Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2007 | ||
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 | N/A | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1055 West Hastings Street, Suite 2200
Vancouver, British Columbia V6E 2E9
and
2700 Colorado Avenue, Suite 200
Santa Monica, California 90404
(Address of principal executive offices)
Vancouver, British Columbia V6E 2E9
and
2700 Colorado Avenue, Suite 200
Santa Monica, California 90404
(Address of principal executive offices)
(877) 848-3866
Registrant’s telephone number, including area code)
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” inRule 12b-2 of the Exchange Act.
Large accelerated Filer þ Accelerated Filer o Non-accelerated Filero
Indicate by check mark whether the registrant is a shell company (as defined inRule 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.
Title of Each Class | Outstanding at November 1, 2007 | |
Common Shares, no par value per share | 120,334,057 shares |
TABLE OF CONTENTS
2
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,” “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 Lions Gate Entertainment Corp.’s (the “Company,” “Lionsgate,” “we,” “us” or “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.
Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors, including the substantial investment of capital required to produce and market films and television series, increased costs for producing and marketing feature films, budget overruns, limitations imposed by our credit facilities, unpredictability of the commercial success of our motion pictures and television programming, the cost of defending our intellectual property, difficulties in integrating acquired businesses, technological changes and other trends affecting the entertainment industry, and the risk factors found herein and under the heading “Risk Factors” in our Annual Report onForm 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on May 30, 2007, which risk factors are incorporated herein by reference.
Unless otherwise indicated, all references to the “Company,” “Lionsgate,” “we,” “us,” and “our” include reference to our subsidiaries as well.
3
Table of Contents
Item 1. | Financial Statements. |
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | March 31, | |||||||
2007 | 2007 | |||||||
(Unaudited) | (Note 1) | |||||||
(Amounts in thousands, | ||||||||
except share amounts) | ||||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 158,865 | $ | 51,497 | ||||
Restricted cash | 12,363 | 4,915 | ||||||
Investments — auction rate securities | 30,000 | 237,379 | ||||||
Investments — equity securities | 104 | 125 | ||||||
Accounts receivable, net of reserve for video returns and allowances of $70,017 (March 31, 2007 — $77,691) and provision for doubtful accounts of $5,757 (March 31, 2007 — $6,345) | 209,457 | 130,496 | ||||||
Investment in films and television programs | 633,024 | 493,140 | ||||||
Property and equipment | 14,120 | 13,095 | ||||||
Goodwill | 224,567 | 187,491 | ||||||
Other assets | 52,725 | 18,957 | ||||||
$ | 1,335,225 | $ | 1,137,095 | |||||
LIABILITIES | ||||||||
Accounts payable and accrued liabilities | $ | 253,368 | $ | 155,617 | ||||
Participation and residuals | 293,622 | 171,156 | ||||||
Film obligations | 211,652 | 167,884 | ||||||
Subordinated notes and other financing obligations | 328,718 | 325,000 | ||||||
Deferred revenue | 92,283 | 69,548 | ||||||
1,179,643 | 889,205 | |||||||
Commitments and contingencies | ||||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common shares, no par value, 500,000,000 shares authorized, 120,317,891 and 116,970,280 shares issued and outstanding at September 30, 2007 and March 31, 2007, respectively | 423,841 | 398,836 | ||||||
Series B preferred shares (10 shares issued and outstanding) | — | — | ||||||
Accumulated deficit | (258,983 | ) | (149,651 | ) | ||||
Accumulated other comprehensive income (loss) | 1,460 | (1,295 | ) | |||||
166,318 | 247,890 | |||||||
Treasury shares, no par value, 1,169,835 shares at September 30, 2007 | (10,736 | ) | — | |||||
155,582 | 247,890 | |||||||
$ | 1,335,225 | $ | 1,137,095 | |||||
See accompanying notes.
4
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(Amounts in thousands, except per share amounts) | ||||||||||||||||
Revenues | $ | 343,505 | $ | 218,169 | $ | 542,247 | $ | 390,625 | ||||||||
Expenses: | ||||||||||||||||
Direct operating | 182,487 | 94,723 | 269,545 | 163,268 | ||||||||||||
Distribution and marketing | 189,012 | 113,345 | 324,513 | 200,391 | ||||||||||||
General and administration | 25,869 | 21,727 | 52,709 | 40,960 | ||||||||||||
Depreciation | 989 | 581 | 1,897 | 1,125 | ||||||||||||
Total expenses | 398,357 | 230,376 | 648,664 | 405,744 | ||||||||||||
Operating loss | (54,852 | ) | (12,207 | ) | (106,417 | ) | (15,119 | ) | ||||||||
Other expenses (income): | ||||||||||||||||
Interest expense | 4,213 | 4,904 | 8,073 | 9,580 | ||||||||||||
Interest and other income | (2,646 | ) | (2,286 | ) | (6,449 | ) | (4,847 | ) | ||||||||
Gain on sale on equity securities | (2,785 | ) | — | (2,785 | ) | — | ||||||||||
Total other expenses (income), net | (1,218 | ) | 2,618 | (1,161 | ) | 4,733 | ||||||||||
Loss before equity interests and income taxes | (53,634 | ) | (14,825 | ) | (105,256 | ) | (19,852 | ) | ||||||||
Equity interests loss | (1,187 | ) | (435 | ) | (1,994 | ) | (377 | ) | ||||||||
Loss before income taxes | (54,821 | ) | (15,260 | ) | (107,250 | ) | (20,229 | ) | ||||||||
Income tax provision (benefit) | 1,393 | (868 | ) | 2,082 | (2,233 | ) | ||||||||||
Net loss | $ | (56,214 | ) | $ | (14,392 | ) | $ | (109,332 | ) | $ | (17,996 | ) | ||||
Basic and Diluted Net Loss Per Common Share | $ | (0.47 | ) | $ | (0.14 | ) | $ | (0.93 | ) | $ | (0.17 | ) | ||||
See accompanying notes.
