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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 | |
For the quarterly period ended December 31, 2005 | ||
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 |
Commission File No. 1-14880
Lions Gate Entertainment Corp.
(Exact name of registrant as specified in its charter)
British Columbia, Canada | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2200-1055 West Hastings Street
Vancouver, British Columbia V7J 3S5
and
2700 Colorado Avenue, Suite 200
Santa Monica, California 90404
(Address of principal executive offices)
Registrant’s telephone number, including area code:
(604) 721-0719
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated Filer o Non-accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Outstanding at February 1, 2006 | ||
(Common Stock, no par value per share) | 104,081,068 shares |
TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases you can identify forward-looking statements by terms such as “may,” “intend,” “will,” “should,” “could,” “would,” “expects,” “believe,” “estimate,” or the negative of these terms, and similar expressions intended to identify forward-looking statements.
These forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. Also, these forward-looking statements present our estimates and assumptions only as of the date of this report. Except for our ongoing obligation to disclose material information as required by federal securities laws, we do not intend to update you concerning any future revisions to any forward-looking statements to reflect events or circumstances occurring after the date of this report.
Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to, those risk factors found in our Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on June 29, 2005, which is incorporated herein by reference.
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PART I
Item 1. | Financial Statements. |
LIONS GATE ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, | March 31, | |||||||
2005 | 2005 | |||||||
(Unaudited) | (Note 2) | |||||||
(Amounts in thousands, | ||||||||
except share amounts) | ||||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 50,548 | $ | 112,839 | ||||
Restricted cash | 796 | 2,913 | ||||||
Investments — auction rate preferreds and municipal bonds | 80,900 | — | ||||||
Investments — equity securities | 11,185 | — | ||||||
Accounts receivable, net of reserve for video returns of $56,988 (March 31, 2005 — $58,449) and provision for doubtful accounts of $10,654 (March 31, 2005 — $6,102) | 134,522 | 150,019 | ||||||
Investment in films and television programs | 416,963 | 367,376 | ||||||
Property and equipment | 33,909 | 30,842 | ||||||
Goodwill | 186,627 | 161,182 | ||||||
Other assets | 30,730 | 29,458 | ||||||
$ | 946,180 | $ | 854,629 | |||||
LIABILITIES | ||||||||
Bank loans | $ | — | $ | 1,162 | ||||
Accounts payable and accrued liabilities | 185,453 | 134,200 | ||||||
Film obligations | 211,844 | 130,770 | ||||||
Subordinated notes | 385,000 | 390,000 | ||||||
Mortgages payable | 16,769 | 18,640 | ||||||
Deferred revenue | 41,601 | 62,459 | ||||||
Minority interests | — | 259 | ||||||
840,667 | 737,490 | |||||||
Commitments and Contingencies | ||||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common shares, no par value, 500,000,000 shares authorized, 104,080,322 at December 31, 2005 and 101,843,708 at March 31, 2005 shares issued and outstanding | 326,907 | 305,662 | ||||||
Series B preferred shares (10 shares issued and outstanding) | — | — | ||||||
Restricted common share units | 4,856 | — | ||||||
Unearned compensation | (4,128 | ) | — | |||||
Accumulated deficit | (216,009 | ) | (183,226 | ) | ||||
Accumulated other comprehensive loss | (6,113 | ) | (5,297 | ) | ||||
105,513 | 117,139 | |||||||
$ | 946,180 | $ | 854,629 | |||||
See accompanying notes.
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LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three | Three | |||||||||||||||||
Months | Months | Nine Months | Nine Months | |||||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||||
(Amounts in thousands, except per share amounts) | ||||||||||||||||||
Revenues | $ | 230,964 | $ | 190,398 | $ | 637,781 | $ | 610,186 | ||||||||||
Expenses: | ||||||||||||||||||
Direct operating | 110,681 | 82,461 | 319,960 | 258,610 | ||||||||||||||
Distribution and marketing | 99,486 | 80,263 | 290,655 | 282,546 | ||||||||||||||
General and administration | 12,957 | 15,582 | 45,419 | 49,482 | ||||||||||||||
Depreciation | 631 | 835 | 1,976 | 2,224 | ||||||||||||||
Total expenses | 223,755 | 179,141 | 658,010 | 592,862 | ||||||||||||||
Operating Income (Loss) | 7,209 | 11,257 | (20,229 | ) | 17,324 | |||||||||||||
Other Expense (Income): | ||||||||||||||||||
Interest expense | 4,929 | 8,275 | 14,718 | 19,388 | ||||||||||||||
Interest rate swaps mark-to-market | (218 | ) | (419 | ) | (119 | ) | (2,408 | ) | ||||||||||
Interest income | (1,046 | ) | (74 | ) | (2,962 | ) | (111 | ) | ||||||||||
Minority interests | — | (19 | ) | — | 2 | |||||||||||||
Other income | — | — | — | (825 | ) | |||||||||||||
Total other expenses | 3,665 | 7,763 | 11,637 | 16,046 | ||||||||||||||
Income (Loss) Before Equity Interests and Income Taxes | 3,544 | 3,494 | (31,866 | ) | 1,278 | |||||||||||||
Equity interests | (44 | ) | — | (98 | ) | (200 | ) | |||||||||||
Income (Loss) Before Income Taxes | 3,500 | 3,494 | (31,964 | ) | 1,078 | |||||||||||||
Income tax provision | 358 | 141 | 819 | 857 | ||||||||||||||
Net Income (Loss) | $ | 3,142 | $ | 3,353 | $ | (32,783 | ) | $ | 221 | |||||||||
Basic Income (Loss) Income Per Common Share | $ | 0.03 | $ | 0.03 | $ | (0.32 | ) | $ | 0.00 | |||||||||
Diluted Income (Loss) Per Common Share | $ | 0.03 | $ | 0.03 | $ | (0.32 | ) | $ | 0.00 | |||||||||
See accompanying notes.
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LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Series B | Restricted | Accumulated | |||||||||||||||||||||||||||||||||||||||
Common Shares | Preferred 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 | ||||||||||||||||||||||||||||||||||||||
Impact of previously modified 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 | 244,280 | 779 | 779 | ||||||||||||||||||||||||||||||||||||||
Issuance to directors for services | 20,408 | 203 | 203 | ||||||||||||||||||||||||||||||||||||||
Impact of previously modified stock options | — | 27 | 27 | ||||||||||||||||||||||||||||||||||||||
Issuance of common shares in connection with acquisition of film assets | 399,042 | 4,000 | 4,000 | ||||||||||||||||||||||||||||||||||||||
Issuance of common shares in connection with acquisition of common shares of Image Entertainment | 885,258 | 9,251 | 9,251 | ||||||||||||||||||||||||||||||||||||||
Issuance of common shares in connection with acquisition of Redbus | 643,460 | 6,100 | 6,100 | ||||||||||||||||||||||||||||||||||||||
Issuance of restricted share units | 5,301 | (5,301 | ) | — | |||||||||||||||||||||||||||||||||||||
Amortization of restricted share units | 1,173 | 1,173 | |||||||||||||||||||||||||||||||||||||||
Vesting of restricted share units | 44,166 | 445 | (445 | ) | — | ||||||||||||||||||||||||||||||||||||
Comprehensive loss | |||||||||||||||||||||||||||||||||||||||||
Net loss | (32,783 | ) | (32,783 | ) | (32,783 | ) | |||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | 1,476 | 1,476 | 1,476 | ||||||||||||||||||||||||||||||||||||||
Net unrealized loss on foreign exchange contracts | (315 | ) | (315 | ) | (315 | ) | |||||||||||||||||||||||||||||||||||
Unrealized loss on investments — available for sale | (1,537 | ) | (1,537 | ) | (1,537 | ) | |||||||||||||||||||||||||||||||||||
Fair value adjustment of common shares to be acquired in exchange agreement with Image Entertainment | — | 440 | (440 | ) | (440 | ) | — | ||||||||||||||||||||||||||||||||||
Comprehensive loss | $ | (33,599 | ) | — | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2005 | 104,080,322 | $ | 326,907 | 10 | $ | — | $ | 4,856 | $ | (4,128 | ) | $ | (216,009 | ) | $ | (6,113 | ) | $ | 105,513 | ||||||||||||||||||||||
See accompanying notes.
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LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended | Nine Months Ended | ||||||||
December 31, 2005 | December 31, 2004 | ||||||||
(Amounts in thousands) | |||||||||
Operating Activities: | |||||||||
Net income (loss) | $ | (32,783 | ) | $ | 221 | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||
Depreciation of property and equipment | 1,976 | 2,224 | |||||||
Amortization of deferred financing costs | 2,814 | 5,998 | |||||||
Amortization of films and television programs | 191,337 | 169,163 | |||||||
Amortization of intangible assets | 1,760 | 1,644 | |||||||
Non-cash stock-based compensation | 1,403 | 364 | |||||||
Interest rate swaps mark-to-market | (119 | ) | (2,408 | ) | |||||
Gain on disposition of assets | — | (666 | ) | ||||||
Minority interests | — | 2 | |||||||
Equity interests | 98 | 200 | |||||||
Changes in operating assets and liabilities: | |||||||||
Decrease (increase) in restricted cash | 2,117 | (20,000 | ) | ||||||
Accounts receivable, net | 12,878 | 17,137 | |||||||
Increase in investment in films and television programs | (215,192 | ) | (125,387 | ) | |||||
Other assets | (3,186 | ) | (1,263 | ) | |||||
Accounts payable and accrued liabilities | 43,254 | (16,157 | ) | ||||||
Film obligations | 73,043 | 51,555 | |||||||
Deferred revenue | (20,467 | ) | 507 | ||||||
Net Cash Flows Provided By Operating Activities | 58,933 | 83,134 | |||||||
Investing Activities: | |||||||||
Purchases of investments — auction rate preferreds and municipal bonds | (163,400 | ) | — | ||||||
Purchases of investments — equity securities | (3,470 | ) | — | ||||||
Sales of investments — auction rate preferreds | 82,500 | — | |||||||
Cash received from sale of investment | 2,945 | — | |||||||
Cash received from disposition of assets, net | — | 1,172 | |||||||
Acquisition of Redbus, net of cash acquired | (27,122 | ) | — | ||||||
Purchases of property and equipment | (4,059 | ) | (1,952 | ) | |||||
Net Cash Flows Used In Investing Activities | (112,606 | ) | (780 | ) | |||||
Financing Activities: | |||||||||
Issuance of common shares | 779 | 21,991 | |||||||
Financing fees | (240 | ) | (1,077 | ) | |||||
Increase in subordinated notes, net of issue costs | — | 145,390 | |||||||
Repayment of subordinated notes | (5,000 | ) | — | ||||||
Decrease in bank loans | — | (251,212 | ) | ||||||
Repayment of mortgages payable | (2,523 | ) | (1,585 | ) | |||||
Net Cash Flows Used In Financing Activities | (6,984 | ) | (86,493 | ) | |||||
Net Change In Cash And Cash Equivalents | (60,657 | ) | (4,139 | ) | |||||
Foreign Exchange Effects On Cash | (1,634 | ) | 2,189 | ||||||
Cash and Cash Equivalents — Beginning Of Period | 112,839 | 7,089 | |||||||
Cash and Cash Equivalents — End Of Period | $ | 50,548 | $ | 5,139 | |||||
See accompanying notes.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. | Nature of Operations |
Lions Gate Entertainment Corp. (“the Company” or “Lions Gate” or “we”) is an integrated entertainment company engaged in the development, production and distribution of feature films, television series, television movies and mini-series, non-fiction programming and animated programming. As an independent distribution company, the Company also acquires distribution rights from a wide variety of studios, production companies and independent producers. On December 15, 2003, the Company acquired Film Holdings Co., the parent company of Artisan Entertainment Inc. (“Artisan”) and on October 17, 2005, the Company acquired the Redbus companies as described in note 8.
2. | Basis of Presentation and Use of Estimates |
The accompanying unaudited condensed consolidated financial statements include the accounts of Lions Gate and all of its majority-owned and controlled subsidiaries and consolidated variable interest entities, with a provision for minority interests.
The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) which conforms, in all material respects, with the accounting principles generally accepted in Canada (“Canadian GAAP”), except as described in note 15.
The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. or Canadian GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these unaudited condensed consolidated financial statements. Operating results for the three and nine months ended December 31, 2005 are not necessarily indicative of the results that may be expected for the year ended March 31, 2006. The balance sheet at March 31, 2005 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. 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.
Certain amounts presented for fiscal 2005 have been reclassified to conform to the fiscal 2006 presentation.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The most significant estimates made by management in the preparation of the financial statements relate to ultimate revenue and costs for investment in films and television programs; estimates of sales returns, provision for doubtful accounts, fair value of assets and liabilities for allocation of the purchase price of companies acquired, income taxes and accruals for contingent liabilities; and impairment assessments for investment in films and television programs, property and equipment, goodwill and intangible assets. Actual results could differ from such estimates.
Investments |
Investments classified as available-for-sale are reported at fair value based on quoted market prices, with unrealized gains and losses excluded from earnings and reported as other comprehensive income (see note 10). The cost of investments sold is determined in accordance with the specific identification method and
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
realized gains and losses are included in interest income. As of December 31, 2005, the cost, unrealized losses and carrying value of the Company’s available-for-sale investments were as follows:
Unrealized | ||||||||||||
Holding | Carrying | |||||||||||
Cost | Losses | Value | ||||||||||
(Amounts in thousands) | ||||||||||||
Auction Rate Preferreds | ||||||||||||
Auction rate preferred stock | $ | 45,000 | $ | — | $ | 45,000 | ||||||
Auction rate notes | 20,900 | — | 20,900 | |||||||||
65,900 | — | 65,900 | ||||||||||
Municipal Obligations | ||||||||||||
Municipal obligations | 15,000 | — | 15,000 | |||||||||
Equity Securities | ||||||||||||
Equity securities | 12,722 | (1,537 | ) | 11,185 | ||||||||
$ | 93,622 | $ | (1,537 | ) | $ | 92,085 | ||||||
During the six months ended December 31, 2005, the Company began investing in auction rate preferred stock and auction rate notes (collectively, the “auction rate preferreds”). Auction rate preferred stock is preferred stock with a dividend rate determined periodically, typically less than every 90 days, based on an auction mechanism. Auction rate notes are debt instruments. The interest rate for the auction rate notes will adjust to current market rates at each interest reset date, typically every seven, 28 or 35 days. The interest rates are impacted by various factors, including credit risk, tax risk, general market interest rate risk and other factors. Auction rate preferreds do not meet the definition of a cash equivalent since they do not have scheduled maturities of less than 90 days from investment. All of the Company’s $65.9 million investment in auction rate preferreds as of December 31, 2005 are invested in securities rated as “AAA”. Proceeds from sales of auction rate preferreds during the nine months ended December 31, 2005 were $82.5 million.
All of the Company’s $15.0 million investment in municipal obligations as of December 31, 2005 are invested in securities rated at “AAA”. As of December 31, 2005, the Company’s investment in municipal obligations were comprised of taxable revenue bonds with a maturity date of May 15, 2034.
