. The Company is exposed to credit loss in the event of
nonperformance by the counterparty, which is limited to the cost of
replacing the contracts, at current market rates. The Company does not
require collateral or other security to support these contracts.
Unrecognized gains as at March 31, 20012002 amounted to $0.5Cdn$0.5 million.
24. Supplementary Cash Flow Statement Information
The following investing and financing activities20. SUPPLEMENTARY CASH FLOW STATEMENT INFORMATION
(a) Common shares issued in fiscal 2001 in conjunction with a business
combination in the amount of $35.0 million are on a non-cash basis and are,
therefore, excluded from the consolidated statement of cash flows:
2001 2000 1999
Business combinations financed by debt to the seller $ - $ - $3,968
Common shares issued in conjunction with business
combinations $34,975 $ - $3,579
flows.
(b) Interest paid forduring the year ended March 31, 20012002 amounted to $7.6$18.8
million (2000(2001 - $10.4 million; 2000 - $7.0 million; 1999 - $6.0 million).
72
(c) Income taxes paid during the year ended March 31, 20012002 amounted to $1.4
million (2001 - $2.5 million (2000million; 2000 - $473,000; 1999 - $1.1$0.5 million).
25. Reconciliation to United States21. RECONCILIATION TO UNITED STATES GAAP
The consolidated financial statements of the Company have been prepared in
accordance with Canadian GAAP. The material differences between the
accounting policies used by the Company under Canadian GAAP and U.S. GAAP
are disclosed below in accordance with the provisions of the Securities and
Exchange Commission.
Under U.S. GAAP, the net loss and loss per share figures for the years
ended March 31, 2002, 2001 2000 and 1999,2000, and the shareholders' equity as at
March 31, 2002 and 2001 and 2000 wereare as follows:
Page 9073
Net Income (Loss) Shareholders' EquityNET INCOME (LOSS) SHAREHOLDERS' EQUITY
---------------------------------------- --------------------
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, March 31,
2002 2001 2000 2002 2001
2001 2000 1999 2001 2000
As reported under CanadianAS REPORTED UNDER CANADIAN
GAAP $8,728$(73,562) $ 8,728 $(5,293) $(14,156) $196,789 $206,414$ 120,194 $ 196,789
Equity interest in loss of
Mandalay Pictures (a) 1,150 1,150 1,907 (6,982)(3,419) (4,569) (5,719)
Adjustment for capitalized
pre-operating costs (b) 580 580 962 (4,797)(2,675) (3,255) (3,835)
Restructuring costs (d)(c) -- (1,733) - --- (1,733) -(1,733)
Accounting for income taxes (e) - - -taxes(d) -- -- -- 2,754 -
Other differences (f) - - 238 - -2,754
Presentation of Series A
preferred Shares outside
shareholders equity (g) - - -(e) -- -- -- (40,387) (38,986)
(37,886)
----------------------------------------------------------------------------------------------
Net income (loss) before accounting
change/shareholders' equity under-------- -------- ------- --------- ---------
NET INCOME (LOSS) BEFORE
ACCOUNTING CHANGE/
SHAREHOLDERS' EQUITY
UNDER U.S. GAAP (71,832) 8,725 (2,424) (25,697)74,734 151,000 158,974
Cumulative effect of
accounting changes, net
of income taxes (c)(f) -- (58,942) - - - -
---------------------------------------------------------------------------------------------
Net loss/shareholders' equity under-- -- --
-------- -------- ------- --------- ---------
NET LOSS/SHAREHOLDERS' EQUITY
UNDER U.S. GAAP (71,832) (50,217) (2,424) (25,697)74,734 151,000 $158,974
Adjustment to cumulative
translation adjustments
account (net of tax of
$nil) (g) (1,879) 8,722 (2,981) 4,445
----------------------------------------------------------------------
Comprehensive-- --
Other comprehensive loss attributable
to common shareholders
under(net
of tax of $nil)(g) (405) -- -- (405) --
-------- -------- ------- --------- ---------
COMPREHENSIVE LOSS
ATTRIBUTABLE TO COMMON
SHAREHOLDERS UNDER U.S.
GAAP $(74,116) $(41,495) $(5,405) $(21,252)
-----------------------------------------------------------------------
Basic and fully diluted income (loss)
per common share under$ 74,329 $ 151,000
======== ======== ======= ========= =========
BASIC AND DILUTED INCOME
(LOSS) PER COMMON SHARE
UNDER U.S. GAAP before accounting
change $0.13 $(0.11) $(1.05)
-----------------------------------------------------------------------
Basic and fully diluted loss per
common share underBEFORE
ACCOUNTING CHANGE $ (1.78) $ 0.13 $ (0.11)
BASIC AND DILUTED LOSS PER
COMMON SHARE UNDER U.S.
GAAP $(1.50) $(0.11) $(1.05)
-----------------------------------------------------------------------$ (1.78) $ (1.50) $ (0.11)
======== ======== =======
Page 9174
Reconciliation of the movement in the cumulative translation
adjustments account:
2001 2000 1999
Balance at beginning of the year $1,444 $4,425 $(20)
- -----------------------------------------------------------------------------------
Change in underlying assets of Mandalay
Pictures March 31, 1998 at 1.4198 - - (71,386)
Investment in Mandalay Pictures carried at
March 31, 1999 at 1.5087 - (75,831) 75,831
Investment in Mandalay Pictures carried at
March 31, 2000 at 1.4494 (72,850) 72,850 -
Investment in Mandalay Pictures carried at
March 31, 2001 at 1.5763 76,508 - -
Change in net investment US self-sustaining
Subsidiaries March 31, 2001 at 1.5763 5,064 - -
---------------------------------------------------------------------------------
Net change in year 8,722 (2,981) 4,445
---------------------------------------------------------------------------------
Balance - end of the year $10,166 $1,444 $4,425
---------------------------------------------------------------------------------
Reconciliation of movement in Shareholders' Equity under U.S. GAAP:
MARCH 31, March 31, March 31,
2002 2001 2000
2001 2000 1999
Balance at beginning of the year $158,974 $154,361 $143,069BALANCE AT BEGINNING OF THE YEAR $ 151,000 $ 158,974 $ 154,361
Increase in capital stock 1,857 37,573 11,055 32,544
Dividends paid on preferred shares (2,492) (2,497) (591) -
Accretion on preferred shares (g)(e) (1,920) (1,555) (446) -
Net loss under U.S. GAAP (71,832) (50,217) (2,424) (25,697)
Adjustment to cumulative translation adjustments
account (1,879) 8,722 (2,981)
4,445
--------------------------------------------------------------------------------
BalanceOther comprehensive loss (405) -- --
--------- --------- ---------
BALANCE - end of the year $151,000 $158,974 $154,361
--------------------------------------------------------------------------------END OF THE YEAR $ 74,329 $ 151,000 $ 158,974
========= ========= =========
(a) Equity Interest in loss of Mandalay Pictures, LLCEQUITY INTEREST IN LOSS OF MANDALAY
The Company accounts for Mandalay Pictures using the equity method. As described in
note 5,4, under Canadian GAAP, pre-
operatingpre-operating costs incurred by Mandalay were
deferred and are
beingwere amortized to income.income to December 31, 2001. Under U.S.
GAAP, all start-up costs are required to be expensed as incurred. The
amounts are presented net of income taxes of $0.8 million (2000(2001 - $nil, 1999$0.8
million; 2000 - $nil).
(b) Accounting for Capitalized Pre-Operating Period Costs
In the year ended March 31, 1999, underACCOUNTING FOR CAPITALIZED PRE-OPERATING PERIOD COSTS
Under Canadian GAAP, the Company deferred certain pre-operating costs
related to the launch of the television one-hour series business amounting
to $4.8 million. This amount is being amortized over five years commencing
in the year ended March 31, 2000. Under U.S. GAAP, all start-up costs are
to be expensed as incurred. The amounts are presented net of income taxes
of $0.4 million (2000(2001 - $nil, 1999$0.4 million; 2000 - $nil).
(c) Accounting changesACCOUNTING FOR BUSINESS COMBINATIONS
Under Canadian GAAP prior to January 1, 2001, costs related to activities
or employees of an acquiring company were considered in the purchase price
allocation. In fiscal 2001, the Company included $2.1 million of such costs
in the purchase price for a subsidiary. Under U.S. GAAP, costs related to
the acquiring Company must be expensed as incurred. The amount is presented
net of income taxes of $0.4 million.
(d) ACCOUNTING FOR INCOME TAXES
Under Canadian GAAP commencing in the year ended March 31, 2001, the
Company used the asset and liability method to recognize future income
taxes which is consistent with the U.S. GAAP method required under SFAS 109
except that Canadian GAAP requires use of the substantively enacted tax
rates and legislation, whereas U.S. GAAP only permits use of enacted tax
rates and legislation. For the year ended March 31, 2000, the Company used
the deferral method for accounting for deferred income taxes, which differs
from the requirements of SFAS 109. The use of substantively enacted tax
rates under Canadian GAAP to measure future income tax assets and
liabilities resulted in an increase in Canadian net future income tax
assets (before valuation allowances) by $0.3 million (2001 - $2.3 million),
with a corresponding increase in valuation allowances by $0.3 million (2001
- $2.3 million).