5
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||||||||||||||||||
Series B | Restricted | Comprehensive | Comprehensive | |||||||||||||||||||||||||||||||||||||||||||||
Common Shares | Preferred Shares | Share | Unearned | Accumulated | Income | Income | Treasury Shares | |||||||||||||||||||||||||||||||||||||||||
Number | Amount | Number | Amount | Units | Compensation | Deficit | (Loss ) | (Loss ) | Number | Amount | Total | |||||||||||||||||||||||||||||||||||||
(Amounts in thousands, except share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2006 | 104,422,765 | $ | 328,771 | 10 | $ | — | $ | 5,178 | $ | (4,032 | ) | $ | (177,130 | ) | $ | (3,517 | ) | — | $ | — | $ | 149,270 | ||||||||||||||||||||||||||
Reclassification of unearned compensation and restricted share common units upon adoption of SFAS No. 123(R) | 1,146 | (5,178 | ) | 4,032 | — | |||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 1,297,144 | 4,277 | 4,277 | |||||||||||||||||||||||||||||||||||||||||||||
Stock based compensation, net of share units withholding tax obligations of $504 | 113,695 | 6,517 | 6,517 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares to directors for services | 25,568 | 238 | 238 | |||||||||||||||||||||||||||||||||||||||||||||
Conversion of 4.875% notes, net of unamortized issuance costs | 11,111,108 | 57,887 | 57,887 | |||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss) | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 27,479 | $ | 27,479 | 27,479 | ||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | 1,876 | 1,876 | 1,876 | |||||||||||||||||||||||||||||||||||||||||||||
Net unrealized gain on foreign exchange contracts | 259 | 259 | 259 | |||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on investments — available for sale | 87 | 87 | 87 | |||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | $ | 29,701 | — | |||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2007 | 116,970,280 | 398,836 | 10 | — | — | — | (149,651 | ) | (1,295 | ) | — | — | 247,890 | |||||||||||||||||||||||||||||||||||
Exercise of stock options, net of shares cancelled to fund withholding tax obligations and exercise price of options of $8,273 | 927,688 | (2,903 | ) | (2,903 | ) | |||||||||||||||||||||||||||||||||||||||||||
Stock based compensation, net of share units withholding tax obligations of $647 | 424,671 | 6,030 | 6,030 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares to directors for services | 10,126 | 127 | 127 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares for investment in NextPoint, Inc | 1,890,189 | 20,851 | 20,851 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares related to the Redbus acquisition | 94,937 | 900 | 900 | |||||||||||||||||||||||||||||||||||||||||||||
Repurchase of common shares, no par value | 1,169,835 | (10,736 | ) | (10,736 | ) | |||||||||||||||||||||||||||||||||||||||||||
Comprehensive loss | ||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | (109,332 | ) | $ | (109,332 | ) | (109,332 | ) | |||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | 2,560 | 2,560 | 2,560 | |||||||||||||||||||||||||||||||||||||||||||||
Net unrealized gain on foreign exchange contracts | 169 | 169 | 169 | |||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on investments — available for sale | 26 | 26 | 26 | |||||||||||||||||||||||||||||||||||||||||||||
Comprehensive loss | $ | (106,577 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2007 | 120,317,891 | $ | 423,841 | 10 | $ | — | $ | — | $ | — | $ | (258,983 | ) | $ | 1,460 | 1,169,835 | $ | (10,736 | ) | $ | 155,582 | |||||||||||||||||||||||||||
See accompanying notes
6
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months | Six Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2007 | 2006 | |||||||
(Amounts in thousands) | ||||||||
Operating Activities: | ||||||||
Net loss | $ | (109,332 | ) | $ | (17,996 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities | ||||||||
Depreciation of property and equipment | 1,897 | 1,125 | ||||||
Amortization of deferred financing costs | 1,771 | 1,957 | ||||||
Amortization of films and television programs | 175,619 | 81,998 | ||||||
Amortization of intangible assets | 325 | 488 | ||||||
Non-cash stock-based compensation | 6,677 | 2,490 | ||||||
Gain on sale of equity securities | (2,711 | ) | — | |||||
Equity interests loss | 1,994 | 377 | ||||||
Changes in operating assets and liabilities: | ||||||||
Restricted cash | 359 | (1,724 | ) | |||||
Accounts receivable, net | (81,272 | ) | 99,804 | |||||
Investment in films and television programs | (247,216 | ) | (164,071 | ) | ||||
Other assets | (2,736 | ) | 5,543 | |||||
Accounts payable and accrued liabilities | 69,164 | (34,039 | ) | |||||
Unpresented bank drafts | — | (14,772 | ) | |||||
Participation and residuals | 115,726 | (16,075 | ) | |||||
Film obligations | (6,846 | ) | 43,361 | |||||
Deferred revenue | 18,028 | 22,316 | ||||||
Net Cash Flows Provided By (Used In) Operating Activities | (58,553 | ) | 10,782 | |||||
Investing Activities: | ||||||||
Purchases of investments — auction rate securities | (207,266 | ) | (296,043 | ) | ||||
Proceeds from the sale of investments — auction rate securities | 414,641 | 316,375 | ||||||
Purchases of investments — equity securities | (4,672 | ) | — | |||||
Proceeds from the sale of investments — equity securities | 23,782 | — | ||||||
Acquisition of Mandate, net of unrestricted cash acquired | (40,850 | ) | — | |||||
Acquisition of Debmar, net of unrestricted cash acquired | — | (24,112 | ) | |||||
Investment in equity method investees | (6,465 | ) | — | |||||
Loan to equity method investee | (3,059 | ) | — | |||||
Purchases of property and equipment | (2,385 | ) | (3,537 | ) | ||||
Net Cash Flows Provided By (Used In) Investing Activities | 173,726 | (7,317 | ) | |||||
Financing Activities: | ||||||||
Exercise of stock options | 745 | 2,429 | ||||||
Repurchases of common shares | (10,736 | ) | — | |||||
Borrowings under financing arrangements | 3,718 | — | ||||||
Net Cash Flows Provided By (Used In) Financing Activities | (6,273 | ) | 2,429 | |||||
Net Change In Cash And Cash Equivalents | 108,900 | 5,894 | ||||||
Foreign Exchange Effects on Cash | (1,532 | ) | (110 | ) | ||||
Cash and Cash Equivalents — Beginning Of Period | 51,497 | 46,978 | ||||||
Cash and Cash Equivalents — End Of Period | $ | 158,865 | $ | 52,762 | ||||
See accompanying notes.
