þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the quarterly period ended |
or
or | |||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the transition period from to . |
British Columbia, Canada | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
PART I
FORWARD LOOKING STATEMENTS
2
Item 1. | Financial Statements. |
LIONS GATE ENTERTAINMENT CORP.
June 30, | March 31, | |||||||
2005 | 2005 | |||||||
(Unaudited) | (Note 2) | |||||||
(Amounts in thousands, | ||||||||
except share amounts) | ||||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 138,272 | $ | 112,839 | ||||
Restricted cash | 968 | 2,913 | ||||||
Accounts receivable, net of reserve for video returns of $51,208 (March 31, 2005 — $58,449) and provision for doubtful accounts of $6,133 (March 31, 2005 — $6,102) | 102,439 | 150,019 | ||||||
Investment in films and television programs | 365,595 | 367,376 | ||||||
Property and equipment | 30,188 | 30,842 | ||||||
Goodwill | 161,182 | 161,182 | ||||||
Other assets | 31,417 | 29,458 | ||||||
$ | 830,061 | $ | 854,629 | |||||
LIABILITIES | ||||||||
Bank loans | $ | — | $ | 1,162 | ||||
Accounts payable and accrued liabilities | 139,605 | 134,200 | ||||||
Film obligations | 144,188 | 130,770 | ||||||
Subordinated notes | 385,000 | 390,000 | ||||||
Mortgages payable | 18,109 | 18,640 | ||||||
Deferred revenue | 48,286 | 62,459 | ||||||
Minority interests | — | 259 | ||||||
735,188 | 737,490 | |||||||
Commitments and Contingencies | ||||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common shares, no par value, 500,000,000 shares authorized, 101,873,874 at June 30, 2005 and 101,843,708 at March 31, 2005 shares issued and outstanding | 305,812 | 305,662 | ||||||
Series B preferred shares (10 shares issued and outstanding) | — | — | ||||||
Restricted common share units | 2,099 | — | ||||||
Unearned compensation | (2,099 | ) | — | |||||
Accumulated deficit | (205,045 | ) | (183,226 | ) | ||||
Accumulated other comprehensive loss | (5,894 | ) | (5,297 | ) | ||||
94,873 | 117,139 | |||||||
$ | 830,061 | $ | 854,629 | |||||
December 31, | March 31, | |||||||
2004 | 2004 | |||||||
(Unaudited) | (Note 2) | |||||||
(All amounts in thousands, | ||||||||
except share | ||||||||
amounts) | ||||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 5,139 | $ | 7,089 | ||||
Restricted cash | 20,000 | — | ||||||
Accounts receivable, net of reserve for video returns of $54,932 (March 31, 2004 — $46,985) and provision for doubtful accounts of $7,482 (March 31, 2004 — $11,702) | 110,649 | 129,245 | ||||||
Investment in films and television programs | 366,465 | 406,170 | ||||||
Property and equipment | 31,426 | 29,661 | ||||||
Goodwill | 168,705 | 166,804 | ||||||
Other assets | 22,868 | 23,714 | ||||||
$ | 725,252 | $ | 762,683 | |||||
LIABILITIES | ||||||||
Bank loans | $ | 75,102 | $ | 326,174 | ||||
Accounts payable and accrued liabilities | 112,359 | 129,724 | ||||||
Film obligations | 168,806 | 114,068 | ||||||
Subordinated notes | 215,000 | 65,000 | ||||||
Mortgages payable | 19,063 | 19,041 | ||||||
Deferred revenue | 39,014 | 38,932 | ||||||
Minority interests | 150 | 135 | ||||||
629,494 | 693,074 | |||||||
Commitments and Contingencies | ||||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common shares, no par value, 500,000,000 shares authorized, 100,944,357 at December 31, 2004 and 93,615,896 at March 31, 2004 shares issued and outstanding | 302,856 | 280,501 | ||||||
Series B preferred shares (10 shares issued and outstanding) | — | — | ||||||
Accumulated deficit | (203,286 | ) | (203,507 | ) | ||||
Accumulated other comprehensive loss | (3,812 | ) | (7,385 | ) | ||||
95,758 | 69,609 | |||||||
$ | 725,252 | $ | 762,683 | |||||
See accompanying notes.
3
LIONS GATE ENTERTAINMENT CORP.
Three Months Ended | Three Months Ended | |||||||||
June 30, 2005 | June 30, 2004 | |||||||||
(Amounts in thousands, except | ||||||||||
per share amounts) | ||||||||||
Revenues | $ | 194,229 | $ | 188,724 | ||||||
Expenses: | ||||||||||
Direct operating | 100,264 | 80,810 | ||||||||
Distribution and marketing | 93,481 | 98,066 | ||||||||
General and administration | 17,329 | 17,127 | ||||||||
Depreciation | 748 | 675 | ||||||||
Total expenses | 211,822 | 196,678 | ||||||||
Operating Loss | (17,593 | ) | (7,954 | ) | ||||||
Other Expense (Income): | ||||||||||
Interest expense | 4,884 | 5,461 | ||||||||
Interest rate swaps mark-to-market | 337 | (2,060 | ) | |||||||
Interest income | (1,065 | ) | (37 | ) | ||||||
Minority interests | — | (123 | ) | |||||||
Total other expenses, net | 4,156 | 3,241 | ||||||||
Loss Before Income Taxes | (21,749 | ) | (11,195 | ) | ||||||
Income tax provision | (70 | ) | (267 | ) | ||||||
Net Loss | $ | (21,819 | ) | $ | (11,462 | ) | ||||
Basic and Diluted Loss Per Common Share | $ | (0.21 | ) | $ | (0.12 | ) | ||||
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(All amounts in thousands, except per share amounts) | ||||||||||||||||
Revenues | $ | 190,398 | $ | 70,619 | $ | 610,186 | $ | 217,005 | ||||||||
Expenses: | ||||||||||||||||
Direct operating | 82,461 | 42,535 | 258,610 | 113,131 | ||||||||||||
Distribution and marketing | 80,263 | 34,660 | 282,546 | 102,910 | ||||||||||||
General and administration | 15,582 | 9,300 | 49,482 | 23,647 | ||||||||||||
Severance and relocation costs | — | 5,934 | — | 5,934 | ||||||||||||
Write-down of other assets | — | 8,064 | — | 8,064 | ||||||||||||
Depreciation | 835 | 718 | 2,224 | 1,748 | ||||||||||||
Total expenses | 179,141 | 101,211 | 592,862 | 255,434 | ||||||||||||
Operating Income (Loss) | 11,257 | (30,592 | ) | 17,324 | (38,429 | ) | ||||||||||
Other Expenses (Income): | ||||||||||||||||
Interest | 8,201 | 4,808 | 19,277 | 9,017 | ||||||||||||
Interest rate swaps mark-to-market | (419 | ) | (688 | ) | (2,408 | ) | (950 | ) | ||||||||
Minority interests | (19 | ) | — | 2 | — | |||||||||||
Other income | — | — | (825 | ) | — | |||||||||||
Equity interests | — | 948 | 200 | 1,959 | ||||||||||||
Total other expenses, net | 7,763 | 5,068 | 16,246 | 10,026 | ||||||||||||
Income (Loss) Before Income Taxes | 3,494 | (35,660 | ) | 1,078 | (48,455 | ) | ||||||||||
Income tax provision | 141 | 84 | 857 | 315 | ||||||||||||
Net Income (Loss) | 3,353 | (35,744 | ) | 221 | (48,770 | ) | ||||||||||
Modification of warrants | — | (2,031 | ) | — | (2,031 | ) | ||||||||||
Dividends on Series A preferred shares | — | (66 | ) | — | (320 | ) | ||||||||||
Accretion and amortization on Series A preferred shares | — | (73 | ) | — | (575 | ) | ||||||||||
Net Income (Loss) Available to Common Shareholders | $ | 3,353 | $ | (37,914 | ) | $ | 221 | $ | (51,696 | ) | ||||||
Basic and Diluted Income (Loss) Per Common Share | $ | 0.03 | $ | (0.45 | ) | $ | 0.00 | $ | (0.81 | ) | ||||||
See accompanying notes.
4
Restricted | Accumulated | ||||||||||||||||||||||||||||||||||||||||
Common Shares | Common | Comprehensive | Other | ||||||||||||||||||||||||||||||||||||||
Share | Unearned | Accumulated | Income | Comprehensive | |||||||||||||||||||||||||||||||||||||
Number | Amount | Number | Amount | Units | Compensation | Deficit | (Loss) | (Loss) | Total | ||||||||||||||||||||||||||||||||
(Amounts in thousands, except share amounts) | |||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2004 | 93,615,896 | $ | 280,501 | 10 | $ | — | $ | (203,507 | ) | $ | (7,385 | ) | $ | 69,609 | |||||||||||||||||||||||||||
Exercise of stock options | 4,991,141 | 13,871 | 13,871 | ||||||||||||||||||||||||||||||||||||||
Exercise of warrants | 3,220,867 | 10,842 | 10,842 | ||||||||||||||||||||||||||||||||||||||
Issuance to directors for services | 15,804 | 137 | 137 | ||||||||||||||||||||||||||||||||||||||
Modification of stock options | — | 311 | 311 | ||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||
Net income | 20,281 | $ | 20,281 | 20,281 | |||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | 2,374 | 2,374 | 2,374 | ||||||||||||||||||||||||||||||||||||||
Net unrealized loss on foreign exchange contracts | (286 | ) | (286 | ) | (286 | ) | |||||||||||||||||||||||||||||||||||
Comprehensive income | $ | 22,369 | — | ||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2005 | 101,843,708 | $ | 305,662 | 10 | $ | — | $ | (183,226 | ) | $ | (5,297 | ) | $ | 117,139 | |||||||||||||||||||||||||||
Exercise of stock options | 23,916 | 61 | 61 | ||||||||||||||||||||||||||||||||||||||
Issuance to directors for services | 6,250 | 62 | 62 | ||||||||||||||||||||||||||||||||||||||
Modification of stock options | — | 27 | 27 | ||||||||||||||||||||||||||||||||||||||
Issuance of restricted share units | $ | 2,099 | $ | (2,099 | ) | — | |||||||||||||||||||||||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||
Net loss | (21,819 | ) | (21,819 | ) | (21,819 | ) | |||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (831 | ) | (831 | ) | (831 | ) | |||||||||||||||||||||||||||||||||||
Net unrealized gain on foreign exchange contracts | 234 | 234 | 234 | ||||||||||||||||||||||||||||||||||||||
Comprehensive loss | $ | (22,416 | ) | — | |||||||||||||||||||||||||||||||||||||
Balance at June 30, 2005 | 101,873,874 | $ | 305,812 | 10 | $ | — | $ | 2,099 | $ | (2,099 | ) | $ | (205,045 | ) | $ | (5,894 | ) | $ | 94,873 | ||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Series B | Other | |||||||||||||||||||||||||||
Common Shares | Preferred Shares | Accumulated | Comprehensive | |||||||||||||||||||||||||
Number | Amount | Number | Amount | Deficit | Loss | Total | ||||||||||||||||||||||
(All amounts in thousands, except share amounts) | ||||||||||||||||||||||||||||
Balance at March 31, 2003 | 43,231,921 | $ | 159,549 | 10 | $ | — | $ | (108,350 | ) | $ | (7,567 | ) | $ | 43,632 | ||||||||||||||
Issuance of common shares | 44,951,056 | 103,176 | 103,176 | |||||||||||||||||||||||||
Exercise of stock options | 955,562 | 2,609 | 2,609 | |||||||||||||||||||||||||
Exercise of warrants | 275,400 | 1,377 | 1,377 | |||||||||||||||||||||||||
Modification of stock options | — | 1,740 | 1,740 | |||||||||||||||||||||||||
Modification of warrants | — | 2,031 | 2,031 | |||||||||||||||||||||||||
Redemption of Series A preferred shares | — | 566 | 566 | |||||||||||||||||||||||||
Conversion of Series A preferred shares | 4,201,957 | 9,453 | 9,453 | |||||||||||||||||||||||||
Net loss available to common shareholders | (95,157 | ) | (95,157 | ) | ||||||||||||||||||||||||
Foreign currency translation adjustments | (440 | ) | (440 | ) | ||||||||||||||||||||||||
Net unrealized gain on foreign exchange contracts | 622 | 622 | ||||||||||||||||||||||||||
Balance at March 31, 2004 | 93,615,896 | 280,501 | 10 | — | (203,507 | ) | (7,385 | ) | 69,609 | |||||||||||||||||||
Exercise of stock options | 4,091,790 | 11,149 | 11,149 | |||||||||||||||||||||||||
Exercise of warrants | 3,220,867 | 10,842 | 10,842 | |||||||||||||||||||||||||
Issued to directors for services | 15,804 | 137 | 137 | |||||||||||||||||||||||||
Modification of stock options | — | 227 | 227 | |||||||||||||||||||||||||
Net income available to common shareholders | 221 | 221 | ||||||||||||||||||||||||||
Foreign currency translation adjustments | 3,497 | 3,497 | ||||||||||||||||||||||||||
Net unrealized gain on foreign exchange contracts | 76 | 76 | ||||||||||||||||||||||||||
Balance at December 31, 2004 | 100,944,357 | $ | 302,856 | 10 | $ | — | $ | (203,286 | ) | $ | (3,812 | ) | $ | 95,758 | ||||||||||||||
See accompanying notes.
5
LIONS GATE ENTERTAINMENT CORP.
Three Months Ended | Three Months Ended | ||||||||
June 30, 2005 | June 30, 2004 | ||||||||
(Amounts in thousands) | |||||||||
Operating Activities: | |||||||||
Net loss | $ | (21,819 | ) | $ | (11,462 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||
Depreciation of property and equipment | 748 | 675 | |||||||
Amortization of deferred financing costs | 898 | 838 | |||||||
Amortization of films and television programs | 65,376 | 60,225 | |||||||
Amortization of intangible assets | 548 | 548 | |||||||
Non-cash stock-based compensation | 89 | — | |||||||
Interest rate swaps mark-to-market | 337 | (2,060 | ) | ||||||
Minority interests | — | (123 | ) | ||||||
Changes in operating assets and liabilities: | |||||||||
Decrease in restricted cash | 1,945 | — | |||||||
Accounts receivable, net | 40,774 | 24,767 | |||||||
Increase in investment in films and television programs | (69,195 | ) | (45,790 | ) | |||||
Other assets | (140 | ) | 87 | ||||||
Accounts payable and accrued liabilities | 9,114 | (17,372 | ) | ||||||
Film obligations | 15,247 | 22,412 | |||||||
Deferred revenue | (13,755 | ) | 6,662 | ||||||
Net Cash Flows Provided By Operating Activities | 30,167 | 39,407 | |||||||
Investing Activities: | |||||||||
Cash received from sale of investment | 2,011 | — | |||||||
Purchases of property and equipment | (629 | ) | (45 | ) | |||||
Net Cash Flows Provided By (Used In) Investing Activities | 1,382 | (45 | ) | ||||||
Financing Activities: | |||||||||
Issuance of common shares | 61 | 10,651 | |||||||
Financing fees | — | (346 | ) | ||||||
Repayment of subordinated notes | (5,000 | ) | — | ||||||
Decrease in bank loans | — | (34,285 | ) | ||||||
Repayment of mortgages payable | (285 | ) | (241 | ) | |||||
Net Cash Flows Used In Financing Activities | (5,224 | ) | (24,221 | ) | |||||
Net Change In Cash And Cash Equivalents | 26,325 | 15,141 | |||||||
Foreign Exchange Effects On Cash | (892 | ) | (171 | ) | |||||
Cash And Cash Equivalents — Beginning Of Period | 112,839 | 7,089 | |||||||
Cash And Cash Equivalents — End Of Period | $ | 138,272 | $ | 22,059 | |||||
Nine Months | Nine Months | |||||||
Ended | Ended | |||||||
December 31, | December 31, | |||||||
2004 | 2003 | |||||||
(All amounts in thousands) | ||||||||
Operating activities: | ||||||||
Net income (loss) | $ | 221 | $ | (48,770 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Depreciation of property and equipment | 2,224 | 1,748 | ||||||
Amortization and write-off of deferred financing costs | 5,998 | 3,284 | ||||||
Amortization of films and television programs | 169,163 | 87,188 | ||||||
Amortization of intangible assets | 1,644 | — | ||||||
Relocation costs | — | 2,131 | ||||||
Write-down of other assets | — | 8,064 | ||||||
Gain on disposition of assets | (666 | ) | — | |||||
Interest rate swaps mark-to-market | (2,408 | ) | (950 | ) | ||||
Non-cash stock-based compensation | 364 | 1,064 | ||||||
Minority interests | 2 | — | ||||||
Equity interests | 200 | 1,959 | ||||||
Changes in operating assets and liabilities: | ||||||||
Increase in restricted cash | (20,000 | ) | — | |||||
Accounts receivable, net | 17,137 | (5,034 | ) | |||||
Increase in investment in films and television programs | (125,387 | ) | (100,976 | ) | ||||
Other assets | (1,263 | ) | 3,968 | |||||
Future income taxes | — | (2,214 | ) | |||||
Accounts payable and accrued liabilities | (16,157 | ) | 8,334 | |||||
Film obligations | 51,555 | (11,453 | ) | |||||
Deferred revenue | 507 | 116 | ||||||
Net cash flows provided by (used in) operating activities | 83,134 | (51,541 | ) | |||||
Financing activities: | ||||||||
Issuance of common shares | 21,991 | 104,589 | ||||||
Redemption of Series A preferred shares | — | (18,090 | ) | |||||
Dividends paid on Series A preferred shares | — | (254 | ) | |||||
Financing fees | (1,077 | ) | (11,287 | ) | ||||
Increase (decrease) in bank loans | (251,212 | ) | 82,507 | |||||
Increase in subordinated notes, net of issue costs | 145,390 | 56,663 | ||||||
Decrease in production loans | — | (1,273 | ) | |||||
Decrease in debt | (1,585 | ) | (7,912 | ) | ||||
Net cash flows provided by (used in) financing activities | (86,493 | ) | 204,943 | |||||
Investing activities: | ||||||||
Cash received from disposition of assets, net | 1,172 | — | ||||||
Acquisition of Artisan Entertainment Inc, net of cash acquired | — | (149,559 | ) | |||||
Purchase of property and equipment | (1,952 | ) | (445 | ) | ||||
Net cash flows used in investing activities | (780 | ) | (150,004 | ) | ||||
Net change in cash and cash equivalents | (4,139 | ) | 3,398 | |||||
Foreign exchange effect on cash | 2,189 | (835 | ) | |||||
Cash and cash equivalents — beginning of period | 7,089 | 6,851 | ||||||
Cash and cash equivalents — end of period | $ | 5,139 | $ | 9,414 | ||||
See accompanying notes.