75
SFAS 109 requires deferred tax assets and liabilities be recognized for
temporary differences, other than non-deductible goodwill, arising in a
business combination. In the year ended March 31, 2000, under U.S. GAAP,
goodwill was increased to reflect the additional deferred tax liability
resulting from temporary differences arising on the acquisition of Lions
Gate Studios in fiscal 1999. Under Canadian GAAP, the Company did not
restate income taxes for years prior to March 31, 2001, accordingly, there
is a difference in the carrying amount of goodwill arising in the business
combination of $2.8 million as at March 31, 2002 (March 31, 2001 - $2.8
million).
(e) ACCRETION ON PREFERRED SHARES
Under Canadian GAAP, the Company's preferred shares have been included in
shareholders' equity as the Company considers the likelihood of redemption
by the holders to be remote. Under U.S. GAAP, the preferred shares would be
presented outside of shareholders equity.
As explained in note 11(b), under Canadian GAAP, the fair value of the
basic preferred shares was determined using the residual value method after
determining the fair value of the common share purchase warrants and the
preferred share conversion feature. Under U.S. GAAP, the carrying amount of
the preferred shares at the date of the offering of $40.0 million is the
residual value arrived at by taking the $48.0 million proceeds less the
fair value of the share purchase warrants of $5.7 million less share issue
costs of $2.4 million.
Under Canadian GAAP, the difference between the carrying amount and the
redemption value of $50.5 million is being accreted as a charge to
accumulated deficit on a straight-line basis over five years whereas, under
U.S. GAAP, the difference is being accreted using the effective interest
method over five years.
(f) ACCOUNTING CHANGES
In the year ended March 31, 2001, the Company elected early adoption of Statement of Position 00-2 "Accounting by
Producers or Distributors of Films" ("SoP
00-2").00-2. Under Canadian GAAP, the one-time after-tax adjustment for the
initial adoption of SoP 00-2 was made to opening retained
earnings.accumulated deficit. Under
SoP 00-2, the cumulative effect of changes in accounting principles caused
by adopting the
Page 92
provisions of SoP 00-2 should be included in the
determination of net earnings for GAAP purposes. The cumulative effect of
the adjustment comprises $58.9 million net of income taxes of $2.2 million
for the Company and its subsidiaries as well as $5.5 million, net of income
taxes of $nil for the Company's equity investee Mandalay Pictures.
(d) AccountingMandalay.
(g) COMPREHENSIVE LOSS
Comprehensive loss consists of net income (loss) and other gains and losses
affecting shareholders' equity that, under U.S. GAAP are excluded from the
determination of net income or loss. Adjustment to cumulative translation
adjustments comprises foreign currency translation gains and losses. Other
comprehensive loss comprises unrealized losses on investments available for
Business Combinations
Under Canadian GAAP, costs related to activities or
employeessale based on the market price of an acquiring company are not considered in the purchase price allocation. The Company included $2.1 million
of such costs in the purchase equation for Trimark as
described in Note 14(b). Under US GAAP, costs related to the
acquiring Company must be expensed as incurred. The amount
is presentedshares at March 31, 2002 net of
income taxes of $0.9 million.
(e) Accounting for Income Taxes$nil (2001 - $nil).
(h) ACCOUNTING FOR TAX CREDITS
Under Canadian GAAP, for the year ended March 31, 2001, the
Company used the assetfederal and liability method to recognize
future income taxes which is consistent with the US GAAP
method required under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", ("SFAS
109") except that Canadian GAAP requires use of the
substantively enacted tax rates and legislation, whereas US
GAAP only permits use of enacted tax rates and legislation.
For the years ended March 31, 2000 and March 31, 1999, the
Company used the deferral method for accounting for deferred
income taxes, which differs from the requirements of SFAS
109. The use of substantively enacted tax rates under
Canadian GAAP to measure future income tax assets and
liabilities resulted in an increase in Canadian net future
income tax assets (before valuation allowances) by $2.3
million, with a corresponding increase in valuation
allowances by $2.3 million.
SFAS 109 requires deferred tax assets and liabilities be
recognized for temporary differences, other than non-
deductible goodwill, arising in a business combination. As a
result of the acquisition of Lions Gate Studios in the year
ended March 31, 2000, under US GAAP, goodwill was increased
to reflect the additional deferred tax liability resulting
from temporary differences arising on the acquisition. Under
Canadian GAAP, the company did not restate income taxes for
years prior to March 31, 2001, accordingly, there is a
difference in the carrying amount of goodwill arising in the
business combination of $2.8 million as at March 31, 2001.
(f) Accounting for Development Costs
Under Statement of Financial Accounting Standards No. 53,
"Financial Reporting by Producers and Distributors of Motion
Picture Films" ("SFAS 53"), certain costs related to the
development of film and television projects must be written
off after three years unless the project has been set for
production. The effect of writing off costs more than three
years old associated with projects not abandoned is treated
as a GAAP reconciling item. The corresponding impact would
reduce investment in films and television programs by a
corresponding amount. In fiscal 1999, management wrote off
certain development projects under Canadian GAAP, therefore
$0.2 million written off in 1998 under U.S. GAAP reversed
in that fiscal year.
(g) Accretion on Preferred Shares
Under Canadian GAAP, the Company's preferred shares have
been included in shareholders' equity as the Company
considers the likelihood of redemption by the holders to be
remote. Under U.S. GAAP, the preferred shares would be
presented outside of shareholders equity as temporary
equity.
As explained in note 13(c), under Canadian GAAP, the fair
value of the basic preferred shares was determined using the
residual value method after determining the fair value of
the common share purchase warrants and the preferred share
conversion feature. Under U.S. GAAP, the proceeds received
would be allocated to the common share purchase warrants and
the preferred shares based on
Page 93
the relative fair values of the two instruments. Under U.S.
GAAP, the preferred shares would have been valued at $40.0
million and the warrants at $48.4 million.
Under Canadian GAAP, the difference between the carrying
amount and the redemption value of $50.5 million is being
accreted as a charge to retained earnings on a straight line
basis over five years whereas, under US GAAP, the difference
is being accreted using the effective interest method over
the five year period to the first available date that the
preferred shares are redeemable.
(h) Accounting for Tax Credits
Under Canadian GAAP,provincial tax credits earned arewith respect
to production costs may be included in revenue. Accounting Principles Board
Opinion No. 4, "Accounting for the Investment Credit"Credit," requires tax credits
to be presented as reduction of income tax expense. The corresponding
impact would be a reduction of revenue and credit to income tax expense of
$25.7 million (2001 - $18.2 million (2000million; 2000 - $24.0 million, 1999 - $3.9 million).
76
(i) Accounting for Stock Based CompensationACCOUNTING FOR STOCK BASED COMPENSATION
Under CanadianU.S. GAAP compensation cost is not recorded for
stock based compensation to employees. Under US GAAP, the
company follows the intrinsic value method to measure stock
based compensation to employees in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and its interpretations. Under
the intrinsic value method, the compensation cost would be
measured as the difference between the quoted market price
on the date of grant and the exercise price, if any. For
the three years ended March 31, 2001, no compensation cost
resulted under U.S. GAAP.
As the Company has elected to use the intrinsic value method
in accounting for stock based compensation. In accordance with SFAS No. 123
accounting for stock based compensation the following disclosures are
provided about the costs of stock based compensation awards using the fair
value method:method.
The weighted average estimated fair value of each stock option granted in
the year ended March 31, 20012002 was $1.64
(2000$1.36 (2001 - $1.76; 1999$1.64; 2000 - $2.11)$1.76). On
December 14, 1998 the Company modified the terms of 2,676,414 options
outstanding on that date, reducing the exercise price from $8.10 to $5.25,
with the effect that it effectively issued new options with an exercise
price of $5.25. The vesting period and remaining contractual term were
unchanged. For proforma purposes, the Company has recognized additional
compensation cost for the excess of the fair value of the modified options
issued over the value of the original options at the date of the exchange
measured using the Black-Scholes option pricing model, with the following
assumptions: $4.75 market common share price, $5.25 exercise price, 6.0%
risk-free interest rate, 35% volatility, and a 0% dividend yield. The total
excess fair value of the stock options affected was estimated to be $1.4
million and is being recognized over the remaining vesting period of the
options. The total stock compensation expense in the year ended March 31,
20012002 would be $3.9 million (2001 - $5.4 million. (2000million; 2000 - $4.0 million; 1999 - $2.7 million).
For disclosure purposes fair value of each stock option grant was estimated
on the date of grant using the Black-
ScholesBlack-Scholes option pricing model with the
following assumptions used for stock options granted: a dividend yield of
0%, expected volatility of 50% (2000(2001 - 35%50%; 2000 - $35%), risk-free
interest rate of 2.0% (2001 - 5.5% (2000; 2000 - 6.0%) and expected life of five
years.
The resulting pro forma U.S. GAAP net income and loss per
share for the year ended March 31, 2001 before the accounting
change was $3.3 million and $0.02 respectively (2000 - loss
and loss per share $6.4 million and $0.24 respectively; 1999
- loss and loss per share $28.4 million and $1.16
respectively).