7
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. | General |
Nature of Operations
Lions Gate Entertainment Corp. (the “Company,” “Lionsgate,” “we,” “us” or “our”) is a diversified independent producer and distributor of motion pictures, television programming, home entertainment, family entertainment,video-on-demand and music content. The Company also acquires distribution rights from a wide variety of studios, production companies and independent producers.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Lionsgate and all of its wholly owned and controlled subsidiaries.
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions toForm 10-Q under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Article 10 ofRegulation S-X under the Exchange Act. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s 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 six months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ended March 31, 2008. The balance sheet at March 31, 2007 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by U.S. GAAP 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 onForm 10-K for the fiscal year ended March 31, 2007.
Certain amounts presented for fiscal 2007 have been reclassified to conform to the fiscal 2008 presentation.
Use of Estimates
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 the Company’s 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.
Recent Accounting Pronouncements
FASB Issued Interpretation No. 48. On July 13, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN No. 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN No. 48 provides guidance on derecognition, classification, interest and penalties,
8
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006.
The Company’s practice is to recognize interestand/or penalties related to income tax matters in income tax expense. For the three and six months ended September 30, 2007 and 2006, interest and penalties were not significant.
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. With a few exceptions, the Company is subject to income tax examination by U.S. and state tax authorities for the fiscal years ended March 31, 2004 and forward. However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where net operating losses (“NOLs”) were generated and carried forward, and make adjustments up to the amount of the NOLs. The Company’s fiscal years ended March 31, 2006 and forward are subject to examination by the UK tax authorities. The Company’s fiscal years ended March 31, 1998 and forward are subject to examination by the Canadian tax authorities. The Company is not currently under examination by the IRS. Currently, audits are occurring in Canada, and various state and local tax jurisdictions.
The adoption of FIN No. 48 on April 1, 2007 did not have a material impact on the Company’s financial condition, results of operations or cash flows. At April 1, 2007, the Company had net deferred tax assets of $93.3 million. The total amount of unrecognized tax benefits as of the date of adoption was not significant. The deferred tax assets are largely composed of federal and state tax NOLs. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation has been established to offset the net deferred tax asset. Additionally, the future utilization of the Company’s NOLs to offset future taxable income may be subject to a substantial annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future.
Statement of Financial Accounting Standards No. 157. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. The Company will be required to adopt the provisions on SFAS No. 157 on April 1, 2008. The Company is currently evaluating the impact of adopting the provisions of SFAS No. 157 but does not believe that the adoption of SFAS No. 157 will materially impact its financial position, cash flows, or results of operations.
Statement of Financial Accounting Standards No. 159. In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”), which is effective for fiscal years beginning after November 15, 2007. The Company will be required to adopt the provisions on SFAS No. 159 on April 1, 2008. SFAS No. 159 permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The Company is currently evaluating the potential impact of SFAS No. 159.
9
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. | Investments Available-For-Sale |
Investments classified as available-for-sale as of September 30, 2007 and March 31, 2007 are set forth below:
September 30, | ||||||||||||
2007 | ||||||||||||
Unrealized | Fair | |||||||||||
Cost | Gains (Losses) | Value | ||||||||||
(Amounts in thousands ) | ||||||||||||
Auction rate notes | $ | 30,000 | $ | — | $ | 30,000 | ||||||
Equity securities | 78 | 26 | 104 | |||||||||
$ | 30,078 | $ | 26 | $ | 30,104 | |||||||
March 31, | ||||||||||||
2007 | ||||||||||||
Unrealized | Fair | |||||||||||
Cost | Gains (Losses) | Value | ||||||||||
(Amounts in thousands ) | ||||||||||||
Auction rate notes | $ | 237,379 | $ | — | $ | 237,379 | ||||||
Equity securities | 125 | — | 125 | |||||||||
$ | 237,504 | $ | — | $ | 237,504 | |||||||
On November 5, 2007, the auction rate note that was outstanding as of September 30, 2007 was sold at the end of its auction period and settled to cash equivalents at its carrying value resulting in no gain or loss. During the six months ended September 30, 2007, the auction rate notes that were outstanding as of March 31, 2007 were also converted to cash equivalents at their carrying value with no resulting gain or loss.
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 or loss (see note 10). The cost of investments sold is determined using the average cost method.
Interest and dividend income earned on available for sale investments during the three- and six-month periods ended September 30, 2007 were $2.0 million and $4.6 million, respectively. Interest and dividend income earned on available for sale investments during the three- and six-month periods ended September 30, 2006 were $1.7 million and $3.6 million, respectively.
