EXHIBIT 99.3
The following unaudited condensed consolidated balance sheet of Lions Gate Entertainment Corp. (“Lions Gate” or the “Company”) as included in our Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2003 includes the transactions described below. The following unaudited pro forma condensed consolidated statements of operations for the year ended March 31, 2003 and the nine months ended December 31, 2003 give effect to the transactions described below as if such transactions had occurred on April 1, 2002.
The unaudited condensed consolidated balance sheet and unaudited pro forma condensed consolidated statements of operations and accompanying notes should be read in conjunction with the historical consolidated financial statements of Lions Gate previously filed in our Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2003 and our Annual Report on Form 10-K for the fiscal year ended March 31, 2003. The unaudited pro forma condensed consolidated statements of operations are presented for informational purposes only and should not be considered indicative of the consolidated results that would have been obtained had all the transactions been completed as of the dates indicated and are not intended to be indicative of future operating results or trends.
Merger.On October 24, 2003, the Company entered into a definitive merger agreement with Film Holdings Co., the parent company of Artisan Entertainment Inc. (“Artisan”), an independent distributor and producer of film and entertainment content. Under the terms of the merger agreement, the Company acquired Film Holdings Co. by means of a merger of a subsidiary of the Company with and into Film Holding Co., pursuant to which Film Holdings Co. became a subsidiary of the Company. On December 15, 2003, the Company completed its acquisition of Film Holdings Co. for at total purchase price of $169.5 million consisting of $160.0 million in cash and direct transaction costs of $9.5 million. In addition, the Company assumed debt of $59.9 million and other obligations of $157.0 million. Direct transaction costs are considered liabilities assumed in the acquisition, and as such, are included in the purchase price. Direct transaction costs include: amounts totaling $3.4 million paid to lawyers, accountants and other consultants; amounts totaling $0.7 million relating to the closure of Artisan’s offices and facilities not required in the Company’s operations after the acquisition; involuntary termination benefits totaling $5.3 million payable to certain Artisan employees terminated under a severance plan and various other amounts totaling $0.1 million. At December 31, 2003 the remaining liabilities under the severance plan and for the closure of offices and facilities are $4.8 million and $0.7 million, respectively.
The acquisition was accounted for as a purchase, with the results of operations of Film Holdings Co. consolidated from December 15, 2003, the date of acquisition, to December 31, 2003. The preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values was as follows:
| (All amounts in | ||||
| thousands of | ||||
| U.S. dollars) | ||||
| Cash and cash equivalents | $ | 23,262 | ||
| Accounts receivable | 31,625 | |||
| Investment in films and television programs | 228,927 | |||
| Other tangible assets acquired | 4,254 | |||
| Goodwill | 102,345 | |||
| Bank loans | (54,900 | ) | ||
| Subordinated notes | (5,000 | ) | ||
| Other liabilities assumed | (161,008 | ) | ||
| Total | $ | 169,505 | ||
A preliminary estimate of $102.3 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired. The preliminary allocation of the
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Severance and relocation costs incurred by Lions Gate, the acquiring company, in connection with the acquisition of Film Holdings Co., are not included in the purchase price, and as such, are recorded in the unaudited pro forma condensed consolidated statements of operations. Severance and relocation costs of $5.9 million include property lease abandonment costs of $2.8 million, the write-off of capital assets no longer in use of $2.1 million and severance of $1.0 million. At December 31, 2003 the remaining liabilities under the severance plan and for the property lease abandonment are $1.0 million and $2.8 million, respectively.
The unaudited condensed consolidated balance sheet as at December 31, 2003 includes this transaction. The unaudited pro forma condensed consolidated statements of operations reflect the accounting for this transaction as if it had occurred on April 1, 2002. The unaudited pro forma condensed consolidated statements of operations also reflect adjustments required to conform Film Holdings Co. financial statements prepared under U.S. generally accepted accounting principles (“GAAP”) to Canadian GAAP, under which Lions Gate’s financial statements are prepared.