Page 94
The resulting pro forma U.S. GAAP loss and loss per share for the year
ended March 31, 20012002 before the effect of adoption of new accounting
pronouncements was $55.6$75.8 million and $1.54$1.88 respectively (2000(2001 - net income
of $3.3 million and loss per share of $0.02; 2000 - loss and loss per
share $6.4 million and $0.24 respectively; 1999respectively).
The resulting pro forma U.S. GAAP net loss and loss per share for the year
ended March 31, 2002 was $75.8 million and $1.88 respectively (2001 - loss
and loss per share $28.5of $55.6 million and $1.16$1.54 respectively; 2000 - loss and
loss per share $6.4 million and $0.24 respectively).
77
(j) Income (Loss) Per ShareINCOME (LOSS) PER SHARE
Basic income (loss) per share under U.S. GAAP is calculated as follows:
YEAR ENDED Year ended Year ended
MARCH 31, March 31, March 31,
2002 2001 2000 1999
Numerator:
Net income (loss) before(before accounting change $8,725 $(2,424) $(25,697)$(71,832) $ 8,725 $ (2,424)
in 2001)
Less:
Series A preferred share dividends (2,492) (2,497) (591) -
Accretion on Series A preferred shares (1,920) (1,555) (1,008)
-
- ---------------------------------------------------------------------------------------- -------- --------
Income (loss) available (loss attributable) to common $4,673 $(4,023) $(25,697)
shareholders - --------------------------------------------------------------------------------$(76,244) $ 4,673 $ (4,023)
======== ======== ========
Denominator:
Weighted average common shares outstanding
(number/'000s) 42,753 36,196 30,665
======== ======== ========
Basic and diluted income (loss) per share $ (1.78) $ 0.13 $ (0.11)
======== ======== ========
(k) Consolidated Statements of Cash Flows
The Company's cash flow statement prepared in accordance
with Canadian GAAP complies with U.S. GAAP.
(l) Proportionate ConsolidationPROPORTIONATE CONSOLIDATION
The accounts of all jointly controlled companies are proportionately
consolidated according to the Company's ownership interest. Under U.S.
GAAP, proportionate consolidation is not permitted for jointly controlled
companies and the cost, equity or full consolidation methods of accounting
must be followed, as appropriate. As permitted by the United States
Securities and Exchange Commission, the effect of this difference in
accounting principles is not reflected above.
(l) CONSOLIDATED STATEMENTS OF CASH FLOWS
The Company's cash flow statement prepared in accordance with Canadian GAAP
complies with U.S. GAAP.
(m) Impairment of Long-Lived AssetsCONSOLIDATED FINANCIAL STATEMENTS
Under Canadian GAAP, capital assets and goodwill are
reviewedthe Company consolidates the financial statements of
CineGroupe Corporation ("CineGroupe"). On July 10, 2001, as a condition of
a $14.0 million equity financing with a third party, CineGroupe's
Shareholders' Agreement was amended to allow for impairment as described in note 2. Undercertain participatory
super-majority rights to be granted to the shareholders. Therefore, under
U.S. GAAP, in addition to the review for impairment of goodwill
described in note 2, the Company reviews long-livedis now precluded from consolidating CineGroupe and
will account for CineGroupe, commencing April 1, 2001, using the equity
method.
The impact of accounting for CineGroupe using the equity method under U.S.
GAAP, would be a reduction in fiscal 2002 revenue to $371.0 million, direct
operating expenses to $207.0 million, distribution and marketing costs to
$119.0 million and general and administration expenses to $50.2 million.
The impact of using the equity method under U.S. GAAP on the consolidated
balance sheet at March 31, 2002 would be a reduction in total assets for impairment whenever events or changesto
$536.3 million and a reduction in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability is measured by a comparison of
the carrying amount of an assetdebt (including bank loans, production
and distribution loans, and long-term debt) to the net cash flows
expected to be generated from the asset. If an asset is
considered to be impaired, its carrying amount is reduced to
fair value.
(n) Impact of Recently Issued Accounting Pronouncements$300.7 million.
78
22. RECENT PRONOUNCEMENTS
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS-
In June 1998,August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133,SFAS 144,
"Accounting for Derivative Instruments and
Hedging Activities"the Impairment or Disposal of Long-Lived Assets". In June 1999, the FASBSFAS 144
will be effective for financial statements issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB
Statement No. 133", which deferred the required date of
adoption of SFAS No. 133 for one year, to fiscal years
beginning after JuneDecember 15, 2000. This standard is applicable2001. SFAS 144 supersedes SFAS 121 "Accounting
for the Company's 2002 fiscal year and currently its impact,
if any, has not been determined.
In September, 2000, StatementImpairment of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing
of FinancialLong-Lived Assets and Extinguishmentfor Long-Lived Assets to be
Disposed Of", however, it retains the fundamental provisions of Liabilities", was
issuedthat
statement related to replace Statementthe recognition and measurement of Financial Accounting
Standards No. 125, "Accountingthe impairment of
long-lived assets to be "held and used". In addition, SFAS 144 provides
more guidance on estimating cash flows when performing a recoverability
test, requires that long-lived assets to be disposed of other than by sale
to be classified as "held and used" until it is disposed of, and
establishes more restrictive criteria to classify an asset as "held for
Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities"sale". SFAS 140 provides accounting and reporting standards for
transfers and servicing of financial assets and
extinguishments of liabilities. As the
Page 95
company currently does not transfer or service any financial
assets, theThe new standard is not expected to have any affect on the Company.
STOCK-BASED COMPENSATION-
In June 2000,January 2002, the Financial Accounting Standards Board
approved Statement No. 141, "Business Combinations" (SFAS
141), and Statement No. 142, "GoodwillCICA released Section 3870, "Stock-Based Compensation
and Other Intangible
Assets" (SFAS 142). Those Statements will changeStock-Based Payments", to be applied by companies for fiscal
years beginning on or after January 1, 2002 and applied to awards granted
on or after the accountingdate of adoption. Section 3870 establishes standards for
business combinationsthe recognition, measurement and goodwill. SFAS 141
requires that the purchase methoddisclosure of accounting be usedstock-based compensation and
other stock-based payments made in exchange for all business combinations initiated after June 30, 2001. Use
of the pooling-of-interests method will be prohibited. SFAS
142 changes the accounting for goodwill from an amortization
methodgoods and services, and is
similar, in many respects to an impairment-only approach. Thus, amortization of
goodwill, including goodwill recorded in past business
combinations, will cease upon adoption of that Statement,
presently expected to occur in the Company's 2003 fiscal
year.APB 25. The Company has not yet determined the effects of the
new standards as the full text of the standards have not
yet been published.
In June 2000, the Financial Accounting Standards Board
approved Statement No. 143, "Accounting for Asset Retirement
Obligations". That standard requires entities to record the
fair value of a liability for an asset retirement obligation
in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by
increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is amortized
over the useful life of the related asset. Upon settlement
of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon
settlement. The Company has not yet determined the effects
of this new standard as the full text of the standard is not yet available.
26. Comparative Figuresexpected to
have any affect on the Company.
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
Certain quarterly information is presented below (all amounts presented in thousands
of Canadian dollars, except per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
2002
Revenues $ 69,549 $ 92,309 $ 111,062 $ 153,662
Direct operating costs $ 38,262 $ 49,759 $ 63,988 $ 98,326
Income (loss) before write-down and equity
interest in investments subject to significant
influence $ 1,515 $ 525 $ (3,804) $ (19,292)
Net income (loss) $ (517) $ 220 $ (4,993) $ (68,272)
Basic and diluted loss per share $ (0.05) $ (0.03) $ (0.15) $ (1.63)
79
Report of Independent Auditors
The Members
Mandalay Pictures, LLC
We have audited the prior year have been
reclassified to conform to the current year's presentation.
27. Subsequent Events
(a) On April 27, 2001, in accordance with the terms of the
Company's share bonus plan, 200,000 common shares were issued
to a senior executive of the Company as compensation for
services rendered in connection with the Trimark
acquisition and the Company's long-term financing
arrangements. The market value of the shares was accrued
in the Company's financial statements in fiscal 2001.
(b) On July 10, 2001 a subsidiary of the Company
completed an equity financing with a third party for
$14.0 million.
Page 96
REPORT OF INDEPENDENT ACCOUNTANTS
To the Membersbalance sheet of Mandalay Pictures, LLC:
In our opinion, the accompanying consolidated balance sheetsLLC as of March 31,
2002, and the related consolidated statements of operations, changechanges in members' equity, and
cash flows present fairly, in all material
respects, the financial position of Mandalay Pictures, LLC (the
"Company") at March 31, 2001 and 2000, and the results of its
operations and its cash flows for the yearsyear then ended, in
conformity with accounting principles generally accepted in the
United States.ended. These financial statements are the
responsibility of the Company's management; ourmanagement. Our responsibility is to express an
opinion on these financial statements based on our audits.audit. The financial
statements of Mandalay Pictures, LLC for the year ended March 31, 2001 were
audited by other auditors, whose report dated June 22, 2001, expressed an
unqualified opinion on those statements and included an explanatory paragraph
that disclosed the change in the Company's method of film accounting discussed
in Note 1 to these financial statements.
We conducted our audits of these statementsaudit in accordance with auditing standards generally accepted auditing standards
in the United States whichStates. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, andas well as evaluating the overall financial statement
presentation. We believe that our audits provideaudit provides a reasonable basis for our
opinion.