Equity securities are comprised of the Company’s investment in the common shares of Image Entertainment, Inc. (“Image”), a distributor of DVDs and entertainment programming. During the three months ended September 30, 2005, the Company purchased 1,150,000 common shares of Image for $3.5 million in cash, representing an average cost per share of $3.02. Also during the three months ended September 30, 2005 the Company completed a negotiated exchange with certain shareholders of Image in which the Company exchanged 885,258 of its common shares (at $10.45 per share) in return for 2,312,567 common shares of Image (at $4.00 per share). The cost on an exchanged basis of the additional 2,312,567 common shares of Image is $9.2 million. As at December 31, 2005, the Company held 3,462,567 common shares of Image acquired at an average cost per share of $3.67. The closing price of Image’s common shares on December 31, 2005 was $3.23 per common share. As a result, the Company had an unrealized loss of $1.5 million on its investment in Image common shares as of December 31, 2005. The Company has reported the $1.5 million unrealized loss as other comprehensive loss in the unaudited condensed consolidated statement of shareholder’s equity as of December 31, 2005. Additionally, during the three months ended September 30, 2005, the Company entered into exchange agreements with certain holders of Image common shares in which the Company agreed to exchange 218,746 of its common shares (at $10.45 per share) in return for 571,429 common shares of Image (at $4.00 per share) held by those holders. The exchange agreements are subject to certain conditions precedent to the Company and the holders of the Image common shares to be exchanged. At December 31, 2005, the Company has recorded an unrealized loss of $0.4 million
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
on the 571,429 shares to be exchanged based on the difference between the negotiated price per common share of $4.00 and the closing price of Image’s common shares on December 31, 2005 of $3.23 per common share. The Company has reported the $0.4 million unrealized loss as a charge to other comprehensive loss and as an increase in shareholders’ equity in the unaudited condensed consolidated statement of shareholder’s equity as of December 31, 2005. The exchange agreements will terminate if the closing of the agreement does not occur on or prior to March 31, 2006.
Recent Accounting Pronouncements |
Statement of Financial Accounting Standards No. 123R. In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)). SFAS 123(R) revises SFAS No. 123 and eliminates the alternative to use the intrinsic method of accounting under APB No. 25. SFAS 123(R) requires all public companies accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments, to account for these types of transactions using a fair-value-based method. The Company currently accounts for share-based payments to employees using the intrinsic value method as set forth in APB No. 25 “Accounting for Stock Issued to Employees.” As such, the Company generally recognizes no compensation cost for employee stock options. SFAS No. 123(R) eliminates the alternative to use APB No. 25’s intrinsic value method of accounting. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income (loss) and basic and diluted income (loss) per share in note 12. SFAS No. 123(R) permits companies to adopt its requirements using either a modified prospective method or a modified retrospective method. The Company has not yet determined which method it will utilize. The adoption of SFAS No. 123(R)’s fair value method will have an impact on our results of operations, although it will have no material impact on our overall financial position. The provisions of SFAS No. 123(R) are effective for financial statements with the first interim or annual reporting period beginning after June 15, 2005. However, the SEC announced on April 14, 2005 that it would provide for a phased-in implementation process for SFAS No. 123(R). As a result, the Company will not be required to apply SFAS No. 123(R) until the period beginning April 1, 2006.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
3. | Investment in Films and Television Programs |
December 31, | March 31, | |||||||
2005 | 2005 | |||||||
(Amounts in thousands) | ||||||||
Theatrical and Non-Theatrical Films | ||||||||
Released, net of accumulated amortization | $ | 159,927 | $ | 113,536 | ||||
Acquired libraries, net of accumulated amortization | 108,759 | 109,805 | ||||||
Completed and not released | 28,110 | 12,083 | ||||||
In progress | 35,785 | 42,581 | ||||||
In development | 3,381 | 2,302 | ||||||
Product inventory | 24,227 | 26,029 | ||||||
360,189 | 306,336 | |||||||
Made-for-Television Programs | ||||||||
Released, net of accumulated amortization | 33,882 | 21,098 | ||||||
In progress | 22,577 | 39,221 | ||||||
In development | 315 | 721 | ||||||
56,774 | 61,040 | |||||||
$ | 416,963 | $ | 367,376 | |||||
Acquired libraries of $108.8 million at December 31, 2005 (March 31, 2005 — $109.8 million) include the Trimark library acquired October 2000, the Artisan library acquired December 2003 (refer to note 8), the Modern Entertainment, Ltd. (“Modern”) library acquired in August 2005 and the Redbus library acquired in October 2005 (refer to note 8). On August 17, 2005, the Company acquired certain of the film assets and accounts receivable of Modern, a licensor of film rights to DVD distributors, broadcasters and cable networks. Under the terms of the Modern purchase agreement, total consideration issued was $7.5 million, comprised of $3.5 million in cash and 399,042 shares of the Company’s common shares valued at $4.0 million. In addition, the Company recorded $0.2 million in direct transaction costs comprised primarily of legal costs incurred in connection with the purchased assets resulting in a total purchase price of $7.7 million for the Modern library. The allocation of the Modern purchase price to the assets acquired was $5.6 million to investment in films and television programs and $2.1 million to accounts receivable. The Trimark library is amortized over its expected revenue stream for a period of 20 years from the acquisition date. The remaining amortization period on the Trimark library at December 31, 2005 is 14.75 years on unamortized costs of $20.2 million. The Artisan library includes titles released at least three years prior to the date of acquisition and is amortized over its expected revenue stream for a period of up to 20 years from the date of acquisition. The remaining amortization period on the Artisan library at December 31, 2005 is 18.0 years on unamortized costs of $80.8 million. The Modern library is amortized over its expected revenue stream for a period of up to 20 years from the acquisition date. The remaining amortization period on the Modern library at December 31, 2005 is 19.5 years on unamortized costs of $5.5 million. The Redbus library includes titles released at least three years prior to the date of acquisition and is amortized over its expected revenue stream for a period of up to 20 years from the date of acquisition. The remaining amortization period on the Redbus library at December 31, 2005 is 19.75 years on unamortized costs of $2.3 million.
The Company expects approximately 47% of completed films and television programs, net of accumulated amortization, will be amortized during the one-year period ending December 31, 2006. Additionally, the Company expects approximately 81% of completed and released films and television programs, net of
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
accumulated amortization and excluding acquired libraries, will be amortized during the three-year period ending December 31, 2008.
4. | Other Assets |
December 31, | March 31, | |||||||
2005 | 2005 | |||||||
(Amounts in thousands) | ||||||||
Deferred financing costs, net | $ | 16,596 | $ | 18,882 | ||||
Prepaid expenses and other | 10,475 | 8,148 | ||||||
Other investments | 1,937 | 250 | ||||||
Intangible assets, net | 1,722 | 2,178 | ||||||
$ | 30,730 | $ | 29,458 | |||||
Deferred Financing Costs. Deferred financing costs primarily include costs incurred in connection with the credit facility (see note 5) and the issuance of the 4.875% Notes, the 2.9375% Notes and the 3.625% Notes (see note 7) that are deferred and amortized to interest expense.
Intangible Assets. Intangible assets acquired in connection with the purchase of Artisan of $5.1 million represent distribution and personal service agreements and are amortized over a period of two to four years from the date of acquisition. In June 2005, the Company acquired all of the publishing assets of a music publishing company, for a total purchase price of $1.2 million in cash. The publishing rights are amortized over a three-year period from the date of acquisition. Amortization expense of $0.5 million and $1.7 million was recorded for the three and nine months ended December 31, 2005 (2004 — $0.5 million and $1.6 million). Based on the current amount of intangibles subject to amortization, the estimated amortization expense for each of the succeeding years is $0.9 million, $0.6 million and $0.2 million for the years ending December 31, 2006, 2007 and 2008, respectively.
Other Investments. |
On April 8, 2005, Lions Gate entered into library and output agreements with Maple Pictures Corp. (“Maple Pictures”), a Canadian corporation, for the distribution of Lions Gate’s motion picture, television and home video product in Canada. As part of this transaction, Maple Pictures purchased a majority of the Company’s interest in Christal Distribution, a number of production entities and other Lions Gate distribution assets in Canada. Maple Pictures was formed by two former Lions Gate executives and a third-party equity investor. Lions Gate also acquired a minority interest in Maple Pictures.
As a result of these transactions with Maple Pictures, Lions Gate recorded an investment in Maple Pictures of $2.0 million as of June 30, 2005 in other assets in the unaudited condensed consolidated balance sheet. The Company is accounting for the investment in Maple Pictures using the equity method. For the three and nine months ended December 31, 2005, a loss of $0.1 million is recorded in equity interests in the unaudited condensed consolidated statements of operations and the investment in Maple Pictures is $1.9 million as of December 31, 2005.
5. | Bank Loans |
The Company entered into a $350 million credit facility in December 2003 consisting of a $200 million U.S. dollar-denominated revolving credit facility, a $15 million Canadian dollar-denominated revolving credit facility and a $135 million U.S. dollar-denominated term-loan. By December 31, 2004, the Company had repaid the term loan in full, thereby reducing the credit facility to $215 million at March 31, 2005. Effective
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
March 31, 2005, the credit facility was amended to eliminate the $15 million Canadian dollar-denominated revolving credit facility and increase the U.S. dollar-denominated revolving credit facility by the same amount. At December 31, 2005, the Company had no borrowings (March 31, 2005 — nil) under the credit facility. The credit facility expires December 31, 2008 and bears interest at 2.75% over the Adjusted LIBOR or 1.75% over the U.S. prime rate. The availability of funds under the credit facility is limited by the borrowing base, which is calculated on a monthly basis. Amounts available under the credit facility are also limited by outstanding letters of credit which amount to $7.2 million at December 31, 2005. The borrowing base assets at December 31, 2005 totaled $411.3 million (March 31, 2005 — $405.1 million) and therefore $207.8 million is available under the credit facility at December 31, 2005. The Company is required to pay a monthly commitment fee of 0.50% per annum on the total credit facility of $215 million less the amount drawn. Right, title and interest in and to all personal property of the Company and Lions Gate Entertainment Inc., the Company’s wholly-owned subsidiary, is being pledged as security for the credit facility. The credit facility is senior to the Company’s film obligations, subordinated notes and mortgages payable. The credit facility restricts the Company from paying cash dividends on its common shares. The Company entered into a $100 million interest rate swap at an interest rate of 3.08%, commencing January 2003 and ended September 2005. The swap was in effect as long as three month LIBOR was less than 5.0%. Fair market value of the interest rate swap at the maturity date of September 30, 2005 was nil (March 31, 2005 — negative $0.1 million). Changes in the fair value representing fair valuation losses on the interest rate swap during the three and nine months ended December 31, 2005 amount to nil and $0.1 million, respectively (2004 — gains of $0.5 million and $2.2 million, respectively) and are included in the unaudited condensed consolidated statements of operations. On October 17, 2005, the Company amended the credit facility in connection with its acquisition of Redbus Film Distribution Limited and Redbus Pictures Limited (collectively, “Redbus”) to provide for $10 million of the credit facility available for borrowing by the new Redbus subsidiaries in either U.S. dollars or British pounds sterling.
6. | Film Obligations |
December 31, | March 31, | |||||||
2005 | 2005 | |||||||
(Amounts in thousands) | ||||||||
Minimum guarantees | $ | 21,528 | $ | 5,210 | ||||
Minimum guarantees initially incurred for a term of more than one year | 16,083 | 18,081 | ||||||
Participation and residual costs | 134,853 | 95,650 | ||||||
Theatrical marketing | 1,757 | 1,665 | ||||||
Film productions | 37,623 | 10,164 | ||||||
$ | 211,844 | $ | 130,770 | |||||
The Company expects approximately 62% of accrued participants’ shares will be paid during the one-year period ending December 31, 2006.
7. | Subordinated Notes |
3.625% Notes. In February 2005, Lions Gate Entertainment Inc. sold $150.0 million of 3.625% Convertible Senior Subordinated Notes. In connection with this sale, Lions Gate Entertainment Inc. granted the initial purchasers of the 3.625% Notes an option to purchase up to an additional $25.0 million of the 3.625% Notes for 13 days. The fair value of this option was not significant. The initial purchasers exercised this option in February 2005 and purchased an additional $25 million of the 3.625% Notes. The Company received $170.2 million of net proceeds after paying placement agents’ fees from the sale of $175.0 million of
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
the 3.625% Notes. The Company also paid $0.6 million of offering expenses incurred in connection with the 3.625% Notes. Interest on the 3.625% Notes is payable semi-annually on March 15 and September 15 commencing on September 15, 2005. After March 15, 2012, interest will be 3.125% per annum on the principal amount of the 3.625% Notes, payable semi-annually on March 15 and September 15 of each year. The 3.625% Notes mature on March 15, 2025. Lions Gate Entertainment Inc. may redeem all or a portion of the 3.625% Notes at its option on or after March 15, 2012 at 100% of their principal amount, together with accrued and unpaid interest through the date of redemption.
The holders may require Lions Gate Entertainment Inc. to repurchase the 3.625% Notes on March 15, 2012, 2015 and 2020 or upon a change in control at a price equal to 100% of the principal amount, together with accrued and unpaid interest through the date of repurchase. Under certain circumstances, if the holders require Lions Gate Entertainment Inc. to repurchase all or a portion of their notes upon a change in control, they will be entitled to receive a make whole premium. The amount of the make whole premium, if any, will be based on the price of the common shares of the Company on the effective date of the change in control. No make whole premium will be paid if the price of the common shares of the Company is less than $10.35 per share or if the price of the common shares of the Company exceeds $75.00 per share.
The 3.625% Notes are convertible, at the option of the holder, at any time before the close of business on or prior to the trading day immediately before the maturity date, if the notes have not been previously redeemed or repurchased, at a conversion rate of 70.0133 shares of the Company per $1,000 principal amount of the 3.625% Notes, subject to adjustment in certain circumstances, which is equal to a conversion price of approximately $14.28 per share. Upon conversion of the 3.625% Notes, the Company has the option to deliver, in lieu of common shares, cash or a combination of cash and common shares of the Company. The holder may convert the 3.625% Notes into common shares of the Company prior to maturity if the notes have been called for redemption, a change in control occurs or certain corporate transactions occur. In addition, under certain circumstances, if the holder converts their notes upon a change in control they will be entitled to receive a make whole premium.
2.9375% Notes. In October 2004, Lions 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 from the sale of $150.0 million of the 2.9375% Notes. The Company also paid $0.7 million of offering 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. From October 15, 2009 to October 14, 2010, Lions Gate Entertainment Inc. may redeem the 2.9375% Notes at 100.839%; from October 15, 2010 to October 14, 2011, Lions Gate Entertainment Inc. may redeem the 2.9375% Notes at 100.420%; and thereafter at 100%.