At March 31, 2007, equity securities were comprised of 592,156 common shares of Magna Pacific Holdings (“Magna”), an independent DVD distributor in Australia and New Zealand, purchased at an average cost per share of $0.21. During the six months ended September 30, 2007 the Company purchased 15,989,994 common shares of Magna for approximately $4.7 million, at an average price of $0.29 per share. During July 2007, the Company sold 16,129,740 of Magna’s common shares for total proceeds of approximately $7.5 million, resulting in a gain of approximately $2.7 million. At September 30, 2007, the Company held 452,410 common shares of Destra Corporation, an independent digital media and entertainment company in Australia who acquired the Company’s Magna shares in exchange for cash and stock consideration.
10
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. | Investment in Films and Television Programs |
September 30, | March 31, | |||||||
2007 | 2007 | |||||||
(Amounts in thousands ) | ||||||||
Motion Picture Segment — Theatrical and Non-Theatrical Films | ||||||||
Released, net of accumulated amortization | $ | 217,263 | $ | 144,302 | ||||
Acquired libraries, net of accumulated amortization | 90,422 | 90,980 | ||||||
Completed and not released | 81,152 | 19,424 | ||||||
In progress | 103,947 | 107,105 | ||||||
In development | 8,736 | 5,205 | ||||||
Product inventory | 27,913 | 30,330 | ||||||
529,433 | 397,346 | |||||||
Television Segment — Direct-to-Television Programs | ||||||||
Released, net of accumulated amortization | 79,435 | 70,949 | ||||||
In progress | 23,519 | 24,083 | ||||||
In development | 637 | 762 | ||||||
103,591 | 95,794 | |||||||
$ | 633,024 | $ | 493,140 | |||||
The following table sets forth acquired libraries that represent titles released three years prior to the date of acquisition, and amortized over their expected revenue stream from acquisition date up to 20 years:
Unamortized | Unamortized | |||||||||||||||||
Total | Remaining | Costs | Costs | |||||||||||||||
Acquired | Acquisition | Amortization | Amortization | September 30, | March 31, | |||||||||||||
Library | Date | Period | Period | 2007 | 2007 | |||||||||||||
(In years) | (Amounts in thousands) | |||||||||||||||||
Trimark | October 2000 | 20.00 | 13.00 | $ | 13,341 | $ | 14,854 | |||||||||||
Artisan | December 2003 | 20.00 | 16.25 | 64,732 | 69,402 | |||||||||||||
Modern | August 2005 | 20.00 | 17.75 | 4,592 | 4,753 | |||||||||||||
LGUK | October 2005 | 20.00 | 18.00 | 1,957 | 1,971 | |||||||||||||
Mandate | September 2007 | 20.00 | 20.00 | 5,800 | — | |||||||||||||
Total Acquired Libraries | $ | 90,422 | $ | 90,980 | ||||||||||||||
The Company expects approximately 45% of completed films and television programs, net of accumulated amortization, will be amortized during the one-year period ending September 30, 2008. Additionally, the Company expects approximately 80% of completed and released films and television programs, net of accumulated amortization and excluding acquired libraries, will be amortized during the three-year period ending September 30, 2010.
11
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. | Other Assets |
September 30, | March 31, | |||||||
2007 | 2007 | |||||||
(Amounts in thousands ) | ||||||||
Deferred financing costs, net of accumulated amortization | $ | 8,518 | $ | 10,038 | ||||
Prepaid expenses and other | 12,450 | 3,553 | ||||||
Equity method investments | 31,757 | 5,366 | ||||||
$ | 52,725 | $ | 18,957 | |||||
Deferred Financing Costs
Deferred financing costs primarily include costs incurred in connection with the credit facility (see note 5) and the issuance of the 2.9375% Notes and the 3.625% Notes (see note 7) that are deferred and amortized to interest expense.
Prepaid expenses and other
Prepaid expenses and other primarily include prepaid expenses, security deposits and intangible assets. In addition, included in prepaid and other assets is a $3.0 million note receivable from NextPoint, Inc. (“Break.com”), an equity method investee as described below, during the three months ended September 30, 2007.
Equity Method Investments
The carrying amount of significant equity method investments at September 30, 2007 and March 31, 2007 were as follows:
September 30, | March 31, | |||||||
2007 | 2007 | |||||||
(Amounts in thousands ) | ||||||||
Maple | $ | 1,952 | $ | 1,764 | ||||
CinemaNow | — | — | ||||||
Horror Entertainment, LLC (“FEARnet”) | 4,307 | 3,602 | ||||||
NextPoint, Inc. (“Break.com”) | 21,389 | — | ||||||
Roadside Attractions, LLC | 3,341 | — | ||||||
Elevation Sales Limited | 768 | — | ||||||
$ | 31,757 | $ | 5,366 | |||||
Equity interests in equity method investments on our unaudited condensed consolidated statements of operations represent our portion of the income or loss of our equity method investee based on our percentage
12
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ownership. Equity interests in equity method investments for the three and six months ended September 30, 2007 and 2006 were as follows (income (loss)):
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(Amounts in thousands ) | ||||||||||||||||
Maple | $ | (152 | ) | $ | (92 | ) | $ | (90 | ) | $ | (34 | ) | ||||
CinemaNow | — | (343 | ) | — | (343 | ) | ||||||||||
Horror Entertainment, LLC (“FEARnet”) | (1,030 | ) | — | (1,899 | ) | — | ||||||||||
NextPoint, Inc. (“Break.com”) | (5 | ) | (5 | ) | ||||||||||||
$ | (1,187 | ) | $ | (435 | ) | $ | (1,994 | ) | $ | (377 | ) | |||||
Maple. Represents the Company’s interest in Maple Pictures (“Maple”), a motion picture, television and home video distributor in Canada. Maple was formed by a director of the Company, a former Lionsgate executive and a third-party equity investor. Due to the timing of the availability of financial statements from Maple, the Company is recording its share of the Maple results on a one quarter lag. Through June 30, 2007, the Company owned 10% of the common shares of Maple and, accordingly, during the six months ended September 30, 2007 and 2006, the Company recorded 10% of the loss incurred by Maple during the six months ended June 30, 2007 and 2006, respectively. Subsequent to June 30, 2007, Lionsgate entered into a transaction where it effectively gained control of Maple for financial reporting purposes. The Company is currently evaluating strategic alternatives as it relates to its investment in Maple. If this control becomes other than temporary, the Company would consolidate Maple in the future.