6
LIONS GATE ENTERTAINMENT CORP.
1. Nature of Operations
1. | Nature of Operations |
2. Basis of Presentation and Use of Estimates
2. | Basis of Presentation and Use of Estimates |
Effective April 1, 2004, the
The accompanying unaudited condensed consolidated financial statements should be read together with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended March 31, 2005.
7
7
Recent Accounting Pronouncements
3. | Investment in Films and Television Programs |
June 30, | March 31, | |||||||
2005 | 2005 | |||||||
(Amounts in thousands) | ||||||||
Theatrical and Non-Theatrical Films | ||||||||
Released, net of accumulated amortization | $ | 105,229 | $ | 113,536 | ||||
Acquired libraries, net of accumulated amortization | 107,465 | 109,805 | ||||||
Completed and not released | 19,649 | 12,083 | ||||||
In progress | 43,401 | 42,581 | ||||||
In development | 2,613 | 2,302 | ||||||
Product inventory | 25,289 | 26,029 | ||||||
303,646 | 306,336 | |||||||
Direct-to-Television Programs | ||||||||
Released, net of accumulated amortization | 24,069 | 21,098 | ||||||
In progress | 37,094 | 39,221 | ||||||
In development | 786 | 721 | ||||||
61,949 | 61,040 | |||||||
$ | 365,595 | $ | 367,376 | |||||
EITF Issue No. 04-8.During the three months ended December 31, 2004, the Company adopted EITF Issue No. 04-8 “The Effect of Contingently Convertible Debt on Diluted Earnings Per Share”, which applied to reporting periods ending after the effective date of December 15, 2004. Under EITF Issue No. 04-8, all instruments that have embedded conversion features that are contingent on market conditions indexed to an issuer’s share price are included in diluted earnings per share computations (if dilutive) regardless of whether the market conditions have been met. On October 4, 2004, Lions Gate Entertainment Inc., a wholly owned subsidiary of the Company sold $150.0 million 2.9375% Convertible Senior Subordinated Notes (“2.9375% Notes”) with a maturity date of October 15, 2024. The 2.9375% Notes are convertible at the option of the holder, at any time prior to maturity, upon satisfaction of certain conversion contingencies, into common shares of Lions Gate Entertainment Corp. and therefore the 2.9375% Notes would be included in diluted earnings per share computations for the three and nine months ended December 31, 2004 (if dilutive).8
3. Investment in Films and Television Programs
December 31, | March 31, | |||||||
2004 | 2004 | |||||||
(Amounts in thousands) | ||||||||
Theatrical and Non-Theatrical Films | ||||||||
Released, net of accumulated amortization | $ | 133,122 | $ | 111,242 | ||||
Acquired libraries, net of accumulated amortization | 116,127 | 128,559 | ||||||
Completed and not released | 8,762 | 63,158 | ||||||
In progress | 32,690 | 22,347 | ||||||
In development | 2,002 | 1,230 | ||||||
Product inventory | 25,244 | 26,957 | ||||||
317,947 | 353,493 | |||||||
Direct-to-Television Programs | ||||||||
Released, net of accumulated amortization | 23,710 | 17,640 | ||||||
In progress | 24,029 | 34,250 | ||||||
In development | 779 | 787 | ||||||
48,518 | 52,677 | |||||||
$ | 366,465 | $ | 406,170 | |||||
8
June 30, 2006. Additionally, the Company expects approximately 82%81% of completed and released films and television programs, excluding acquired libraries, net of accumulated amortization and excluding acquired libraries, will be amortized during the three-yearthree year period ending December 31, 2007.
4. Other AssetsJune 30, 2008.
December 31, | March 31, | |||||||
2004 | 2004 | |||||||
(Amounts in thousands) | ||||||||
Deferred financing costs, net | $ | 13,756 | $ | 14,181 | ||||
Prepaid expenses and other | 5,941 | 4,230 | ||||||
Intangible assets, net | 2,726 | 4,370 | ||||||
Deferred print costs | 445 | 933 | ||||||
$ | 22,868 | $ | 23,714 | |||||
4. | Other Assets |
June 30, | March 31, | |||||||
2005 | 2005 | |||||||
(Amounts in thousands) | ||||||||
Deferred financing costs, net | $ | 18,024 | $ | 18,882 | ||||
Prepaid expenses and other | 7,412 | 8,148 | ||||||
Other investments | 3,197 | 250 | ||||||
Intangible assets, net | 2,784 | 2,178 | ||||||
$ | 31,417 | $ | 29,458 | |||||
Other Investments. |
9
5. Bank Loans
2005, the Company had a 75% economic interest and a 30% voting interest in Christal Distribution (“Christal”), a film distributor and sub-distributor in Quebec, Canada. Through March 31, 2005 the Company was the primary beneficiary of Christal under FIN 46 and accordingly the Company consolidated Christal as at March 31, 2005. In connection with the Maple Pictures transaction discussed above, the Company sold the majority of its interest in Christal to Maple Pictures and the remainder of its interest was repurchased by Christal. As a result of the sale and repurchase of the interests, effective April 8, 2005, the Company no longer consolidated Christal and recorded amounts owing from Christal of $0.5 million, net of amounts payable to Christal, as of June 30, 2005 in other assets in the condensed consolidated balance sheet.
5. | Bank Loans |
The Company also has a $2.5 million operating line of credit available to a subsidiary, which is renewable annually. At December 31, 2004, $1.7 million (March 31, 2004 — $1.5 million) was drawn on the operating line of credit.
9
6. Film ObligationsLIONS GATE ENTERTAINMENT CORP.
December 31, | March 31, | |||||||
2004 | 2004 | |||||||
(Amounts in thousands) | ||||||||
Minimum guarantees | $ | 7,933 | $ | 10,704 | ||||
Minimum guarantees initially incurred for a term of more than one year | 20,094 | 16,189 | ||||||
Participation and residual costs | 107,198 | 79,034 | ||||||
Theatrical marketing | 19,290 | — | ||||||
Film productions | 14,291 | 8,141 | ||||||
$ | 168,806 | $ | 114,068 | |||||
6. | Film Obligations |
June 30, | March 31, | |||||||
2005 | 2005 | |||||||
(Amounts in thousands) | ||||||||
Minimum guarantees | $ | 7,014 | $ | 5,210 | ||||
Minimum guarantees initially incurred for a term of more than one year | 16,081 | 18,081 | ||||||
Participation and residual costs | 104,866 | 95,650 | ||||||
Theatrical marketing | 1,605 | 1,665 | ||||||
Film productions | 14,622 | 10,164 | ||||||
$ | 144,188 | $ | 130,770 | |||||
7. | Subordinated Notes |
7. Subordinated11
. In October 2004, the CompanyLions Gate Entertainment Inc. sold $150.0 million of 2.9375% Convertible Senior Subordinated Notes. The Company received $146.0 million of net proceeds after paying placement agents’ fees andfrom the sale of $150.0 million of the 2.9375% Notes. The Company also paid $0.7 million of offering expenses.expenses incurred in connection with the 2.9375% Notes. Interest on the 2.9375% Notes is payable semi-annually on April 15 and October 15 commencing on April 15, 2005 and the 2.9375% Notes mature on October 15, 2024. The CompanyFrom October 15, 2009 to October 14, 2010, Lions Gate Entertainment Inc. may redeem all or a portion of the 2.9375% Notes at its option on or after100.839%; from October 15, 20092010 to October 14, 2011, Lions Gate Entertainment Inc. may redeem the 2.9375% Notes at 100% of their principal amount, together with accrued100.420%; and unpaid interest through the date of redemption.
thereafter at 100%.
12
10
8. Acquisitions
8. | Acquisitions |
were nil and $0.2 million, respectively, and included in accounts payable and accrued liabilities in the condensed consolidated balance sheets.
The acquisition was accounted for as a purchase, with the results of operations of Artisan consolidated from December 15, 2003. Goodwill of $136.5 million represents the excess of the purchase price over the fair value of the net identifiable tangible and intangible assets acquired. The allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their fair values was as follows:
(Amounts in | ||||
thousands) | ||||
Cash and cash equivalents | $ | 19,946 | ||
Accounts receivable, net | 37,842 | |||
Investment in films and television programs | 170,224 | |||
Intangible assets | 5,100 | |||
Other tangible assets acquired | 4,471 | |||
Goodwill | 136,518 | |||
Bank loans | (54,900 | ) | ||
Subordinated note | (5,000 | ) | ||
Other liabilities assumed | (145,264 | ) | ||
Total | $ | 168,937 | ||
During the three months ended December 31, 2004, the allocation of the purchase price was adjusted resulting in a decrease in other liabilities of $2.3 million and a decrease in goodwill of $2.3 million.
Severance and relocation costs incurred by Lions Gate, associated with the acquisition of Artisan, are not included in the purchase price and, as such, were recorded in the consolidated statementsstatement of operations during fiscalfor the year ended March 31, 2004. Severance and relocation costs of $5.6 million included property lease abandonment costs of $2.5 million, the write-off of capital assets no longer in use of $2.1 million and severance of $1.0 million. At DecemberJune 30, 2005 and March 31, 20042005, the remaining liabilities under the severance plan andare nil. At June 30, 2005, the remaining liabilities for the property lease abandonment are nil and $1.7 million respectively.(March 31, 2005 — $1.7 million) and are included in accounts payable and accrued liabilities in the condensed consolidated balance sheets.
9. | Direct Operating Expenses |
Three Months Ended | Three Months Ended | |||||||
June 30, 2005 | June 30, 2004 | |||||||
(Amounts in thousands) | ||||||||
Amortization of films and television programs | $ | 65,376 | $ | 60,225 | ||||
Participation and residual expense | 33,076 | 20,887 | ||||||
Amortization of acquired intangible assets | 548 | 548 | ||||||
Other expenses | 1,264 | (850 | ) | |||||
$ | 100,264 | $ | 80,810 | |||||
9. Direct Operating Expenses
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Amortization of films and television programs | $ | 44,793 | $ | 31,418 | $ | 169,163 | $ | 87,188 | ||||||||
Participation and residual expense | 38,723 | 7,709 | 89,500 | 21,370 | ||||||||||||
Other expenses | (1,055 | ) | 3,408 | (53 | ) | 4,573 | ||||||||||
$ | 82,461 | $ | 42,535 | $ | 258,610 | $ | 113,131 | |||||||||
11
the provision for doubtful accounts as a result of a reclassification to sales allowances, which are reflected as a reduction of revenue, and due to the collection of accounts receivable that were previously reserved.
10. Comprehensive Income (Loss)accounts.
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Net income (loss) | $ | 3,353 | $ | (35,744 | ) | $ | 221 | $ | (48,770 | ) | ||||||
Add (deduct): Foreign currency translation adjustments | 1,979 | (362 | ) | 3,497 | 171 | |||||||||||
Add: Net change in unrealized gain on foreign exchange contracts | 442 | — | 76 | — | ||||||||||||
Comprehensive income (loss) | $ | 5,774 | $ | (36,106 | ) | $ | 3,794 | $ | (48,599 | ) | ||||||
10. Comprehensive Loss
Three Months Ended | Three Months Ended | |||||||
June 30, 2005 | June 30, 2004 | |||||||
(Amounts in thousands) | ||||||||
Net loss | $ | (21,819 | ) | $ | (11,462 | ) | ||
Less: Foreign currency translation adjustments | (831 | ) | (1,153 | ) | ||||
Less: Net unrealized gain (loss) on foreign exchange contracts | 234 | (645 | ) | |||||
Comprehensive loss | $ | (22,416 | ) | $ | (13,260 | ) | ||
11. | Loss Per Share |
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(Amounts in thousands, except per share amounts) | ||||||||||||||||
Basic income (loss) per common share is calculated as follows: | ||||||||||||||||
Numerator: | ||||||||||||||||
Net income (loss) available to common shareholders | $ | 3,353 | $ | (37,914 | ) | $ | 221 | $ | (51,696 | ) | ||||||
Denominator: | ||||||||||||||||
Weighted average common shares outstanding | 98,119 | 84,375 | 96,437 | 63,646 | ||||||||||||
Basic income (loss) per common share | $ | 0.03 | $ | (0.45 | ) | $ | 0.00 | $ | (0.81 | ) | ||||||
Basic income (loss)loss per share is calculated after adjusting net income (loss)based on the weighted average common shares outstanding for modificationthe period. Diluted earnings per share includes the impact of the convertible senior subordinated notes, share purchase warrants, stock options and dividends and accretion on Series A preferred shares andrestricted share units, if dilutive.
Three Months Ended | Three Months Ended | ||||||||
June 30, 2005 | June 30, 2004 | ||||||||
(Amounts in thousands, except | |||||||||
per share amounts) | |||||||||
Basic loss per common share is calculated as follows: | |||||||||
Numerator: | |||||||||
Net loss | $ | (21,819 | ) | $ | (11,462 | ) | |||
Denominator: | |||||||||
Weighted average common shares outstanding | 101,852 | 94,921 | |||||||
Basic and diluted loss per common share | $ | (0.21 | ) | $ | (0.12 | ) | |||
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
December 31, | December 31, | |||||||
2004 | 2004 | |||||||
(Amounts in | (Amounts in | |||||||
thousands, except | thousands, except | |||||||
per share amounts) | per share amounts) | |||||||
Diluted income per common share is calculated as follows: | ||||||||
Numerator: | ||||||||
Net income available to common shareholders | $ | 3,353 | $ | 221 | ||||
Denominator: | ||||||||
Weighted average common shares outstanding | 98,119 | 96,437 | ||||||
Share purchase options | 5,287 | 5,216 | ||||||
Share purchase warrants | 1,548 | 1,206 | ||||||
Adjusted weighted average common shares outstanding | 104,954 | 102,859 | ||||||
Diluted income per common share | $ | 0.03 | $ | 0.00 | ||||
The3.625% Notes and restricted share units could potentially dilute income (loss) per share in the future, but were not reflected in diluted loss per share during the periods presented because to do so would be anti-dilutive. Under the “if converted” method of calculating diluted earnings per share, the share purchase options, andthe restricted share units, the share purchase warrants are includedand the convertible senior subordinated notes, if outstanding, were anti-dilutive in each of the periods presented and were not reflected in diluted income per share under the treasury method. The shares issuable on the potential conversion of the 4.875% Notes and 2.9375% Notes are not included in diluted income per share as they are anti-dilutive.
During the three months ended December 31, 2004, the Company amended the outstanding warrants to allow the holders, at their option, to exercise by cashless exercise. Each warrant may be exchanged for common shares in the Company determined by taking the difference in the market price of the Company’s shares (defined as the average closing trading priceloss per common share for the twenty consecutive trading
12
days ending on the third day before the exercise date) less the exercise price of $5.00 and dividing this number by the market price. During December 2004, 1,993,250 warrants were exercised by cashless exercise resulting in the issuance of 1,052,517 common shares. As of December 31, 2004, 1,088,000 warrants remain outstanding.