The holders may require Lions Gate Entertainment Inc. to repurchase the 2.9375% Notes on October 15, 2011, 2014 and 2019 or upon a change in control at a price equal to 100% of the principal amount, together with accrued and unpaid interest through the date of repurchase. Under certain circumstances, if the holders require Lions Gate Entertainment Inc. to repurchase all or a portion of their notes upon a change in control, they will be entitled to receive a make whole premium. The amount of the make whole premium, if any, will be based on the price of the common shares of the Company on the effective date of the change in control. No make whole premium will be paid if the price of the common shares of the Company is less than $8.79 per share or if the price of the common shares of the Company exceeds $50.00 per share.
The holder may convert the 2.9375% Notes into common shares of the Company prior to maturity only if the price of the common shares of the Company issuable upon conversion of a note reaches a specified threshold over a specified period, the trading price of the notes falls below certain thresholds, the notes have been called for redemption, a change in control occurs or certain corporate transactions occur. In addition, under certain circumstances, if the holder converts their notes upon a change in control they will be entitled to
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
receive a make whole premium. Before the close of business on or prior to the trading day immediately before the maturity date if the notes have not been previously redeemed or repurchased, the holder may convert the notes into common shares of the Company at a conversion rate of 86.9565 shares per $1,000 principal amount of the 2.9375% Notes, subject to adjustment in certain circumstances, which is equal to a conversion price of approximately $11.50 per share.
4.875% Notes. In December 2003, Lions Gate Entertainment Inc. sold $60.0 million of 4.875% Convertible Senior Subordinated Notes. The Company received $57.0 million of net proceeds after paying placement agents’ fees from the sale of $60.0 million of the 4.875% Notes. The Company also paid $0.7 million of offering expenses incurred in connection with the 4.875% Notes. Interest on the 4.875% Notes is due semi-annually on June 15 and December 15 commencing on June 15, 2004 and the 4.875% Notes mature on December 15, 2010. Lions Gate Entertainment Inc. may redeem all or a portion of the 4.875% Notes at its option on or after December 15, 2006 at 100% of their principal amount, together with accrued and unpaid interest through the date of redemption; provided, however, that the 4.875% Notes will only be redeemable if the closing price of the Company’s common shares equals or exceeds 175% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the day before the date of the notice of optional redemption.
The 4.875% Notes are convertible, at the option of the holder, at any time before the close of business on or prior to the trading day immediately before the maturity date if the notes have not been previously redeemed or repurchased at a conversion rate of 185.0944 shares of the Company per $1,000 principal amount of the 4.875% Notes, subject to adjustment in certain circumstances, which is equal to a conversion price of approximately $5.40 per share. Upon conversion of the 4.875% Notes, the Company has the option to deliver, in lieu of common shares, cash or a combination of cash and common shares of the Company. The holder may convert the 4.875% Notes into common shares of the Company prior to maturity if the notes have been called for redemption, a change in control occurs or certain corporate transactions occur.
Promissory Note. On December 15, 2003, the Company assumed, as part of the purchase of Artisan, a $5.0 million subordinated promissory note to Vialta, Inc (“Promissory Note”) issued by Artisan which bore interest at 7.5% per annum compounded quarterly. The Promissory Note matured and was paid during April 2005.
8. | Acquisitions |
On October 17, 2005, the Company acquired all outstanding shares of Redbus, an independent United Kingdom film distributor. Consideration for the Redbus acquisition was $36.1 million comprised of a combination of $28.0 million in cash, $7.0 million in Lions Gate common shares and direct transaction costs of $1.1 million. In addition, the Company assumed other obligations (including accounts payable and accrued liabilities and film obligations) of $24.1 million. At the closing of the transaction the Company issued 643,460 common shares to Redbus Group Limited (“RGL”) valued at approximately $6.1 million, or $9.48 per share, and will issue up to an additional 94,937 common shares to RGL upon satisfaction of the terms of the escrow agreement. At December 31, 2005, the additional 94,937 common shares are valued at approximately $0.9 million. Direct transaction costs are considered liabilities assumed in the acquisition, and as such, are included in the purchase price. Direct transaction costs consist primarily of legal and accounting fees. The Company now has the ability to self-distribute its motion pictures in the UK. The Company also acquired the Redbus library of approximately 130 films. Effective October 17, 2005, the credit facility was amended in connection with the acquisition of Redbus, which made a portion of the credit facility available for borrowing by Redbus in either U.S. dollars or British pounds sterling.
The Redbus acquisition was accounted for as a purchase, with the results of operations of Redbus consolidated from October 17, 2005. Goodwill of $25.4 million represents the excess of the purchase price over
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
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 is preliminary and subject to completion of final appraisals as follows:
(Amounts in | |||||
thousands) | |||||
Cash and cash equivalents | $ | 1,937 | |||
Accounts receivable, net | 2,890 | ||||
Investment in films and television programs | 28,987 | ||||
Other tangible assets acquired | 863 | ||||
Goodwill | 25,446 | ||||
Other liabilities assumed | (24,064 | ) | |||
Total | $ | 36,059 | |||
On December 15, 2003, the Company completed its acquisition of Film Holdings Co., the parent company of Artisan, an independent distributor and producer of film and entertainment content, for a total purchase price of $168.9 million consisting of $160.0 million in cash and direct transaction costs of $8.9 million. In addition, the Company assumed debt of $59.9 million and other obligations (including accounts payable and accrued liabilities, film obligations and other advances) of $144.0 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 statement of operations for 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 December 31, 2005 and March 31, 2005, the remaining liabilities under the severance plan are nil. At December 31, 2005, the remaining liabilities for the property lease abandonment are $1.4 million (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 | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Amortization of films and television programs | $ | 56,928 | $ | 44,793 | $ | 191,337 | $ | 169,163 | ||||||||
Participation and residual expense | 48,003 | 39,798 | 118,221 | 89,500 | ||||||||||||
Amortization of acquired intangible assets | 520 | 548 | 1,760 | 1,644 | ||||||||||||
Other expenses | 5,230 | (2,678 | ) | 8,642 | (1,697 | ) | ||||||||||
$ | 110,681 | $ | 82,461 | $ | 319,960 | $ | 258,610 | |||||||||
Other expenses include direct operating expenses related to the studio facility and provision for doubtful accounts. The negative other expenses for the three and nine months ended December 31, 2004 is due to a reversal of the provision for doubtful accounts of $4.6 million. The reversal is primarily due to collection of accounts receivable during the three and nine months ended December 31, 2004 that were previously provided for.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
10. | Comprehensive Income (Loss) |
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Net income (loss) | $ | 3,142 | $ | 3,353 | $ | (32,783 | ) | $ | 221 | |||||||
Add (deduct): Foreign currency translation adjustments | 228 | 1,979 | 1,476 | 3,497 | ||||||||||||
Add (deduct): Net unrealized gain (loss) on foreign exchange contracts | (286 | ) | 442 | (315 | ) | 76 | ||||||||||
Add (deduct): Unrealized loss on investments — available for sale | (3,324 | ) | — | (1,537 | ) | — | ||||||||||
Add (deduct): Fair value adjustment of common shares to be acquired in exchange agreement with Image Entertainment | (440 | ) | — | (440 | ) | — | ||||||||||
Comprehensive income (loss) | $ | (680 | ) | $ | 5,774 | $ | (33,599 | ) | $ | 3,794 | ||||||
11. | Income (Loss) Per Share |
The Company calculates earnings per share in accordance with SFAS No. 128, “Earnings Per Share”. Basic income (loss) per share is calculated based on the weighted average common shares outstanding for the period. Diluted earnings per share includes the impact of the convertible senior subordinated notes, share purchase warrants, stock options and restricted share units, if dilutive.
Three Months | Three Months | Nine Months | Nine Months | ||||||||||||||
Ended | Ended | Ended | Ended | ||||||||||||||
December 31, | December 31, | December 31, | December 31, | ||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||||
(Amounts in thousands, except per share amounts) | |||||||||||||||||
Basic income (loss) per common share is calculated as follows: | |||||||||||||||||
Numerator: | |||||||||||||||||
Net income (loss) | $ | 3,142 | $ | 3,353 | $ | (32,783 | ) | $ | 221 | ||||||||
Denominator: | |||||||||||||||||
Weighted average common shares outstanding | 103,936 | 98,119 | 102,724 | 96,437 | |||||||||||||
Basic income (loss) per common share | $ | 0.03 | $ | 0.03 | $ | (0.32 | ) | $ | 0.00 | ||||||||
Basic income (loss) per common share is calculated using the weighted average number of common shares outstanding during the three and nine months ended December 31, 2005 of 103,936,000 shares and 102,724,000 shares, respectively (2004 — 98,119,000 and 96,437,000 shares, respectively). The exercise of common share equivalents including stock options, share purchase warrants, the conversion features of the 4.875% Notes, the 2.9375% Notes, the 3.625% Notes and restricted share units could potentially dilute income (loss) per share in the future, but was not reflected in diluted loss per share during the nine months ended December 31, 2005 because to do so would be anti-dilutive. Basic and diluted loss per common share were the
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
same for the nine months ended December 31, 2005. Diluted income per common share for the three months ended December 31, 2005 and for the three and nine months ended December 31, 2004 are presented below:
Three Months | Three Months | Nine Months | |||||||||||
Ended | Ended | Ended | |||||||||||
December 31, | December 31, | December 31, | |||||||||||
2005 | 2004 | 2004 | |||||||||||
(Amounts in thousands, except per share amounts) | |||||||||||||
Diluted income per common share is calculated as follows: | |||||||||||||
Numerator: | |||||||||||||
Net income | $ | 3,142 | $ | 3,353 | $ | 221 | |||||||
Denominator: | |||||||||||||
Weighted average common shares outstanding | 103,936 | 98,119 | 96,437 | ||||||||||
Effect of dilutive securities: | |||||||||||||
Share purchase options | 2,876 | 5,287 | 5,216 | ||||||||||
Share purchase warrants | — | 1,548 | 1,206 | ||||||||||
Restricted share units | 413 | — | — | ||||||||||
Adjusted weighted average common shares outstanding | 107,225 | 104,954 | 102,859 | ||||||||||
Diluted income per common share | $ | 0.03 | $ | 0.03 | $ | 0.00 | |||||||
The dilutive effect, if any, of the share purchase options, the share purchase warrants and the restricted share units are included in diluted income per share under the treasury method. The shares issuable on the potential conversion of the 4.875% Notes, the 2.9375% Notes and the 3.625% 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 price per common share for the twenty consecutive trading 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 remained outstanding. The warrants expired January 1, 2005.
12. | Accounting for Stock-Based Compensation |
Fair Value of Stock Options. The Company elected to use the intrinsic value method in accounting for stock based compensation set forth in APB No. 25, “Accounting for Stock Issued to Employees.” In accordance with 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 using the fair value method for companies that elect to use the intrinsic value method. See Recent Accounting Pronouncements for a discussion of SFAS 123(R).
The weighted average estimated fair value of each stock option granted in the nine months ended December 31, 2005 was $3.61 (2004 — $3.31). The total stock-based compensation expense for disclosure purposes for the three and nine months ended December 30, 2005, based on the fair value of the stock options granted, was $0.4 million and $1.6 million, respectively (2004 — $0.5 million and $1.6 million, respectively)
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
and the fair value of stock option modifications for the three and nine months ended December 31, 2005 was nil and less than and $0.1 million, respectively (2004 — nil and $0.2 million, respectively).
For disclosure purposes the fair value of each stock option grant was estimated on the date 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 33% (2004 — 30%), risk-free interest rate of 4.0% (2004 — 3.8%) and expected life of five years (2004 — five years).
The following pro forma basic and diluted income (loss) per common share includes stock-based compensation expense for stock options issued and modified, as described above:
Three Months | Three Months | Nine Months | Nine Months | ||||||||||||||
Ended | Ended | Ended | Ended | ||||||||||||||
December 31, | December 31, | December 31, | December 31, | ||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||||
(Amounts in thousands, except per share amounts) | |||||||||||||||||
The resulting pro forma basic and diluted income (loss) per common share is calculated as follows: | |||||||||||||||||
Numerator: | |||||||||||||||||
Net income (loss) | $ | 3,142 | $ | 3,353 | $ | (32,783 | ) | $ | 221 | ||||||||
Add: stock-based compensation expense recorded | — | — | 27 | 227 | |||||||||||||
Less: stock-based compensation expense calculated using fair value method | (419 | ) | (529 | ) | (1,553 | ) | (1,618 | ) | |||||||||
Adjusted net income (loss) | $ | 2,723 | $ | 2,824 | $ | (34,309 | ) | $ | (1,170 | ) | |||||||
Denominator: | |||||||||||||||||
Basic weighted average common shares outstanding (thousands) | 103,936 | 98,119 | 102,724 | 96,437 | |||||||||||||
Diluted weighted average common shares outstanding (thousands) | 107,225 | 104,954 | 102,724 | 96,437 | |||||||||||||
Adjusted basic income (loss) per common share | $ | 0.03 | $ | 0.03 | $ | (0.33 | ) | $ | (0.01 | ) | |||||||
Adjusted diluted income (loss) per common share | $ | 0.03 | $ | 0.03 | $ | (0.33 | ) | $ | (0.01 | ) | |||||||
Stock Appreciation Rights. 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”) 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 SARs’ 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 SARs’ price. At December 31, 2005, the market price of common shares was $7.68 (March 31, 2005 — $11.05; December 31, 2004 — $10.62) and the SARs had all vested. Due to the reduction in the market price of its common shares, the Company recorded a
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
reduction in stock-based compensation expense in the amount of $1.4 million and $2.5 million in general and administration expenses in the unaudited condensed consolidated statement of operations for the three and nine months ended December 31, 2005 (December 31, 2004 — expense of $1.5 million and $3.3 million, respectively). The amount in the period is calculated by using the market price of common shares on December 31, 2005 less the SARs’ price, multiplied by the 750,000 SARs vested less the amount previously recorded. At December 31, 2005, the Company has a stock-based compensation accrual in the amount of $2.0 million (March 31, 2005 — $4.5 million) included in accounts payable and accrued liabilities on the condensed consolidated balance sheets relating to these SARs.
On February 2, 2004, an officer of the Company was granted 1,000,000 SARs, which entitle the officer 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 SARs’ price of $5.20 multiplied by the number of SARs exercised. The SARs vest one quarter immediately on the award date and one quarter on each of the first, second and third anniversaries of the award date. These SARs are not considered part of the Employees’ and Directors’ Equity Incentive Plan. Applying FIN 28 “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans”, the Company is accruing compensation expense over the service period, 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 SARs’ price times the SARs assumed to have vested under the graded approach. At December 31, 2005, the market price of common shares was $7.68 (March 31, 2005 — $11.05; December 31, 2004 — $10.62). Due to the reduction in the market price of its common shares, the Company recorded a reduction in stock-based compensation expense in the amount of $1.2 million and $1.6 million in general and administration expenses in the unaudited condensed consolidated statement of operations for the three and nine months ended December 31, 2005 (2004 — expense of $1.8 million and $3.7 million, respectively). During the year ended March 31, 2005 the officer exercised 150,000 of the vested SARs and the Company paid $0.9 million. The amount in the period is calculated by using the market price of common shares on December 31, 2005 less the SARs’ price, multiplied by the remaining 897,929 SARs assumed to have vested less the 150,000 SARs exercised less the amount previously recorded. At December 31, 2005, the Company has a stock-based compensation accrual in the amount of $1.9 million (March 31, 2005 — $3.5 million) included in accounts payable and accrued liabilities on the condensed consolidated balance sheets relating to these SARs.