The unaudited pro forma condensed consolidated statement of operations for the year ended March 31, 2003 and for the nine months ended December 31, 2003 do not reflect any adjustments for synergies, if any, that Lions Gate expects to realize from the merger. No assurances can be made as to the amount of cost savings or revenue enhancements, if any, which may be realized.
Sale of Common Shares.In October 2003, the Company sold 28,750,000 common shares at a public offering price of $2.70 per share and received $73.5 million of net proceeds, after deducting underwriting expenses. The Company incurred offering expenses of $0.5 million. The unaudited condensed consolidated balance sheet as at December 31, 2003 includes this transaction. The unaudited pro forma condensed consolidated statements of operations reflect the accounting for this transaction as if it had occurred on April 1, 2002.
Issuance of Convertible Senior Subordinated Notes.In December 2003, Lions Gate Entertainment Inc., a wholly owned subsidiary of the Company, sold $60.0 million of 4.875% Convertible Senior Subordinated Notes (“Notes”) with a maturity date of December 15, 2010. In December 2003, the Company received $57 million of net proceeds, after paying placement agents’ fees. The Company incurred offering expenses of $0.3 million. The Notes are convertible, at the option of the holder, at any time prior to maturity into common shares of Lions Gate Entertainment Corp. The conversion feature is valued at $16.4 million, net of placement agents’ fees and offering costs, and is classified as contributed surplus. The unaudited condensed consolidated balance sheet as at December 31, 2003 includes this transaction. The unaudited pro forma condensed consolidated statements of operations reflect the accounting for this transaction as if it had occurred on April 1, 2002.
Credit Facility.On December 15, 2003, the Company and JP Morgan Chase Bank entered into an Amended and Restated Credit, Security, Guaranty and Pledge Agreement for a $350 million credit facility consisting of a $135 million five-year term loan and a $215 million five-year revolving credit facility. The credit facility was used to finance our acquisition of Artisan, as referred to above, refinance indebtedness of the Company and for general business purposes. The unaudited condensed consolidated balance sheet as at December 31, 2003 includes this transaction. The unaudited pro forma condensed consolidated statements of operations reflect the accounting for the credit facility and the termination of the existing credit facility as if it had occurred on April 1, 2002.
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LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
| December 31, | ||||
| 2003 | ||||
| ASSETS | ||||
| Cash and cash equivalents | $ | 9,507 | ||
| Accounts receivable, net of reserve for video returns of $63,847 and provision for doubtful accounts of $15,074 | 123,973 | |||
| Investment in films and television programs | 451,765 | |||
| Property and equipment | 34,009 | |||
| Goodwill, net of accumulated amortization of $5,643 | 127,394 | |||
| Other assets | 27,042 | |||
| Future income taxes | 2,985 | |||
| $ | 776,675 | |||
| LIABILITIES | ||||
| Bank loans | $ | 269,068 | ||
| Accounts payable and accrued liabilities | 141,417 | |||
| Accrued participations and residuals costs | 79,667 | |||
| Production loans | 13,570 | |||
| Subordinated notes | 47,865 | |||
| Long-term debt | 42,091 | |||
| Deferred revenue | 48,256 | |||
| Minority interests | 702 | |||
| 642,636 | ||||
| Commitments and contingencies | ||||
| SHAREHOLDERS’ EQUITY | ||||