In our opinion, the opinion expressed
above.
As discussed2002 financial statements referred to above present fairly,
in Note 2 toall material respects, the consolidated financial position of Mandalay
Pictures, LLC at March 31, 2002, and the consolidated results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that Mandalay Pictures, LLC will continue as a going concern. As more fully
described in Note 1, the Company changed its methodhas incurred recurring operating losses and
requires additional financing in order to produce future films. Additionally,
the Company has not successfully negotiated distribution arrangements for future
films. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of film accounting on April 1,
2000.this uncertainty.
/s/ Pricewaterhouse CoopersERNST & YOUNG LLP
- --------------------------------
June 22, 2001
Page 97Los Angeles, California
May 17, 2002
80
Mandalay Pictures, LLC
Consolidated Balance Sheets
(All amounts in US dollars)
MANDALAY PICTURES, LLC
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31
2002 2001
and 2000
2001 2000
-------------- ------------------ ----
ASSETS
Cash and cash equivalents $ 16,113,0954,841,984 $ 13,241,57416,113,095
Restricted cash 13,647,669 21,147,617 32,012,751
Accounts receivable - trade16,214,580 29,105,253 3,563,139
Other receivables -- 15,225,000 3,824,034
Film inventory 86,746,444 133,127,349
50,060,931
Due from (to) from affiliates 42,592 (32,806) 244,180
Other assets and prepaid expenses38,621 113,815
434,136
-------------- --------------
TOTAL ASSETS------------- -------------
Total assets $ 121,531,890 $ 214,799,323
$ 103,380,745
============== =========================== =============
LIABILITIES
Accounts payable and accrued expenses $875,163 $7,505,458$ 4,380,559 $ 875,163
Accrued participations and residuals 13,867,670 9,847,001 3,200,000
Bank loan -- 3,085,380 2,801,184
Production loans 47,430,000 93,126,648 30,557,227
Contractual obligations 6,846,491 36,574,600 16,171,948
Deferred revenue 31,347,078 41,256,404
5,106,294
-------------- --------------
TOTAL LIABILITIES------------- -------------
Total liabilities 103,871,798 184,765,196
65,342,111
-------------- --------------
MEMBERS' EQUITYCommitments and contingencies
Members' equity:
Contributions from members 50,001,00044,639,000 50,001,000
Accumulated deficit (26,978,908) (19,966,873)
(11,962,366)
-------------- --------------
TOTAL MEMBERS' EQUITY------------- -------------
Total members' equity 17,660,092 30,034,127
38,038,634
-------------- --------------
TOTAL LIABILITIES------------- -------------
Total liabilities and MEMBERS' EQUITY $214,799,323 $103,380,745
============== ==============members' equity $ 121,531,890 $ 214,799,323
============= =============
THE ACCOMPANYING NOTES ARE
AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
Page 98See accompanying notes.
81
Mandalay Pictures, LLC
Consolidated Statements of Operations
(All amounts in US dollars)
MANDALAY PICTURES, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARSYEAR ENDED MARCH 31
2002 2001
and 2000
2001 2000
-------------- ------------------ ----
REVENUESRevenues $ 79,672,559 $ 42,671,932
$ 87,033,801
OPERATING EXPENSESOperating expenses:
Amortization of film costs (79,944,752) (42,448,780)
(87,988,812)Write-off of abandoned film projects (4,371,778) (341,090)
General and administration (6,110,105) (4,165,285)(4,020,597) (5,769,015)
Depreciation (39,315) (92,262)
(98,494)
LOSS FROM OPERATIONS------------ ------------
(88,376,442) (48,651,147)
------------ ------------
Loss from operations (8,703,883) (5,979,215)
(5,218,790)
INTEREST INCOMEOther income (expense):
Interest income 1,197,223 1,972,026
2,520,559
INTEREST EXPENSEInterest expense (524,227) (191,000)
-
LOSS BEFORE PROVISION FOR TAXESGain on contractual settlement 1,042,515 --
------------ ------------
1,715,511 1,781,026
------------ ------------
Loss before provision for income taxes and cumulative change in
accounting principle (6,988,372) (4,198,189)
(2,698,231)
PROVISION FOR TAXESProvision for income taxes (23,663) (22,318)
(12,050)
LOSS BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE------------ ------------
Loss before cumulative effect of change in accounting principle (7,012,035) (4,220,507)
(2,710,281)
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLECumulative effect of change in accounting principle -- (3,784,000)
-
NET LOSS------------ ------------
Net loss $ (7,012,035) $ (8,004,507)
$ (2,710,281)============ ============
THE ACCOMPANYING NOTES ARE
AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
Page 99See accompanying notes.
82
Mandalay Pictures, LLC
Consolidated Statements of Changes in Members' Equity
(All amounts in US dollars)
MANDALAY PICTURES, LLC
CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S EQUITY
FOR THE YEARS ENDED MARCH 31, 2001 and 2000
Tigerstripes, LG Pictures,
LLC Inc. Total
------------- -------------- ----------------- ---- -----
Balance at March 31, 19992000 $ 550 $ 40,748,36538,038,084 $ 40,748,915
Net loss - (2,710,281) (2,710,281)
Balance at March 31, 2000 550 38,038,084 38,038,634
Net loss --- (8,004,507) (8,004,507)
---------- ------------ ------------
Balance at March 31, 2001 550 30,033,577 30,034,127
Return of capital -- (5,362,000) (5,362,000)
Net loss -- (7,012,035) (7,012,035)
---------- ------------ ------------
Balance at March 31, 2002 $ 550 $ 30,033,57717,659,542 $ 30,034,12717,660,092
========== ============ ============
THE ACCOMPANYING NOTES ARE
AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
Page 100See accompanying notes.
83
Mandalay Pictures, LLC
Consolidated Statements of Cash Flows
(All amounts in US dollars)
MANDALAY PICTURES, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARSYEAR ENDED MARCH 31
2002 2001
and 2000
2001 2000
-------------- ------------------ ----
Cash flows from operating activities:OPERATING ACTIVITIES
Net loss $ (8,004,507)(7,012,035) $ (2,710,281)(8,004,507)
Adjustments to reconcile net loss to net cash
used inprovided by (used in) operating activities:
Cumulative effect of a change in accounting principle -- 3,784,000
-Gain on contractual settlement (1,042,515) --
Depreciation 39,315 92,262
98,494
Write offWrite-off of abandoned film projects 4,371,778 341,090 -
Amortization of film costs 79,944,752 42,448,780
87,988,812
(Increase) decreaseChanges in assets:operating assets and liabilities:
Restricted cash 7,499,948 10,865,134 (29,310,552)
Accounts receivable - trade12,480,450 (25,542,114) (3,563,139)
Other receivables -- (11,400,966)
(3,452,857)
Additions to film costsFilm inventory (86,040,522) (129,299,198) (97,671,705)
Due to/from affiliates, net (75,398) 276,986 37,149
Other assets and prepaid expenses35,879 320,321 27,322
(Decrease) increase in liabilities:
Accounts payable and accrued expenses 426,778 (6,630,295) (620,834)
Accrued participations and residuals 13,840,676 6,647,001 3,200,000
Contractual obligations 596,491 20,402,652 16,171,948
Deferred revenue (211,894) 36,150,110
644,402
-------------- --------------
Total adjustments------------ -------------
31,865,738 (51,544,237)
(26,450,960)
-------------- -------------------------- -------------
Net cash usedprovided by (used in) operating activities 24,853,703 (59,548,744)
(29,161,241)
-------------- --------------
Cash flows from financing activities:FINANCING ACTIVITIES
Proceeds (repayments) from bank loan, net 53,465 284,196 (1,153,795)
Repayments on production loans (85,176,648) (21,614,163) (33,969,467)
Proceeds from production loans 39,480,000 84,183,584
45,712,935
Payments relating toProceeds from other financing costs
and other assetsarrangements 13,295,708 (433,352)
(518,122)
-------------- --------------Return of members' capital contributions (5,362,000) --
Proceeds from contractual settlement 1,584,661 --
------------ -------------
Net cash (used in) provided by financing activities (36,124,814) 62,420,265
10,071,551
-------------- -------------------------- -------------
Net (decrease) increase (decrease) in cash and cash equivalents (11,271,111) 2,871,521 (19,089,690)
Cash and cash equivalents, beginning of year 16,113,095 13,241,574
32,331,264
-------------- -------------------------- -------------
Cash and cash equivalents, end of year $16,113,095 $13,241,574
============== ==============
Supplemental disclosure of cash flow information:$ 4,841,984 $ 16,113,095
============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $5,926,277 $2,218,759$ 2,095,347 $ 5,926,277
Income taxes paid $22,318 $12,050$ 23,663 $ 22,318
THE ACCOMPANYING NOTES ARE
AN INTEGRAL PARTSee accompanying notes.
84
1. SUMMARY OF THESE FINANCIAL STATEMENTS.
Page 101
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization:SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS AND BASIS OF PRESENTATION
Mandalay Pictures, LLC (the "Company")Company) was incorporated on March 1, 1998 as a
Delaware corporation.limited liability company. The Company develops, finances, produces and
distributes major motion pictures.