Restricted Share Units. Effective June 27, 2005 the Company, pursuant to its 2004 Performance Incentive Plan, entered into restricted share unit agreements with certain employees and directors. During the three and nine months ended December 31, 2005, the Company awarded 158,125 and 518,000, respectively, restricted common share units under these agreements. Upon issuance of the restricted common share units, an unamortized compensation expense equivalent to the market value of the common shares on the date of grant was charged to shareholders’ equity as unearned compensation. This unearned compensation will be amortized over the three-year vesting period. Compensation expense recorded for these restricted common share units was $0.4 million and $1.2 million during the three and nine months ended December 31, 2005 and is included in general and administration expenses in the unaudited condensed consolidated statements of operations.
The Company becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted share units when the restrictions are released and the shares are issued. Restricted shares are forfeited if the employees or directors terminate prior to the lapsing of restrictions. The Company records forfeitures of restricted share units, if any, as treasury share repurchases and any compensation costs previously recorded are reversed in the period of forfeiture.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
13. | Segment Information |
SFAS No. 131 “Disclosures About Segments of an Enterprise and Related Information” requires the Company to make certain disclosures about each reportable segment. The Company’s reportable segments are determined based on the distinct nature of their operations and each segment is a strategic business unit that offers different products and services and is managed separately. The Company evaluates performance of each segment using segment profit (loss) as defined below. The Company has three reportable business segments: Motion Pictures, Television and Studio Facilities.
Motion Pictures consists of the development and production of feature films; acquisition of North American and worldwide distribution rights; North American theatrical, home entertainment and television distribution of feature films produced and acquired and worldwide licensing of distribution rights to feature films produced and acquired.
Television consists of the development, production and worldwide distribution of television productions including television series, television movies and mini-series and non-fiction programming.
Studio Facilities consists of ownership and management of an eight-soundstage studio facility in Vancouver, Canada. Rental revenue is earned from soundstages, office and other equipment and services to tenants that produce or support the production of feature films, television series, movies and commercials. Tenancies vary from a few days to five years depending on the nature of the project and the tenant.
Segmented information by business unit is as follows:
Three Months | Three Months | Nine Months | Nine Months | ||||||||||||||
Ended | Ended | Ended | Ended | ||||||||||||||
December 31, | December 31, | December 31, | December 31, | ||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||||
(Amounts in thousands) | |||||||||||||||||
Segment revenues | |||||||||||||||||
Motion Pictures | $ | 203,314 | $ | 175,141 | $ | 518,579 | $ | 536,983 | |||||||||
Television | 25,999 | 14,158 | 114,551 | 69,692 | |||||||||||||
Studio Facilities | 1,651 | 1,099 | 4,651 | 3,511 | |||||||||||||
$ | 230,964 | $ | 190,398 | $ | 637,781 | $ | 610,186 | ||||||||||
Segment profit (loss) | |||||||||||||||||
Motion Pictures | $ | 11,139 | $ | 19,070 | $ | (3,942 | ) | $ | 39,118 | ||||||||
Television | 1,559 | 1,150 | 8,419 | 7,294 | |||||||||||||
Studio Facilities | 1,028 | 480 | 2,853 | 1,746 | |||||||||||||
$ | 13,726 | $ | 20,700 | $ | 7,330 | $ | 48,158 | ||||||||||
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Segment profit (loss) is defined as segment revenue less segment direct operating, distribution and marketing and general and administration expenses. The reconciliation of total segment profit (loss) to the Company’s income (loss) before income taxes is as follows:
Three Months | Three Months | Nine Months | Nine Months | ||||||||||||||
Ended | Ended | Ended | Ended | ||||||||||||||
December 31, | December 31, | December 31, | December 31, | ||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||||
(Amounts in thousands) | |||||||||||||||||
Company’s total segment profit (loss) | $ | 13,726 | $ | 20,700 | $ | 7,330 | $ | 48,158 | |||||||||
Less: | |||||||||||||||||
Corporate general and administration | (5,886 | ) | (8,608 | ) | (25,583 | ) | (28,610 | ) | |||||||||
Depreciation | (631 | ) | (835 | ) | (1,976 | ) | (2,224 | ) | |||||||||
Interest expense | (4,929 | ) | (8,275 | ) | (14,718 | ) | (19,388 | ) | |||||||||
Interest rate swaps mark-to-market | 218 | 419 | 119 | 2,408 | |||||||||||||
Interest income | 1,046 | 74 | 2,962 | 111 | |||||||||||||
Minority interests | — | 19 | — | (2 | ) | ||||||||||||
Other income | — | — | — | 825 | |||||||||||||
Equity interests | (44 | ) | — | (98 | ) | (200 | ) | ||||||||||
Income (Loss) Before Income Taxes | $ | 3,500 | $ | 3,494 | $ | (31,964 | ) | $ | 1,078 | ||||||||
14. | Commitments and Contingencies |
The Company is from time to time involved in various claims, legal proceedings and complaints arising in the ordinary course of business. The Company does not believe that adverse decisions in any such pending or threatened proceedings, or any amount which the Company might be required to pay by reason thereof, would have a material adverse effect on the financial condition or future results of the Company. The Company has provided an accrual for estimated losses under the above matters as of December 31, 2005, in accordance with FAS 5 “Accounting for Contingencies”.
15. | Reconciliation to Canadian GAAP |
The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. GAAP. The material differences between the accounting policies used by the Company under U.S. GAAP and Canadian GAAP are disclosed below in accordance with the provisions of the SEC and the National Instrument adopted by certain securities authorities in Canada.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Under Canadian GAAP, the net income (loss) and income (loss) per share figures for the three and nine months ended December 31, 2005 and 2004, and the shareholders’ equity as at December 31, 2005 and March 31, 2005 are as follows:
Net Income (Loss) | ||||||||||||||||||||||||
Three Months | Three Months | Nine Months | Nine Months | Shareholders’ Equity | ||||||||||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||||||||||
December 31, | December 31, | December 31, | December 31, | December 31, | March 31, | |||||||||||||||||||
2005 | 2004 | 2005 | 2004 | 2005 | 2005 | |||||||||||||||||||
As reported under U.S. GAAP | $ | 3,142 | $ | 3,353 | $ | (32,783 | ) | $ | 221 | $ | 105,513 | $ | 117,139 | |||||||||||
Adjustment for interest rate swaps(a) | (158 | ) | (158 | ) | (474 | ) | (474 | ) | 1,851 | 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) | (419 | ) | (529 | ) | (1,526 | ) | (1,391 | ) | — | — | ||||||||||||||
Adjustment for accretion on subordinated notes(d) | (3,158 | ) | (1,946 | ) | (9,474 | ) | (3,182 | ) | (15,898 | ) | (6,424 | ) | ||||||||||||
Adjustment for amortization of subordinated notes issue costs(d) | 298 | 47 | 823 | 122 | 1,305 | 482 | ||||||||||||||||||
Adjustment for amortization and write-off of deferred bank loan financing costs(e) | — | (266 | ) | — | (98 | ) | — | — | ||||||||||||||||
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) | — | — | — | — | 1,988 | (304 | ) | |||||||||||||||||
Net Income (Loss)/ Shareholders’ Equity under Canadian GAAP | $ | (295 | ) | $ | 501 | $ | (43,434 | ) | $ | (4,802 | ) | $ | 168,858 | $ | 187,317 | |||||||||
Basic Income (Loss) per Common Share under Canadian GAAP | $ | (0.01 | ) | $ | 0.01 | $ | (0.42 | ) | $ | (0.05 | ) | |||||||||||||
Diluted Income (Loss) per Common Share under Canadian GAAP | $ | (0.01 | ) | $ | 0.00 | $ | (0.42 | ) | $ | (0.05 | ) | |||||||||||||
Reconciliation of movement in Shareholders’ Equity under Canadian GAAP:
December 31, | March 31, | |||||||
2005 | 2005 | |||||||
(Amounts in thousands) | ||||||||
Balance at beginning of the year | $ | 187,317 | $ | 86,827 | ||||
Increase in common shares | 20,805 | 24,850 | ||||||
Increase in contributed surplus(d)(g) | 2,694 | 60,842 | ||||||
Net income (loss) under Canadian GAAP | (43,434 | ) | 12,424 | |||||
Adjustment to cumulative translation adjustments account(f) | 1,476 | 2,374 | ||||||
Balance at end of the period | $ | 168,858 | $ | 187,317 | ||||
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
(a) | Interest Rate SwapsMark-to-Market |
Under U.S. GAAP, the interest swaps do not meet the criteria of effective hedges and therefore the fair valuation losses of nil and $0.1 million for the three and nine months ended December 31, 2005 (2004 — gains of $0.5 million and $2.2 million, respectively) on the Company’s interest rate swap and fair valuation gains of $0.2 million for the three and nine months ended December 31, 2005 (2004 — loss of $0.1 million and gain of $0.2 million, respectively) on a subsidiary company’s interest swap are recorded in the unaudited condensed 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 adoptedAcG-13 effective April 1, 2004 and determined the interest rate swaps do not meet the criteria of effective hedges and therefore the fair valuation losses of nil and $0.1 million for the three and nine months ended December 31, 2005 (2004 — gains of $0.5 million and $2.2 million, respectively) on the Company’s interest swap and fair valuation gains of $0.2 million for the three and nine months ended December 31, 2005 (2004 — loss of $0.1 million and gain of $0.2 million, respectively) on a subsidiary company’s interest swap are recorded in the unaudited condensed consolidated statement of operations, which is consistent with U.S. GAAP.
The transitional provisions ofAcG-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 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 hedged items. This results in an additional interest expense in the three and nine months ended December 31, 2005 of $0.2 million and $0.5 million respectively (2004 — $0.2 million and $0.5 million).
(b) | Accounting for Business Combinations |
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.
(c) | Accounting for Income Taxes |
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
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
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, 2005 (March 31, 2005 — $1.9 million).
(d) | Reclassification of Conversion Feature of Subordinated Notes, Accretion on Subordinated Notes and Amortization of Subordinated Notes Issue Costs |
Under U.S. GAAP, the conversion feature of the 4.875% Notes, as explained in note 7, is not accounted for separately. Under Canadian GAAP, the conversion feature of the 4.875% Notes is valued at $16.3 million, net of placement agents’ fees and offering expenses of $1.0 million and, accordingly, shareholders’ equity is increased by $16.3 million. Under U.S. GAAP the principal amount and the carrying amount of the 4.875% Notes are the same and therefore no accretion is required whereas, under Canadian GAAP, the difference between the principal amount of $60.0 million and the original net carrying amount of $42.7 million is being accreted on a straight-line basis over seven years as a charge to interest. Under U.S. GAAP all of the placement agents’ fees and offering expenses are capitalized and amortized over seven years as a charge to interest expense whereas, under Canadian GAAP, the placement agents’ fees and offering expenses have been allocated to the conversion feature and to debt. The portion allocated to debt is being amortized on a straight-line basis over seven years as a charge to interest expense.
Under U.S. GAAP, the conversion feature of the 2.9375% Notes, as explained in note 7, is not accounted for separately. Under Canadian GAAP, the conversion feature of the 2.9375% Notes is valued at $25.7 million, net of placement agents’ fees and offering expenses of $0.8 million and, accordingly, shareholders’ equity is increased by $25.7 million. Under U.S. GAAP the principal amount and the carrying amount of 2.9375% Notes are the same and therefore no accretion is required whereas, under Canadian GAAP, the difference between the principal amount of $150.0 million and the original net carrying amount of $123.5 million is being accreted on a straight-line basis over five years, the time to the first potential redemption date by the Company, as a charge to interest. Under U.S. GAAP all of the placement agents’ fees and offering expenses are capitalized and amortized through the earliest redemption date of seven years as a charge to interest expense whereas, under Canadian GAAP, the placement agents’ fees and offering expenses have been allocated to the conversion feature and to debt. The portion allocated to debt is being amortized on a straight-line basis through the scheduled maturity date of twenty years as a charge to interest expense.
Under U.S. GAAP, the conversion feature of the 3.625% Notes, as explained in note 7, is not accounted for separately. Under Canadian GAAP, the conversion feature of the 3.625% Notes is valued at $32.9 million, net of placement agents’ fees and offering expenses of $1.0 million and, accordingly, shareholders’ equity is increased by $32.9 million. Under U.S. GAAP the principal amount and the carrying amount of 3.625% Notes are the same and therefore no accretion is required whereas, under Canadian GAAP, the difference between the principal amount of $175.0 million and the original net carrying amount of $141.1 million is being accreted on a straight-line basis over seven years, the time to the first potential redemption date by the Company, as a charge to interest. Under U.S. GAAP all of the placement agents’ fees and offering expenses are capitalized and amortized through the earliest redemption date of seven years as a charge to interest expense whereas, under Canadian GAAP, the placement agents’ fees and offering expenses have been allocated to the conversion feature and to debt. The portion allocated to debt is being amortized on a straight-line basis through the scheduled maturity date of twenty years as a charge to interest expense.
(e) | Accounting for Amortization and Write-Off of Deferred Bank Loan Financing Costs |
Under U.S. GAAP, deferred financing costs in the amount of $4.3 million allocated to the Company’s term loan was being amortized using the effective interest method over the term of the loan as a charge to interest expense whereas, under Canadian GAAP, the same amount was being amortized on a straight-line
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
basis over the term of the loan. On December 31, 2004, the Company repaid its term loan and wrote off the deferred financing costs related to the term loan.
(f) | Comprehensive Income (Loss) |
Comprehensive loss consists of net income (loss) and other gains and losses affecting shareholders’ equity that, under U.S. GAAP are excluded from the determination of net income (loss). Under U.S. GAAP, comprehensive income (loss) includes cumulative translation adjustments, unrealized gains (losses) on foreign exchange contracts and unrealized loss on investments — available for sale, net of income taxes of nil. Under Canadian GAAP, cumulative translation adjustments are included as a separate component of shareholders’ equity and unrealized gains (losses) on foreign exchange contracts and unrealized losses on investments — available for sale are not recorded.
(g) | Accounting for Stock-Based Compensation |
In December 2003, 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 years ended March 31, 2004 and March 31, 2003 have been restated. The impact of this change for the three and nine months ended December 31, 2005 was to decrease net income and increase net loss and increase contributed surplus by $0.4 million and $1.5 million, respectively, (2004 — $0.5 million and $1.4 million) and to decrease basic income per share by $0.01 and $0.01, respectively (2004 — nil and $0.02).
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, 2005 was $3.61 (2004 — $3.31 and $2.57). The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for stock options granted during the three and nine months ended December 31, 2005: a dividend yield of 0%, expected volatility of 33% (2004 — 30%), risk-free interest rate of 4.0% (2004 — 3.8%) and expected life of five years (2004 — five years).