| Preferred shares, 200,000,000 shares authorized, issued in series, including 1,000,000 series A (1,986 shares issued and outstanding) and 10 series B (10 shares issued and outstanding) (liquidation preference $5,064) | 5,631 | |||
| Common stock, no par value, 500,000,000 shares authorized, 90,718,304 shares issued and outstanding | 267,336 | |||
| Contributed surplus | 20,620 | |||
| Accumulated deficit | (152,206 | ) | ||
| Cumulative translation adjustments | (7,342 | ) | ||
| 134,039 | ||||
| $ | 776,675 | |||
See accompanying notes
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LIONS GATE ENTERTAINMENT CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
| Lions Gate | Film | |||||||||||||||||||||||||
| Entertainment | Holdings | Issuance | Artisan Merger | Credit Facility | ||||||||||||||||||||||
| Corp.(a) | Co.(b) | of Notes(c) | Adjustments(d) | Adjustments(e) | Pro Forma | |||||||||||||||||||||
Revenues | $ | 301,844 | $ | 350,444 | $ | — | $ | — | $ | — | $ | 652,288 | ||||||||||||||
Expenses: | ||||||||||||||||||||||||||
| Direct operating | 155,369 | 126,816 | — | 2,588 | — | 284,773 | ||||||||||||||||||||
| Distribution and marketing | 96,523 | 157,188 | — | — | — | 253,711 | ||||||||||||||||||||
| General and administration | 32,252 | 34,240 | — | (228 | ) | — | 66,264 | |||||||||||||||||||
| Severance and relocation costs | — | — | — | 5,934 | — | 5,934 | ||||||||||||||||||||
| Depreciation and amortization | 4,379 | 2,099 | — | — | — | 6,478 | ||||||||||||||||||||
| Total expenses | 288,523 | 320,343 | — | 8,294 | — | 617,160 | ||||||||||||||||||||
Operating Income (Loss) | 13,321 | 30,101 | — | (8,294 | ) | — | 35,128 | |||||||||||||||||||
Other Expenses: | ||||||||||||||||||||||||||
| Interest on debt initially incurred for a term of more than one year | 10,239 | 15,207 | 5,737 | 1,233 | 6,627 | 39,043 | ||||||||||||||||||||
| Minority interests | 45 | — | — | — | — | 45 | ||||||||||||||||||||
| Total other expenses | 10,284 | 15,207 | 5,737 | 1,233 | 6,627 | 39,088 | ||||||||||||||||||||
Income (Loss) Before Equity Interests, Income Taxes, Extraordinary Item and Cumulative Effect of Changes in Accounting Principles | 3,037 | 14,894 | (5,737 | ) | (9,527 | ) | (6,627 | ) | (3,960 | ) | ||||||||||||||||
| Equity interests | (1 | ) | — | — | — | — | (1 | ) | ||||||||||||||||||
Income (Loss) Before Income Taxes, Extraordinary Item and Cumulative Effect of Changes in Accounting Principles | 3,036 | 14,894 | (5,737 | ) | (9,527 | ) | (6,627 | ) | (3,961 | ) | ||||||||||||||||
| Income taxes | 1,910 | 1,760 | — | — | — | 3,670 | ||||||||||||||||||||
Income (Loss) Before Extraordinary Item and Cumulative Effect of Change in Accounting Principles | 1,126 | 13,134 | (5,737 | ) | (9,527 | ) | (6,627 | ) | (7,631 | ) | ||||||||||||||||
| Extraordinary loss on early extinguishment of debt | — | (1,233 | ) | — | 1,233 | — | — | |||||||||||||||||||
| Cumulative effect of changes in accounting principles | — | (13,480 | ) | — | 13,480 | — | — | |||||||||||||||||||
Net Income (Loss) | 1,126 | (1,579 | ) | (5,737 | ) | 5,186 | (6,627 | ) | (7,631 | ) | ||||||||||||||||
| Dividends on Series A preferred shares | (1,584 | ) | — | — | — | — | (1,584 | ) | ||||||||||||||||||
| Accretion on Series A preferred shares | (2,049 | ) | — | — | — | — | (2,049 | ) | ||||||||||||||||||
Net Income (Loss) Available to Common Shareholders | $ | (2,507 | ) | $ | (1,579 | ) | $ | (5,737 | ) | $ | 5,186 | $ | (6,627 | ) | $ | (11,264 | ) | |||||||||
Basic and Diluted Loss Per Common Share | $ | (0.06 | ) | $ | (0.16 | ) | ||||||||||||||||||||
Weighted average shares outstanding (thousands) | 43,232 | (F)71,982 | ||||||||||||||||||||||||
See accompanying notes.