12. | Accounting for Stock Based Compensation |
12. Accounting for Stock Based Compensation
The Company has elected to use the intrinsic value method in accounting for stock-basedstock based compensation as set forth in APB No. 25, “Accounting for Stock Issued to Employees”, as permitted by Statement 123 “Accounting for Stock-based Compensation.Employees.” In accordance with Statement of Financial Accounting Standards (“SFAS”)SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of SFAS No. 123”, the following disclosures are provided about the costs of stock-based compensation awards
14
SFAS 123(R).
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(Amounts in thousands, except per share amounts) | ||||||||||||||||
The resulting pro forma basic income (loss) per common share is calculated as follows: | ||||||||||||||||
Numerator: | ||||||||||||||||
Net income (loss) available to common shareholders | $ | 3,353 | $ | (37,914 | ) | $ | 221 | $ | (51,696 | ) | ||||||
Add: stock-based compensation expense recorded | — | 878 | 227 | 1,064 | ||||||||||||
Less: stock-based compensation expense calculated using fair value method | (529 | ) | (740 | ) | (1,618 | ) | (1,542 | ) | ||||||||
Adjusted net income (loss) available to common shareholders | $ | 2,824 | $ | (37,776 | ) | $ | (1,170 | ) | $ | (52,174 | ) | |||||
Denominator: | ||||||||||||||||
Weighted average common shares outstanding (thousands) | 98,119 | 84,375 | 96,437 | 63,646 | ||||||||||||
Adjusted basic and diluted income (loss) per common share | $ | 0.03 | $ | (0.45 | ) | $ | (0.01 | ) | $ | (0.82 | ) | |||||
During the nine months ended December 31, 2004 two employees of the Company terminated their employment but continued to provide services as consultants. These employees had been granted 150,000 The following pro forma basic and diluted income (loss) per common share includes stock-based compensation expense for stock options 66,668 of which had not vestedissued and modified, as of the date of the change in employment status. The terms of the stock options require the grants to be forfeited upon change in status; however, the Company modified the terms to permit the two individuals to continue to vest in the options. The modified stock options that have not vested are accounted for prospectively as entirely new grants. Additional expense was recognized under the fair value method because the individuals are now non-employees. The fair value method resulted in additional compensation expense during the three and nine months ended December 31, 2004 of nil and $0.2 million, respectively. As of December 31, 2004, 16,667 of these stock options had not yet vested. The options will continue to be re-valued at each reporting date until the options fully vest.
During the three months ended September 30, 2003, the Company modified the terms of 3,048,000 options of certain officers of the Company, extending the expiry dates to coincide with their employment contract dates. The vesting period and exercise prices were unchanged.Intrinsic value:The modification of these options is treated as an exchange of the original award for a new award and the resulting expense is recorded as stock-based compensation in general and administration expenses in the consolidated statement of operations. The additional compensation cost for the three and nine months ended December 31, 2003 is $0.4 million and $0.5 million, respectively, and is calculated by multiplying the market price on the date of the modification times the number of options vested less the original exercise price times the number of options vested. The additional compensation cost is attributed over the remaining
13
Three Months Ended | Three Months Ended | ||||||||
June 30, 2005 | June 30, 2004 | ||||||||
(Amounts in thousands, except | |||||||||
per share amounts) | |||||||||
The resulting pro forma basic loss per common share is calculated as follows: | |||||||||
Numerator: | |||||||||
Net loss | $ | (21,819 | ) | $ | (11,462 | ) | |||
Add: stock-based compensation expense calculated using intrinsic value method | 27 | — | |||||||
Less: stock-based compensation expense calculated using fair value method | (602 | ) | (238 | ) | |||||
Adjusted net loss | $ | (22,394 | ) | $ | (11,700 | ) | |||
Denominator: | |||||||||
Weighted average common shares outstanding | 101,852 | 94,921 | |||||||
Adjusted basic and diluted loss per common share | $ | (0.22 | ) | $ | (0.12 | ) | |||
service period. In the case of the options modified the options which are fully vested have no additional service requirements and the additional compensation is expensed immediately.Fair value:For disclosure purposes, under the fair value method, the value of the new award is measured as the fair value at the date the new award is granted and the value of the old award is its fair value immediately before its terms were modified. The additional compensation cost for the incremental fair value of the new award plus unallocated compensation costs for the old award is attributed over the remaining service period. In the case of the options modified the total additional compensation to be expensed over the service period for the three and nine months ended December 31, 2003 is $0.4 million and $0.6 million, respectively. At December 31, 2003, there are no additional service requirements on these options and the incremental fair value relating to these options of $0.4 million and $0.6 million for the three and nine months ended December 31, 2003, respectively, would be expensed for disclosure purposes immediately.
During the three months ended December 31, 2003, the Company modified the terms of 250,000 options of a certain past director of the Company, amending the price of the options to be consistent with those granted to other Directors. The expiry date and vesting period were unchanged.Intrinsic value:The modification of these options is treated as an exchange of the original award for a new award. The additional compensation cost at the date of modification is calculated by multiplying the market price on the date of the modification times the number of options vested less the original exercise price times the number of options vested. The market price on the date of the modification was less than the exercise price resulting in no additional compensation cost. The options are valued using variable accounting for stock-based compensation until they are exercised, forfeited or expire. The additional compensation cost for the three and nine months ended December 31, 2003 is $0.5 million.Fair value:For disclosure purposes, under the fair value method, the value of the new award is measured as the fair value at the date the new award is granted and the value of the old award is its fair value immediately before its terms were modified. The additional compensation cost for the incremental fair value of the new award plus unallocated compensation costs for the old award is attributed over the remaining service period. In the case of the options modified, the total additional compensation to be expensed over the service period is not material. At December 31, 2003, there are no additional service requirements on these options and the incremental fair value relating to these options, which is not material, would be expensed for disclosure purposes for the three and nine months ended December 31, 2003.
Options were granted to a certain employee of the Company with an exercise price determined at a future date. These options are valued using variable accounting for stock-based compensation and the resulting expense is recorded as stock-based compensation in general and administration expenses in the consolidated statements of operations. The additional compensation cost for the three and nine months ended December 31, 2003 of $0.1 million is calculated by multiplying the market price on December 31, 2003 times the number of options vested less the market price on the date the options were granted times the number of options vested. The additional compensation cost is expensed in the current reporting period and adjusted each reporting period until such time as the exercise price is determined.
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 common shares of the Company, be revised as stock appreciation rights (“SARs”SAR’s”) which entitle the holders to receive cash only and not common shares. The amount of cash received will be equal to the amount by which the trading price of common shares on the exercise notice date exceeds the SARsSARs’ price of $5.00 multiplied by the number of options exercised. Any twenty-day average trading price of common shares prior to the exercise notice date has to be $6.00 or above in order for the officers to exercise their SARs. These SARs are not considered part of the Employees’ and Directors’ Equity Incentive Plan. The Company measures compensation expense as the amount by which the market value of common shares exceeds the SARsSARs’ price. At December 31, 2004,June 30, 2005, the market price of common shares was $10.62$10.26 (March 31, 2005 — $11.05; June 30, 2004 — $6.98) and the SARs had all vested. TheDue to the reduction in the market price of its common shares, the Company recorded stocka reduction in stock-based compensation expense in the amount of $1.5 million and $3.3$0.6 million in general and administration expenses in the unaudited condensed consolidated statement of operations for the three and nine months ended December 31,June 30, 2005 (June 30, 2004 respectively (2003 — nil)expense of $0.5 million). The expense is calculated by using the market price of common shares on December 31, 2004June 30, 2005 less the SARsSARs’ price, multiplied by the 750,000 SARs vested. At December 31, 2004,June 30, 2005, the Company has a stock-based compensation
15
14
which is assumed to be the three year vesting period, using a graded approach and measures compensation cost as the amount by which the market value of common shares exceeds the SARsSARs’ price times the SARs assumed to have vested under the graded approach. At December 31, 2004,June 30, 2005, the market price of common shares was $10.62. The$10.26 (March 31, 2005 — $11.05; June 30, 2004 — $6.98). Due to the reduction in the market price of its common shares, the Company recorded a reduction in stock-based compensation expense related to these SARs in the amount of $1.8 million and $3.7$0.2 million in general and administration expenses in the unaudited condensed consolidated statement of operations for the three months and nine months ended December 31,June 30, 2005 (June 30, 2004 (2003 — nil)expense of $0.8 million). During the three monthsyear ended DecemberMarch 31, 20042005 the officer exercised 150,000 of the vested SARs and the Company paid $0.9 million. The amount paid is included in the $3.7 million for the nine months ending December 31, 2004 and reduced the accrued liability. The total expense is calculated by using the market price of common shares on December 31, 2004June 30, 2005 less the SARsSARs’ price, multiplied by the remaining 517,302793,032 SARs assumed to have vested and adding the actual expense of $0.9 million forless the 150,000 SARs exercised. At December 31, 2004,June 30, 2005, the Company has a stock-based compensation accrual in the amount of $2.8$3.3 million (March 31, 2005 — $3.5 million) included in accounts payable and accrued liabilities on the condensed consolidated balance sheets relating to these SARs.
On October 13, 2004,
13. Segment Information
13. | Segment Information |
16
Three Months Ended | Three Months Ended | ||||||||
June 30, 2005 | June 30, 2004 | ||||||||
(Amounts in thousands) | |||||||||
Segment revenues | |||||||||
Motion Pictures | $ | 146,982 | $ | 159,066 | |||||
Television | 45,858 | 28,647 | |||||||
Studio Facilities | 1,389 | 1,011 | |||||||
$ | 194,229 | $ | 188,724 | ||||||
Segment profit (loss) | |||||||||
Motion Pictures | $ | (9,220 | ) | $ | (2,866 | ) | |||
Television | 2,377 | 4,232 | |||||||
Studio Facilities | 811 | 450 | |||||||
$ | (6,032 | ) | $ | 1,816 | |||||
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Segment revenues | ||||||||||||||||
Motion Pictures | $ | 175,141 | $ | 51,912 | $ | 536,983 | $ | 160,360 | ||||||||
Television | 14,158 | 17,129 | 69,692 | 51,728 | ||||||||||||
Studio Facilities | 1,099 | 1,578 | 3,511 | 4,917 | ||||||||||||
$ | 190,398 | $ | 70,619 | $ | 610,186 | $ | 217,005 | |||||||||
Segment profit (loss) | ||||||||||||||||
Motion Pictures | $ | 19,070 | $ | (14,943 | ) | $ | 39,118 | $ | (22,937 | ) | ||||||
Television | 1,150 | 1,309 | 7,294 | 6,026 | ||||||||||||
Studio Facilities | 480 | 1,020 | 1,746 | 3,221 | ||||||||||||
$ | 20,700 | $ | (12,614 | ) | $ | 48,158 | $ | (13,690 | ) | |||||||
15
Segment profit (loss) is defined as segment revenue less segment direct operating, distribution and marketing, and general and administration expenses and severance and relocation costs.expenses. The reconciliation of total segment profit (loss) to the Company’s income (loss) before income taxes is as follows:
Three Months Ended | Three Months Ended | ||||||||
June 30, 2005 | June 30, 2004 | ||||||||
(Amounts in thousands) | |||||||||
Company’s total segment profit (loss) | $ | (6,032 | ) | $ | 1,816 | ||||
Less: | |||||||||
Corporate general and administration | (10,813 | ) | (9,095 | ) | |||||
Depreciation | (748 | ) | (675 | ) | |||||
Interest expense | (4,884 | ) | (5,461 | ) | |||||
Interest rate swaps mark-to-market | (337 | ) | 2,060 | ||||||
Interest income | 1,065 | 37 | |||||||
Minority interests | — | 123 | |||||||
$ | (21,749 | ) | $ | (11,195 | ) | ||||
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Company’s total segment profit (loss) | $ | 20,700 | $ | (12,614 | ) | $ | 48,158 | $ | (13,690 | ) | ||||||
Less: | ||||||||||||||||
Corporate general and administration | (8,608 | ) | (4,351 | ) | (28,610 | ) | (10,082 | ) | ||||||||
Corporate severance and relocation costs. | — | (4,845 | ) | — | (4,845 | ) | ||||||||||
Write-down of other assets | — | (8,064 | ) | — | (8,064 | ) | ||||||||||
Depreciation | (835 | ) | (718 | ) | (2,224 | ) | (1,748 | ) | ||||||||
Interest | (8,201 | ) | (4,808 | ) | (19,277 | ) | (9,017 | ) | ||||||||
Interest rate swaps mark-to-market | 419 | 688 | 2,408 | 950 | ||||||||||||
Minority interests | 19 | — | (2 | ) | — | |||||||||||
Other income | — | — | 825 | — | ||||||||||||
Equity interests | — | (948 | ) | (200 | ) | (1,959 | ) | |||||||||
Income (Loss) Before Income Taxes | $ | 3,494 | $ | (35,660 | ) | $ | 1,078 | $ | (48,455 | ) | ||||||
14. Commitments and Contingencies
14. | Commitments and Contingencies |
15. Reconciliation to Canadian GAAP17
15. | Reconciliation to Canadian GAAP |
below in accordance with the provisions of the Securities and Exchange Commission (“SEC”) and the National Instrument adopted by certain securities authorities in Canada.