16. | Consolidating Financial Information |
In December 2003, the Company sold $60.0 million of the 4.875% Notes, through its wholly owned U.S. subsidiary Lions Gate Entertainment Inc. (the “Issuer”). The 4.875% Notes, by their terms, are fully and unconditionally guaranteed by the Company. On April 2, 2004, the Company filed a registration statement on Form S-3 to register the resale of the 4.875% Notes and common shares issuable on conversion of the 4.875% Notes. On April 29, 2004, the registration statement was declared effective by the SEC.
In October 2004, the Company sold $150.0 million of the 2.9375% Notes, through the Issuer. The 2.9375% Notes, by their terms, are fully and unconditionally guaranteed by the Company. On February 4, 2005, the Company filed a registration statement on Form S-3 to register the resale of the 2.9375% Notes and common shares issuable on conversion of the 2.9375% Notes. On March 3, 2005, the registration statement was declared effective by the SEC.
In February 2005, the Company sold $175.0 million of the 3.625% Notes, through the Issuer. The 3.625% Notes, by their terms, are fully and unconditionally guaranteed by the Company. On March 29, 2005, and as amended April 6, 2005, the Company filed a registration statement on Form S-3 to register the resale of the 3.625% Notes and common shares issuable on conversion of the 3.625% Notes. On April 13, 2005, the registration statement was declared effective by the SEC.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The following tables present condensed consolidating financial information as of December 31, 2005 and March 31, 2005 and for the nine months ended December 31, 2005 and 2004 for (1) the Company, on a stand-alone basis, (2) the Issuer, on a stand-alone basis, (3) the non-guarantor subsidiaries of the Company (including the subsidiaries of the Issuer) on a combined basis (collectively, the “Other Subsidiaries”) and (4) the Company on a consolidated basis.
As of December 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 | $ | 927 | $ | (8,316 | ) | $ | 57,937 | $ | — | $ | 50,548 | |||||||||
Restricted cash | — | — | 796 | — | 796 | |||||||||||||||
Investments — auction rate preferreds and municipal bonds | — | 80,900 | — | — | 80,900 | |||||||||||||||
Investments — equity securities | — | 11,185 | — | — | 11,185 | |||||||||||||||
Accounts receivable, net | 97 | 1,204 | 133,221 | — | 134,522 | |||||||||||||||
Investment in films and television programs | — | 5,531 | 411,432 | — | 416,963 | |||||||||||||||
Property and equipment | — | 6,606 | 27,303 | — | 33,909 | |||||||||||||||
Goodwill | — | — | 186,627 | — | 186,627 | |||||||||||||||
Other assets | 30 | 17,849 | 12,851 | — | 30,730 | |||||||||||||||
Investment in subsidiaries | 217,241 | 307,452 | — | (524,693 | ) | — | ||||||||||||||
$ | 218,295 | $ | 422,411 | $ | 830,167 | $ | (524,693 | ) | $ | 946,180 | ||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY) | ||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 24 | $ | 15,411 | $ | 170,018 | $ | — | $ | 185,453 | ||||||||||
Film obligations | — | — | 211,844 | — | 211,844 | |||||||||||||||
Subordinated notes | — | 385,000 | — | — | 385,000 | |||||||||||||||
Mortgages payable | — | — | 16,769 | — | 16,769 | |||||||||||||||
Deferred revenue | — | — | 41,601 | — | 41,601 | |||||||||||||||
Intercompany payables (receivables) | (156,051 | ) | 75,444 | 80,387 | 220 | — | ||||||||||||||
Intercompany equity | 268,809 | 102,476 | 350,835 | (722,120 | ) | — | ||||||||||||||
Shareholders’ equity (deficiency) | 105,513 | (155,920 | ) | (41,287 | ) | 197,207 | 105,513 | |||||||||||||
$ | 218,295 | $ | 422,411 | $ | 830,167 | $ | (524,693 | ) | $ | 946,180 | ||||||||||
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Nine Months Ended December 31, 2005 | ||||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||
STATEMENT OF OPERATIONS | ||||||||||||||||||||||
Revenues | $ | 513 | $ | 964 | $ | 636,749 | $ | (445 | ) | $ | 637,781 | |||||||||||
Expenses: | ||||||||||||||||||||||
Direct operating | — | — | 319,960 | — | 319,960 | |||||||||||||||||
Distribution and marketing | — | 275 | 290,380 | — | 290,655 | |||||||||||||||||
General and administration | 1,407 | 24,180 | 20,277 | (445 | ) | 45,419 | ||||||||||||||||
Depreciation | — | 71 | 1,905 | — | 1,976 | |||||||||||||||||
Total expenses | 1,407 | 24,526 | 632,522 | (445 | ) | 658,010 | ||||||||||||||||
Operating Loss | (894 | ) | (23,562 | ) | 4,227 | — | (20,229 | ) | ||||||||||||||
Other Expenses (Income): | ||||||||||||||||||||||
Interest expense | 1 | 13,861 | 856 | — | 14,718 | |||||||||||||||||
Interest rate swaps mark-to-market | — | 123 | (242 | ) | — | (119 | ) | |||||||||||||||
Interest income | — | (2,863 | ) | (99 | ) | — | (2,962 | ) | ||||||||||||||
Total other expenses | 1 | 11,121 | 515 | — | 11,637 | |||||||||||||||||
Income (Loss) Before Equity Interests and Income Taxes | (895 | ) | (34,683 | ) | 3,712 | — | (31,866 | ) | ||||||||||||||
Equity interests | 31,863 | 11,584 | 98 | (43,447 | ) | (98 | ) | |||||||||||||||
Income (Loss) Before Income Taxes | (32,758 | ) | (46,267 | ) | 3,614 | 43,447 | (31,964 | ) | ||||||||||||||
Income tax provision | 25 | 310 | 484 | — | 819 | |||||||||||||||||
Net Income (Loss) | $ | (32,783 | ) | $ | (46,577 | ) | $ | 3,130 | $ | 43,447 | $ | (32,783 | ) | |||||||||
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Nine Months Ended December 31, 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 | $ | 2,250 | $ | (15,636 | ) | $ | 72,319 | $ | — | $ | 58,933 | ||||||||||
Investing activities: | |||||||||||||||||||||
Purchases of investments — auction rate preferreds and municipal bonds | — | (148,400 | ) | (15,000 | ) | — | (163,400 | ) | |||||||||||||
Purchases of investments — equity securities | — | (3,470 | ) | — | — | (3,470 | ) | ||||||||||||||
Sales of investments — auction rate preferreds | — | 82,500 | — | — | 82,500 | ||||||||||||||||
Cash received from sale of investment | — | — | 2,945 | — | 2,945 | ||||||||||||||||
Acquisition of Redbus, net of cash acquired | — | (27,122 | ) | — | — | (27,122 | ) | ||||||||||||||
Purchases of property and equipment | — | (4,133 | ) | 74 | — | (4,059 | ) | ||||||||||||||
Net cash flows used in investing activities | — | (100,625 | ) | (11,981 | ) | — | (112,606 | ) | |||||||||||||
Financing activities: | |||||||||||||||||||||
Issuance of common shares | 779 | — | — | — | 779 | ||||||||||||||||
Financing fees | — | (240 | ) | — | — | (240 | ) | ||||||||||||||
Repayment of subordinated notes | — | — | (5,000 | ) | — | (5,000 | ) | ||||||||||||||
Repayment of mortgages payable | — | — | (2,523 | ) | — | (2,523 | ) | ||||||||||||||
Net cash flows provided by (used in) financing activities | 779 | (240 | ) | (7,523 | ) | — | (6,984 | ) | |||||||||||||
Net change in cash and cash equivalents | 3,029 | (116,501 | ) | 52,815 | — | (60,657 | ) | ||||||||||||||
Foreign exchange effect on cash | (3,045 | ) | 1,829 | (418 | ) | — | (1,634 | ) | |||||||||||||
Cash and cash equivalents — beginning of period | 943 | 106,356 | 5,540 | — | 112,839 | ||||||||||||||||
Cash and cash equivalents — end of period | $ | 927 | $ | (8,316 | ) | $ | 57,937 | $ | — | $ | 50,548 | ||||||||||
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Nine Months Ended December 31, 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 | $ | (32,783 | ) | $ | (46,577 | ) | $ | 3,130 | $ | 43,447 | $ | (32,783 | ) | |||||||
Interest rate swaps mark-to-market | (474 | ) | (246 | ) | (228 | ) | 474 | (474 | ) | |||||||||||
Accounting for stock-based compensation | (1,526 | ) | — | — | — | (1,526 | ) | |||||||||||||
Adjustment for accretion on subordinated notes | (9,474 | ) | (9,474 | ) | — | 9,474 | (9,474 | ) | ||||||||||||
Adjustment for amortization of subordinated notes issue costs | 823 | 823 | — | (823 | ) | 823 | ||||||||||||||
Net income (loss) under Canadian GAAP | $ | (43,434 | ) | $ | (55,474 | ) | $ | 2,902 | $ | 52,572 | $ | (43,434 | ) | |||||||
As of December 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 | 105,513 | (155,920 | ) | (41,287 | ) | 197,207 | 105,513 | |||||||||||||
Interest rate swaps mark-to-market | 1,851 | 1,682 | 327 | (2,009 | ) | 1,851 | ||||||||||||||
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 | (15,898 | ) | (15,898 | ) | �� | — | 15,898 | (15,898 | ) | |||||||||||
Adjustment for amortization of subordinated notes issue costs | 1,305 | 1,305 | — | (1,305 | ) | 1,305 | ||||||||||||||
Reclassification of conversion feature of subordinated notes outside shareholders’ equity | 74,854 | — | — | — | 74,854 | |||||||||||||||
Other comprehensive income (loss) | 1,988 | 1,988 | 1,988 | (3,976 | ) | 1,988 | ||||||||||||||
Shareholders’ equity (deficiency) under Canadian GAAP | $ | 168,858 | $ | (166,843 | ) | $ | (39,727 | ) | $ | 206,570 | $ | 168,858 | ||||||||
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
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 | ||||||||||
�� |
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
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 | ||||||||
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
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 expense | 59 | 17,755 | 1,574 | — | 19,388 | |||||||||||||||||
Interest rate swaps mark-to-market | — | (2,200 | ) | (208 | ) | — | (2,408 | ) | ||||||||||||||
Interest income | — | (111 | ) | — | — | (111 | ) | |||||||||||||||
Minority interests | — | — | 2 | — | 2 | |||||||||||||||||
Other income | — | — | (825 | ) | — | (825 | ) | |||||||||||||||
Total other expenses (income) | 59 | 15,444 | 543 | — | 16,046 | |||||||||||||||||
Income (Loss) Before Equity Interests and Income Taxes | (566 | ) | (43,621 | ) | 45,465 | — | 1,278 | |||||||||||||||
Equity interests | (793 | ) | (38,546 | ) | 200 | 39,339 | 200 | |||||||||||||||
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 | ||||||||||
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
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 paid | — | (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, net | — | — | 1,172 | — | 1,172 | ||||||||||||||||
Purchases 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 | |||||||||||
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
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 | (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 | ) | ||||||
17. | Subsequent Event |
Lions Gate Studios. On January 23, 2006, the Company entered into an amended agreement to sell its partnership interests in its studios facilities located in Vancouver, British Columbia. The transaction is expected to close on March 15, 2006. The purchase price of $35.4 million (net of commissions) is payable in cash. Studios facilities comprise the Company’s studios facilities reporting unit (see note 13). At December 31, 2005, the carrying value of studios property and equipment was $27.6 million and is comprised primarily of land and buildings, with carrying values of $12.5 million and $14.8 million, respectively, and is included in property and equipment in the condensed consolidated balance sheets. At December 31, 2005, the carrying value of the goodwill within the studios reporting unit was $1.9 million. At December 31, 2005, the carrying value of the studios mortgages payable was $16.8 million and is included in mortgages payable in the unaudited condensed consolidated balance sheets. The agreement requires the partnership to pay off the remaining balances of its mortgages payable at the close of the transaction. The Company estimates a pretax gain on the sale of the studio facilities of approximately $5.0 million for the three months ended March 31, 2006. The Company expects additional transaction costs and adjustments in connection with completion of the transaction. The studios facilities reporting unit had revenues of $1.7 million and $4.7 million for the three and nine months ended December 31, 2005, respectively (2004 — $1.1 million and $3.5 million).
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Overview
We are a diversified independent producer and distributor of motion pictures, television programming, home entertainment, family entertainment andvideo-on-demand content. We release approximately 15 to 18 motion pictures theatrically per year. Our theatrical releases include films we produce in-house and films we acquire from third parties. We also have produced approximately 122 hours of television programming on average each of the last three fiscal years. Our disciplined approach to production, acquisition, and distribution is designed to maximize our profit by balancing our financial risks against the probability of commercial success of each project. We currently distribute our library of approximately 6,500 motion picture titles and 1,800 television episodes and programs directly to retailers, video rental stores, and pay and free television channels and indirectly to international markets through third parties. In November 2005, our distribution rights to the Republic library expired and were not renewed. We are currently in a six month non-exclusive sell-off period with respect to the Republic titles. When this sell-off period expires in May 2006, the Republic titles will no longer be included in our library. During the sell-off period, the Company is permitted to sell its remaining Republic inventory. The Republic library includes approximately 3,000 titles and represented approximately 2% of our revenues during the last fiscal year. We also own a minority interest in CinemaNow, Inc. (“CinemaNow”), an internetvideo-on-demand provider, and own and operate a film and television production studio in Vancouver, British Columbia. We also own a minority interest in Maple Pictures, a Canadian film and television distributor based in Toronto, Canada.
Our revenues are derived from the following business segments:
• | 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 anddirect-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, except in the United Kingdom where we now have the ability on a select basis to distribute directly through Redbus. | |
• | Television, which includes the licensing to domestic and international markets of one-hour and half-hour drama series, television movies and mini-series and non-fiction programming. | |
• | Studio Facilities, which derive revenue from rental of sound stages, production offices, construction mills, storage facilities and lighting equipment to film and television producers. |
Our primary operating expenses include the following:
• | Direct Operating Expenses, which primarily include amortization of production or acquisition costs, participation and residual expenses. | |
• | 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. |
Recent Developments
Lions Gate Studios. On January 23, 2006, the Company entered into an amended agreement to sell its partnership interests in its studios facilities located in Vancouver, British Columbia. The transaction is expected to close on March 15, 2006. The purchase price of $35.4 million (net of commissions) is payable in cash. Studios facilities comprise the Company’s studios facilities reporting unit (see note 13). At December 31, 2005, the carrying value of studios property and equipment was $27.6 million and is comprised primarily of land and buildings, with carrying values of $12.5 million and $14.8 million, respectively, and is included in property and equipment in the unaudited condensed consolidated balance sheets. At December 31,
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2005, the carrying value of the goodwill within the studios reporting unit was $1.9 million. At December 31, 2005, the carrying value of the studios mortgages payable was $16.8 million and is included in mortgages payable in the unaudited condensed consolidated balance sheets. The agreement requires the partnership to pay off the remaining balances of its mortgages payable at the close of the transaction. The Company estimates a pretax gain on the sale of the studio facilities of approximately $5.0 million for three months ended March 31, 2006. The Company expects additional transaction costs and adjustments in connection with completion of the transaction. The studios facilities reporting unit had revenues of $1.7 million and $4.7 million for the three and nine months ended December 31, 2005, respectively (2004 — $1.1 million and $3.5 million).