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LIONS GATE ENTERTAINMENT CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
| Lions Gate | Film | |||||||||||||||||||||||||
| Entertainment | Holdings | Issuance | Artisan Merger | Credit Facility | ||||||||||||||||||||||
| Corp.(a) | Co.(b) | of Notes(c) | Adjustments(d) | Adjustments(e) | Pro Forma | |||||||||||||||||||||
Revenues | $ | 232,132 | $ | 213,429 | $ | — | $ | — | $ | — | $ | 445,561 | ||||||||||||||
Expenses: | ||||||||||||||||||||||||||
| Direct operating | 122,521 | 53,803 | — | 20,406 | — | 196,730 | ||||||||||||||||||||
| Distribution and marketing | 109,152 | 119,560 | — | — | — | 228,712 | ||||||||||||||||||||
| General and administration | 25,180 | 20,449 | — | — | — | 45,629 | ||||||||||||||||||||
| Severance and relocation costs | 5,934 | — | — | (5,934 | ) | — | — | |||||||||||||||||||
| Write-down of animation assets | 9,919 | — | — | — | — | 9,919 | ||||||||||||||||||||
| Depreciation and amortization | 3,391 | 1,383 | — | — | — | 4,774 | ||||||||||||||||||||
| Total expenses | 276,097 | 195,195 | — | 14,472 | — | 485,764 | ||||||||||||||||||||
Operating Income (Loss) | (43,965 | ) | 18,234 | — | (14,472 | ) | — | (40,203 | ) | |||||||||||||||||
Other Expenses: | ||||||||||||||||||||||||||
| Interest on debt initially incurred for a term of more than one year | 10,251 | 7,750 | 3,882 | — | (1,352 | ) | 20,531 | |||||||||||||||||||
| Minority interests | (9,042 | ) | — | — | — | — | (9,042 | ) | ||||||||||||||||||
| Total other expenses | 1,209 | 7,750 | 3,882 | — | (1,352 | ) | 11,489 | |||||||||||||||||||
Income (Loss) Before Equity Interests and Income Taxes | (45,174 | ) | 10,484 | (3,882 | ) | (14,472 | ) | 1,352 | (51,692 | ) | ||||||||||||||||
| Equity interests | (127 | ) | — | — | — | — | (127 | ) | ||||||||||||||||||
Income (Loss) Before Income Taxes | (45,301 | ) | 10,484 | (3,882 | ) | (14,472 | ) | 1,352 | (51,819 | ) | ||||||||||||||||
| Income taxes | (2,128 | ) | 2,382 | — | — | — | 254 | |||||||||||||||||||
Net Income (Loss) | (43,173 | ) | 8,102 | (3,882 | ) | (14,472 | ) | 1,352 | (52,073 | ) | ||||||||||||||||
| Dividends on Series A preferred shares | (320 | ) | — | — | — | — | (320 | ) | ||||||||||||||||||
| Accretion on Series A preferred shares | (771 | ) | — | — | — | — | (771 | ) | ||||||||||||||||||
Net Income (Loss) Available to Common Shareholders | $ | (44,264 | ) | $ | 8,102 | $ | (3,882 | ) | $ | (14,472 | ) | $ | 1,352 | $ | (53,164 | ) | ||||||||||
Basic and Diluted Loss Per Common Share | $ | (0.70 | ) | $ | (0.63 | ) | ||||||||||||||||||||
Weighted average shares outstanding (thousands) | 63,646 | (F)84,428 | ||||||||||||||||||||||||
See accompanying notes
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
(a) The “Lions Gate Entertainment Corp.” columns reflect the historical balances of Lions Gate for the year ended March 31, 2003 and the nine months ended December 31, 2003. The nine months ended December 31, 2003 includes the results of Film Holdings Co. from the date of acquisition, December 15, 2003, through December 31, 2003.