Net Income (Loss) | ||||||||||||||||||||||||
Three Months | Nine Months | |||||||||||||||||||||||
Three Months | Ended | Nine Months | Ended | |||||||||||||||||||||
Ended | December 31, | Ended | December 31, | Shareholders’ Equity | ||||||||||||||||||||
December 31, | 2003 | December 31, | 2003 | December 31, | March 31, | |||||||||||||||||||
2004 | (Restated) | 2004 | (Restated) | 2004 | 2004 | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
As reported under U.S. GAAP | $ | 3,353 | $ | (35,744 | ) | $ | 221 | $ | (48,770 | ) | $ | 95,758 | $ | 69,609 | ||||||||||
Adjustment for capitalized pre-operating costs (a) | — | (154 | ) | — | (462 | ) | — | — | ||||||||||||||||
Stock-based compensation (b) | (529 | ) | 138 | (1,391 | ) | (478 | ) | — | — | |||||||||||||||
Adjustment for accretion on subordinated notes (c) | (1,946 | ) | (190 | ) | (3,182 | ) | (190 | ) | (3,991 | ) | (809 | ) | ||||||||||||
Adjustment for amortization of subordinated notes issue costs (c) | 47 | — | 122 | — | 170 | 48 | ||||||||||||||||||
Adjustment for amortization and write-off of deferred debt financing costs (d) | (266 | ) | — | (98 | ) | — | — | 98 | ||||||||||||||||
Provision for debentures and other receivables due from CinéGroupe (e) | — | 8,064 | — | 8,064 | — | — | ||||||||||||||||||
Adjustment for consolidation of CinéGroupe (e) | — | (2,333 | ) | — | (2,333 | ) | — | — | ||||||||||||||||
Adjustment for interest rate swaps mark-to-market (f) | (158 | ) | (688 | ) | (474 | ) | (950 | ) | 2,483 | 2,957 | ||||||||||||||
Accounting for business combinations (g) | — | — | — | — | 1,145 | 1,145 | ||||||||||||||||||
Accounting for income taxes (h) | — | — | — | — | (1,900 | ) | (1,900 | ) |
Net Loss | ||||||||||||||||
Shareholders’ Equity | ||||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
June 30, 2005 | June 30, 2004 | June 30, 2005 | March 31, 2005 | |||||||||||||
(Amounts in thousands, except per share amounts) | ||||||||||||||||
As reported under U.S. GAAP | $ | (21,819 | ) | $ | (11,462 | ) | $ | 94,873 | $ | 117,139 | ||||||
Adjustment for interest rate swaps(a) | (158 | ) | (158 | ) | 2,167 | 2,325 | ||||||||||
Accounting for business combinations(b) | — | — | 1,145 | 1,145 | ||||||||||||
Accounting for income taxes(c) | — | — | (1,900 | ) | (1,900 | ) | ||||||||||
Accounting for stock-based compensation(g) | (575 | ) | (238 | ) | — | — | ||||||||||
Adjustment for accretion on subordinated notes(d) | (3,158 | ) | (618 | ) | (9,582 | ) | (6,424 | ) | ||||||||
Adjustment for amortization of subordinated notes issue costs(d) | 227 | 36 | 709 | 482 | ||||||||||||
Adjustment for amortization and write-off of deferred bank loan financing costs(e) | — | 84 | — | — | ||||||||||||
Reclassification of conversion feature of subordinated notes outside shareholders’ equity(d) | — | — | 74,854 | 74,854 | ||||||||||||
Other comprehensive income (loss) (net of tax of nil)(f) | — | — | (538 | ) | (304 | ) | ||||||||||
Net Loss/ Shareholders’ Equity under Canadian GAAP | $ | (25,483 | ) | $ | (12,356 | ) | $ | 161,728 | $ | 187,317 | ||||||
Basic and Diluted Loss per Common Share under Canadian GAAP | $ | (0.25 | ) | $ | (0.13 | ) | ||||||||||
16
Net Income (Loss) | ||||||||||||||||||||||||
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||||||||||
Ended | Ended | Ended | Ended | Shareholders’ Equity | ||||||||||||||||||||
December 31, | December 31, | December 31, | December 31, | December 31, | March 31, | |||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2004 | 2004 | |||||||||||||||||||
Amounts in thousands | ||||||||||||||||||||||||
Reclassification of conversion feature of subordinated notes inside shareholders’ equity (c) | — | — | — | — | 42,017 | 16,269 | ||||||||||||||||||
Other comprehensive loss (i) | — | — | — | — | (666 | ) | (590 | ) | ||||||||||||||||
Net Income (Loss) Shareholders’ Equity under Canadian GAAP | $ | 501 | $ | (30,907 | ) | $ | (4,802 | ) | $ | (45,119 | ) | $ | 135,016 | $ | 86,827 | |||||||||
Basic Income (Loss) per Common Share under Canadian GAAP (k) | $ | 0.01 | $ | (0.39 | ) | $ | (0.05 | ) | $ | (0.76 | ) | |||||||||||||
Diluted Income (Loss) per Common Share under Canadian GAAP (k) | $ | 0.00 | $ | (0.39 | ) | $ | (0.05 | ) | $ | (0.76 | ) | |||||||||||||
17
Reconciliation of movement in Shareholders’ Equity under Canadian GAAP:
June 30, | March 31, | |||||||
2005 | 2005 | |||||||
(Amounts in thousands) | ||||||||
Balance at beginning of the year | $ | 187,317 | $ | 86,827 | ||||
Increase in common shares | 123 | 24,850 | ||||||
Increase in contributed surplus(d)(g) | 602 | 60,842 | ||||||
Net loss under Canadian GAAP | (25,483 | ) | 12,424 | |||||
Adjustment to cumulative translation adjustments account(f) | (831 | ) | 2,374 | |||||
Balance at end of the period | $ | 161,728 | $ | 187,317 | ||||
December 31, | March 31, | |||||||
2004 | 2004 | |||||||
(Amounts in thousands) | ||||||||
Balance at beginning of the year | $ | 86,827 | $ | 74,717 | ||||
Increase in common shares | 23,746 | 117,894 | ||||||
Decrease in Series A preferred shares | — | (32,519 | ) | |||||
Increase in contributed surplus | 25,748 | 20,528 | ||||||
Deconsolidation of CinéGroupe’s net deficiency in equity | — | 2,333 | ||||||
Dividends paid on Series A preferred shares | — | (387 | ) | |||||
Accretion on Series A preferred shares(j) | — | (1,127 | ) | |||||
Net loss under Canadian GAAP | (4,802 | ) | (94,172 | ) | ||||
Adjustment to cumulative translation adjustments account(i) | 3,497 | (440 | ) | |||||
Balance at end of the period | $ | 135,016 | $ | 86,827 | ||||
(a) | Interest Rate Swaps Mark-to-Market |
(b) | Accounting for |
19
(c) | Accounting for Income Taxes |
In December 2003,increased to reflect the Canadian Institute of Chartered Accountants (“CICA”) amended Section 3870 to require companies to account for stock options using the fair value based method for fiscal years beginning on or after January 1, 2004. In accordance with the transitional alternatives permitted under amended Section 3870, the Company retroactively adopted the fair value based method of accounting for stock options and accordingly, the three and nine months ended December 31, 2003 have been restated. The impact of this change for the three and nine months ended December 31, 2004 was to decrease net income by $0.5 million and $1.6 million respectively (2003 — $0.7 million and $1.5 million, respectively) and to decrease basic earnings per share by nil and $0.02, respectively (2003 — $0.01 and $0.03 respectively).
In accordance with CICA Section 3870, the following disclosures are provided about the costs of stock based compensation awards using the fair value method. The weighted average estimated fair value of each stock option granted in the three and nine months ended December 31, 2004 were $3.31 and $2.64 respectively (2003 — $1.22 and $0.79 respectively). The fair value of each stock option grant was estimatedadditional deferred tax liability resulting from temporary differences arising on the dateacquisition of grant using the Black-Scholes option pricing model with the following assumptions used for stock options granted: a dividend yield of 0%, expected volatility of 30% (2003 — 30%), risk-free interest rate of 3.8% (2003 — 2.6%) and expected life of five years (2003 — five years).
During the three months ended September 30, 2003, the Company modified the terms of 3,048,000 options of certain officers of the Company, extending the expiry dates to coincide with their employment contract dates. The vesting period and exercise prices were unchanged.Lions Gate Studios in fiscal 1999. Under U.S. GAAP the intrinsic value method is applied and under Canadian GAAP, the fair value method is
18
requiredCompany recorded a charge to be applied (refer to note 12).
Duringretained earnings when the three months ended December��31, 2003, the Company modified the terms of 250,000 options of a certain past directordeferred tax liability was established upon adoption of the Company, amending the price of the options to be consistent with those granted to other Directors. The expiry date and vesting period were unchanged. Under U.S. GAAP the intrinsic value methodapplicable accounting standard in 2001; accordingly, there is applied and under Canadian GAAP the fair value method is required to be applied (refer to note 12).
Options were granted to a certain employee of the Company with an exercise price determined at a future date (refer to note 12). Under U.S. GAAP, these options are valued using variable accounting for stock-based compensation and the resulting expense is recorded as stock-based compensation in general and administration expensesdifference in the unaudited condensed consolidated statementscarrying amount of operations. Under Canadian GAAP, variable accounting for stock-based compensation is not applicable and therefore does not resultgoodwill arising in additional compensation expense.
the business combination of $1.9 million as at June 30, 2005 (March 31, 2005 — $1.9 million).
Reclassification of Conversion Feature of Subordinated Notes, Accretion on Subordinated Notes and Amortization of |
20
Accounting for Amortization and Write-Off of Deferred |
On July 10, 2001, as a condition of a $9.2 million equity financing with a third party, CinéGroupe’s Shareholders’ Agreement was
19
amended to allow for certain participatory super-majority rights to be granted to the shareholders. Therefore, under U.S. GAAP, the Company was precluded from consolidating CinéGroupe and accounted for its 29.4% ownership of CinéGroupe, commencing April 1, 2001, using the equity method. Under Canadian GAAP, CinéGroupe was consolidated. During the year ended March 31, 2004, under U.S. GAAP, the Company’s investment in CinéGroupe was reduced to nil and therefore the Company did not record any additional losses under the equity method as it had no further funding requirements. However, under Canadian GAAP, under the consolidation method, the Company continued to consolidate CinéGroupe’s results until January 1, 2004 when the Company deconsolidated the assets and liabilities of CinéGroupe as described below.
During the year ended March 31, 2004, the Company evaluated its investment in CinéGroupe as CinéGroupe was unable to meet its financial obligations in the ordinary course of business and sought protection under the Companies Creditors Arrangement Act (“CCAA”) in December 2003. Under U.S. GAAP the Company recorded a provision of $8.1 million against debentures and other receivables due from CinéGroupe at December 31, 2003. Under Canadian GAAP, the intercompany debentures and other receivables due from CinéGroupe are eliminated on consolidation. On January 1, 2004, the Company determined that as a result of a CCAA filing it no longer had the ability to control or to significantly influence CinéGroupe. Under U.S. GAAP, this determination had no effect as the investment in CinéGroupe was nil and debentures and other receivables due from CinéGroupe had been provided for at December 31, 2003. Under Canadian GAAP, effective January 1, 2004, the Company deconsolidated the assets and liabilities of CinéGroupe, resulting in a net deficiency in equity of $2.3 million which was recorded as an adjustment to accumulated deficit, and wrote-off $8.1 million of convertible debentures and other receivables due from CinéGroupe, which as intercompany debentures and receivables, were previously eliminated on consolidation. At December 31, 2004 and March 31, 2004, because CinéGroupe is being accounted for using the cost method and the investment had been reduced to nil under U.S. and Canadian GAAP, there are no differences on the consolidated balance sheet at December 31, 2004 and March 31, 2004.
Accounting for CinéGroupe using the consolidation method for the period April 1, 2003 to December 31, 2003 under Canadian GAAP would increase the unaudited condensed consolidated statements of operations items to the following amounts:
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
December 31, | December 31, | |||||||
2003 | 2003 | |||||||
(Amounts in | (Amounts in | |||||||
thousands) | thousands) | |||||||
Revenues | $ | 75,176 | $ | 225,909 | ||||
Direct operating expenses | $ | 48,356 | $ | 123,591 | ||||
Distribution and marketing expenses | $ | 34,660 | $ | 102,929 | ||||
General and administration expenses | $ | 10,298 | $ | 26,244 |
(f) |
Under U.S. GAAP, the interest rate swaps do not meet the criteria of effective hedges and therefore the fair valuation gains of $0.5 million and $2.2 million, respectively for the three and nine months ended December 31, 2004 (2003 — gains of $0.7 million and $1.0 million, respectively) on the Company’s interest rate swap and the fair valuation loss of $0.1 million and a gain of $0.2 million respectively, for the three and nine months ended December 31, 2004 (2003 — nil) on a subsidiary company’s interest rate swap are recorded in the unaudited consolidated statement of operations.
Under Canadian GAAP, until April 1, 2004, the interest rate swaps were determined to be effective hedges under Canadian Institute of Chartered Accountants (“CICA”) Section 3860, “Financial Instruments — Disclosure and Presentation”, and no fair valuation adjustments were recorded. In December 2001, the CICA released Accounting Guideline (“AcG-13”), “Hedging Relationships”, to be applied by companies for periods beginning on or after July 1, 2003. The standard establishes criteria to identify, designate, document and determine the effectiveness of hedging relationships, for the purpose of applying hedge accounting and provides guidance on the discontinuance of hedge accounting. Under Canadian GAAP the Company has adopted AcG-13 effective April 1, 2004 and determined the interest rate swaps do not meet the criteria of effective hedges and therefore the fair valuation gains of $0.5 million and $2.2 million, respectively, for the three and nine months ended December 31, 2004 (2003 — gains of $0.7 million and $1.0 million, respectively) on the Company’s interest rate swap and the fair valuation loss of $0.1 million and a gain of $0.2 million respectively, for the three and nine months ended December 31, 2004 (2003 — nil and nil) on a subsidiary company’s interest rate swap are recorded in the consolidated statement of operations, which is consistent with U.S. GAAP.
20
The transitional provisions of AcG-13 provide that when an entity terminates its designation of a hedging relationship or a hedging relationship ceases to be effective, hedge accounting is not applied to gains, losses, revenues or expenses arising subsequently. However, the hedge accounting applied to the hedging relationship in prior periods is not reversed. Any gains, losses, revenues or expenses deferred previously as a result of applying hedge accounting continue to be carried forward for subsequent recognition in income in the same period as the corresponding gains, losses, revenues or expenses associated with the hedged item. Accordingly, under Canadian GAAP at April 1, 2004 the Company recorded the fair values of the interest rate swaps totaling $3.0 million on the unaudited consolidated balance sheet and recorded the off-setting entry to deferred assets which is being amortized straight-line to interest expense over the terms of the interest rate swaps. This results in an additional interest expense for the three and nine months ended December 31, 2004 of $0.2 million and $0.5 million, respectively (2003 — nil and nil).
Under U.S. GAAP, costs related to the acquiring company must be expensed as incurred. Under Canadian GAAP, prior to January 1, 2001, costs related to restructuring activities of an acquiring company were considered in the purchase price allocation. In fiscal 2001, the Company included $1.4 million of such costs in the purchase price for an acquired company under Canadian GAAP. The amount is presented net of income taxes of $0.3 million.
SFAS 109 requires deferred tax assets and liabilities be recognized for temporary differences, other than non-deductible goodwill, arising in a business combination. 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 recorded a charge to retained earnings when the deferred tax liability was established upon adoption of the applicable accounting standard in 2001; accordingly, there is a difference in the carrying amount of goodwill arising in the business combination of $1.9 million as at December 31, 2004 (March 31, 2004 — $1.9 million).
Comprehensive Income (Loss) |
Under U.S. GAAP,
(k) Basicincrease contributed surplus by $0.6 million (2004 — $0.2 million) and Diluted Income (Loss) Per Share
Basic income (loss)to increase basic loss per share under Canadian GAAP is calculated as follows:by $0.01, respectively (2004 — nil).
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(Amounts in thousands, except per share amounts) | ||||||||||||||||
Numerator: | ||||||||||||||||
Net income (loss) | $ | 501 | $ | (30,907 | ) | $ | (4,802 | ) | $ | (45,119 | ) | |||||
Less: | ||||||||||||||||
Modification of warrants | — | (2,031 | ) | — | (2,031 | ) | ||||||||||
Dividends on Series A preferred shares | — | (66 | ) | — | (320 | ) | ||||||||||
Accretion and amortization on Series A preferred shares | — | (131 | ) | — | (771 | ) | ||||||||||
Net income (loss) available to common shareholders | $ | 501 | $ | (33,135 | ) | $ | (4,802 | ) | $ | (48,241 | ) | |||||
Denominator: | ||||||||||||||||
Weighted average common shares outstanding (thousands) | 98,119 | 84,375 | 96,437 | 63,646 | ||||||||||||
Basic income (loss) per common share | $ | 0.01 | $ | (0.39 | ) | $ | (0.05 | ) | $ | (0.76 | ) | |||||
On December 15, 2003, In accordance with CICA Section 3870, the Boardfollowing disclosures are provided about the costs of Directorsstock-based compensation awards using the fair value method. The weighted average estimated fair value of each stock option granted in the Company resolved thatthree months ended June 30, 2005 was $3.61. No stock options were granted during the term of the Company’s 5,525,000 warrants issued in December 1999 would be extended by one year. The warrants will expire January 1, 2005 instead of January 1,three months ended June 30, 2004. The modification of these warrants is treated as an exchange of the original warrant for a new warrant. The fair value of the new warrant is measured ateach stock option grant was estimated on the date of grant using the new warrant is issued andBlack-Scholes option pricing model with the value of the old warrant is its fair value immediately before its terms were modified. The additional incremental fair value of the new warrant is $2.0 millionfollowing assumptions used for stock options granted during the three and nine months ended December 31, 2003.
Fully diluted income per share under Canadian GAAP is calculated as follows:
Three Months | ||||
Ended | ||||
December 31, | ||||
2004 | ||||
(Amounts in | ||||
thousands, except | ||||
per share amounts) | ||||
Diluted income per common share is calculated as follows: | ||||
Numerator: | ||||
Net income available to common shareholders | $ | 501 | ||
Denominator: | ||||
Weighted average common shares outstanding | 98,119 | |||
Share purchase options | 5,287 | |||
Share purchase warrants | 1,548 | |||
Adjusted weighted average common shares outstanding | 104,954 | |||
Diluted income per common share | $ | 0.00 | ||
The share purchase optionsJune 30, 2005: a dividend yield of 0%, expected volatility of 33% (2004 — 30%), risk-free interest rate of 4.0% (2004 — 3.8%) and the share purchase warrants are included in diluted income per share under the treasury method. The shares issuable on the potential conversionexpected life of the 4.875% Notes and 2.9375% Notes are not included in diluted income per share as they are anti-dilutive.
21
16. Consolidating Financial Information
On
16. | Consolidating Financial Information |
OnCommission (SEC).
21
On March 3, 2005, the registration statement was declared effective by the SEC.