2. Summary of Significant Accounting Policies:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant inter-
companyintercompany transactions and
accounts have been eliminated.
The accompanying financial statements have been prepared on the basis that the
Company will continue as a going concern. The Company's ability to continue as a
going concern is dependent upon its ability to produce and distribute films. As
of March 31, 2002, the Company has arranged financing and distribution for two
films that are currently in production. However, the Company has incurred
recurring operating losses, and has not arranged financing for production of any
future films. In addition, although distribution arrangements are in place for
films currently in production, the Company's current distribution arrangements
have been terminated or have expired and the Company has not successfully
negotiated other distribution arrangements for future films. If the Company
cannot produce future films, the Company will not be able to continue as a going
concern.
Management is actively pursuing other film financing and distribution options.
However, there can be no assurance that the Company will be successful in its
efforts to identify additional financing or distribution arrangements on terms
acceptable to the Company. The financial statements do not include any
adjustments relating to the recoverability of the carrying amount of the
recorded assets or the amount of liabilities that might result from the outcome
of the Company's inability to produce future films.
CHANGE IN ACCOUNTING CHANGESPRINCIPLE
In June 2000, the American Institute of Certified Public Accountants issued
Statement of Position 00-2, "Accounting by Producers or Distributors of Films"
(SoP 00-2)(the SOP). SoP 00-2The SOP established new accounting standards for producers and
distributors of films, including changes in revenue recognition concepts and
accounting for exploitation, development and
overhead costs. SoP 00-2development. The SOP requires that advertising
costs be expensed in accordance with SoPSOP 93-7, "Reporting on Advertising Costs"Costs,"
while all other exploitation costs are to be expensed as incurred. DevelopmentIn addition,
the SOP provided that development costs for abandoned projects and indirect
overhead costs are to be charged to expense instead of being capitalized to film
costs.
In addition, methodology for
determining net realizable value includes a discounted cash flow
approach. The Company adopted the pronouncementSOP effective April 1, 2000 and recorded a one-time charge for
the initial adoption totalingof $3,784,000, which has been reflected as a cumulative
effect of a change in accounting principle in the Consolidated
Statementaccompanying consolidated
statements of Operations for the year ended March 31, 2001.operations. Also as a result of the adoption, the Company
recognized approximately $18,748,000 of revenue in the currentfiscal year 2001, which was
recognized last year. It is estimated $6,250,000 of previously recognized
revenue will be recorded in future periods.prior years. The effect on net income (loss)loss of recognizing these revenues
iswas not material.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin 101, Revenue RecognitionUSE OF ESTIMATES
The preparation of financial statements in Financial Statements ("SAB 101"), which summarized the SEC
staff's view in applyingconformity with accounting principles
generally accepted accounting principles
to revenue recognition in financial statements. The Company has
reviewed its revenue recognition policies and revised them to
conform to SAB 101, specifically with respect to distributor-for-
hire arrangements. Accordingly, revenues in the prior year have
been restatedUnited States requires management to conform tomake estimates
and assumptions that affect the current period presentation, with
no net effect on net loss.
REVENUE RECOGNITION.
Revenue is recognized in accordance withreported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the provisions of SoP-02
and SAB 101. The Company licenses certain film rights through
international distribution agreements that provide for the
payment of minimum license fees ("Minimum Guarantees" or "MG's"),
usually payable on deliverydate of the respective completed film,
that are subject to further increase based onfinancial
statements and the actual
distributionreported amounts of revenue and expenses during the year.
Actual results incould differ from those estimates.
85
SUPPLEMENTAL CASH FLOW INFORMATION
During the respective territory. Minimum
Guarantees related to contracts which contain hold-back
provisions precludingyear ended March 31, 2002, the distributor from exploiting secondary
markets until certain time periods have lapsed are allocated
across those markets and recognized as revenue when each hold-
back provision expires.
Page 102
Revenue allocated to the primary market, usually the theatrical
market, is recognized as revenue on the date the completed film
is available for exploitation in the related territory and
certain other conditions of sale have been met pursuant to
criteria specified by SoP-00-2.
The Company has entered into a first look financingan agreement to
settle various amounts owed between the Company and distribution agreement with Paramount Pictures Corporation
("Paramount") that gives Paramount the option to acquire the
distribution rightsthird-party investors in
all territories other than those coveredcertain films produced by the various international distribution agreements, under terms
which are similar to the international agreements. Any amounts
received from Paramount at the commencementCompany. As a result, contractual obligations of
the license period
are treated as minimum guarantees with revenue being recognized
in a manner similar to the international distribution agreements
discussed above. Paramount also pays annual overhead
contribution fees to the Company to help$16,767,000 were offset theagainst film costs of operation$16,002,000, other receivables of
the Company. These fees are presented as reductions
to general$723,000 and administration expenses in the Statementaccounts payable of Operations.
DEFERRED REVENUE
Deferred revenue represents MG's received from distributors for
which holdback provisions have not yet lapsed, thus, precluding
the Company from recognizing revenue.$42,000. In addition, accrued participation of
$4,286,000, contractual obligations of $3,000,000 and film costs of $2,759,000
were offset against other receivables of $10,045,000.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investmentsdebt instruments with an original
maturity of three months or less and investments in money market funds to be
cash equivalents.
Cash and cash equivalents are carried at cost, which approximates
fair value. At times, cash balances held at financial institutions are in
excess of the Federal Deposit Insurance Corporation's limits.
RESTRICTED CASH
Restricted cash represents amounts on deposit with financial institutions that are contractually designatedas
collateral for certain distribution agreements and for the payment of interest
and bank fees associated with loans made for the production of certain filmsfilms. At
March 31, 2002 and 2001, the amount of restricted cash on deposit was
$13,647,669 and $21,147,617, respectively. These deposits require third party
approvals prior to the disbursement of any funds. Any unused funds will be
returned to the Company upon repayment of the underlying loan.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, accounts receivable, other assets,
accounts payable and accrued expenses, bank and production loans, contractual
obligations, accrued participations and residuals, and amounts due from
affiliates as reflected in the financial statements approximate their carrying
value at March 31, 2002 and 2001, respectively.
FILM COSTS:
oCOSTS
FILM INVENTORY
Film inventory represents the unamortized cost of films which have been
developed and produced by the Company or for which the Company has acquired
distribution rights. Film
inventory costs are capitalized and amortized against
revenues guaranteed by the delivery and subsequent
exploitation of the film. Such costs include all development and production costs, (includingincluding an
allocation of direct overhead and financing costs).costs. Included in film inventory
costs are development costs representing expenditures directly attributable to
projects which are incurred prior to their production. Such inventory items are
capitalized and, upon commencement of production, are charged to the production.
Development costs not charged to a production are written off when the project
is abandoned or when more than three years has passed from the first
expenditure.
86
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FILM COSTS (CONTINUED)
FILM INVENTORY (CONTINUED)
Film inventory is stated at the lower of cost, net of amortization, or net realizablefair
value. Film inventory costs are amortized against revenues generated by the
delivery and subsequent exploitation of the film. Amortization is determined
using the individual film forecast method, whereby costs accumulated in the
development and production of a film are amortized in the proportion that
current gross revenues bear to management's estimate of the total gross revenues
expected to be received from all sources within ten years of release. Revenue estimates on a film-by-film basis
are reviewed periodically by management and are revised, if
warranted, based on management's appraisal of current market
conditions. Where
applicable, unamortized inventory is written down to net realizablefair value using a
discounted cash flowsflow model based on this appraisal.
Page 103
Included in film inventory costs are development costs.
Development costs represent expenditures directly
attributable to projects which are incurred prior to their
production. Such inventory items are capitalizedParticipations and upon
commencement of production, are charged to the production.
Development costs not charged to the production are written
off when the project is abandoned or when more than three
years has passed from the first expenditure.
o PARTICIPATIONS AND RESIDUALSResiduals
Estimated liabilities for participations and residuals are amortized in the same
manner as film inventory costs.
Based on management's estimates, $5,534,001approximately $6,934,000 of the balance of
accrued participations and residuals at March 31, 20012002 will be paid during the
year ending March 31, 2002.2003.
REVENUE RECOGNITION
Revenue is recognized in accordance with the provisions of the SOP. The Company
licenses certain film rights through international distribution agreements that
provide for the payment of minimum guaranteed license fees (MGs), usually
payable on delivery of the respective completed film, that are subject to
further increase based on the actual distribution results in the respective
territory. MGs related to contracts which contain holdback provisions,
precluding the distributor from exploiting secondary markets until certain time
periods have lapsed, are allocated across those markets and recognized as
revenue when each holdback provision expires and the film is available for
exploitation by the distributor.
Revenue allocated to the primary market, usually the theatrical market, is
recognized as revenue on the date the completed film is available for
exploitation in the related territory and certain other conditions of sale have
been met pursuant to criteria specified by the SOP.
In March 1998, the Company entered into a financing and distribution agreement
(the Paramount Agreement) with Paramount Pictures Corporation (Paramount) that
gave Paramount the option to acquire the distribution rights in all territories
other than those covered by the various international distribution agreements.
Any amounts received from Paramount at the commencement of the license period
are treated as MGs with revenue being recognized in a manner similar to the
international distribution agreements discussed above. See Note 6.