Redbus. On October 17, 2005, the Company acquired all outstanding shares of Redbus, an independent United Kingdom film distributor. Consideration for the Redbus acquisition was $36.1 million comprised of a combination of $28.0 million in cash, $7.0 million in Lions Gate common shares and direct transaction costs of $1.1 million. In addition, the Company assumed other obligations (including accounts payable and accrued liabilities and film obligations) of $24.1 million. At the closing of the transaction the Company issued 643,460 common shares to Redbus Group Limited (“RGL”) valued at approximately $6.1 million, or $9.48 per share, and will issue up to an additional 94,937 common shares to RGL valued at approximately $0.9 million upon satisfaction of the terms of the escrow agreement. Direct transaction costs are considered liabilities assumed in the acquisition and, as such, are included in the purchase price. Direct transaction costs consist primarily of legal and accounting fees. The Company now has the ability to self-distribute its motion pictures in the UK. The Company also acquired the Redbus library of approximately 130 films. Effective October 17, 2005, the credit facility was amended in connection with the acquisition of Redbus, which made a portion of the credit facility available for borrowing by Redbus in either U.S. dollars or British pounds sterling.
The Redbus acquisition was accounted for as a purchase, with the results of operations of Redbus consolidated from October 17, 2005. Goodwill of $25.4 million represents the excess of 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 is preliminary and subject to completion of final appraisals.
Image. During the three months ended September 30, 2005, we purchased 1,150,000 common shares of Image for $3.5 million in cash and completed a negotiated exchange with certain shareholders of Image in which we exchanged 885,258 of our common shares (at $10.45 per share) for 2,312,567 common shares of Image (at $4.00 per share) at a cost on an exchanged basis of $9.2 million. We also entered into exchange agreements for an additional 571,429 common shares of Image, which are required to be delivered by March 31, 2006 and were not delivered as of December 31, 2005. As a result of these transactions we purchased, or will conclude the purchase of, an aggregate of 4,033,996 shares, representing 18.94% of Image’s outstanding common shares. We acquired the common shares of Image in connection with possibly pursuing a negotiated strategic transaction with Image to acquire 100% of Image’s outstanding common shares. On October 31, 2005, Lions Gate proposed to purchase all the outstanding common shares of Image for cash of $4.00 per common share. This proposal was rejected by the Special Committee of the Board of Directors of Image on October 31, 2005. Lion’s Gate is currently considering its alternatives. At December 31, 2005, the Company has recorded an unrealized loss of $0.4 million on the 571,429 shares to be exchanged based on the difference between the negotiated price per common share of $4.00 and the closing price of Image’s common shares on December 31, 2005 of $3.23 per common share. The Company has reported the $0.4 million unrealized loss as a charge to other comprehensive loss and as an increase in shareholders’ equity in the unaudited condensed consolidated statement of shareholder’s equity as of December 31, 2005.
CRITICAL ACCOUNTING POLICIES
The application of the following accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management. For a summary of all of our accounting policies, including the accounting policies discussed below, see note 2 to our March 31, 2005 audited consolidated financial statements.
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Generally Accepted Accounting Principles. Our consolidated financial statements have been prepared in accordance with U.S. GAAP which conforms, in all material respects, with Canadian GAAP, except as described in the notes to the unaudited condensed consolidated financial statements.
On March 29, 2004, the new British Columbia Business Corporations Act came into force, which allows the Company to prepare its financial statements either under Canadian or U.S. GAAP. The Company elected to prepare financial statements under U.S. GAAP commencing April 1, 2004. Prior to April 1, 2004, the Company’s consolidated financial statements were prepared under Canadian GAAP. Amounts presented in prior years in the consolidated financial statements have been converted to U.S. GAAP. The Company must disclose and quantify material differences with Canadian GAAP in its interim and annual financial statements through March 31, 2006.
Accounting for Films and Television Programs. In June 2000, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 00-2 “Accounting by Producers or Distributors of Films” (“SoP 00-2”). SoP 00-2 establishes accounting standards for producers or distributors of films, including changes in revenue recognition, capitalization and amortization of costs of acquiring films and television programs and accounting for exploitation costs, including advertising and marketing expenses.
We capitalize costs of production and acquisition, including financing costs and production overhead, to investment in films and television programs. These costs are amortized to direct operating expenses in accordance with SoP 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. No assurance can be given that unfavorable changes to revenue and cost estimates will not occur, which may result in significant write-downs affecting our results of operations and financial condition.
Revenue Recognition. Revenue from the sale or licensing of films and television programs is recognized upon meeting all recognition requirements of SoP 00-2. Revenue from the theatrical release of feature films is recognized at the time of exhibition based on the Company’s participation in box office receipts. Revenue from the sale of videocassettes and DVDs in the retail market, net of an allowance for estimated returns and other allowances, is recognized on the later of receipt by the customer or “street date” (when it is available for sale by the customer). Under revenue sharing arrangements, rental revenue is recognized when the Company is entitled to receipts and such receipts are determinable. Revenues from television licensing are recognized when the feature film or television program is available to the licensee for telecast. For television licenses that include separate availability “windows” during the license period, revenue is allocated over the “windows”. Revenue from sales to international territories are recognized when access to the feature film or television program has been granted or delivery has occurred, as required under the sales contract, and the right to exploit the feature film or television program has commenced. For multiple media rights contracts with a fee for a single film or television program where the contract provides for media holdbacks, the fee is allocated to the various media based on management’s assessment of the relative fair value of the rights to exploit each media and is recognized as each holdback is released. For multiple-title contracts with a fee, the fee is allocated on a title-by-title basis, based on management’s assessment of the relative fair value of each title.
Rental revenue from short-term operating leases of studio facilities is recognized over the term of the lease.
Cash payments received are recorded as deferred revenue until all the conditions of revenue recognition have been met. Long-term, non-interest bearing receivables are discounted to present value.
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Reserves. Revenues are recorded net of estimated returns and other allowances. We estimate reserves for video returns in the unaudited condensed consolidated financial statements based on previous returns and our estimated expected future returns related to current period sales on a title-by-title basis in each of the video businesses. There may be differences between actual returns and our historical experience. We estimate provisions for accounts receivable based on historical experience and relevant facts and information regarding the collectability of the accounts receivable.
Income Taxes. The Company is subject to income taxes in the United States, and in several states and foreign jurisdictions in which we operate. We account for income taxes according to Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). SFAS 109 requires the recognition of deferred tax assets, net of applicable reserves, related to net operating loss carryforwards and certain temporary differences. The standard requires recognition of a future tax benefit to the extent that realization of such benefit is more likely than not or a valuation allowance is applied.
Goodwill. On April 1, 2001, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. Goodwill is reviewed annually for impairment within each fiscal year or between the annual tests if an event occurs or circumstances change that indicate it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. The Company performs its annual impairment test as of December 31 in each fiscal year. The Company performed its annual impairment test on its goodwill as of 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.
Business Acquisitions. The Company accounts for its business acquisitions as a purchase, whereby the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair value. The excess of the purchase price over estimated fair value of the net identifiable assets is allocated to goodwill. Determining the fair value of assets and liabilities requires various assumptions and estimates.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 123R. In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)). SFAS 123(R) revises SFAS No. 123 and eliminates the alternative to use the intrinsic method of accounting under APB No. 25. SFAS 123(R) requires all public companies accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments, to account for these types of transactions using a fair-value-based method. The Company currently accounts for share-based payments to employees using the intrinsic value method as set forth in APB No. 25 “Accounting for Stock Issued to Employees.” As such, the Company generally recognizes no compensation cost for employee stock options. SFAS No. 123(R) eliminates the alternative to use APB No. 25’s intrinsic value method of accounting. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income (loss) and basic and diluted income (loss) per share in note 12 in the notes to the unaudited condensed consolidated financial statements. SFAS No. 123(R) permits companies to adopt its requirements using either a modified prospective method or a modified retrospective method. The adoption of SFAS No. 123(R)’s fair value method will have an impact on our results of operations, although it will have no material impact on our overall financial position. The Company has not yet determined which method it will utilize. The provisions of SFAS No. 123(R) are effective for financial statements with the first interim or annual reporting period beginning after June 15, 2005. However, the SEC announced on April 14, 2005 that it would provide for a phased-in implementation process for SFAS No. 123(R). As a result, the Company will not be required to apply SFAS No. 123(R) until the period beginning April 1, 2006.
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Results of Operations
Three Months Ended December 31, 2005 Compared to Three Months Ended December 31, 2004 |
Consolidated revenues this quarter of $231.0 million increased $40.6 million, or 21.3%, compared to $190.4 million in the prior year’s quarter.
Motion pictures revenue of $203.3 million this quarter increased $28.2 million, or 16.1%, compared to $175.1 million in the prior year’s quarter. Theatrical revenue included in motion picture revenue of $49.9 million this quarter increased $21.0 million, or 72.7%, compared to $28.9 million in the prior year’s quarter. Significant theatrical releases this quarter includedSaw II, WaitingandIn The Mix.Significant theatrical releases in the prior year’s quarter includedSaw.Video revenue included in motion picture revenue of $115.9 million this quarter decreased $4.9 million, or 4.1%, compared to $120.8 million in the prior year’s quarter. Significant video releases this quarter includedDevil’s RejectandHigh Tension.Previously released titles such asCrash, SawandBarbie and the Magic of Pegasusalso continued to generate significant video revenues in the quarter. Significant video releases in the prior year which generated significant revenue in the prior year’s quarter includedOpen Water, The Punisher, Barbie as the Princess and the Pauper, GodsendandCare Bears: Journey to Joke-A-Lot.International revenue included in motion picture revenue of $14.5 million this quarter increased $3.2 million, or 28.3%, compared to $11.3 million in the prior year’s quarter. Significant international sales this quarter includedHappy EndingsandSaw II.Significant international sales in the prior year’s quarter includedGodsendandThe Prince and Me.Television revenue included in motion picture revenue of $20.2 million this quarter increased $9.5 million, or 88.8%, compared to $10.7 million in the prior year’s quarter. Significant television license fees this quarter were generated fromDiary of a Mad Black Woman.Significant television license fees in the prior year’s quarter includedVan Wilder: Party LiaisonandGirl With a Pearl Earring.
Television production revenue of $26.0 million this quarter increased by $11.8 million, or 83.1%, from $14.2 million in the prior year’s quarter. This quarter, 17 hours of one-hour drama series were delivered contributing revenue of $18.0 million and international and other revenue on one-hour drama series was $4.2 million. This quarter, revenue contributed from television movies, video releases of television product and non-fiction programming totaled $3.8 million. In the prior year’s quarter, 19 hours of one-hour drama series were delivered for revenue of $8.4 million, international and other revenue on one-hour drama series was $1.9 million and revenue contributed from television movies and video releases of television product was $3.9 million. Domestic deliveries of one-hour drama series this quarter includedWildfire, MissingandThe Dead Zone.Television movies includedThree Wise Guys.Domestic deliveries in the prior year’s quarter included the one-hour drama series Second VerdictandMissingand television movies includedFrankenstein.
Studio facilities revenue of $1.7 million this quarter increased $0.6 million, or 54.6%, compared to $1.1 million in the prior year’s quarter due to increases in occupancy and rental rates.
Direct operating expenses primarily include amortization of film and television production or acquisition costs, participation and residual expenses. Direct operating expenses of $110.7 million for the quarter were 47.9% of revenue, compared to direct operating expenses of $82.5 million, which were 43.3% of revenue in the prior year’s quarter. Direct operating expenses as a percentage of revenue for the motion pictures segment increased due to a provision for doubtful accounts recorded this quarter primarily for a video retail customer of $4.4 million and to a reversal of the provision for doubtful accounts in the prior year’s quarter. The reversal was primarily due to collection of accounts receivable during the three months ended December 31, 2004 that were previously provided for.
Distribution and marketing expenses of $99.5 million increased $19.2 million, or 23.9%, compared to $80.3 million in the prior year’s quarter. Theatrical prints and advertising (“P&A”) this quarter of $45.6 million increased $15.5 million, or 51.5%, compared to $30.1 million in the prior year’s quarter. Theatrical P&A this quarter included significant expenditures on the release of titles such asSaw II, In The MixandWaiting.Theatrical P&A in the prior year’s quarter included significant expenditures on the release of titles such asSawandBeyond the Sea. In The Mixreleased theatrically during the quarter is not expected to be an ultimately profitable title. Video distribution and marketing costs on motion picture and television
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product this quarter of $48.3 million remain unchanged compared to $48.3 million in the prior year’s quarter. Video expenditure this quarter included significant expenditure on the release of titles such asDevil’s Rejects andCare Bears: Big Wish. Video expenditure in the prior year’s quarter included significant expenditure on titles such asOpen Water, Care Bears: The King Funshine andBarbie as the Princess and the Pauper.
General and administration expenses of $13.0 million this quarter decreased $2.6 million, or 16.7%, compared to $15.6 million in the prior year’s quarter. The decrease was primarily due to decreased stock-based compensation expense consisting of a decrease in stock appreciation rights expense of $5.8 million (this quarter included a recovery of SARs’ expense of $2.6 million and the prior year’s quarter included an expense of $3.2 million), offset by an increase in amortization of unearned compensation expense on restricted share units granted in the current year of $0.4 million. The prior year’s quarter included general and administration expenses for Christal of $0.4 million, a variable interest entity no longer consolidated effective April 2005 due to the sale of our interest in Christal. In the current quarter, $1.2 million of production overhead was capitalized compared to $0.6 million in the prior year’s quarter.
Depreciation and amortization of $0.6 million this quarter decreased $0.2 million, or 25.0%, from $0.8 million in the prior year’s quarter.
Interest expense of $4.9 million this quarter decreased $3.4 million, or 41.0%, from $8.3 million in the prior year’s quarter primarily due to a write-off of deferred financing costs in the prior quarter’s amortization and a decrease in interest and amortization of deferred financing fees on the credit facility, offset by an increase in interest and amortization of deferred financing fees on the subordinated notes. The credit facility had a nil balance during the three months ended December 31, 2005 resulting in a decrease in interest on the credit facility. During the three months ended December 31, 2004, deferred financing fees of $3.4 million on the term loan portion of the credit facility were written off to interest expense. The three months ended December 31, 2005 includes interest and amortization on the 4.875% Notes issued December 2003, the 2.9375% Notes issued October 2004 and the 3.625% Notes issued February 2005, whereas the three months ended December 31, 2004 includes interest and amortization on the 4.875% Notes and the 2.9375% Notes only.
Interest rate swaps do not meet the criteria of effective hedges and therefore a fair valuation gain of $0.2 million was recorded this quarter compared to a fair valuation gain of $0.4 million recorded in the prior year’s quarter.
This quarter included interest income of $1.0 million, compared to $0.1 million in the prior year’s quarter. Interest income this quarter was earned on the cash balance and available-for-sale investments held during the three months ended December 31, 2005.