As of December 31, 2004 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
BALANCE SHEET | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 2,934 | $ | 327 | $ | 1,878 | $ | — | $ | 5,139 | ||||||||||
Restricted cash | — | — | 20,000 | — | 20,000 | |||||||||||||||
Accounts receivable, net | 760 | — | 109,889 | — | 110,649 | |||||||||||||||
Investment in films and television programs | — | — | 366,465 | — | 366,465 | |||||||||||||||
Property and equipment | 58 | 1,562 | 29,806 | — | 31,426 | |||||||||||||||
Goodwill | — | — | 168,705 | — | 168,705 | |||||||||||||||
Other assets | 138 | 15,400 | 7,330 | — | 22,868 | |||||||||||||||
Investment in subsidiaries | 225,189 | 251,226 | — | (476,415 | ) | — | ||||||||||||||
Future income taxes | 1,868 | — | (1,868 | ) | — | — | ||||||||||||||
$ | 230,947 | $ | 268,515 | $ | 702,205 | $ | (476,415 | ) | $ | 725,252 | ||||||||||
Liabilities and Shareholders’ Equity (Deficiency) | ||||||||||||||||||||
Bank loans | $ | — | $ | 73,400 | $ | 1,702 | $ | — | $ | 75,102 | ||||||||||
Accounts payable and accrued liabilities | 2,452 | 11,823 | 98,084 | — | 112,359 | |||||||||||||||
Film obligations | — | — | 168,806 | — | 168,806 | |||||||||||||||
Subordinated notes | — | 210,000 | 5,000 | — | 215,000 | |||||||||||||||
Mortgages payable | — | — | 19,063 | — | 19,063 | |||||||||||||||
Deferred revenue | — | — | 39,014 | — | 39,014 | |||||||||||||||
Minority interests | — | — | 150 | — | 150 | |||||||||||||||
Intercompany payables (receivables) | (129,523 | ) | 486 | 144,617 | (15,580 | ) | — | |||||||||||||
Intercompany equity | 262,260 | 93,217 | 306,514 | (661,991 | ) | — | ||||||||||||||
Shareholders’ equity (deficiency) | 95,758 | (120,411 | ) | (80,745 | ) | 201,156 | 95,758 | |||||||||||||
$ | 230,947 | $ | 268,515 | $ | 702,205 | $ | (476,415 | ) | $ | 725,252 | ||||||||||
As of June 30, 2005 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
BALANCE SHEET | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
Cash and cash equivalents | $ | 4,004 | $ | 19,603 | $ | 114,665 | $ | — | $ | 138,272 | ||||||||||
Restricted cash | — | — | 968 | — | 968 | |||||||||||||||
Accounts receivable, net | 34 | — | 102,405 | — | 102,439 | |||||||||||||||
Investment in films and television programs | — | — | 365,595 | — | 365,595 | |||||||||||||||
Property and equipment | — | 3,174 | 27,014 | — | 30,188 | |||||||||||||||
Goodwill | — | — | 161,182 | — | 161,182 | |||||||||||||||
Other assets | 77 | 19,215 | 12,125 | — | 31,417 | |||||||||||||||
Investment in subsidiaries | 220,334 | 273,515 | — | (493,849 | ) | — | ||||||||||||||
Deferred income taxes | 1,896 | — | (1,896 | ) | — | — | ||||||||||||||
$ | 226,345 | $ | 315,507 | $ | 782,058 | $ | (493,849 | ) | $ | 830,061 | ||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY) | ||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 192 | $ | 19,726 | $ | 119,687 | $ | — | $ | 139,605 | ||||||||||
Film obligations | — | — | 144,188 | — | 144,188 | |||||||||||||||
Subordinated notes | — | 385,000 | — | — | 385,000 | |||||||||||||||
Mortgages payable | — | — | 18,109 | — | 18,109 | |||||||||||||||
Deferred revenue | — | — | 48,286 | — | 48,286 | |||||||||||||||
Intercompany payables (receivables) | (130,990 | ) | (51,540 | ) | 198,090 | (15,560 | ) | — | ||||||||||||
Intercompany equity | 262,270 | 93,217 | 306,513 | (662,000 | ) | — | ||||||||||||||
Shareholders’ equity (deficiency) | 94,873 | (130,896 | ) | (52,815 | ) | 183,711 | 94,873 | |||||||||||||
$ | 226,345 | $ | 315,507 | $ | 782,058 | $ | (493,849 | ) | $ | 830,061 | ||||||||||
22
Nine Months Ended December 31, 2004 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
STATEMENT OF OPERATIONS | ||||||||||||||||||||
Revenues | $ | 345 | $ | — | $ | 610,147 | $ | (306 | ) | $ | 610,186 | |||||||||
Expenses: | ||||||||||||||||||||
Direct operating | — | — | 258,610 | — | 258,610 | |||||||||||||||
Distribution and marketing | — | — | 282,546 | — | 282,546 | |||||||||||||||
General and administration | 818 | 28,081 | 20,889 | (306 | ) | 49,482 | ||||||||||||||
Depreciation | 34 | 96 | 2,094 | — | 2,224 | |||||||||||||||
Total expenses | 852 | 28,177 | 564,139 | (306 | ) | 592,862 | ||||||||||||||
Operating Income (Loss) | (507 | ) | (28,177 | ) | 46,008 | — | 17,324 | |||||||||||||
Other Expenses (Income): | ||||||||||||||||||||
Interest | 59 | 17,644 | 1,574 | — | 19,277 | |||||||||||||||
Interest rate swaps mark-to-market | — | (2,200 | ) | (208 | ) | — | (2,408 | ) | ||||||||||||
Minority interests | — | — | 2 | — | 2 | |||||||||||||||
Other income | — | — | (825 | ) | — | (825 | ) | |||||||||||||
Equity interests | (793 | ) | (38,546 | ) | 200 | 39,339 | 200 | |||||||||||||
Total other expenses (income) | (734 | ) | (23,102 | ) | 743 | 39,339 | 16,246 | |||||||||||||
Income (Loss) Before Income Taxes | 227 | (5,075 | ) | 45,265 | (39,339 | ) | 1,078 | |||||||||||||
Income tax provision | (6 | ) | — | (851 | ) | — | (857 | ) | ||||||||||||
Net Income (Loss) | $ | 221 | $ | (5,075 | ) | $ | 44,414 | $ | (39,339 | ) | $ | 221 | ||||||||
Nine Months Ended December 31, 2004 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
STATEMENT OF CASH FLOWS | ||||||||||||||||||||
Net cash flows provided by (used in) operating activities | $ | (23,161 | ) | $ | 108,133 | $ | (1,838 | ) | $ | — | $ | 83,134 | ||||||||
Financing activities: | ||||||||||||||||||||
Issuance of common shares | 21,991 | — | — | — | 21,991 | |||||||||||||||
Financing fees | — | (1,077 | ) | — | — | (1,077 | ) | |||||||||||||
Increase (decrease) in bank loans | — | (251,300 | ) | 88 | — | (251,212 | ) | |||||||||||||
Increase in subordinated notes | — | 145,390 | — | — | 145,390 | |||||||||||||||
Decrease in mortgages payable | — | — | (1,585 | ) | — | (1,585 | ) | |||||||||||||
Net cash flows provided by (used in) financing activities | 21,991 | (106,987 | ) | (1,497 | ) | — | (86,493 | ) | ||||||||||||
Investing activities: | ||||||||||||||||||||
Cash received from disposition of assets, net | — | — | 1,172 | — | 1,172 | |||||||||||||||
Purchase of property and equipment | — | (1,424 | ) | (528 | ) | — | (1,952 | ) | ||||||||||||
Net cash flows provided by (used in) investing activities | — | (1,424 | ) | 644 | — | (780 | ) | |||||||||||||
Net change in cash and cash equivalents | (1,170 | ) | (278 | ) | (2,691 | ) | — | (4,139 | ) | |||||||||||
Foreign exchange effect on cash | 3,099 | 614 | (1,524 | ) | — | 2,189 | ||||||||||||||
Cash and cash equivalents — beginning of period | 1,005 | (9 | ) | 6,093 | — | 7,089 | ||||||||||||||
Cash and cash equivalents — end of period | $ | 2,934 | $ | 327 | $ | 1,878 | $ | — | $ | 5,139 | ||||||||||
Three Months Ended June 30, 2005 | ||||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||
STATEMENT OF OPERATIONS | ||||||||||||||||||||||
Revenues | $ | 172 | $ | — | $ | 194,201 | $ | (144 | ) | $ | 194,229 | |||||||||||
Expenses: | ||||||||||||||||||||||
Direct operating | — | — | 100,264 | — | 100,264 | |||||||||||||||||
Distribution and marketing | — | — | 93,481 | — | 93,481 | |||||||||||||||||
General and administration | 351 | 10,432 | 6,690 | (144 | ) | 17,329 | ||||||||||||||||
Depreciation | — | 26 | 722 | — | 748 | |||||||||||||||||
Total expenses | 351 | 10,458 | 201,157 | (144 | ) | 211,822 | ||||||||||||||||
Operating Loss | (179 | ) | (10,458 | ) | (6,956 | ) | — | (17,593 | ) | |||||||||||||
Other Expenses (Income): | ||||||||||||||||||||||
Interest expense | 17 | 4,564 | 303 | — | 4,884 | |||||||||||||||||
Interest rate swaps mark-to-market | — | 19 | 318 | — | 337 | |||||||||||||||||
Interest income | — | (1,065 | ) | — | — | (1,065 | ) | |||||||||||||||
Total other expenses | 17 | 3,518 | 621 | — | 4,156 | |||||||||||||||||
Loss Before Equity Interests and Income Taxes | (196 | ) | (13,976 | ) | (7,577 | ) | — | (21,749 | ) | |||||||||||||
Equity interests | 21,623 | 8,955 | — | (30,578 | ) | — | ||||||||||||||||
Income (Loss) Before Income Taxes | (21,819 | ) | (22,931 | ) | (7,577 | ) | 30,578 | (21,749 | ) | |||||||||||||
Income tax provision | — | — | (70 | ) | — | (70 | ) | |||||||||||||||
Net Income (Loss) | $ | (21,819 | ) | $ | (22,931 | ) | $ | (7,647 | ) | $ | 30,578 | $ | (21,819 | ) | ||||||||
23
Nine Months Ended December 31, 2004 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
RECONCILIATION OF NET INCOME (LOSS) TO CANADIAN GAAP | ||||||||||||||||||||
As reported under U.S. GAAP | $ | 221 | $ | (5,075 | ) | $ | 44,414 | $ | (39,339 | ) | $ | 221 | ||||||||
Adjustment for interest rate swaps mark-to market | (474 | ) | (368 | ) | (106 | ) | 474 | (474 | ) | |||||||||||
Adjustment for accretion on subordinated notes | (3,182 | ) | (3,182 | ) | — | 3,182 | (3,182 | ) | ||||||||||||
Adjustment for amortization of subordinated notes issue costs | 122 | 122 | — | (122 | ) | 122 | ||||||||||||||
Stock-based compensation | (1,391 | ) | (1,391 | ) | — | 1,391 | (1,391 | ) | ||||||||||||
Adjustment for amortization of debt financing costs | (98 | ) | (98 | ) | — | 98 | (98 | ) | ||||||||||||
Net income (loss) under Canadian GAAP | $ | (4,802 | ) | $ | (9,992 | ) | $ | 44,308 | $ | (34,316 | ) | $ | (4,802 | ) | ||||||
Three Months Ended June 30, 2005 | |||||||||||||||||||||
Lions Gate | Lions Gate | ||||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | |||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | |||||||||||||||||
(Amounts in thousands) | |||||||||||||||||||||
STATEMENT OF CASH FLOWS | |||||||||||||||||||||
Net cash flows provided by (used in) operating activities | $ | 3,916 | $ | (85,958 | ) | $ | 112,209 | $ | — | $ | 30,167 | ||||||||||
Investing activities: | |||||||||||||||||||||
Cash received from sale of investment | — | — | 2,011 | — | 2,011 | ||||||||||||||||
Purchases of property and equipment | — | (758 | ) | 129 | — | (629 | ) | ||||||||||||||
Net cash flows provided by (used in) investing activities | — | (758 | ) | 2,140 | — | 1,382 | |||||||||||||||
Financing activities: | |||||||||||||||||||||
Issuance of common shares | 61 | — | — | — | 61 | ||||||||||||||||
Repayment of subordinated notes | — | — | (5,000 | ) | — | (5,000 | ) | ||||||||||||||
Repayment of mortgages payable | — | — | (285 | ) | — | (285 | ) | ||||||||||||||
Net cash flows provided by (used in) financing activities | 61 | — | (5,285 | ) | — | (5,224 | ) | ||||||||||||||
Net change in cash and cash equivalents | 3,977 | (86,716 | ) | 109,064 | — | 26,325 | |||||||||||||||
Foreign exchange effect on cash | (916 | ) | (37 | ) | 61 | — | (892 | ) | |||||||||||||
Cash and cash equivalents — beginning of period | 943 | 106,356 | 5,540 | — | 112,839 | ||||||||||||||||
Cash and cash equivalents — end of period | $ | 4,004 | $ | 19,603 | $ | 114,665 | $ | — | $ | 138,272 | |||||||||||
24
As of December 31, 2004 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
RECONCILIATION OF SHAREHOLDERS’ EQUITY (DEFICIENCY) TO CANADIAN GAAP | ||||||||||||||||||||
As reported under U.S. GAAP | $ | 95,758 | $ | (120,411 | ) | $ | (80,745 | ) | $ | 201,156 | $ | 95,758 | ||||||||
Adjustment for interest rate swaps mark-to-market | 2,483 | 1,962 | 521 | (2,483 | ) | 2,483 | ||||||||||||||
Accounting for business combinations | 1,145 | — | 1,145 | (1,145 | ) | 1,145 | ||||||||||||||
Accounting for income taxes | (1,900 | ) | — | — | — | (1,900 | ) | |||||||||||||
Adjustment for accretion on subordinated notes | (3,991 | ) | (3,991 | ) | — | 3,991 | (3,991 | ) | ||||||||||||
Adjustment for amortization of subordinated notes issue costs | 170 | 170 | — | (170 | ) | 170 | ||||||||||||||
Reclassification of conversion feature of subordinated notes outside shareholders’ equity | 42,017 | — | — | — | 42,017 | |||||||||||||||
Other comprehensive loss | (666 | ) | (666 | ) | (666 | ) | 1,332 | (666 | ) | |||||||||||
Shareholders’ equity (deficiency) under Canadian GAAP | $ | 135,016 | $ | (122,936 | ) | $ | (79,745 | ) | $ | 202,681 | $ | 135,016 | ||||||||
As of March 31, 2004 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
BALANCE SHEET | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 1,005 | $ | (9 | ) | $ | 6,093 | $ | — | $ | 7,089 | |||||||||
Accounts receivable, net | 180 | 75 | 128,990 | — | 129,245 | |||||||||||||||
Investment in films and television programs | — | — | 406,170 | — | 406,170 | |||||||||||||||
Property and equipment | 87 | 236 | 29,338 | — | 29,661 | |||||||||||||||
Goodwill | — | — | 166,804 | — | 166,804 | |||||||||||||||
Other assets | 141 | 14,246 | 9,327 | — | 23,714 | |||||||||||||||
Investment in subsidiaries | 226,691 | 215,109 | — | (441,800 | ) | — | ||||||||||||||
Future income taxes | 1,824 | — | (1,824 | ) | — | — | ||||||||||||||
$ | 229,928 | $ | 229,657 | $ | 744,898 | $ | (441,800 | ) | $ | 762,683 | ||||||||||
Liabilities and Shareholders’ Equity (Deficiency) | ||||||||||||||||||||
Bank loans | $ | — | $ | 324,700 | $ | 1,474 | $ | — | $ | 326,174 | ||||||||||
Accounts payable and accrued liabilities | 1,183 | 8,850 | 119,691 | — | 129,724 | |||||||||||||||
Film obligations | — | — | 114,068 | — | 114,068 | |||||||||||||||
Subordinated notes | 60,000 | 5,000 | — | 65,000 | ||||||||||||||||
Mortgages payable | — | — | 19,041 | — | 19,041 | |||||||||||||||
Deferred revenue | — | — | 38,932 | — | 38,932 | |||||||||||||||
Minority interests | — | — | 135 | — | 135 | |||||||||||||||
Intercompany payables (receivables) | (103,124 | ) | (144,035 | ) | 262,738 | (15,579 | ) | — | ||||||||||||
Intercompany equity | 262,260 | 93,217 | 306,545 | (662,022 | ) | — | ||||||||||||||
Shareholders’ equity (deficiency) | 69,609 | (113,075 | ) | (122,726 | ) | 235,801 | 69,609 | |||||||||||||
$ | 229,928 | $ | 229,657 | $ | 744,898 | $ | (441,800 | ) | $ | 762,683 | ||||||||||
Three Months Ended June 30, 2005 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
RECONCILIATION OF NET INCOME (LOSS) TO CANADIAN GAAP | ||||||||||||||||||||
As reported under U.S. GAAP | $ | (21,819 | ) | $ | (22,931 | ) | $ | (7,647 | ) | $ | 30,578 | $ | (21,819 | ) | ||||||
Interest rate swaps mark-to-market | (158 | ) | (123 | ) | (35 | ) | 158 | (158 | ) | |||||||||||
Accounting for stock-based compensation | (575 | ) | — | — | — | (575 | ) | |||||||||||||
Adjustment for accretion on subordinated notes | (3,158 | ) | (3,158 | ) | — | 3,158 | (3,158 | ) | ||||||||||||
Adjustment for amortization of subordinated notes issue costs | 227 | 227 | — | (227 | ) | 227 | ||||||||||||||