CinemaNow. At September 30, 2007, the Company has an equity interest in CinemaNow, Inc. (“CinemaNow”) of approximately 18.6% on a fully diluted basis and 21.0% on an undiluted basis. The investment carrying amount is nil as a result of the Company absorbing its share of losses to the full extent of the investment in CinemaNow.
Horror Entertainment, LLC. Represents the Company’s 33.3% interest in Horror Entertainment, LLC (“FEARnet”), a multiplatform programming and content service provider of horror genre films operating under the branding of “FEARnet.” In addition, the Company entered into a five-year license agreement with FEARnet for the U.S. territories and possessions whereby the Company will license content to FEARnet forvideo-on-demand and broadband exhibition. The Company made capital contributions to FEARnet of $5.0 million in October 2006, and $2.6 million in July 2007. As of September 30, 2007, the Company has a remaining commitment for additional capital contributions totaling $5.7 million, which are expected to be fully funded over the next two-year period. Under certain circumstances, if the Company defaults on any of its funding obligations, the Company could forfeit its equity and its license agreement with FEARnet could be terminated. Due to the timing of the availability of financial statements from FEARnet, the Company is recording its share of the FEARnet results on a one quarter lag and, accordingly, during the six months ended September 30, 2007 the Company recorded 33.3% of the loss incurred by FEARnet through June 30, 2007.
NextPoint, Inc. Represents the Company’s 42% equity interest or 21,000,000 shares of the Series B Preferred Stock of NextPoint, Inc. (“Break.com”), an online video entertainment service provider operating under the branding of “Break.com.” The interest was acquired on June 29, 2007 for an aggregate purchase price of $21.4 million which includes $0.5 million of transaction costs, by issuing 1,890,189 of the Company’s common shares. The Company has a call option which is exercisable at any time from June 29, 2007 until the earlier of 30 months after June 29, 2007 or one year after a change of control, as narrowly defined, to purchase all of the remaining 58% equity interests (excluding any subsequent dilutive events), including in-the-money stock options,
13
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
warrants and other rights of Break.com for $58.0 million in cash or common stock, at the Company’s option. The fair value of the call option is included in the investment balance. Due to the timing of the availability of financial statements from Break.com, the Company is recording its share of the Break.com results on a one quarter lag and, accordingly, during the six months ended September 30, 2007 the Company recorded 42% of the loss incurred by Break.com from the date of investment through June 30, 2007.
Roadside Attractions, LLC. Represents the Company’s 43% equity interest in Roadside Attractions, LLC (“Roadside”), an independent theatrical releasing company acquired on July 26, 2007. The Company has a call option which is exercisable for a period of 90 days commencing on the receipt of certain audited financial statements for a period ending on the third anniversary of this investment to purchase all of the remaining 57% equity interests of Roadside, at a price representative of the then fair value of the remaining interest. The fair value of the call option was not significant since the exercise price represents the then fair value of the company. Due to the timing of the availability of financial statements from Roadside, the Company is recording its share of the Roadside results on a one quarter lag. Through September 30, 2007, the Company has not recorded its share of the results of Roadside because first quarter will be reported in the Company’s quarter ended December 31, 2007.
Elevation Sales Limited. Represents a 50% equity interest in Elevation Sales Limited (“Elevation”), a UK based film distributor. The Company’s share of the results of Elevation for the quarter ended September 30, 2007 was nil.
5. | Bank Loans |
At September 30, 2007, the Company had a $215 million revolving line of credit, of which $10 million is available for borrowing by Lionsgate UK in either U.S. dollars or British pounds sterling. At September 30, 2007, the Company had no borrowings (March 31, 2007 — nil) under the credit facility. The credit facility expires December 31, 2008 and bears interest at 2.75% over the “Adjusted LIBOR” or the “Canadian Bankers Acceptance” rate (as defined in the credit facility), or 1.75% over the U.S. or Canadian prime rates. The availability of funds under the credit facility is limited by the borrowing base. Amounts available under the credit facility are also limited by outstanding letters of credit, which amounted to $15.2 million at September 30, 2007. At September 30, 2007, there was $199.8 million available under the credit facility. The Company is required to pay a monthly commitment fee based upon 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., the Company’s wholly owned U.S. subsidiary is pledged as security for the credit facility. The credit facility is senior to the Company’s film obligations and subordinated notes. The credit facility restricts the Company from paying cash dividends on its common shares.