Equity interests of less than $0.1 million this quarter includes the equity interest in the loss of Maple Pictures consisting of 10% of the losses of Maple Pictures.
Net income for the three months ended December 31, 2005 was $3.1 million, or basic income per common share of $0.03 on 103.9 million weighted average shares outstanding. This compares to net income for the three months ended December 31, 2004 of $3.4 million or basic income per common share of $0.03 on 98.1 million weighted average common shares outstanding. Diluted income per common share for the three months ended December 31, 2005 was $0.03 on 107.2 million weighted average shares outstanding. This compares to diluted income per common share for the three months ended December 31, 2004 of $0.03 on 105.0 million weighted average shares outstanding.
Nine Months Ended December 31, 2005 Compared to Nine Months Ended December 31, 2004 |
Consolidated revenues for the nine months ended December 31, 2005 of $637.8 million increased $27.6 million, or 4.5%, compared to $610.2 million for the nine months ended December 31, 2004.
Motion pictures revenue of $518.6 million this period decreased $18.4 million, or 3.4%, compared to $537.0 million in the prior year’s period. Theatrical revenue from motion pictures of $90.9 million this period decreased $22.4 million, or 19.8%, compared to $113.3 million in the prior year’s period. Significant theatrical
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releases this period includedSaw II, Crash, Lord of War, The Devil’s RejectsandWaiting. Significant theatrical releases in the prior year’s period includedFahrenheit 9/11, Saw, The Punisher, Open Water, GodsendandThe Cookout.Video revenue from motion pictures of $333.1 million this period increased $7.2 million, or 2.2%, compared to $325.9 million in the prior year’s period. Significant video releases this period includedDiary of a Mad Black Woman, Crash, Devil’s Rejects, Alone in the Dark, Beyond the Sea, Barbie and the Magic of Pegasusand theTyler Perry Plays. Significant video releases in the prior year’s period includedThe Punisher, Barbie in the Prince and the Pauper, Godsend, Dirty Dancing: Havana Nights, Open Water, The CoolerandGirl With A Pearl Earring. International revenue from motion pictures of $34.4 million this period decreased $32.7 million, or 48.7%, compared to $67.1 million in the prior year’s period. Significant international sales this period includedHotel Rwanda, Happy Endings, Dirty Dancing: Havana Nights, Saw, Devil’s RejectsandSaw II. Significant international sales in the prior year’s period includedThe Punisher, Godsend, The Prince and Me, Open WaterandFinal Cut. Television revenue from motion pictures of $54.8 million this period increased $27.9 million, or 103.7%, compared to $26.9 million in the prior year’s period. Significant television license fees this period includedSaw, Diary of a Mad Black Woman, Open Water, The CookoutandThe Punisher. Significant television license fees in the prior year’s period includedVan Wilder: Party Liaison, House of the DeadandCabin Fever.
Television production revenue of $114.6 million this period increased by $44.9 million, or 64.4%, from $69.7 million in the prior year’s period. This period, 68 hours of one-hour drama series and 10 half-hours of half-hour drama series were delivered domestically contributing revenue of $91.6 million and international and other revenue on one-hour and half-hour drama series was $14.7 million. This period, revenue contributed from television movies, video releases of television and non-fiction programming totaled $8.3 million. In the prior year’s period, 46 hours of one-hour drama series were delivered for revenue of $38.8 million, international and other revenue on one-hour drama series was $15.0 million and revenue contributed from television movies, video releases of television product and non-fiction programming was $15.9 million. Domestic deliveries of one-hour drama series this period includedThe Cut, Wildfire, MissingandThe Dead Zoneand of half-hour drama series includedWeeds. Television movies includedThree Wise Guys. Domestic deliveries of one-hour drama series in the prior year’s period includedThe Dead Zone, Second Verdict, Missingand5 Days to Midnight. Television movies in the prior year’s period includedFrankenstein, Baby for Sale, InfidelityandA Mother’s Gift.
Studio facilities revenue of $4.7 million this period increased $1.2 million, or 34.3%, compared to $3.5 million in the prior year’s period due primarily to increases in occupancy and rental rates period over period.
Direct operating expenses primarily include amortization of film and television production or acquisition costs, participation and residual expenses. Direct operating expenses of $320.0 million for the period were 50.2% of revenue, compared to direct operating expenses of $258.6 million, which were 42.4% of revenue in the prior year’s period. Direct operating expenses as a percentage of revenue for the motion pictures and television segment increased period over period due to lower margins on the mix of titles released during the period. The television segment in particular generated significant revenues during the period associated with higher direct operating expenses as a percentage of revenue. Direct operating expenses as a percentage of revenue for the motion pictures segment also increased due to a provision for doubtful accounts recorded this period, primarily for a video retail customer of $4.4 million and to a reversal of the provision for doubtful accounts in the prior year’s period. The reversal was primarily due to collection of accounts receivable during the nine months ended December 31, 2004 that were previously provided for.
Distribution and marketing expenses of $290.7 million increased $8.2 million, or 2.9%, compared to $282.5 million in the prior year’s period. Theatrical P&A this period of $146.1 million increased $10.7 million, or 7.9%, compared to $135.4 million in the prior year’s period. Theatrical P&A this period included significant expenditure on the release of titles such asSaw II, Crash, Lord of War, In the Mix, The Devil’s Rejects, High Tension, Rize, UndiscoveredandWaiting.In The Mix, High Tension, Undiscovered, RizeandHappy Endingsreleased theatrically during the period are not expected to be ultimately profitable titles. Theatrical P&A in the prior year’s period included significant expenditures on the release of titles such asOpen Water, Saw, Godsend, The Punisher, Fahrenheit 9/11andThe Cookout. Video distribution and marketing costs on motion
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picture and television product this period of $134.0 million decreased $6.4 million, or 4.6%, compared to $140.4 million in the prior year’s period. Video distribution and marketing costs this period included significant expenditure on the release of titles such asDiary of a Mad Black Woman, Crash, Devil’s Rejects, Barbie and the Magic of Pegasus, Alone in the Dark, Beyond the Seaand theTyler Perry Plays.Video distribution and marketing costs in the prior year’s period included significant expenditure on the release of titles such asThe Punisher, Barbie in the Prince and the Pauper, Dirty Dancing: Havana Nights, Godsend, Care Bears: The King Funshine, The CoolerandGirl With A Pearl Earring.
General and administration expenses of $45.4 million this period decreased $4.1 million, or 8.3%, compared to $49.5 million in the prior year’s period primarily due to a decrease in stock-based compensation expense, offset by an increase in professional fees. The decrease in stock-based compensation expense consists of a decrease in share appreciation rights expense of $11.1 million (this period included a recovery of SARs’ expense of $4.1 million and the prior year’s period included an expense of $7.0 million), offset by an increase in amortization of unearned compensation expense on restricted share units granted during the current year period of $1.1 million. Professional fees increased primarily due to fees associated with the documentation, assessment and testing of our internal controls as required by Section 404 of the Sarbanes Oxley Act and due to the fees associated with our fiscal year end audit services. The prior year’s period included general and administration expenses for Christal of $1.7 million, a variable interest entity no longer consolidated effective April 2005 due to the sale of our interest in Christal. In the current period, $3.5 million of production overhead was capitalized compared to $1.9 million in the prior year’s period.
Depreciation of $2.0 million this period decreased $0.2 million, or 9.1%, compared to $2.2 million in the prior year’s period.
Interest expense of $14.7 million this period decreased $4.7 million, or 24.2%, compared to $19.4 million in the prior year’s period primarily due to a write-off of deferred financing costs in the prior year’s amortization and a decrease in interest and amortization of deferred financing fees on the credit facility, offset by an increase in interest and amortization of deferred financing fees on the subordinated notes. The credit facility had a nil balance during the nine months ended December 31, 2005 resulting in a decrease in interest on the credit facility. During the three months ended December 31, 2004, deferred financing fees of $3.4 million on the term loan portion of the credit facility were written off to interest expense. The nine months ended December 31, 2005 includes interest and amortization on the 4.875% Notes issued December 2003, the 2.9375% Notes issued October 2004 and the 3.625% Notes issued February 2005, whereas the nine months ended December 31, 2004 includes interest and amortization on the 4.875% Notes and the 2.9375% Notes only. Interest expense in the prior year’s period was partially offset by interest capitalized to production costs of $0.7 million in the prior year’s period.
Interest rate swaps do not meet the criteria of effective hedges and therefore a fair valuation gain of $0.1 million was recorded this period and a fair valuation gain of $2.4 million was recorded in the prior year’s period.
This period included interest income of $3.0 million, compared to $0.1 million in the prior year’s period. Interest income this period was earned on the cash balance and available-for-sale investments held during the nine months ended December 31, 2005.
Other income in the prior year’s period includes $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 in the prior year’s period also includes $0.1 million reversal of a provision for a promissory note previously provided for as write-down of other assets, due to the collection of cash on the promissory note in October 2004.
Equity interests of $0.1 million this period includes $0.1 million equity interest in the loss of Maple Pictures consisting of 10% of the losses of Maple Pictures. Equity interests of $0.2 million in the prior year’s 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 September 30, 2004 and therefore we do not record any additional losses, as we have no further funding requirements.
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Net loss for the nine months ended December 31, 2005 was $32.8 million, or basic loss per common share of $0.32 on 102.7 million weighted average shares outstanding. This compares to net income for the nine months ended December 31, 2004 of $0.2 million or basic income per common share of $0.00 on 96.4 million weighted average common shares outstanding. Diluted income per common share for the nine months ended December 31, 2004 was $0.00 on 102.9 million weighted average common shares outstanding.
EBITDA
EBITDA, defined as earnings before interest expense, interest rate swapsmark-to-market, interest income, income tax provision, depreciation and minority interests of $7.8 million for the three months ended December 31, 2005 decreased $4.3 million, or 35.5%, compared to EBITDA of $12.1 million for the three months ended December 31, 2004. EBITDA of negative $18.4 million for the nine months ended December 31, 2005 decreased $38.6 million compared to EBITDA of $20.2 million for the nine months ended December 31, 2004.
EBITDA is a non-GAAP financial measure. Management believes EBITDA to be a meaningful indicator of our performance that provides useful information to investors regarding our financial condition and results of operations. Presentation of EBITDA is consistent with our past practice, and EBITDA is a non-GAAP financial measure commonly used in the entertainment industry and by financial analysts and others who follow the industry to measure operating performance. While management considers EBITDA to be an important measure of comparative operating performance, it should be considered in addition to, but not as a substitute for, net income and other measures of financial performance reported in accordance with GAAP. EBITDA does not reflect cash available to fund cash requirements. Not all companies calculate EBITDA in the same manner and the measure as presented may not be comparable to similarly-titled measures presented by other companies.
The following table reconciles EBITDA to net income (loss):
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
EBITDA, as defined | $ | 7,796 | $ | 12,092 | $ | (18,351 | ) | $ | 20,173 | |||||||
Depreciation | (631 | ) | (835 | ) | (1,976 | ) | (2,224 | ) | ||||||||
Interest expense | (4,929 | ) | (8,275 | ) | (14,718 | ) | (19,388 | ) | ||||||||
Interest rate swaps mark-to-market | 218 | 419 | 119 | 2,408 | ||||||||||||
Interest income | 1,046 | 74 | 2,962 | 111 | ||||||||||||
Minority interests | — | 19 | — | (2 | ) | |||||||||||
Income tax provision | (358 | ) | (141 | ) | (819 | ) | (857 | ) | ||||||||
Net income (loss) | $ | 3,142 | $ | 3,353 | $ | (32,783 | ) | $ | 221 | |||||||
Refer to note 15 of the unaudited condensed consolidated financial statements for reconciliation of net income (loss) reported under U.S. GAAP to net income (loss) reported under Canadian GAAP.
Liquidity and Capital Resources
Our liquidity and capital resources are provided principally through cash generated from operations, issuance of subordinated notes and our credit facility.
Convertible Senior Subordinated Notes. In December 2003, Lions Gate Entertainment Inc. sold $60.0 million of 4.875% Notes that mature on December 15, 2010. We received $57.0 million of net proceeds, after paying placement agents’ fees. Offering expenses were $0.7 million. The 4.875% Notes are convertible, at the option of the holder, at any time before the close of business on the business day immediately preceding the maturity date of the 4.875% Notes, unless previously redeemed, into common shares of the Company at a
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conversion rate of 185.0944 shares per $1,000 principal amount of the 4.875% Notes, which is equal to a conversion price of approximately $5.40 per share. Lions Gate Entertainment Inc. may redeem the 4.875% Notes at its option on or after December 15, 2006 at 100% of their principal amount plus accrued and unpaid interest if the closing price of our common shares exceeds 175% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day before the date of notice of redemption.
In October 2004, Lions Gate Entertainment Inc. sold the 2.9375% Notes that mature on October 15, 2024. We received $146.0 million of net proceeds after paying placement agents’ fees. Offering expenses were $0.7 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 the Company 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. From October 15, 2009 to October 14, 2010, Lions Gate Entertainment Inc. may redeem the 2.9375% Notes at 100.839%; from October 15, 2010 to October 14, 2011, Lions Gate Entertainment Inc. may redeem the 2.9375% Notes at 100.420%; and thereafter at 100%.
In February 2005, Lions Gate Entertainment Inc. sold the 3.625% Notes that mature on March 15, 2025. We received $170.2 million 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.
Credit Facility. The Company entered into a $350 million credit facility in December 2003 consisting of a $200 million U.S. dollar-denominated revolving credit facility, a $15 million Canadian dollar-denominated revolving credit facility and a $135 million U.S. dollar-denominated term-loan. By December 31, 2004, the Company had repaid the term loan in full, thereby reducing the credit facility to $215 million. Effective March 31, 2005, the credit facility was amended to eliminate the $15 million Canadian dollar-denominated revolving credit facility and increase the U.S. dollar-denominated revolving credit facility by the same amount. Effective October 17, 2005, the credit facility was amended in connection with the acquisition of Redbus, to provide a portion of the credit facility available for borrowing by Redbus in either U.S. dollars or British pounds sterling. At December 31, 2005, the Company had no borrowings (March 31, 2005 — nil) under the credit facility. The credit facility expires December 31, 2008 and bears interest at 2.75% over the Adjusted LIBOR or 1.75% over the U.S. prime rates. The availability of funds under the credit facility is limited by the borrowing base, which is calculated on a monthly basis. Amounts available under the credit facility are also limited by outstanding letters of credit which amounted to $7.2 million at December 31, 2005. The borrowing base assets at December 31, 2005 totaled $411.3 million (March 31, 2005 — $405.1 million) and therefore $207.8 million is available under the credit facility at December 31, 2005. The Company is required to pay a monthly commitment fee of 0.50% per annum on the total credit facility of $215 million less the amount drawn. Right, title and interest in and to all personal property of Lions Gate Entertainment Corp. and Lions Gate Entertainment Inc. is being pledged as security for the credit facility. The credit facility is senior to the Company’s film obligations, subordinated notes and mortgages payable. The credit facility restricts the Company from paying cash dividends on its common shares. The Company entered into a $100 million interest rate swap at an interest rate of 3.08%, commencing January 2003 and ended September 30, 2005. The swap was in effect as long as three month LIBOR was less than 5.0%. The value of the interest rate swap at the maturity date of December 31, 2005 is nil (March 31, 2005 — $0.1 million). Changes in the fair value representing a fair valuation loss on the interest rate swap during the nine months ended December 31, 2005 are $0.1 million (2004 — gain of $2.2 million) and are included in the unaudited condensed consolidated statements of operations.