Net income (loss) under Canadian GAAP | $ | (25,483 | ) | $ | (25,985 | ) | $ | (7,682 | ) | $ | 33,667 | $ | (25,483 | ) | ||||||
As of June 30, 2005 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
RECONCILIATION OF SHAREHOLDERS’ EQUITY (DEFICIENCY) TO CANADIAN GAAP | ||||||||||||||||||||
As reported under U.S. GAAP | $ | 94,873 | $ | (130,896 | ) | $ | (52,815 | ) | $ | 183,711 | $ | 94,873 | ||||||||
Interest rate swaps mark-to-market | 2,167 | 1,682 | 485 | (2,167 | ) | 2,167 | ||||||||||||||
Accounting for business combinations | 1,145 | — | 1,145 | (1,145 | ) | 1,145 | ||||||||||||||
Accounting for income taxes | (1,900 | ) | — | (1,900 | ) | 1,900 | (1,900 | ) | ||||||||||||
Adjustment for accretion on subordinated notes | (9,582 | ) | (9,582 | ) | — | 9,582 | (9,582 | ) | ||||||||||||
Adjustment for amortization of subordinated notes issue costs | 709 | 709 | — | (709 | ) | 709 | ||||||||||||||
Reclassification of conversion feature of subordinated notes outside shareholders’ equity | 74,854 | — | — | — | 74,854 | |||||||||||||||
Other comprehensive income (loss) | (538 | ) | (538 | ) | (538 | ) | 1,076 | (538 | ) | |||||||||||
Shareholders’ equity (deficiency) under Canadian GAAP | $ | 161,728 | $ | (138,625 | ) | $ | (53,623 | ) | $ | 192,248 | $ | 161,728 | ||||||||
25
As of March 31, 2004 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
RECONCILIATION OF SHAREHOLDERS’ EQUITY (DEFICIENCY) TO CANADIAN GAAP | ||||||||||||||||||||
As reported under U.S. GAAP | $ | 69,609 | $ | (113,075 | ) | $ | (122,726 | ) | $ | 235,801 | $ | 69,609 | ||||||||
Adjustment for interest rate swaps mark-to-market | 2,957 | 2,957 | — | (2,957 | ) | 2,957 | ||||||||||||||
Accounting for business combinations | 1,145 | — | 1,145 | (1,145 | ) | 1,145 | ||||||||||||||
Accounting for income taxes | (1,900 | ) | — | (1,900 | ) | 1,900 | (1,900 | ) | ||||||||||||
Adjustment for accretion on subordinated notes | (809 | ) | (809 | ) | — | 809 | (809 | ) | ||||||||||||
Adjustment for amortization of subordinated notes issue costs | 48 | 48 | — | (48 | ) | 48 | ||||||||||||||
Adjustment for amortization of debt financing costs | 98 | 98 | — | (98 | ) | 98 | ||||||||||||||
Reclassification of conversion feature of subordinated notes outside shareholders’ equity | 16,269 | — | — | — | 16,269 | |||||||||||||||
Other comprehensive loss | (590 | ) | (590 | ) | (590 | ) | 1,180 | (590 | ) | |||||||||||
Shareholders’ equity (deficiency) under Canadian GAAP | $ | 86,827 | $ | (111,371 | ) | $ | (124,071 | ) | $ | 235,442 | $ | 86,827 | ||||||||
As of March 31, 2005 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
BALANCE SHEET | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
Cash and cash equivalents | $ | 943 | $ | 106,356 | $ | 5,540 | $ | — | $ | 112,839 | ||||||||||
Restricted cash | — | — | 2,913 | — | 2,913 | |||||||||||||||
Accounts receivable, net | 35 | 69 | 149,915 | — | 150,019 | |||||||||||||||
Investment in films and television programs | — | — | 367,376 | — | 367,376 | |||||||||||||||
Property and equipment | — | 2,544 | 28,298 | — | 30,842 | |||||||||||||||
Goodwill | — | — | 161,182 | — | 161,182 | |||||||||||||||
Other assets | 92 | 19,517 | 9,849 | — | 29,458 | |||||||||||||||
Investment in subsidiaries | 250,701 | 291,206 | — | (541,907 | ) | — | ||||||||||||||
Deferred income taxes | 1,896 | — | (1,896 | ) | — | — | ||||||||||||||
$ | 253,667 | $ | 419,692 | $ | 723,177 | $ | (541,907 | ) | $ | 854,629 | ||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY) | ||||||||||||||||||||
Bank loans | $ | — | $ | — | $ | 1,162 | $ | — | $ | 1,162 | ||||||||||
Accounts payable and accrued liabilities | 143 | 21,074 | 112,983 | — | 134,200 | |||||||||||||||
Film obligations | — | — | 130,770 | — | 130,770 | |||||||||||||||
Subordinated notes | 385,000 | 5,000 | 390,000 | |||||||||||||||||
Mortgages payable | — | — | 18,640 | — | 18,640 | |||||||||||||||
Deferred revenue | — | — | 62,459 | — | 62,459 | |||||||||||||||
Minority interests | — | — | 259 | — | 259 | |||||||||||||||
Intercompany payables (receivables) | (134,932 | ) | 19,623 | 130,887 | (15,578 | ) | — | |||||||||||||
Intercompany equity | 262,269 | 93,217 | 306,515 | (662,001 | ) | — | ||||||||||||||
Shareholders’ equity (deficiency) | 126,187 | (99,222 | ) | (45,498 | ) | 135,672 | 117,139 | |||||||||||||
$ | 253,667 | $ | 419,692 | $ | 723,177 | $ | (541,907 | ) | $ | 854,629 | ||||||||||
26
Nine Months Ended December 31, 2003 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
STATEMENT OF OPERATIONS | ||||||||||||||||||||
Revenues | $ | 1,140 | $ | — | $ | 216,472 | $ | (607 | ) | $ | 217,005 | |||||||||
Expenses: | ||||||||||||||||||||
Direct operating | — | — | 113,131 | — | 113,131 | |||||||||||||||
Distribution and marketing | — | — | 102,910 | — | 102,910 | |||||||||||||||
General and administration | 1,918 | 8,164 | 14,172 | (607 | ) | 23,647 | ||||||||||||||
Severance and relocation costs | 118 | 5,348 | 468 | — | 5,934 | |||||||||||||||
Write-down of other assets | 5,409 | — | 2,655 | — | 8,064 | |||||||||||||||
Depreciation | 111 | 434 | 1,203 | — | 1,748 | |||||||||||||||
Total expenses | 7,556 | 13,946 | 234,539 | (607 | ) | 255,434 | ||||||||||||||
Operating Loss | (6,416 | ) | (13,946 | ) | (18,067 | ) | — | (38,429 | ) | |||||||||||
Other Expenses: | ||||||||||||||||||||
Interest | 274 | 7,042 | 1,701 | — | 9,017 | |||||||||||||||
Interest rate swaps mark-to-market | — | (950 | ) | — | — | (950 | ) | |||||||||||||
Equity interests | 41,333 | 21,775 | 1,959 | (63,108 | ) | 1,959 | ||||||||||||||
Total other expenses | 41,607 | 27,867 | 3,660 | (63,108 | ) | 10,026 | ||||||||||||||
Loss Before Income Taxes | (48,023 | ) | (41,813 | ) | (21,727 | ) | 63,108 | (48,455 | ) | |||||||||||
Income tax (provision) benefit | (747 | ) | 1 | 431 | — | (315 | ) | |||||||||||||
Net Loss | $ | (48,770 | ) | $ | (41,812 | ) | $ | (21,296 | ) | $ | 63,108 | $ | (48,770 | ) | ||||||
Nine Months Ended December 31, 2003 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
STATEMENT OF CASH FLOWS | ||||||||||||||||||||
Net cash flows provided by (used in) operating activities | $ | (61,501 | ) | $ | (200,831 | ) | $ | 210,791 | $ | — | $ | (51,541 | ) | |||||||
Financing activities: | ||||||||||||||||||||
Issuance of common shares | 104,589 | — | — | — | 104,589 | |||||||||||||||
Redemption of Series A preferred shares | (18,090 | ) | — | — | — | (18,090 | ) | |||||||||||||
Dividends paid on Series A preferred shares | (254 | ) | — | — | — | (254 | ) | |||||||||||||
Financing fees | (73 | ) | (11,214 | ) | — | — | (11,287 | ) | ||||||||||||
Increase (decrease) in bank loans | (18,027 | ) | 155,434 | (54,900 | ) | — | 82,507 | |||||||||||||
Increase in subordinated notes | — | 56,663 | — | — | 56,663 | |||||||||||||||
Decrease in production loans | — | — | (1,273 | ) | — | (1,273 | ) | |||||||||||||
Increase (decrease) in debt | (12,080 | ) | — | 4,168 | — | (7,912 | ) | |||||||||||||
Net cash flows provided by (used in) financing activities | 56,065 | 200,883 | (52,005 | ) | — | 204,943 | ||||||||||||||
Investing activities: | ||||||||||||||||||||
Acquisition of Artisan Entertainment Inc, net of cash acquired | — | — | (149,559 | ) | — | (149,559 | ) | |||||||||||||
Purchase of property and equipment | (21 | ) | (201 | ) | (223 | ) | — | (445 | ) | |||||||||||
Net cash flows used in investing activities | (21 | ) | (201 | ) | (149,782 | ) | — | (150,004 | ) | |||||||||||
Net change in cash and cash equivalents | (5,457 | ) | (149 | ) | 9,004 | — | 3,398 | |||||||||||||
Foreign exchange effect on cash | 8,199 | (460 | ) | (8,574 | ) | — | (835 | ) | ||||||||||||
Cash and cash equivalents — beginning of period | (126 | ) | 1,706 | 5,271 | — | 6,851 | ||||||||||||||
Cash and cash equivalents —end of period | $ | 2,616 | $ | 1,097 | $ | 5,701 | $ | — | $ | 9,414 | ||||||||||
As of March 31, 2005 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
RECONCILIATION OF SHAREHOLDERS’ EQUITY (DEFICIENCY) TO CANADIAN GAAP | ||||||||||||||||||||
As reported under U.S. GAAP | $ | 126,187 | $ | (99,222 | ) | $ | (45,498 | ) | $ | 135,672 | $ | 117,139 | ||||||||
Interest rate swaps mark-to-market | 2,325 | 1,840 | 485 | (2,325 | ) | 2,325 | ||||||||||||||
Accounting for business combinations | 1,145 | 1,145 | 1,145 | (2,290 | ) | 1,145 | ||||||||||||||
Accounting for income taxes | (1,900 | ) | — | (1,900 | ) | 1,900 | (1,900 | ) | ||||||||||||
Adjustment for accretion on subordinated notes | (6,424 | ) | (6,424 | ) | — | 6,424 | (6,424 | ) | ||||||||||||
Adjustment for amortization of subordinated note issue costs | 482 | 482 | — | (482 | ) | 482 | ||||||||||||||
Reclassification of conversion feature of subordinated notes to shareholders’ equity | 74,854 | — | — | — | 74,854 | |||||||||||||||
Other comprehensive loss | (304 | ) | (304 | ) | (304 | ) | 608 | (304 | ) | |||||||||||
Shareholders’ equity (deficiency) under Canadian GAAP | $ | 196,365 | $ | (102,483 | ) | $ | (46,072 | ) | $ | 139,507 | $ | 187,317 | ||||||||
27
Nine Months Ended December 31, 2003 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
RECONCILIATION OF NET LOSS TO CANADIAN GAAP | ||||||||||||||||||||
As reported under U.S. GAAP | $ | (48,770 | ) | $ | (41,812 | ) | $ | (21,296 | ) | $ | 63,108 | $ | (48,770 | ) | ||||||
Adjustment for capitalized pre-operating costs | (462 | ) | (462 | ) | (462 | ) | 924 | (462 | ) | |||||||||||
Adjustment for interest rate swaps mark-to-market | (950 | ) | (950 | ) | — | 950 | (950 | ) | ||||||||||||
Adjustment for accretion on subordinated notes | (190 | ) | (190 | ) | — | 190 | (190 | ) | ||||||||||||
Provision for debentures and other receivables due from CinéGroupe | 8,064 | — | 2,655 | (2,655 | ) | 8,064 | ||||||||||||||
Adjustment for consolidation of CinéGroupe | (2,333 | ) | — | (2,333 | ) | 2,333 | (2,333 | ) | ||||||||||||
Stock-based compensation | (478 | ) | (478 | ) | — | 478 | (478 | ) | ||||||||||||
Net loss under Canadian GAAP | $ | (45,119 | ) | $ | (43,892 | ) | $ | (21,436 | ) | $ | 65,328 | $ | (45,119 | ) | ||||||
Three Months Ended June 30, 2004 | ||||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||
STATEMENT OF OPERATIONS | ||||||||||||||||||||||
Revenues | $ | 120 | $ | — | $ | 188,751 | $ | (147 | ) | $ | 188,724 | |||||||||||
Expenses: | ||||||||||||||||||||||
Direct operating | — | — | 80,810 | — | 80,810 | |||||||||||||||||
Distribution and marketing | — | — | 98,066 | — | 98,066 | |||||||||||||||||
General and administration | 1,467 | 7,628 | 8,179 | (147 | ) | 17,127 | ||||||||||||||||
Depreciation | 11 | 31 | 633 | — | 675 | |||||||||||||||||
Total expenses | 1,478 | 7,659 | 187,688 | (147 | ) | 196,678 | ||||||||||||||||
Operating Income (Loss) | (1,358 | ) | (7,659 | ) | 1,063 | — | (7,954 | ) | ||||||||||||||
Other Expenses (Income): | ||||||||||||||||||||||
Interest expense | 21 | 4,899 | 541 | — | 5,461 | |||||||||||||||||
Interest income | — | — | (37 | ) | — | (37 | ) | |||||||||||||||
Interest rate swaps mark-to-market | — | (1,591 | ) | (469 | ) | — | (2,060 | ) | ||||||||||||||
Minority interests | — | — | (123 | ) | — | (123 | ) | |||||||||||||||
Total other expenses (income) | 21 | 3,308 | (88 | ) | — | 3,241 | ||||||||||||||||
Income (Loss) Before Equity Interests and Income Taxes | (1,379 | ) | (10,967 | ) | 1,151 | — | (11,195 | ) | ||||||||||||||
Equity interests | (10,083 | ) | (113 | ) | — | 10,196 | — | |||||||||||||||
Income (Loss) Before Income Taxes | (11,462 | ) | (11,080 | ) | 1,151 | 10,196 | (11,195 | ) | ||||||||||||||
Income tax provision | — | (241 | ) | (26 | ) | — | (267 | ) | ||||||||||||||
Net Income (Loss) | $ | (11,462 | ) | $ | (11,321 | ) | $ | 1,125 | $ | 10,196 | $ | (11,462 | ) | |||||||||
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Three Months Ended June 30, 2004 | |||||||||||||||||||||
Lions Gate | Lions Gate | ||||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | |||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | |||||||||||||||||
(Amounts in thousands) | |||||||||||||||||||||
STATEMENT OF CASH FLOWS | |||||||||||||||||||||
Net cash flows provided by (used in) operating activities | $ | (3,513 | ) | $ | 35,184 | $ | 7,736 | $ | — | $ | 39,407 | ||||||||||
Investing activities: | |||||||||||||||||||||
Purchases of property and equipment | — | (45 | ) | — | — | (45 | ) | ||||||||||||||
Net cash flows used in investing activities | — | (45 | ) | — | — | (45 | ) | ||||||||||||||
Financing activities: | |||||||||||||||||||||
Issuance of common stock | 10,651 | — | — | — | 10,651 | ||||||||||||||||
Financing fees paid | — | (346 | ) | — | — | (346 | ) | ||||||||||||||
Increase (decrease) in bank loans | — | (34,700 | ) | 415 | — | (34,285 | ) | ||||||||||||||
Decrease in mortgages payable | — | — | (241 | ) | — | (241 | ) | ||||||||||||||
Net cash flows provided by (used in) financing activities | 10,651 | (35,046 | ) | 174 | — | (24,221 | ) | ||||||||||||||
Net change in cash and cash equivalents | 7,138 | 93 | 7,910 | — | 15,141 | ||||||||||||||||
Foreign exchange effect on cash | (3,778 | ) | (84 | ) | 3,691 | — | (171 | ) | |||||||||||||
Cash and cash equivalents — beginning of period | 1,005 | (9 | ) | 6,093 | — | 7,089 | |||||||||||||||
Cash and cash equivalents — end of period | $ | 4,365 | $ | — | $ | 17,694 | $ | — | $ | 22,059 | |||||||||||
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Three Months Ended June 30, 2004 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
RECONCILIATION OF NET INCOME (LOSS) TO CANADIAN GAAP | ||||||||||||||||||||
As reported under U.S. GAAP | $ | (11,462 | ) | $ | (11,321 | ) | $ | 1,125 | $ | 10,196 | $ | (11,462 | ) | |||||||
Interest rate swaps mark-to-market | (158 | ) | (123 | ) | (35 | ) | 158 | (158 | ) | |||||||||||
Accounting for stock-based compensation | (238 | ) | — | — | — | (238 | ) | |||||||||||||
Adjustment for accretion on subordinated notes | (618 | ) | (618 | ) | — | 618 | (618 | ) | ||||||||||||
Adjustment for amortization of subordinated notes issue costs | 36 | 36 | — | (36 | ) | 36 | ||||||||||||||
Adjustment for amortization of debt financing costs | 84 | 84 | — | (84 | ) | 84 | ||||||||||||||
Net income (loss) under Canadian GAAP | $ | (12,356 | ) | $ | (11,942 | ) | $ | 1,090 | $ | 10,852 | $ | (12,356 | ) | |||||||
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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Overview |
distributor based in Toronto, Canada.