6. | Film Obligations and Participation and Residuals |
September 30, | March 31, | |||||||
2007 | 2007 | |||||||
(Amounts in thousands ) | ||||||||
Minimum guarantees(1) | $ | 17,035 | $ | 19,286 | ||||
Theatrical marketing obligations(2) | 3,158 | 4,482 | ||||||
Production obligations(3) | 191,459 | 144,116 | ||||||
Total film obligations | 211,652 | 167,884 | ||||||
Less film obligations expected to be paid within one year | (113,053 | ) | (82,350 | ) | ||||
Production obligations expected to be paid after one year | $ | 98,599 | $ | 85,534 | ||||
Participation and residuals | $ | 293,622 | $ | 171,156 | ||||
(1) | Minimum guarantees represent amounts payable for film rights which the Company has acquired. |
14
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(2) | Theatrical marketing obligations represent amounts which are contractually committed for theatrical marketing expenditures associated with specific titles. | |
(3) | Production obligations represent amounts payable for the cost incurred for the production of film and television programs that the Company produces, which in some cases are financed over periods exceeding one year. Production obligations have contractual repayment dates either at or near the expected completion date, with the exception of certain obligations containing repayment dates on a longer term basis. Production obligations of $108.1 million incur interest at rates ranging from 6.72% to 8.02%, one production loan of $2.5 million bears interest of 14.08%, and approximately $80.9 million of production obligations are non-interest bearing. |
The Company expects approximately 74% of accrued participations and residuals will be paid during the one-year period ending September 30, 2008.
Theatrical Slate Financing
On May 25, 2007, the Company, through a series of agreements, closed a theatrical slate funding arrangement. Under this arrangement Pride Pictures LLC (“Pride”), an unrelated entity, will fund, generally, 50% of the Company’s production, acquisition, marketing and distribution costs of theatrical feature films up to an aggregate of approximately $196 million, net of transaction costs. The funds available from Pride are generated from the issuance by Pride of $35 million of subordinated debt instruments, $35 million of equity and $134 million from a senior credit facility, which is subject to a borrowing base. The Company is not a party to the Pride debt obligations or their senior credit facility, and provides no guarantee of repayment of these obligations. The percentage of the contribution may vary on certain pictures. The slate of films covered by the arrangement is expected to be comprised of 23 films over the next three years. Pride will participate in a pro rata portion of the pictures’ net profits or losses similar to a co-production arrangement based on the portion of costs funded. The Company continues to distribute the pictures covered by the arrangement with a portion of net profits after all costs and the Company’s distribution fee being distributed to Pride based on their pro rata contribution to the applicable costs similar to a back-end participation on a film.
The $134 million senior credit facility is a revolving facility for print and advertising costs, other releasing costs, and direct production and acquisition costs. Borrowings for direct production and acquisition cost are subject to a borrowing base calculation generally based on 90% of the estimated ultimate amounts due to Pride on previously released films, as defined.
Amounts funded from Pride are reflected as a participation liability. The difference between the ultimate participation expected to be paid to Pride and the amount funded by Pride is amortized as a charge to or a reduction of participation expense under the individual film forecast method. At September 30, 2007, $96.5 million was payable to Pride and is included in the participation liability on the consolidated balance sheet and $96.1 million was available to be funded by Pride under the terms of the arrangement.
Société Générale de Financement du Québec Filmed Entertainment Financing Deal
On July 30, 2007, the Company entered into a four-year filmed entertainment slate financing agreement with Société Générale de Financement du Québec (“SGF”), the Québec provincial government’s investment arm. SGF will finance up to 35% of production costs of television and feature film productions produced in Québec for a four year period for an aggregate investment of up to $140 million, and the Company will advance all amounts necessary to fund the remaining budgeted costs. The maximum aggregate of budgeted costs over the four-year period will be $400 million, including the Company’s portion, but no more than $100 million per year. In connection with this agreement the Company and SGF will proportionally share in the proceeds derived from the funded productions after the Company deducts a distribution fee, recoups all distribution expenses and releasing costs, and pays all applicable participations and residuals.
15
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Amounts funded from SGF are reflected as a participation liability. The difference between the ultimate participation expected to be paid to SGF and the amount funded by SGF is amortized as a charge to or a reduction of participation expense under the individual film forecast method. At September 30, 2007, $5.1 million was payable to SGF and is included in the participation liability on the consolidated balance sheet and $132.8 million was available to be funded by SGF under the terms of the arrangement.
7. | Subordinated Notes and Other Financing Obligations |
The following table sets forth the subordinated notes and other financing obligations outstanding at September 30, 2007 and March 31, 2007:
September 30, | March 31, | |||||||
2007 | 2007 | |||||||
(Amounts in thousands ) | ||||||||
2.9375% Convertible Senior Subordinated Notes | $ | 150,000 | $ | 150,000 | ||||
3.625% Convertible Senior Subordinated Notes | 175,000 | 175,000 | ||||||
Other Financing Obligations | 3,718 | — | ||||||
$ | 328,718 | $ | 325,000 | |||||
Subordinated Notes
3.625% Notes. In February 2005, Lions Gate Entertainment Inc. sold $175.0 million of 3.625% Convertible Senior Subordinated Notes (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 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, which commenced 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 holder 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 holder requires 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 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 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.
2.9375% Notes. In October 2004, Lions Gate Entertainment Inc. sold $150.0 million of 2.9375% Convertible Senior Subordinated Notes (the “2.9375% 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
16
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$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, which commenced 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, Lions Gate Entertainment Inc. may redeem the notes at 100%.
The holder 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 holder requires 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 exceeds $50.00 per share.
The holder may convert the 2.9375% Notes into our common shares 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 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 our common shares 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.
Other Financing Obligations
On June 1, 2007, the Company entered into a bank financing agreement for $3.7 million to fund the acquisition of certain capital assets. Interest is payable in monthly payments totaling $0.3 million per year for five years at an interest rate of 8.02%, with the entire principal due June 2012.