DEFERRED REVENUE
Deferred revenue represents MGs received from distributors for which holdback
provisions have not yet lapsed, thus precluding the distributor from exploiting
the film in markets covered by the holdback provisions. Revenue is recognized by
the Company when the holdback has lapsed and the film is available for
exploitation by the distributor.
87
INCOME TAXES
For federal income tax purposes, profits and losses are passed through to the
members. Accordingly, no provision has been made in these financial statements
for federal income taxes. For the years ended March 31, 2001,2002 and March 31, 2000,2001, the
Company recorded a provision related to California Limited Liability
Companylimited liability company
taxes of $23,663 and $22,318, and $12,050, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, accounts receivable,
other assets, accounts payable and accrued expenses, bank and
production loans, contractual obligations, accrued participations
and residuals, and amounts due from affiliates as reflected in
the financial statements approximate their carrying value at
March 31, 2001 and March 31, 2000, respectively.
NEWRECENT ACCOUNTING STANDARDSPRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB")(FASB) issued SFASStatement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standardActivities" (FAS 133). FAS 133 requires companies to
record derivatives on their balance sheets as assets or liabilities, measured at
fair value. Under SFAS No.FAS 133, gains or losses resulting from changes in the values
of derivatives are to be reported in the statement of operations or as a
deferred item, depending on the use of the derivatives and whether they qualify
for hedge accounting. The Company is required to adopt SFAS No.adopted FAS 133 in the first quarter of fiscal 2002.on April 1, 2001. The impact
on the financial statements of adopting this standard is currently
anticipated to be immaterial.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the year. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to
the current-year presentation.
Page 104
3. Film inventory:was not material.
2. FILM INVENTORY
Film inventory consistconsists of the following at March 31:
2002 2001 2000
---- ----
Projects released, net of amortization $ 56,885,45634,711,370 $ 7,020,18456,885,456
Projects in production 50,310,244 64,948,138 37,773,547
Projects in development / development/pre-production 1,724,830 11,293,755
5,267,200
-------------- -------------
Total------------ ------------
$ 133,127,349 $ 50,060,931
============== =============86,746,444 $133,127,349
============ ============
The Company estimates that approximately 90%29% and 80% of its unamortized costs
of released
filmsfilm costs at March 31, 20012002 will be amortized within the next one and three
years. Approximately $39,500,000 of released film
inventory is expected to be amortized during the next twelve
months.year periods, respectively.
During the years ended March 31, 20012002 and 2000,2001, the Company capitalized to film
projectsinventory interest of approximately$1,759,453 and $5,200,602,
and $2,335,000, respectively, and production
overhead of $6,003,815 and $7,000,000, in each of 2001 and 2000, respectively.
4. Bank Loan:3. BANK LOAN
On February 12, 1999, the Company entered into a credit facility, which provided
a line of credit of $32,500,000, which was reduced
to $6,000,000 duringbearing interest at the current year, bearing an interest rate of LIBOR plus 1.75%. At March 31, 2001 and 2000, the Company had
$414,620 and $26,500,000 of unused available credit with this
facility. Borrowings
under this credit facility arewere guaranteed by a group of insurance companies,
arewere non-recourse to the Company and arewere collateralized by certain revenues and
copyrights. AmountsThe Company had $3,085,380 outstanding under this facility at March
31, 2001 and
2000 were $3,085,380 and $2,801,184, respectively, and are due no
later than November 19, 2002.
5. Production Loans:
On December 15, 2000,2001. In fiscal year 2002, in conjunction with a settlement with Paramount
(see Note 6), the Company repaid all amounts owed under this credit facility and
negotiated with the insurers for a refund of a portion of the premiums paid. As
a result of these negotiated settlements, the Company recorded a gain of
approximately $1,043,000.
4. PRODUCTION LOANS
In order to finance the production of its films, the Company has entered into
avarious non-recourse production loans with its lenders. The credit facility, which providesfacilities
each provide a line of credit up to an amount approximating the total budgeted
costs of $20,614,797,
bearing anthe underlying film and bear interest at the rate of LIBOR, +plus
88
1.5%, with a final maturity of
January 7, 2003. At March 31, 2001 the outstanding balance was
$12,200,000, leaving $8,414,797 of unused available credit with
this facility.. Borrowings under this facilitythe production loans are collateralized by, and will be
paidrepaid from, contractual MG'sMGs due on certain
distribution contracts entered into with foreign
distributors.
Approximately $6,000,000distributors for the distribution of the available credit facility is
temporarily collateralized with the Company's restricted cash and
will be released to the general account of theunderlying film. The production loans
are cancelled upon repayment. The Company as
additional distribution contracts are delivered to the bank.
On May 19, 2000, the Companyhas entered into a non-recourse credit
facility, which provides a line of credit of $57,458,000, bearing
an interest rate of LIBOR + 1.5%, with a final maturity of July 3,
2002. At March 31, 2001, the outstanding balance was
$53,191,000, leaving $4,267,000 of unused available credit with
this facility. Borrowings under this facility are also
collateralized by, and will be paid from, contractual MG's due on
certain distribution contracts.
On October 15, 1999, the Company entered into a non-recourse
credit facility, providing a line of credit of $46,336,190,
bearing an interest rate of LIBOR + 1.5%, with a final maturity
of February 27, 2002. The Company had $27,734,918 and
$27,534,590 outstanding on this facility at March 31, 2001 and
2000, respectively. The unused available credit with this
facility was $0 and $18,791,853 at March 31, 2001 and 2000,
respectively. Consistent with the credit facilities discussed
above, borrowings under this
Page 105
facility are collaterized by, and are being repaid from, contractual
MG's due on certain distribution contracts entered into with foreign
distributors.following
production loan arrangements:
2002 2001
---- ----
Production loan dated December 3, 2001, due February 3, 2004 $27,030,000 $ --
Production loan dated December 15, 2000, due January 7, 2003 20,400,000 12,200,000
Production loan dated May 19, 2000, due July 3, 2002 -- 53,191,730
Production loan dated October 15, 1999, due February 27, 2002 -- 27,734,918
----------- -----------
$47,430,000 $93,126,648
=========== ===========
For each of the three production loans discussed above, the bank has required the
Company to enter into foreign exchange options to hedge the Japanese yen
translation fluctuation applicable to the distribution contracts entered into
with the Japanese distributor. These options, which are exercisable during 2002,
havehad a fair value of $26,300 and $113,800 at March 31, 2001.
On December 1, 1998,2002 and 2001,
respectively.
5. FILM FINANCING TRANSACTIONS
In addition to the production loans described in Note 4, the Company has entered
into arrangements with a credit facility
which providedthird party (the Film Investor), whereby the Film
Investor contributed a line of credit of $36,993,000, bearing an
interest rate of LIBOR plus 1.25%. The Company had $0 and
$3,022,638 outstanding on this facility at March 31, 2001 and
2000, respectively, and no unused available credit at both March
31, 2001 and 2000. Borrowings under this credit facility were
collateralized by certain distribution contracts entered into
with foreign distributors.
For eachportion of the credit facilities discussed above, the Company
deposited cash into a restricted account from which the bank can
withdraw interest and related expenses over the termbudgeted costs of the
credit facilities. The amount of restricted cash on deposit with
the bank was $11,547,999 and $4,278,785 at March 31, 2001 and
2000, respectively. Any unused funds will be returned to the
Company upon repayment of the related facility.
6. Film Financing Transactions:
During the current fiscal year, the Company entered into three
separate financing transactions with third parties to assist in
the financing of three of its films.
The first transaction provided for the third party to contribute
approximately $23,750,000certain films in
exchange for a share of all distribution proceeds, as defined, generated by the
underlying film. The proceeds of these transactions represent equity investments
in the underlying film in
perpetuity. Approximately $14,500,000 of the proceedsand were recorded as a reduction to the costs of the
relatedfilm. During the years ended March 31, 2002 and 2001, the Company received
approximately $9,400,000 and $28,500,000, respectively, from the Film Investor
pursuant to these arrangements.
In addition, during the year ended March 31, 2001, the Film Investor paid to the
Company $9,250,000 toward the costs of a film, which amount is collateralized by
a subordinated security interest in the underlying film. The remaining amount of $9,250,000 is
guaranteed to be returned to the investor, plusFilm Investor no later than July 2004, together
with interest at LIBOR +plus 0.4%, through. During the defined
distribution proceeds ofyear ended March 31, 2002, the
film, butCompany repaid $3,000,000 to the Film Investor. The remaining obligation
included in no event later than 42
months after delivery of the completed film to Paramount. This
amount has been recorded as a contractual obligationobligations in the accompanying consolidated balance
sheet.
The second transaction provided for the third party to contribute
approximately $15,560,000 in exchange for a share of the
distribution proceeds, as defined, generated by the film and was
recorded as a reduction to the costs of the related film.
The third transaction utilized the same sale and leaseback
structure used in December 1999 as discussed below. Proceeds of
$10,558,000 received therefrom have been reflected as a
contractual obligation at March 31, 2001, as the film project to
which it related has not yet commenced production and certain
refund provisions apply if a film is not delivered by December
31, 2002.