• | Motion Pictures, which includes Theatrical, Home Entertainment, Television and International Distribution. Theatrical revenues are derived from the domestic theatrical release of motion pictures in North America. Home entertainment revenues are derived from the sale of video and DVD releases of our own productions and acquired films, including theatrical releases and direct-to-video releases. Television revenues are primarily derived from the licensing of our productions and acquired films to the domestic cable, free and pay television markets. International revenues are derived from the licensing of our productions and acquired films to international markets on a territory-by-territory basis. |
• | Television, which includes the licensing to domestic and international markets of one-hour drama series, television movies and mini-series and non-fiction programming. |
• | Studio Facilities, which includes Lions Gate Studios and the leased facility Eagle Creek Studios, which derive revenue from rental of sound stages, production offices, construction mills, |
• | Direct Operating Expenses, which |
• | Distribution and Marketing Expenses, which primarily include the costs of theatrical “prints and advertising” and of video and DVD duplication and marketing. |
• | General and Administration Expenses, which include salaries and other overhead. |
Generally Accepted Accounting Principles (“GAAP”).On March 29, 2004, the new British Columbia Business Corporations Act came into force, which allows us to prepare our financial statements either under Canadian or U.S. GAAP. We have elected to prepare financial statements under U.S. GAAP commencing April 1, 2004. Therefore, these consolidated financial statements have been prepared in accordance with U.S. GAAP and amounts previously reported under Canadian GAAP have been restated under U.S. GAAP. We must disclose and quantify material differences with Canadian GAAP in our interim and annual financial statements for
29
the next two fiscal years from April 1, 2004. The differences for the three and nine months ended December 31, 2004 are describedChristal Distributions, net of amounts payable, was recorded, as of June 30, 2005 in note 15 of our accompanying consolidated financial statements.
CinemaNow.In July 2004, we purchased $0.2 million Series D Convertible Preferred Shares as part of an $11 million round of financing secured by CinemaNow. The round of financing decreased our voting and economic interests from approximately 54% to 30%. During the nine months ended December 31, 2004, we recorded losses of $0.2 million as other equity interestsassets in the condensed consolidated statements of operations. Therefore the investment in CinemaNow is nil at December 31, 2004.
Non-fiction programming.In July 2004, we entered into a transaction with Creative Differences Productions Inc., a company wholly owned by a former employee of Lions Gate who was primarily responsible for Termite Art. As a result of this transaction, Creative Differences Productions Inc. assumed the responsibility for the San Fernando Valley premises and certain operations of Termite Art. The transaction resulted in a gain of $0.7 million recorded as other income in the consolidated statement of operations for the nine months ended December 31, 2004. The transaction also resulted in a reduction of non-fiction programming hours for the three and nine months ended December 31, 2004 compared to previous periods. Lions Gate retained the distribution operations of Termite Art.
Stock-Based Compensation Plan.On September 14, 2004, the shareholders approved the 2004 Performance Incentive Plan that provides for the issue of 2.0 million common shares of the Company to eligible employees, directors, officers and other eligible persons of the Company and its affiliates.
Issuance of Convertible Senior Subordinated Notes.On October 4, 2004, Lions Gate Entertainment Inc., a wholly owned subsidiary of the Company sold $150.0 million 2.9375% Convertible Senior Subordinated Notes (“2.9375% Notes”) with a maturity date of October 15, 2024. We received $146.0 million of net proceeds after paying placement agents’ fees. Offering expenses were approximately $0.5 million. The 2.9375% Notes are convertible at the option of the holder, at any time prior to maturity, upon satisfaction of certain conversion contingencies, into common shares of Lions Gate Entertainment Corp. at a conversion rate of 86.9565 shares per $1,000 principal amount of the 2.9375% Notes, which is equal to a conversion price of approximately $11.50 per share, subject to adjustment upon certain events. We used the net proceeds for repayment of outstanding indebtedness under the existing U.S. dollar revolving credit facility and term loan, and may also use the net proceeds for other general business purposes, which may include the financing of a portion of any future acquisitions.
Exercise of Warrants.During the nine months ended December 31, 2004, 2,168,350 warrants were exercised and the Company issued 2,168,350 common shares and received proceeds of $10.8 million. During December 2004, an additional 1,993,250 warrants were exercised by cashless exercise resulting in the issuance of 1,052,517 common shares. Any remaining warrants expired January 1, 2005 and therefore no warrants are outstanding.
Credit Facility.In anticipation of the proceeds from the 2.9375% Notes, we repaid $60 million of term loan with the revolving credit facility on September 30, 2004 and on October 4, 2004 used the proceeds from the 2.9375% Notes to partially repay the revolving credit facility. Therefore, on September 30, 2004, the term loan was reduced to $75 million and the credit facility to $290 million. On December 31, 2004, we repaid the term loan in full with the revolving credit facility, thereby reducing the credit facility to a $215 million revolving facility at December 31, 2004. The repayment of our term loan resulted in the write-off of deferred financing fees of $3.4 million on the term loan portion of the credit facility which is recorded as interest expense.
Critical Accounting Policies
balance sheet.
statements.
30
accordance with Statement of Position 00-2 “Accounting by Producers or Distributors of Films” (“SoP 00-2”).00-2. These costs are stated at the lower of unamortized films or television program costs or estimated fair value. These costs for an individual film or television program are amortized and participation and residual costs are accrued in the proportion that current year’s revenues bear to management’s estimates of the ultimate revenue at the beginning of the year expected to be recognized from exploitation, exhibition or sale of such film or television program over a period not to exceed ten years from the date of initial release. For previously released film 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. Management regularly reviews and revises when necessary, its ultimate revenue and cost estimates, which may result in a change in the rate of amortization of film costs and participations and residuals and/or write-down of all or a portion of the unamortized costs of the film or television program to its estimated fair value. UnfavorableNo assurance can be given that unfavorable changes to revenue and cost estimates maywill not occur, which may result in significant write-downs affecting our results of operations and financial condition.
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Goodwill.Other Intangible Assets”. Goodwill is assessedreviewed annually for impairment at least annually within each fiscal year or between the annual tests if an event occurs or circumstances change that indicate it is more-likely-than-not reducesthat the fair value of a reporting unit belowis less than its carrying value. The Company completedperforms its annual impairment teststest as required under SFAS 142 and CICA 3062, with the most recent test completed atof December 31 2003. No events have occurred or circumstances changed subsequent to December 31, 2003, that would cause thein each fiscal year. The Company to perform an interim impairment test. The nextperformed its annual impairment test will be completed during the quarter ended March 31, 2005,on its goodwill as atof December 31, 2004. No goodwill impairment was identified in any of the Company’s reporting units. Determining the fair value of reporting units requires various assumptions and estimates.
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Recent Accounting Pronouncements
33
EITF Issue No. 04-8.For the three months ended December 31, 2004, the Company adopted EITF Issue No. 04-8 The Effect of Contingently Convertible Debt on Diluted Earnings Per Share, which applied to reporting periods ending after the effective date of December 15, 2004. Under EITF Issue No. 04-8, all instruments that have embedded conversion features that are contingent on market conditions indexed to an issuer’s share price are included in diluted earnings per share computations (if dilutive) regardless of whether the market conditions have been met. On October 4, 2004, Lions Gate Entertainment Inc., a wholly owned subsidiary of the Company sold $150.0 million 2.9375% Notes with a maturity date of October 15, 2024. The 2.9375% Notes are convertible at the option of the holder, at any time prior to maturity, upon satisfaction of certain conversion contingencies, into common shares of Lions Gate Entertainment Corp. and therefore the shares issuable on the potential conversion of the 2.9375% Notes would be included in diluted earning per share computations for the three and nine months ended December 31, 2004 (if dilutive).
2006.
Three Months Ended December 31, 2004 Compared to Three Months Ended December 31, 2003
Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004 |
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delivered contributingcontributed revenue of $4.3$1.3 million. Domestic deliveries of one-hour drama series this quarter includedThe Cut, Wildfire, MissingandSecond Verdict.The Dead ZoneTelevision movies thisand of half-hour drama series includedWeeds. Domestic deliveries in the prior year’s quarter included the one-hour drama series Frankenstein.The decrease in revenue Dead Zoneand hours of non-fiction programming is duethe mini-series 5 Days to the disposition in July 2004 of the production operations of Termite Art, a division of the television segment.
Midnight.
the prior year’s quarter.
34
In the current quarter, we decreased the provision for doubtful accounts by $1.8 million to $7.5 million at December 31, 2004. The decrease in the provision is primarilyand television segments increased due to a reclassificationthe margins on the mix of sales allowances, which are reflectedtitles released during the quarter. The television segment in particular generated significant series revenue associated with higher direct operating expenses as a reductionpercentage of revenue, and due to collection of accounts receivable that were previously provided for.
revenue.
Generalthe fees associated with our fiscal year end audit services. Salaries and administration expensesbenefits decreased as the prior year’s quarter included stock-price bonuses due under employment contracts and stock-based compensation expense related to share appreciation rights, whereas in the current quarter a recovery of $15.6the stock-based compensation expense is recorded. In the current quarter, $1.1 million of production overhead was capitalized compared to $0.6 million in the prior year’s quarter.
Severance and relocation costs of $5.9 million in the prior year’s quarter represent costs incurredcredit facility, offset by Lions Gate, associated with the acquisition of Artisan, which include property and lease abandonment costs of $2.8 million, the write-off of capital assets no longer in use of $2.1 million and severance of $1.0 million.
Write down of other assets of $8.1 million in the prior year’s quarter consists of a provision against convertible debentures and other receivables due from CinéGroupe. CinéGroupe was unable to meet its financial obligations in the ordinary course of business and sought protection under the Companies Creditors Arrangement Act (“CCAA”) in December 2003. As a result, we determined that amounts owing may not be collectible and recorded a provision against convertible debentures and other receivables due from CinéGroupe, resulting in a write-down of amounts owing to nil.
Depreciation of $0.8 million this quarter increased $0.1 million, or 14.3%, compared to $0.7 million in the prior year’s quarter.
Interest expense of $8.2 million this quarter increased $3.4 million, or 70.8%, compared to $4.8 million in the prior year’s quarter primarily due to an increase in interest and amortization on subordinated notes and an increase in amortization and write-off of deferred financing costsfees on the subordinated notes. The credit facility had a nil balance during the three months ended June 30, 2005 resulting in a decrease in interest on the credit facility. During the three months ended December 31, 2004, deferred financing fees on the term loan portion of the credit facility were written off resulting in a decrease in amortization of deferred financing fees. The current quarterthree months ended June 30, 2005 includes interest and amortization on the 4.875% Notes issued December 2003, and the 2.9375% Notes issued October 2004 and the 3.625% Notes issued February 2005, whereas the prior year’s quarterthree months ended June 30, 2004 includes approximately one month of interest and amortization on the 4.875% Notes only. The current quarter includes amortization of increased deferred financing fees on the amended credit facility and write-off of deferred financing fees of $3.4 million on the term loan portion of the amended credit facility which was repaid December 31, 2004. The prior year’s quarter includes amortization of deferred financing fees and write-off of deferred financing fees of $2.0 million on the previous credit facility repaid December 2003. In both the current quarter and prior year’s quarter $0.3 million interest is capitalized to production costs.
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Interest rate swaps do not meet the criteria of effective hedges and therefore a fair valuation gainloss of $0.4$0.3 million was recorded this quarter and a fair valuation gain of $0.7$2.1 million was recorded in the prior year’s quarter.
Equity interests
Net income for the three months ended December 31, 2004June 30, 2005 was $3.4$21.8 million, or basic earningsloss per share of $0.03$0.21 on 98.1101.9 million weighted average shares outstanding. Diluted earnings per share for the three months ended December 31, 2004 were $0.03. This compares to net loss for the three months ended December 31, 2003June 30, 2004 of $35.7$11.5 million or loss per share of $0.45$0.12 on 84.494.9 million weighted average common shares outstanding (after giving effect to modification of warrants and dividends and accretion on the Series A Preferred Shares). In December 2003, the expiration date of warrants was extended by one year to January 1, 2005 and the modification resulted in a charge to net income (loss) available to common shareholders. In February 2004, we exercised our right to convert all remaining preferred shares to common shares. Therefore, for the three months ended December 31, 2004, there are no Series A Preferred Share dividends or accretion on the Series A Preferred Shares.
outstanding.
Consolidated revenues for the nine months ended December 30. 2004 of $610.2 million increased $393.2 million, or 181.2%, compared to $217.0 million for the nine months ended December 31, 2003.
Motion pictures revenue of $537.0 million this period increased $376.6 million, or 234.8%, compared to $160.4 million in the prior year’s period due to significant releases during the period and revenues generated by acquired Artisan titles. Theatrical revenue of $113.3 million this period increased $93.1 million, or 460.9%, compared to $20.2 million in the prior year’s period. Significant theatrical releases this period includedFahrenheit 9/11, Saw, The PunisherandOpen Water.Significant theatrical releases in the prior year’s period includedCabin Fever, House of 1000 CorpsesandConfidence.Video revenue of $325.9 million this period increased $220.5 million, or 209.2%, compared to $105.4 million in the prior year’s period. Significant video releases this period includedThe Punisher, Barbie in the Prince and the Pauper, Open Water, Godsend, Dirty Dancing: Havana Nights, The CoolerandGirl With a Pearl Earring.Video releases in prior quarters and the video library continued to contribute significant video revenue. Significant video releases in the prior year’s period includedHouse of 1000 Corpses, Confidence, Will & Grace: Season 1andSecretary. International revenue of $67.1 million this period increased $41.8 million, or 165.2%, compared to $25.3 million in the prior year’s period. Significant international sales this period includedThe Punisher, GodsendandThe Prince and Me.Significant international sales in the prior year’s period includedConfidence, WonderlandandCabin Fever.Television revenue from motion pictures of $26.9 million this period increased $19.6 million, or 268.5%, compared to $7.3 million in the prior year’s period. Significant television license fees this period includedVan Wilder: Party Liaison, House of the DeadandCabin Fever.
Television production revenue of $69.7 million this period increased by $18.0 million, or 34.8%, from $51.7 million in the prior year’s period. This period, 46.0 hours of one-hour drama series were delivered domestically contributing revenue of $38.8 million and international and other revenue on one-hour drama series was $15.0 million. Also this period, television movies contributed revenue of $11.9 million, video releases of television product contributed revenue of $2.7 million and non-fiction programming contributed revenue of $0.9 million. In the prior year’s period, 24.0 hours of one-hour drama series were delivered for revenue of $24.1 million and international and other revenue on one-hour drama series was $9.2 million, television movies contributed revenue of $7.6 million, video releases of television product contributed revenue of $2.3 million and non-fiction programming contributed revenue of $7.5 million. Domestic deliveries of one-hour drama series this period includedMissing, Second Verdict, Dead Zoneand5 Days to Midnight.Television movies this period includedFrankenstein, Baby For Sale, InfidelityandA Mother’s Gift.15.0 hours of non-fiction programming were delivered during the period compared to 62.0 hours in the prior year’s period. The decrease in revenue and hours of non-fiction programming is due to the disposition in July 2004 of the production operations of Termite Art, a division of the television segment.
Studio facilities revenue of $3.5 million this period decreased $1.4 million, or 28.6%, compared to $4.9 million in the prior year’s period due primarily to a decrease in occupancy and rental rates period over period. We anticipate a continued decrease in revenues for fiscal 2005, compared to fiscal 2004, due to a decrease in occupancy rates.
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Direct operating expenses primarily include amortization of film and television production or acquisition costs, participation and residual expenses. Direct operating expenses of $258.6 million for the period were 42.4% of revenue, compared to direct operating expenses of $113.1 million, which were 52.1% of revenue in the prior year’s period. Direct operating expenses as a percentage of revenue for the motion pictures segment decreased period over period as higher margin titles were included in the current period.
In the current period, we decreased the provision for doubtful accounts by $4.2 million to $7.5 million at December 31, 2004. The decrease in the provision is primarily due to a reclassification of sales allowances, which are reflected as a reduction of revenue, and due to accounts receivable written off and collection of accounts receivable that were previously provided for.