8. | Acquisitions |
On September 10, 2007, the Company purchased all of the membership interests in Mandate Pictures, LLC, a Delaware limited liability company (“Mandate”). Mandate is an independent film producer and distributor. The Mandate acquisition brings to the Company additional experienced management personnel working within the motion picture business segment. In addition, the Mandate acquisition adds an independent film and distribution business to the Company’s motion picture business. The aggregate purchase price was approximately $60.2 million, comprised of $48.3 million in cash and 1,282,999 million in shares of the Company’s common stock to be issued and delivered over a period of 18 months pursuant to certain holdback provisions. Of the $48.3 million cash portion of the purchase price, $44.3 million was paid at closing, $1.2 million represented estimated direct transaction costs (to be paid to lawyers, accountants and other consultants), and $2.8 million represented the remaining estimated cash consideration that will be paid within the next 12 month period. The value assigned to the shares for purposes of recording the acquisition was $11.8 million and was based on the closing price of the Company’s common stock on the date of the acquisition. In addition, the Company may be obligated to pay additional amounts should certain films or derivative works meet certain target performance thresholds. Such amounts, which are directly based on the performance of these films, will be accounted for similar to other film participation arrangements. The amount of contingent consideration ultimately estimated to be paid, if anything, will be amortized to direct operating expense in the proportion that the year’s revenue bears to management’s estimate of ultimate revenue at the beginning of the year.
17
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The acquisition was accounted for as a purchase, with the results of operations of Mandate included in the Company’s consolidated results from September 10, 2007 through September 30, 2007. Goodwill of $37.1 million represents the excess of purchase price over the preliminary estimate of the fair value of the net identifiable tangible and intangible assets acquired. Although the goodwill will not be amortized for financial reporting purposes it is anticipated that substantially all of the goodwill will be deductible for federal tax purposes over the statutory period of 15 years. The preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values was as follows:
Preliminary | ||||
Allocation | ||||
(Amounts in | ||||
thousands) | ||||
Cash and cash equivalents | $ | 3,952 | ||
Restricted cash | 7,807 | |||
Accounts receivable, net | 12,807 | |||
Investment in films and television programs | 62,951 | |||
Definite life intangible assets | 5,400 | |||
Other assets acquired | 2,742 | |||
Goodwill | 37,076 | |||
Accounts payable and accrued liabilities | (10,697 | ) | ||
Participation and residuals | (6,658 | ) | ||
Film obligations | (50,565 | ) | ||
Deferred revenue | (4,658 | ) | ||
Total | $ | 60,157 | ||
The allocation above is preliminary until completion and receipt of final appraisals of the net assets acquired. The preliminary allocation of the purchase price is subject to revision, as more detailed analysis of investment in films and intangible assets is completed and additional information on the fair value of assets and liabilities becomes available. Any change in the fair value of the net assets of Mandate will change the amount of the purchase price allocable to goodwill. The $37.1 million of goodwill was assigned to the motion pictures reporting segment.
The following unaudited pro forma condensed consolidated statements of operations presented below illustrate the results of operations of the Company as if the acquisition of Mandate as described above occurred at April 1, 2006 based on the preliminary purchase price allocation:
Six Months | Six Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2007 | 2006 | |||||||
(Amounts in thousands, except per share amounts ) | ||||||||
Revenues | $ | 563,497 | $ | 394,928 | ||||
Operating loss | $ | (109,318 | ) | $ | (16,117 | ) | ||
Net loss | $ | (112,646 | ) | $ | (19,026 | ) | ||
Basic and Diluted Net Loss Per Common Share | $ | (0.94 | ) | $ | (0.18 | ) | ||
Weighted average number of common shares outstanding | 119,419 | 105,944 |
18
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9. | Direct Operating Expenses |
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Amortization of films and television programs | $ | 125,757 | $ | 48,805 | $ | 175,619 | $ | 81,998 | ||||||||
Participation and residual expense | 55,956 | 43,824 | 93,967 | 81,022 | ||||||||||||
Amortization of acquired intangible assets | 163 | 244 | 325 | 488 | ||||||||||||
Other expenses | 611 | 1,850 | (366 | ) | (240 | ) | ||||||||||
$ | 182,487 | $ | 94,723 | $ | 269,545 | $ | 163,268 | |||||||||
Other expenses primarily consist of the provision for doubtful accounts and foreign exchange gains and losses. The provision for doubtful accounts included in other expenses for the three months ended September 30, 2007 and 2006 was $0.6 million and $1.8 million, respectively. The provision (benefit) for doubtful accounts included in other expenses for the six months ended September 30, 2007 and 2006 was a provision of less than $0.1 million and a benefit of ($0.2) million, respectively.
Foreign exchange gains included in other expenses for the six months ended September 30, 2007 and 2006 were $0.4 million and nil, respectively.
10. | Comprehensive Loss |
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(Amounts in thousands ) | ||||||||||||||||
Net loss | $ | (56,214 | ) | $ | (14,392 | ) | $ | (109,332 | ) | $ | (17,996 | ) | ||||
Add: Foreign currency translation adjustments | 126 | 130 | 2,560 | 1,680 | ||||||||||||
Add (Deduct): Net unrealized gain (loss) on foreign exchange contracts | 181 | (31 | ) | 169 | (14 | ) | ||||||||||
Add (Deduct): Unrealized gain (loss) on investments — available for sale | (1,254 | ) | (517 | ) | 26 | (880 | ) | |||||||||
Comprehensive loss | $ | (57,161 | ) | $ | (14,810 | ) | $ | (106,577 | ) | $ | (17,210 | ) | ||||
19
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11. | Loss Per Share and Treasury Shares |
The Company calculates loss per share in accordance with SFAS No. 128, “Earnings Per Share.” Basic loss per share is calculated based on the weighted average common shares outstanding for the period. Basic loss per share for the three and six months ended September 30, 2007 and 2006 are presented below:
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(Amounts in thousands ) | ||||||||||||||||
Basic and Diluted Net Loss Per Share | ||||||||||||||||
Numerator: | ||||||||||||||||
Net loss | $ | (56,214 | ) | $ | (14,392 | ) | $ | (109,332 | ) | $ | (17,996 | ) | ||||
Denominator: | ||||||||||||||||
Weighted average common shares outstanding | 119,155 | 104,856 | 118,136 | 104,661 | ||||||||||||
Basic and Diluted Net Loss Per Common Share | $ | (0.47 | ) | $ | (0.14 | ) | $ | (0.93 | ) | $ | (0.17 | ) | ||||
The exercise of common share equivalents including stock options, the conversion features of the 2.9375% Notes, and the 3.625% Notes and restricted share units could potentially dilute income (loss) per share in the future, but were not reflected in diluted loss per share during the periods presented because their effect is anti-dilutive.