In order for the unrelated third party in the first and second
transactions to fulfill its obligations to fund these films,
$14,500,000 of cash deposited into the restricted cash account,
plus interest earned thereon, at March 31, 2000 was lent to the
investor and is repayable out of 100% of the investor's
entitlement to proceeds from the distribution of its other films
financed with the Company and a pledge against any money raised
through its ongoing fundraising efforts, but in no event later
than September 30, 2001. Therefore, $14,500,000 plus interest
has been recorded as other receivables at March 31, 2001 and the
restricted cash has been reduced accordingly.
Page 106
During the prior fiscal year, the Company entered into three
separate financing transactionsarrangements with unrelated third parties to
assist in the financing of three of its films.
The first provided for the third party to contribute
approximately $23,000,000 which was recorded as a reduction to
the costs of the related film, and provides for a contingent
participation interest in the results of distribution.
The second was structured as a sale and leaseback arrangement whereby the Company
sold all of its rights to one filmcertain films and immediately leased back the attendant
distribution rights for a 17.5 yearspecified term. Under the terms of that arrangement,these arrangements,
the Company has agreed to make certain fixed annual payments to the purchaserpurchasers
over the length of the term. These payments have been legally assumed by a German bank,various
banks, in exchange for the Company depositing a certain amount in cash, and the
purchaser haspurchasers have relinquished any claim against the Company for the payments.
Upon the payment of the final amount, in the 18th year, all rights previously sold revert back to
the Company. The depositdeposits and corresponding fixed payment obligations are not
presented in the financial statements, as they are no longer the property nor
the responsibility of the Company. The net gain
fromDuring the transaction ofyears ended March 31, 2002 and
2001, the Company received approximately $4,100,000 has been$2,300,000 and $3,000,000,
respectively, which were recorded as a reductionreductions to film costs. In addition,
during the third,year ended March 31, 2001, $10,558,000 was received by the Company
and reflected as a contractual obligation
89
since the film project to which it related had not yet commenced production and
certain refund provisions applied under these circumstances. During the year
ended March 31, 2002, the underlying film commenced production and, accordingly,
the contractual obligation was offset against film costs.
The Company avails itself of government programs that are designed to assist
film and television production and distribution in Canada. During the years
ended March 31, 2002 and 2001, the Company received $16,000,000approximately $1,000,000 and
$500,000, respectively, from an investor
relatedthese government programs. Such amounts were
recorded as reductions to the intended productionfilm costs.
6. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company employs certain of a motion picture, that asits executives (who are also members of
March 31, 2001, remains in development / pre-production. Of
this amount, $14,500,000 was placed on restricted deposit with a
German bank and $1,500,000 was deposited into the general bank
account of the Company to fund development costs. The amount
placed in the restricted cash account was subsequently loaned
back to the investor to fund other financing commitments with the
Company, as discussed above. Should the project be abandoned,
the Company must return these funds, plus all interest earned on
the restricted deposit. At March 31, 2001 and 2000, $16,766,600
and $16,171,948 are included in contractual obligations related
thereto.
7. Commitments and Contingencies:
EMPLOYMENT AGREEMENTS:
It has been the Company's policy to employ all executivesTigerstripes, LLC) under formal employment agreements. TheIn January 2001, the
executives and the parent company of LG Pictures, Inc., Lions Gate Entertainment
Corp. (Lions Gate), entered into an agreement whereby the executives agreed to
defer a portion of their salaries. In November 2001, pursuant to the
Reorganization Agreement (see Note 7), the terms of these employment agreements
have
generally terminated on or about February 28, 2001 and have been
temporarilywere extended through December 31, 2001 while2004, subject to earlier termination under
certain circumstances. The Reorganization Agreement also provided for payment of
a portion of the Company
develops its long-term strategy. During the next fiscal year the
Company plans to further extend the terms of employment of those
executives necessary to fulfill its business plan.salaries that had been previously deferred. The employment
and compensation agreements with the Company's two
most senior executives, who are also members, providedprovide for minimum annual base compensation of $4,444,000 and $1,280,000
respectively, through the year ending February 28, 2003. These
executives have agreed to defer 50%$4,280,000, of these amounts to be
conditionally recouped outwhich
$238,500 was deferred at March 31, 2002.
DISTRIBUTION AGREEMENTS
The Paramount Agreement (see Note 1) provided for a term of the resultsshorter of future productions,five
years, or commencement of production of 20 motion pictures, subject to earlier
termination under certain specific instances, if at all. Based uponcircumstances. Pursuant to the results asParamount Agreement,
Paramount made annual contributions to the overhead expenses of the Company.
These overhead contributions totaled $1,500,000 and $2,000,000 for the years
ended March 31, 2002 and 2001, no such recoupment is expected.
The Company terminated the contract of its next ranking officer,
which had an expiration date of December 31, 2001,respectively, and provided
for no mitigation offset, by paying the amount of $1,265,799.
This amount has been included inare presented as reductions to
general and administration expenses in the Statementaccompanying consolidated statements
of Operations foroperations.
In December 2001, the year ended March
31, 2001.
Page 107
DISTRIBUTION AGREEMENTSparties agreed to terminate the Paramount Agreement. The
termination of the Paramount Agreement will have no impact on its obligations
with respect to the Company's released films, nor with the two films currently
in post-production.
Under the distribution agreements with Paramount related to the
motion picture "Sleepy Hollow"Agreement, the Company assumed responsibility for certain
amounts payable to unions and actors based on the performance of the motion picture in certain
territories.territories of one of its motion pictures. Paramount iswas the primary obligor of
these obligations. Based
upon the performanceIn May 2001, in conjunction with repayment of the picture to date,underlying
credit facility (see Note 3), the Company has
accrued $5,534,001 at March 31, 2001 as an estimate of this
obligation. The Company is in the process of negotiatingnegotiated a settlement of this
arrangement duewith Paramount, which resulted in the Company transferring its
rights in the motion picture to certain actionsParamount, in exchange for Paramount's
assumption of Paramount duringall obligations to unions and actors.
7. MEMBERS' EQUITY
Mandalay is governed by an operating agreement (the Operating Agreement),
between LG Pictures, Inc. and Tigerstripes, LLC (the Members). As a limited
liability company, the productionMembers of Mandalay are not liable for debts or other
obligations of Mandalay. The LLC Agreement governs the relative rights and
distributionduties of the film.
Any formal reliefMembers.
90
The ownership interests of this obligation will be recorded as income
when legally binding.
8. Members' Equity:
The Company's equity structure is as follows at eachthe Members in Mandalay consist of March 31,
2001 and March 31, 2000:44,638,000 Class A
Preferred Membership Units, $ 50,000,000450 Class B Common Membership Units 450and 550 Class C Common Membership Units 550
-------------
$ 50,001,000
=============
The Class A Preferred membership units have a pro-rata claim,
with thatUnits.
Pursuant to the Operating Agreement, LG Pictures, Inc. shares in 100% of
Mandalay's losses and 100% of its earning until LG Pictures, Inc. recovers its
original $50,000,000 investment. Thereafter, Tigerstripes and LG Pictures, Inc.
are entitled to 55% and 45%, respectively, of the two senior executives' salary deferrals,earnings of Mandalay.
In November 2001, Mandalay and Lions Gate entered into an agreement to
reorganize Mandalay (the Reorganization Agreement). Pursuant to the
Reorganization Agreement, certain restrictions were placed on any
non-tax related distribution until fully redeemed.
9. Related Parties:the amounts
Mandalay can spend for overhead and development expenses. In addition, the
Reorganization Agreement modified the employment agreements of certain
executives of Mandalay (see Note 6) and provided for returns of capital to Lions
Gate under certain circumstances. As security for the payment of all amounts
owed to Lions Gate provided for in the Reorganization Agreement, Mandalay agreed
to grant to Lions Gate a security interest in all of its assets, including its
films and all proceeds from the production or exploitation thereof. During the
year ended March 31, 2002, Mandalay returned capital of $5,362,000 to Lions Gate
pursuant to the Reorganization Agreement.
The Reorganization Agreement also provides that under certain circumstances (as
specified in the Reorganization Agreement), Lions Gate will have the right to
terminate the Reorganization Agreement and wind down the operations of Mandalay
at December 31, 2003.
8. RELATED PARTIES
Due (to) from affiliates consists of the following at March 31:
2002 2001 2000
---- ----
Lions Gate Entertainment Corp. $ (84,466) $ 244,1805,258 $(84,468)
Other Mandalay companies* 37,334 51,662
34,000
----------- ------------------ --------
$ 42,592 $(32,806)
$278,180
=========== ==========
======== ========
* - Includes various Mandalay named companies in which members of the Company have
significant interest.
LG Pictures, Inc., a wholly owned subsidiary of Lions Gate
Entertainment Corp., the member that owns class A preferred and
class B common membership units, was required to compensate the Company for any interest income
foregone on a required equity contribution that was replaced by the
establishment of the bank loan (see Note 4)3). During the current year this obligation was
terminated. During the years ended March 31,
2001, and 2000, the Company received $ 190,000 and $1,237,000, respectively$190,000 under this agreement, which amounts areamount was
included in interest income.