Filmed Entertainment Backlog. Backlog represents the amount of future revenue not yet recorded from executed contracts for the licensing of films and television product for television exhibition and in international markets. Backlog at December 31, 2005 and March 31, 2005 is $147.6 million and $100.3 million,
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respectively. The increase in backlog is primarily due to contracts entered into on titles such asCrash, Saw II, In the Mix, Skinwalkers, Waiting, WildfireandLord of Warduring the nine months ended December 31, 2005.
Cash Flows Provided by Operating Activities. Cash flows provided by operating activities in the nine months ended December 31, 2005 were $58.9 million compared to cash flows provided by operating activities in the nine months ended December 31, 2004 of $83.1 million. The decrease in cash flows provided by operating activities primarily resulted from an increase in net loss this period and an increase in investment in films and television programs expenditure, offset by an increase in accounts payable and accrued liabilities in the current period.
Cash Flows Used in Investing Activities. Cash flows used in investing activities of $112.6 million for the nine months ended December 31, 2005 included the acquisition of a net $84.4 million of investments available-for-sale, $27.1 million for our acquisition of Redbus, net of cash acquired, cash received from the sale of our investment in Christal Distribution of $2.9 million, less $4.1 million for purchases of property and equipment. Cash flows used in investing activities of $0.8 million in the nine months ended December 31, 2004 included $2.0 million for purchases of property and equipment less $1.2 million received on the disposition of the assets and liabilities of Termite Art, as division of the television segment.
Cash Flows Used in Financing Activities. Cash flows used in financing activities of $7.0 million in the nine months ended December 31, 2005 were primarily for repayment of a promissory note and mortgages payable. Cash flows used in financing activities of $86.5 million in the nine months ended December 31, 2004 were primarily due to the repayment of bank loans, offset by proceeds from the sale of the 2.9375% Notes and proceeds from the issuance of common shares for the exercise of stock options and warrants.
Anticipated Cash Requirements. The nature of our business is such that significant initial expenditures are required to produce, acquire, distribute and market films and television programs, while revenues from these films and television programs are earned over an extended period of time after their completion or acquisition. We believe that cash flow from operations, cash on hand, investments available-for-sale, credit facility availability, tax shelter and production financing available will be adequate to meet known operational cash requirements for the foreseeable future, including the funding of future film and television production, film rights acquisitions and theatrical and video release schedules. We monitor our cash flow liquidity, availability, fixed charge coverage, capital base, film spending and leverage ratios with the long-term goal of maintaining our creditworthiness.
Our current financing strategy is to fund operations and to leverage investment in films and television programs through our cash flow from operations, our credit facility, single-purpose production financing, government incentive programs and distribution commitments. In addition, we may acquire businesses or assets, including individual films or libraries, that are complementary to our business. Any such transaction could be financed through our cash flow from operations, credit facilities, equity or debt financing.
Future annual repayments on debt and other financing obligations, initially incurred for a term of more than one year, as of December 31, 2005 are as follows:
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 | 202 | 3,444 | 12,437 | — | — | — | 16,083 | |||||||||||||||||||||
Film obligations — Film productions | 5,923 | 12,632 | — | 4,080 | — | 14,988 | 37,623 | |||||||||||||||||||||
Subordinated notes | — | — | — | — | — | 385,000 | 385,000 | |||||||||||||||||||||
Mortgages payable | 275 | 1,153 | 2,101 | 13,240 | — | — | 16,769 | |||||||||||||||||||||
$ | 6,400 | $ | 17,229 | $ | 14,538 | $ | 17,320 | $ | — | $ | 399,988 | $ | 455,475 | |||||||||||||||
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Principal debt and other financing obligation repayments due during the three months ending March 31, 2006 of $6.4 million consists primarily of $5.9 million owed to film production entities on delivery of titles. Principal repayments due are expected to be paid through cash generated from operations or from the available borrowing capacity from our revolving credit facility.
Future commitments under contractual obligations by expected maturity date as of December 31, 2005 are as follows:
Year Ended March 31, | ||||||||||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | Total | ||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||
Operating leases | $ | 813 | $ | 2,279 | $ | 2,203 | $ | 454 | $ | 42 | $ | — | $ | 5,791 | ||||||||||||||
Employment and consulting contracts | 4,739 | 12,613 | 5,758 | 914 | — | — | 24,024 | |||||||||||||||||||||
Purchase obligations | 19,077 | 29,962 | 14,314 | 3,000 | 2,900 | 900 | 70,153 | |||||||||||||||||||||
Distribution and marketing commitments | 3,108 | 35,625 | — | — | — | — | 38,733 | |||||||||||||||||||||
$ | 27,737 | $ | 80,479 | $ | 22,275 | $ | 4,368 | $ | 2,942 | $ | 900 | $ | 138,701 | |||||||||||||||
Purchase obligations relate to the purchase of film rights for future delivery, future film production and development obligations. Amounts due during the three months ending March 31, 2006 of $27.7 million are expected to be paid through cash generated from operations or from the available borrowing capacity from our revolving credit facility.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Currency and Interest Rate Risk Management
Market risks relating to our operations result primarily from changes in interest rates and changes in foreign currency exchange rates. Our exposure to interest rate risk results from the financial debt and obligation instruments that arise from transactions entered into during the normal course of business. As part of our overall risk management program, we evaluate and manage our exposure to changes in interest rates and currency exchange risks on an ongoing basis. Hedges and derivative financial instruments will be used in the future in order 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.
Currency Rate Risk. We incur certain operating and production costs in foreign currencies and are subject to market risks resulting from fluctuations in foreign currency exchange rates. Our principal currency exposure is between Canadian and U.S. dollars. The Company enters into forward foreign exchange contracts to hedge foreign currency exposures on future production expenses denominated in Canadian dollars. As of December 31, 2005, we had outstanding contracts to sell US$9.0 million in exchange for CDN$10.5 million over a period of five weeks at a weighted average exchange rate of CDN$1.1663. Net changes in the fair value representing an unrealized fair value loss on foreign exchange contracts outstanding during the three and nine months ended December 31, 2005 amounted to $0.3 million and $0.3 million, respectively, and are included in accumulated other comprehensive income (loss), a separate component of shareholders’ equity. During the three and nine months ended December 31, 2005, we completed foreign exchange contracts denominated in Canadian dollars. The net gains resulting from the completed contracts were $0.3 million and $1.0 million for the three months and nine months ended December 31, 2005, respectively. These contracts are entered into with a major financial institution as counterparty. We are exposed to credit loss in the event of nonperformance by the counterparty, which is limited to the cost of replacing the contracts, at current market rates. We do not require collateral or other security to support these contracts.
Interest Rate Risk. Our principal risk with respect to our debt and other financing obligations is interest rate risk, to the extent not mitigated by interest rate swaps. We currently have minimal exposure to cash flow risk due to changes in market interest rates related to our outstanding debt and other financing obligations.
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Our credit facility has a nil balance at December 31, 2005. Other financing obligations subject to variable interest rates include $37.6 million owed to film production entities on delivery of titles.
The Company entered into a $100 million interest rate swap at an interest rate of 3.08%, commencing January 2003 and ended September 30, 2005. The swap was in effect as long as three month LIBOR was less than 5.0%. The value of the interest rate swap at the maturity date of September 30, 2005 was nil (March 31, 2005 — negative $0.1 million). Changes in the fair value representing a fair valuation loss on the interest rate swap during the nine months ended December 31, 2005 are $0.1 million (2004 — gain of $2.2 million) and are included in the unaudited condensed consolidated statements of operations.
A subsidiary of the Company entered into a CDN$20 million interest rate swap at a fixed interest rate of 5.62%, commencing September 2003 and ending September 2008. The subsidiary entered into the interest rate swap as a condition of its loan which states the interest rates under the facility are to be fixed either by way of a fixed rate term loan or by way of an interest rate swap. During the three and nine months ended December 31, 2005, the subsidiary recorded interest expense of $0.3 million and $0.8 million, respectively (2004 — $0.2 million and $0.7 million), including amounts incurred under the interest rate swap, that approximates the amount they would have paid if they had entered into a fixed rate loan agreement. Fair value of the interest rate swap at December 31, 2005 is negative $0.1 million (March 31, 2005 — negative $0.3 million). Change in the fair value representing a fair valuation gain on the interest rate swap for the nine months ended December 31, 2005 is $0.2 million (2004 — gain of $0.2 million) and is included in the unaudited condensed consolidated statements of operations. This contract is entered into with a major financial institution as counterparty. The subsidiary is exposed to credit loss in the event of nonperformance by the counterparty, which is limited to the cost of replacing the contract, at current market rates.
The table below presents repayments and related weighted average interest rates for our interest-bearing debt and other obligations as of December 31, 2005.
Year Ended March 31, | ||||||||||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | Total | ||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||
Film obligations — Film productions: | ||||||||||||||||||||||||||||
Variable(1) | $ | 5,923 | $ | 12,632 | $ | — | $ | 4,080 | $ | — | $ | 14,988 | $ | 37,623 | ||||||||||||||
Subordinated notes: | ||||||||||||||||||||||||||||
Fixed(2) | — | — | — | — | — | 60,000 | 60,000 | |||||||||||||||||||||
Fixed(3) | — | — | — | — | — | 150,000 | 150,000 | |||||||||||||||||||||
Fixed(4) | — | — | — | — | — | 175,000 | 175,000 | |||||||||||||||||||||
Mortgages payable: | ||||||||||||||||||||||||||||
Fixed(5) | 275 | 1,153 | 2,101 | 13,240 | — | — | 16,769 | |||||||||||||||||||||
$ | 6,198 | $ | 13,785 | $ | 2,101 | $ | 17,320 | $ | — | $ | 399,988 | $ | 439,392 | |||||||||||||||
(1) | Amounts owed to film production entities on delivery of titles. The film production entities incurred average variable interest rates at December 31, 2005 of U.S. prime minus 4.0%. |
(2) | 4.875% Notes with fixed interest rate equal to 4.875%. |
(3) | 2.9375% Notes with fixed interest rate equal to 2.9375%. |
(4) | 3.625% Notes with fixed interest rate equal to 3.625%. |
(5) | Mortgages payable on the studio facility. Fixed interest rate equal to 5.62% to 7.51%. |
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As previously disclosed in our Annual Report on Form 10-K for 2005, our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2005 and September 30, 2005, management had identified
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material weaknesses in internal controls over financial reporting as a result of its annual assessment of its internal controls over financial reporting for the year ended March 31, 2005 related to the following areas:
• | 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; and | |
• | Financial statement close process. |
Notwithstanding these material weaknesses, there were no restatements of any previously issued financial statements of the Company as a result of these identified control deficiencies.
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. As of December 31, 2005, the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of our disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures were not effective. Although we believe we have substantially addressed the previously identified material weaknesses through execution of our action plan to remediate these material weaknesses, we will not be able to demonstrate that these material weaknesses have been fully remediated or that our controls are operating effectively until we and our independent registered public accounting firm conduct the required testing and assessment of our internal controls over financial reporting in connection with our March 31, 2006 annual assessment date.
Changes in Internal Control over Financial Reporting
The Company has implemented an action plan to remediate the material weaknesses described above. We will not complete our full assessment and testing until fiscal year end, and accordingly, can not provide any assurance as to the complete remediation of these issues. However, we believe that the actions taken as disclosed in our 2005 Annual Report on Form 10-K, our quarterly report on Form 10-Q for the first and second quarters and below, have improved our internal controls. We have made the following additional enhancements to our internal controls:
• | The personnel hired in the previous quarters continue to have a positive effect on our internal controls as they become more experienced with our systems, processes and procedures and have provided additional account analysis, implemented additional control procedures and provided additional review of analysis performed by others. In addition, the additional personnel have allowed for greater allocation of duties within our financial statement close process to specific personnel and provided an opportunity for senior financial executives to monitor and manage the process more effectively. | |
• | The additional personnel in our participations royalty department have helped to improve the timeliness of preparation of our participation statements which assists our accounting department in determining necessary accruals earlier and allowing more time for review procedures. | |
• | We implemented additional control procedures performed as part of our participations accounting including a procedure to accelerate the analysis of our participations liabilities as compared to our participation statements and payments. We continue to work on a system development project intended to improve and simplify the reconciliation of the data to the general ledger. | |
• | Our new investment in film controller, hired in the prior quarter, has positively impacted the controls over the calculations of the film amortization by providing additional review and analysis of the calculations. In addition, we implemented a more extensive review process that included at least two individuals performing review procedures and holding meetings to review the analysis. |
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• | We have continued to work closely with our outsourced home entertainment distribution service provider to obtain more visibility and allow for more analysis of the information provided. | |
• | We reorganized the duties within the accounts receivable group in connection with filling certain open positions to better address the needs of the department, enhance communications and allow for more specific focus on billing and collections, revenue recognition and cash application. | |
• | We added a senior analyst in our financial planning and analysis group to allow for additional analysis of preliminary results and actual versus budget comparisons by the overall financial planning and analysis group as well as allowing for more financial modeling for business decisions. | |
• | We added a vice president of taxation, replacing our former director of tax, who brings additional experience and can provide additional oversight and management to our corporate tax group. | |
• | We added a vice president of internal audit to coordinate and oversee our internal audit group which performs internal audits of our internal controls and procedures. |
We will continue to evaluate and align the accounting workload with existing and new personnel as determined necessary. Management intends to further implement its action plan to remediate material weaknesses identified at the end of fiscal 2005 described above and improve our processes and control procedures.
No other changes to internal control over financial reporting have come to our management’s attention during the three months ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
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PART II
Item 1. | Legal Proceedings. |
None
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None
Item 3. | Defaults Upon Senior Securities. |
None
Item 4. | Submission of Matters to a Vote of Security Holders. |
None
Item 5. | Other Information. |
None
Item 6. | Exhibits. |
Exhibits filed for Lions Gate through the filing of this Form 10-Q.
Exhibit | ||||
Number | Description of Documents | |||
10 | .1 | Partnership Interest Purchase Agreement, dated December 22, 2005, by and among Lions Gate Entertainment Corp., Lions Gate Films Corp., Bosa Development Corp., and 0742102 B.C. LTD. | ||
10 | .2 | Amendment to Partnership Interest Purchase Agreement Amendment and Removal of Conditions Precedent, January 23, 2006, by and among Lions Gate Entertainment Corp., Lions Gate Films Corp., Bosa Development Corp., and 0742102 B.C. LTD. | ||
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
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LIONS GATE ENTERTAINMENT CORP. |
By: | /s/ James Keegan |
Name: James Keegan |
Title: | Chief Financial Officer |
Date: February 9, 2006
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