(b) The “Film Holdings Co.” columns reflect the historical balances of Film Holdings Co. for the year ended December 31, 2002 and for the period from April 1, 2003 through December 15, 2003.
(c) The “Issuance of Notes” columns reflect additional interest associated with the sale of $60 million of 4.875% Convertible Senior Subordinated Notes, the amortization of associated placement agent’s fees and other transaction costs incurred and the amortization of the discount associated with the conversion feature of the notes:
| Year Ended | Nine Months Ended | |||||||
| March 31, 2003 | December 31, 2003 | |||||||
| (All amounts in thousands of dollars) | ||||||||
| Additional amortization of deferred financing costs of $2.4 million incurred in connection with issuing the notes, amortized over 7 years | $ | 337 | $ | 228 | ||||
| Additional interest expense at a rate of 4.875% on $60 million of notes | 2,925 | 1,979 | ||||||
| Additional amortization of the discount on notes for the $17.3 million difference between the principal amount and carrying amount of the notes, amortized over 7 years | 2,475 | 1,675 | ||||||
| Net adjustment to interest expense | $ | 5,737 | $ | 3,882 | ||||
(d) The “Artisan Merger Adjustments” columns reflect the following:
| Year Ended | Nine Months Ended | |||||||
| March 31, 2003 | December 31, 2003 | |||||||
| (All amounts in thousands of dollars) | ||||||||
| Additional film amortization expense resulting from fair value purchase accounting adjustment for investment in films and television programs | $ | 2,588 | $ | 20,406 | ||||
| Eliminate stock compensation expense not recorded under Canadian GAAP | $ | (228 | ) | $ | — | |||
| Severance and relocation costs incurred by Lions Gate in connection with the merger, assuming merger occurred on April 1, 2002 | $ | 5,934 | $ | (5,934 | ) | |||
| Add interest expense for loss on early extinguishment of debt recorded as extraordinary loss under U.S. GAAP | $ | 1,223 | $ | — | ||||
| Eliminate extraordinary loss on early extinguishment of debt as recorded as interest expense under Canadian GAAP | $ | (1,223 | ) | $ | — | |||
| Eliminate cumulative effect of changes in accounting principles as adjustment is made to opening retained earnings under Canadian GAAP | $ | (13,480 | ) | $ | — | |||
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NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
(e) The “Credit Facility” columns reflect the following:
| Year Ended | Nine Months Ended | |||||||
| March 31, 2003 | December 31, 2003 | |||||||
| (All amounts in thousands of dollars) | ||||||||
| Add write-off of deferred financing fees following the termination of the existing credit facility | $ | 5,440 | $ | — | ||||
| Eliminate amortization and write-off of deferred financing fees following the termination of the existing credit facility | (3,829 | ) | (4,091 | ) | ||||
| Eliminate interest expense following the termination of existing credit facility | (10,906 | ) | (7,384 | ) | ||||
| Additional amortization of deferred financing costs of $11.3 million over 5 years incurred in connection with entering the credit facility | 2,472 | 1,754 | ||||||
| Additional interest expense and commitment fees associated with the credit facility, at a weighted average interest rate of 5.0% and 4.8% on a $258.9 million and $238.9 million balance, respectively | 13,450 | 8,369 | ||||||
| Net adjustment to interest expense | $ | 6,627 | $ | (1,352 | ) | |||
(f) Weighted average shares outstanding represents the number of shares used in the calculation of pro forma basic and diluted net income (loss) per share applicable to the common shareholders resulting from the issuance of 28,750,000 common shares pursuant to the prospectus supplement dated October 2003.
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