Page 10891
INDEX TO EXHIBITS
Exhibit Page
Number Description of Documents
Number Description of Documents
------ ------------------------
3.1(1) Articles of Incorporation
3.2(3) Amendment to Articles of Incorporation to Provide Terms of the
Series A Preferred Shares dated as of December 20, 1999
3.3(5) Amendment to Articles of Incorporation to Provide Terms of the
Series B Preferred Shares dated as of September 26, 2000
3.4(6) Amendment to Articles of Incorporation to change the size of the
Board of Directors dated as of September 12, 2001
4.1(1) Trust Indenture between the Company and CIBC Mellon Trust Company
dated as of April 15, 1998
4.2(3) Warrant Indenture between the Company and CIBC Mellon Trust
Company dated as of December 30, 1999
10.1(8) Amended Employees' and Directors' Equity Incentive Plan
10.2(1) Incentive Plan Stock Option Agreement No. 1
10.3(1) Incentive Plan Stock Option Agreement No. 2
10.4(1)+ Memorandum of Understanding among the Company, LG Pictures Inc.,
Tigerstripes, Peter Guber, Paul Schaeffer and Adam Platnick dated
March 6, 1998
10.5(1) Amendment to Memorandum of Understanding among the Company, LG
Pictures Inc., Tigerstripes, Peter Guber, Paul Schaeffer and Adam
Platnick dated December 29, 1998
10.6(1) Amendment to Memorandum of Understanding among the Company, LG
Pictures Inc., Tigerstripes, Peter Guber, Paul Schaeffer and Adam
Platnick dated December 30, 1998
10.7(4) Agreement and Plan of Merger among the Company, LGE Merger Sub and
Trimark dated June 6, 2000
10.8(4) Registration Rights Agreement dated as of June 6, 2000, by and
among the Company, Mark Amin and Reza Amin
10.9 Amended and Restated Unanimous Shareholders Agreement of
Corporation CineGroupe dated as of July 10, 2001
10.10(4) Employment Agreement dated as of June 6, 2000, between the Company
and Mark Amin
10.11(5) Employment Agreement between the Company and Marni Wieshofer dated
August 26, 2000
10.12(5) Employment Agreement between the Company and Jon Feltheimer dated
February 27, 2001
10.13(5) Employment Agreement between the Company and John Dellaverson
dated April 1, 2001
10.14(5) Ignite, LLC and Lions Gate Films Inc. deal memo dated February 15,
2001
10.15 Amendment #2 dated May 13, 2002 to Ignite, LLC and Lions Gate
Films Inc. deal memo dated February 15, 2001
92
Exhibit
Number Description of Documents
------ ------------------------
10.16(7) Credit, Security, Guaranty and Pledge Agreement by and among Lions
Gate Entertainment Corp., Lions Gate Entertainment Inc., the
Guarantors referred to therein, the Lenders referred to therein,
The Chase Manhattan Bank, National Bank of Canada, and Dresdner
Bank AG, New York and Grand Cayman Branches dated as of September
25, 2000
10.17(7) First Amendment dated as of April 4, 2001 to the Credit, Security,
Guaranty and Pledge Agreement by and among Lions Gate
Entertainment Corp., Lions Gate Entertainment Inc., the Guarantors
referred to therein, the Lenders referred to therein, The Chase
Manhattan Bank, National Bank of Canada, and Dresdner Bank AG, New
York and Grand Cayman Branches dated as of September 25, 2000
10.18(7) Second Amendment dated as of May 30, 2001 to the Credit, Security,
Guaranty and Pledge Agreement by and among Lions Gate
Entertainment Corp., Lions Gate Entertainment Inc., the Guarantors
referred to therein, the Lenders referred to therein, The Chase
Manhattan Bank, National Bank of Canada, and Dresdner Bank AG, New
York and Grand Cayman Branches dated as of September 25, 2000
10.19(7) Third Amendment dated as of July 31, 2001 to the Credit, Security,
Guaranty and Pledge Agreement by and among Lions Gate
Entertainment Corp., Lions Gate Entertainment Inc., the Guarantors
referred to therein, the Lenders referred to therein, The Chase
Manhattan Bank, National Bank of Canada, and Dresdner Bank AG, New
York and Grand Cayman Branches dated as of September 25, 2000
10.20 Fourth Amendment dated as of February 6, 2002 to the Credit,
Security, Guaranty and Pledge Agreement by and among Lions Gate
Entertainment Corp., Lions Gate Entertainment Inc., the Guarantors
referred to therein, the Lenders referred to therein, The Chase
Manhattan Bank, National Bank of Canada, and Dresdner Bank AG, New
York and Grand Cayman Branches dated as of September 25, 2000
21.1 List of Subsidiaries
23.1 Consent of Independent Accountant
23.2 Consent of Independent Accountant
23.3 Consent of Independent Accountant
23.4 Consent of Independent Accountant
24.1 Power of Attorney (Contained on Signature Page)
- --------- --------------------------------------------- ------
3.1* Articles of Incorporation ...................
3.2*** Amendment to Articles of Incorporation
to Provide Terms of the Series A
Preferred Shares dated as of December
20, 1999.....................................
3.3 Amendment to Articles of Incorporation
to Provide Terms of the Series B
Preferred Shares dated as of September
26, 2000..................................... 111
3.4 Amendment to Articles of Incorporation
to change the size of the Board of
Directors dated as of September 26, 2000..... 115
4.1* Trust Indenture between the Company and
CIBC Mellon Trust Company dated as of
April 15, 1998...............................
4.2*** Warrant Indenture between the Company
and CIBC Mellon Trust Company dated as
of December 30, 1999.........................
10.1* Employees' and Directors' Equity
Incentive Plan...............................
10.2* Incentive Plan Stock Option Agreement No. 1..
10.3* Incentive Plan Stock Option Agreement No. 2..
10.4*+ Memorandum of Understanding among the
Company, LG Pictures Inc., Tigerstripes,
Peter Guber, Paul Schaeffer and Adam
Platnick dated March 6, 1998.................
10.5* Amendment to Memorandum of
Understanding among the Company, LG
Pictures Inc., Tigerstripes, Peter
Guber, Paul Schaeffer and Adam Platnick
dated December 29, 1998......................
10.6* Amendment to Memorandum of
Understanding among the Company, LG
Pictures Inc., Tigerstripes, Peter
Guber, Paul Schaeffer and Adam Platnick
dated December 30, 1998......................
10.7*+ Agreement between Paramount and
Mandalay Pictures dated March 9, 1998........
10.8** Credit and Security Agreement among
IDC, LLC, Mandalay Pictures, MP
Finance, LLC, the Production Servicers
referred to therein, the Lenders
referred to therein and the Chase
Manhattan Bank dated as of February 12,
1999.........................................
10.9*** Agreement and Plan of Merger among the
Company, LGE Merger Sub and Trimark
dated June 6, 2000...........................
10.10**** Registration Rights Agreement dated as
of June 6, 2000, by and among the
Company, Mark Amin and Reza Amin.............
10.11**** Trimark Stockholders Voting Agreement
dated June 6, 2000, by and among the
Company and the stockholders of Trimark
Holdings, Inc. listed on Schedule A
thereto......................................
10.12**** Lions Gate Stockholders Voting
Agreement dated June 6, 2000, by and
among Trimark Holdings, Inc. and the
stockholders of the Company listed on
Schedule A thereto...........................
10.13 Amended and Restated Unanimous
Shareholders Agreement among
CineGroupe, Animation Cinepix Inc.,
Jacques Pettigrew, Fiducie Famille
Pettigrew, Robert Paul and Fox Family
Worldwide, Inc. dated as of September
8, 2000...................................... 116
Page 109
Exhibit Page
Number Description of Documents Number
- --------- --------------------------------------------- ------
10.14**** Employment Agreement dated as of June
6, 2000, between the Company and Mark Amin...
10.15 Employment Agreement between the
Company and Marni Wieshofer dated
August 26, 2000.............................. 157
10.16 Employment Agreement between the
Company and Gordon Keep dated October
1, 2000...................................... 163
10.17 Employment Agreement between the
Company and Jon Feltheimer dated
February 27, 2001............................ 169
10.18 Employment Agreement between the
Company and John Dellaverson dated
April 1, 2001................................ 177
10.19 Ignite, LLC and Lions Gate Films Inc.
deal memo dated February 15, 2001............ 181
21.1 List of Subsidiaries......................... 186
23.1 Consent of Independent Accountant............ 187
23.2 Consent of Independent Accountant............ 188
24.1 Power of Attorney (Contained on
Signature Page)..............................
*------------
(1) Incorporated by reference to the Company's Annual Report on Form 20-F for
the fiscal year ended March 31, 1998 (File No. 000-27730).
**(2) Incorporated by reference to the Company's Annual Report on Form 20-F for
the fiscal year ended March 31, 1999 (File No. 000-27730).
***(3) Incorporated by reference to the Company's Annual Report on Form 20-F for
the fiscal year ended March 31, 2000 (File No. 000-27730).
****93
(4) Incorporated by reference to the Company's Form F-4 Registration Statement
under the Securities Act of 1933 dated August 2000.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 2001 (File No. 1-14880).
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period year ended September 30, 2001 (File No. 1-14880).
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period year ended December 31, 2001 (File No. 1-14880).
(8) Incorporated by reference to the Company's Definition Proxy Statement dated
August 13, 2001 (File No. 1-14880)
+ Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.
Page 110
94