Distribution and marketing expenses of $282.5 million increased $179.6 million, or 174.5%, compared to $102.9 million in the prior year’s period due to significant releases during the period and to costs associated with revenues generated by acquired Artisan titles. Theatrical prints and advertising (“P&A”) this period of $135.4 million increased $89.1 million, or 192.4%, compared to $46.3 million in the prior year’s period. Theatrical P&A this period included significant expenditures on the release of titles such as OpenWater, Saw, Godsend, The PunisherandFahrenheit 9/11.Video distribution and marketing costs on motion picture and television product this period of $140.4 million increased $89.6 million, or 176.4%, compared to $50.8 million in the prior year’s period due to an increase in marketing and duplication costs related to the increase in video revenues generated during the period, primarily due to the release ofThe Punisher, Barbie in the Prince and the Pauper, Open Water, Dirty Dancing: Havana Nights, Godsend, Care Bears: Journey to Joke-A-LotandThe Cooler.
General and administration expenses of $49.5 million this period increased $25.9 million, or 109.8%, compared to $23.6 million in the prior year’s period primarily due to an increase in salaries and benefits, professional fees and office and operations costs as a result of the increase in the number of employees and volume of operations due to the acquisition of Artisan in December 2003. Salaries and benefits also increased as a result of stock-price bonuses due under employment contracts and stock compensation expense related to share appreciation rights of $7.0 million. Effective March 31, 2004, Christal, a variable interest entity, was consolidated and therefore general and administration expenses of $1.7 million for Christal are recorded this period, but not in the prior year’s period. In the current period, $1.9 million of production overhead was capitalized compared to $2.1 million in the prior year’s period.
Severance and relocation costs of $5.9 million in the prior year’s quarter represent costs incurred by Lions Gate, associated with the acquisition of Artisan, which include property and lease abandonment costs of $2.8, the write-off of capital assets no longer in use of $2.1 million and severance of $1.0 million.
Write down of other assets of $8.1 million in the prior year’s quarter consists of a provision against convertible debentures and other receivables due from CinéGroupe. CinéGroupe was unable to meet its financial obligations in the ordinary course of business and sought protection under CCAA in December 2003. As a result, we determined that amounts owing may not be collectible and recorded a provision against convertible debentures and other receivables due from CinéGroupe, resulting in a write-down of amounts owing to nil.
Depreciation of $2.2 million this period increased $0.5 million, or 29.4%, compared to $1.7 million in the prior year’s period due primarily to the addition of $2.7 million of property and equipment as a result of the purchase of Artisan in December 2003.
Interest expense of $19.3 million this period increased $10.2 million, or 113.3%, compared to $9.0 million in the prior year’s period primarily due to an increase in interest on the credit facility, interest on promissory notes and advances acquired as part of the acquisition of Artisan, an increase in interest and amortization on subordinated notes and an increase in amortization and write-off of deferred financing costs on the credit facility. Interest on the credit facility increased as the credit facility balance increased to finance the acquisition of Artisan in December 2003 and remained higher than the prior year’s period until October 2004 when the credit facility balance was partially repaid with proceeds from the issuance on the 2.9375% Notes. Interest rates also increased from December 2003 when the amended credit facility was entered into. The current period includes interest and amortization on the 4.875% Notes issued December 2003 and the 2.9375% Notes issued October 2004, whereas the prior year’s quarter includes approximately one month of interest and amortization on the 4.875% Notes only. The current period includes amortization of increased deferred financing fees on the amended credit facility and write-off of increased deferred financing fees of $3.4 million on the term loan portion of the amended credit facility which was repaid December 31, 2004. The prior year’s quarter includes amortization of deferred financing fees and write-off of deferred financing fees of $2.0 million on the previous credit facility repaid December 2003. In the current period $0.7 million interest is capitalized to production costs, compared to $1.0 million in the prior year’s period.
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Interest rate swaps do not meet the criteria of effective hedges and therefore a fair valuation gain of $2.4 million was recorded this period and a fair valuation gain of $1.0 million was recorded in the prior year’s period.
Other income this period includes a $0.7 million gain on the disposition of assets and liabilities of Termite Art, a division of the television segment, in exchange for cash. Other income this period also includes $0.1 million collection of cash on a promissory note that was previously fully reserved.
Equity interests of $0.2 million this period includes $0.2 million equity interest in the loss of CinemaNow which consists of approximately 30% of the losses of CinemaNow. The investment in CinemaNow made in July 2004 was reduced to nil by December 31, 2004 and therefore we did not record any additional losses, as we have no further funding requirements. Equity interests of $2.0 million in the prior year’s period includes $1.8 million equity interest in the loss of CinéGroupe which consists of approximately 29% of the net loss of CinéGroupe, $0.3 million equity interest in the loss of CinemaNow which consists of approximately 55% of the net loss of CinemaNow and $0.1 million equity interest in the income of Christal which consists of approximately 75% of the net income of Christal. Effective January 1, 2004, we began accounting for CinéGroupe under the cost method of accounting, as we no longer had the ability to significantly influence CinéGroupe due to a CCAA filing, and therefore no equity interest is recorded this period. Effective March 31, 2004, Christal was consolidated as a variable interest entity and therefore no equity interest is recorded this period.
Net income for the nine months ended December 31, 2004 was $0.2 million, or income per share of $0.00 on 96.4 million weighted average shares outstanding. Diluted earnings per share for the nine months ended December 31, 2004 were $0.00. This compares to net loss for the nine months ended December 31, 2003 of $48.8 million or loss per share of $0.81 on 63.6 million weighted average common shares outstanding (after giving effect to modification of warrants and dividends and accretion on the Series A Preferred Shares). In December 2003, the expiration date of warrants was extended by one year to January 1, 2005 and the modification resulted in a charge to net income (loss) available to common shareholders. In February 2004, we exercised our right to convert all remaining preferred shares to common shares. Therefore, for the nine months ended December 31, 2004, there are no Series A Preferred Share dividends or accretion on the Series A Preferred Shares.
EBITDA
EBITDA, defined as earnings before interest, interest rate swapswaps mark-to-market, income tax provision, depreciation and minority interests of $12.1negative $16.8 million for the three months ended December 31, 2004 June 30, 2005
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June 30, 2004.
Three Months Ended | ||||||||
June 30, | ||||||||
2005 | 2004 | |||||||
(Amounts in thousands) | ||||||||
EBITDA, as defined | $ | (16,845 | ) | $ | (7,279 | ) | ||
Depreciation | (748 | ) | (675 | ) | ||||
Interest expense | (4,884 | ) | (5,461 | ) | ||||
Interest rate swaps mark-to-market | (337 | ) | 2,060 | |||||
Interest income | 1,065 | 37 | ||||||
Minority interests | — | 123 | ||||||
Income tax provision | (70 | ) | (267 | ) | ||||
Net loss | $ | (21,819 | ) | $ | (11,462 | ) | ||
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
EBITDA, as defined | $ | 12,092 | $ | (30,822 | ) | $ | 20,173 | $ | (38,640 | ) | ||||||
Depreciation | (835 | ) | (718 | ) | (2,224 | ) | (1,748 | ) | ||||||||
Interest | (8,201 | ) | (4,808 | ) | (19,277 | ) | (9,017 | ) | ||||||||
Interest rate swaps mark-to-market | 419 | 688 | 2,408 | 950 | ||||||||||||
Minority interests | 19 | — | (2 | ) | — | |||||||||||
Income tax provision | (141 | ) | (84 | ) | (857 | ) | (315 | ) | ||||||||
Net income (loss) | $ | 3,353 | $ | (35,744 | ) | $ | 221 | $ | (48,770 | ) | ||||||
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Refer to note 15 of the condensed consolidated financial statements for reconciliation of net income (loss) reported under U.S. GAAP to net income (loss) reported under Canadian GAAP.
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of net proceeds after paying placement agents’ fees. Offering expenses were approximately $0.6 million. The 3.625% Notes are convertible at the option of the holder, at any time prior to maturity into common shares of the Company at a conversion rate of 70.0133 shares per $1,000 principal amount of the 3.625% Notes, which is equal to a conversion price of approximately $14.28 per share, subject to adjustment upon certain events. Lions Gate Entertainment Inc. may redeem the 3.625% Notes at its option on or after March 15, 2012 at 100% of their principal amount plus accrued and unpaid interest.
operations.
The increase in backlog is primarily due to contracts entered into on titles such asSaw, Diary of a Mad Black Woman, MissingandWildfireduring the three months ended June 30, 2005.
liabilities and an increase in cash provided by the collection of accounts receivables in the current quarter.
Cash Flows Used in Investing Activities.Cash flows used in investing activities of $0.8 million in the nine months ended December 31, 2004 consists of cash received on the disposition of the assets and liabilities of Termite Art, a division of the television
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segment, less $2.0$0.6 million for purchases of property and equipment. Cash flows used in investing activities in the three months ended June 30, 2004 consisted of $150.0purchases of property and equipment and were not significant.
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warrants of $10.7 million.
Year Ended March 31, | ||||||||||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | Total | ||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||
Bank loans | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Film obligations — Minimum guarantees initially incurred for a term of more than one year | 24 | 3,620 | 12,437 | — | — | — | 16,081 | |||||||||||||||||||||
Film obligations — Film productions | 2,609 | 7,933 | — | 4,080 | — | — | 14,622 | |||||||||||||||||||||
Subordinated notes | — | — | — | — | — | 385,000 | 385,000 | |||||||||||||||||||||
Mortgages payable | 2,401 | 897 | 1,656 | 13,155 | — | — | 18,109 | |||||||||||||||||||||
$ | 5,034 | $ | 12,450 | $ | 14,093 | $ | 17,235 | $ | — | $ | 385,000 | $ | 433,812 | |||||||||||||||
Year Ended March 31, | ||||||||||||||||||||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | ||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||
Bank loans | $ | 1,702 | $ | — | $ | — | $ | — | $ | 73,400 | $ | — | $ | 75,102 | ||||||||||||||
Film obligations — Film productions | 9,542 | 4,749 | — | — | — | — | 14,291 | |||||||||||||||||||||
Film obligations — Minimum guarantees initially incurred for a term of more than one year | 24 | 1,513 | 6,120 | 12,437 | — | — | 20,094 | |||||||||||||||||||||
Subordinated notes | — | 5,000 | — | — | — | 210,000 | 215,000 | |||||||||||||||||||||
Mortgages payable | 297 | 2,739 | 1,081 | 2,003 | 12,943 | — | 19,063 | |||||||||||||||||||||
$ | 11,565 | $ | 14,001 | $ | 7,201 | $ | 14,440 | $ | 86,343 | $ | 210,000 | $ | 343,550 | |||||||||||||||
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Year Ended March 31, | ||||||||||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | Total | ||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||
Operating leases | $ | 1,727 | $ | 1,999 | $ | 2,042 | $ | 454 | $ | 42 | $ | — | $ | 6,264 | ||||||||||||||
Employment and consulting contracts | 10,672 | 7,643 | 2,122 | — | — | — | 20,437 | |||||||||||||||||||||
Purchase obligations | 52,744 | 12,325 | 1,100 | 5,095 | — | — | 71,264 | |||||||||||||||||||||
Distribution and marketing commitments | 25,205 | 20,000 | — | — | — | — | 45,205 | |||||||||||||||||||||
$ | 90,348 | $ | 41,967 | $ | 5,264 | $ | 5,549 | $ | 42 | $ | — | $ | 143,170 | |||||||||||||||
Commitments.The table below presents future commitments under contractual obligations at December 31, 2004 by expected maturity date.
Year Ended March 31, | ||||||||||||||||||||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | ||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||
Operating leases | $ | 852 | $ | 2,786 | $ | 2,244 | $ | 2,169 | $ | 453 | $ | — | $ | 8,504 | ||||||||||||||
Employment and consulting contracts | 5,340 | 9,825 | 4,346 | 1,325 | — | — | 20,836 | |||||||||||||||||||||
Unconditional purchase obligations | 14,386 | 35,494 | 11,500 | 1,100 | 1,000 | — | 63,480 | |||||||||||||||||||||
Distribution and marketing commitments | — | 11,608 | 20,000 | — | — | — | 31,608 | |||||||||||||||||||||
$ | 20,578 | $ | 59,713 | $ | 38,090 | $ | 4,594 | $ | 1,453 | $ | — | $ | 124,428 | |||||||||||||||
Unconditional purchase obligations relate to the purchase of film rights for future delivery and advances to producers. Amounts due during the three months ended March 31, 2005 of $ 20.6 million are expected to be paid through cash generated from operations or from the available borrowing capacity from our revolving credit facility.
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to manage our interest rate and currency exposure. We have no intention of entering into financial derivative contracts, other than to hedge a specific financial risk.
delivery of titles.
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limited to the cost of replacing the contract, at current market rates.
Year Ended March 31, | ||||||||||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | Total | ||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||
Film obligations — Film productions: | ||||||||||||||||||||||||||||
Variable(1) | $ | 2,609 | $ | 7,933 | $ | — | $ | 4,080 | $ | — | $ | — | $ | 14,622 | ||||||||||||||
Subordinated notes: | ||||||||||||||||||||||||||||
Fixed(2) | — | — | — | — | — | 60,000 | 60,000 | |||||||||||||||||||||
Fixed(3) | — | — | — | — | — | 150,000 | 150,000 | |||||||||||||||||||||
Fixed(4) | — | — | — | — | — | 175,000 | 175,000 | |||||||||||||||||||||
Mortgages payable: | ||||||||||||||||||||||||||||
Fixed(5) | 2,401 | 897 | 1,656 | 13,155 | — | — | 18,109 | |||||||||||||||||||||
$ | 5,010 | $ | 8,830 | $ | 1,656 | $ | 17,235 | $ | — | $ | 385,000 | $ | 417,731 | |||||||||||||||
Year Ended March 31, | ||||||||||||||||||||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | ||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||
Bank loans: | ||||||||||||||||||||||||||||
Variable(1) | $ | — | $ | — | $ | — | $ | — | $ | 73,400 | $ | — | $ | 73,400 | ||||||||||||||
Variable(2) | 1,702 | — | — | — | — | — | 1,702 | |||||||||||||||||||||
Subordinated notes: | ||||||||||||||||||||||||||||
Fixed(3) | — | — | — | — | — | 60,000 | 60,000 | |||||||||||||||||||||
Fixed(4) | — | — | — | — | — | 150,000 | 150,000 | |||||||||||||||||||||
Fixed(5) | — | 5,000 | — | — | — | — | 5,000 | |||||||||||||||||||||
Mortgages payable: | ||||||||||||||||||||||||||||
Fixed(6) | 297 | 2,739 | 1,081 | 2,003 | 12,943 | — | 19,063 | |||||||||||||||||||||
$ | 1,999 | $ | 7,739 | $ | 1,081 | $ | 2,003 | $ | 86,343 | $ | 210,000 | $ | 309,165 | |||||||||||||||
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(1) | ||||
(2) | ||||
4.875% Notes with fixed interest rate equal to 4.875%. | ||||
2.9375% Notes with fixed interest rate equal to 2.9375%. | ||||
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Item 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
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process of remediating the material weaknesses described below.
• | Calculating participations expense and related liabilities for financial reporting purposes | |
• | Calculating amortization of investment in film and television programs | |
• | Monitoring certain charges billed to us by our outsourced home entertainment distribution service provider | |
• | Financial statement close process |
With the completion of the acquisition of Artisan in December 2003 and much of the integration complete, management is actively working to address these matters and continued to make significant improvements in the financial close process during its third quarter of fiscal 2005 resulting in a timely filing of each quarterly report on Form 10-Q filed in this fiscal year. Although the complete remediation of the reportable conditions will take some time, Management continues to add and reallocate accounting staff and resources appropriately and put in place processes and systems to further improve itsidentified control processes.
deficiencies.
Certain improvements were made
Item 1. | Legal Proceedings |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 3. | Defaults Upon Senior Securities |
Item 4. | Submission of Matters to a Vote of Security Holders |
Item 5. | Other Information |
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PART II
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the nine months ended December 31, 2004, 2,168,350 warrants to purchase common shares of the Company were exercised and the Company issued 2,168,350 common shares and received proceeds of $10.8 million. In December 2004, the Company amended the warrants to allow for cashless exercise. During December 2004, an additional 1,993,250 warrants were exercised by cashless exercise resulting in the issuance of 1,052,517 common shares. Any remaining warrants expired January 1, 2005 and therefore no warrants are outstanding. The Company claimed an exemption from registration for the issuances under Section 4(2) of the Securities Act of 1933, as amended.
Item 6. | Exhibits |
Item 6. Exhibits
Exhibits filed for Lions Gate through the filing of this Form 10-Q.
Exhibit | ||||
Number | Description of Documents | |||
10 | .6 | Director Compensation Summary. | ||
31 | .1 | Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31 | .2 | Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32 | .1 | Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
LIONS GATE ENTERTAINMENT CORP. |
By: | /s/ |
Name: James Keegan | ||||
Title: Chief Financial Officer | ||||
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