The Company had 500,000,000 authorized shares of common stock at September 30, 2007 and March 31, 2007. The table below outlines common shares reserved for future issuance:
September 30, | March 31, | |||||||
2007 | 2007 | |||||||
(Amounts in thousands ) | ||||||||
Stock options outstanding | 5,208 | 5,933 | ||||||
Restricted share units — unvested | 2,374 | 1,872 | ||||||
Share purchase options and restricted share units available for future issuance | 6,924 | 1,026 | ||||||
Shares issuable upon conversion of 2.9375% Notes | 13,043 | 13,043 | ||||||
Shares issuable upon conversion of 3.625% Notes | 12,252 | 12,252 | ||||||
Shares reserved for future issuance | 39,801 | 34,126 | ||||||
On May 31, 2007, the Company’s Board of Directors authorized the repurchase of up to $50 million of the Company’s common shares, with the timing, price, quantity, and manner of the purchases to be made at the discretion of management, depending upon market conditions. During the period from the authorization date through September 30, 2007, 1,169,835 million shares have been repurchased at a cost of approximately $10.7 million, including commission costs. The share repurchase program has no expiration date. The shares repurchased under the stock repurchase program are included in treasury shares in the accompanying unaudited consolidated balance sheets and statements of shareholders’ equity.
20
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. | Accounting for Stock-Based Compensation |
Share-Based Compensation
The Company accounts for stock-based compensation in accordance with the provisions of SFAS No. 123(R). SFAS No. 123(R) requires the measurement of all stock-based awards using a fair value method and the recognition of the related stock-based compensation expense in the consolidated financial statements over the requisite service period. Further, as required under SFAS No. 123(R), the Company estimates forfeitures for share-based awards that are not expected to vest. As stock-based compensation expense recognized in the Company’s consolidated financial statements is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.
The fair value of each option award is estimated on the date of grant using a closed-form option valuation model (Black-Scholes) based on the assumptions noted in the following table. Expected volatilities are based on implied volatilities from traded options on the Company’s stock, historical volatility of the Company’s stock and other factors. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The following table represents the assumptions used in the Black-Scholes option-pricing model for options granted during the six months ended September 30, 2007 and 2006:
Six Months | Six Months | |||
Ended | Ended | |||
September 30, | September 30, | |||
2007 | 2006 | |||
Risk-free interest rate | 4.1%- 4.8% | 4.7% | ||
Expected option lives (in years) | 5.6 to 6.5 years | 6 years | ||
Expected volatility for options | 31% | 26% | ||
Expected dividend yield | 0% | 0% |
The weighted-average grant-date fair values for options granted during the six months ended September 30, 2007 was $4.17. The Company recognized the following share-based compensation expense during the three and six months ended September 30, 2007 and 2006:
Six Months | ||||||||||||||||
Three Months Ended | Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(Amounts in thousands ) | ||||||||||||||||
Compensation Expense (Benefit): | ||||||||||||||||
Stock Options | $ | 851 | $ | 433 | $ | 1,636 | $ | 891 | ||||||||
Restricted Share Units | 2,980 | 905 | 5,041 | 1,421 | ||||||||||||
Stock Appreciation Rights | (629 | ) | 1,910 | (1,009 | ) | 526 | ||||||||||
Total | $ | 3,202 | $ | 3,248 | $ | 5,668 | $ | 2,838 | ||||||||
There was no income tax benefit recognized in the statements of operations for share-based compensation arrangements during the three and six months ended September 30, 2007 and 2006.
21
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Options
A summary of option activity as of September 30, 2007 and changes during the six months then ended is presented below:
Weighted | Aggregate | |||||||||||||||||||||||
Weighted- | Average | Intrinsic | ||||||||||||||||||||||
Total | Average | Remaining | Value as of | |||||||||||||||||||||
Number of | Number of | Number of | Exercise | Contractual | September 30, | |||||||||||||||||||
Options: | Shares(1) | Shares(2) | Shares | Price | Term In Years | 2007 | ||||||||||||||||||
Outstanding at March 31, 2007 | 5,933,289 | — | 5,933,289 | $ | 4.18 | |||||||||||||||||||
Granted | 490,000 | — | 490,000 | 11.70 | ||||||||||||||||||||
Exercised | (61,807 | ) | — | (61,807 | ) | 6.31 | ||||||||||||||||||
Forfeited or expired | (5,665 | ) | — | (5,665 | ) | 8.75 | ||||||||||||||||||
Outstanding at June 30, 2007 | 6,355,817 | — | 6,355,817 | $ | 6.71 | |||||||||||||||||||
Granted | — | 600,000 | 600,000 | 9.22 | ||||||||||||||||||||
Exercised | (1,743,167 | ) | — | (1,743,167 | ) | 2.86 | ||||||||||||||||||
Forfeited or expired | (4,501 | ) | — | (4,501 | ) | 8.95 | ||||||||||||||||||
Outstanding at September 30, 2007 | 4,608,149 | 600,000 | 5,208,149 | $ | 8.29 | 6.22 | $ | 11,225,616 | ||||||||||||||||
Outstanding as of September 30, 2007, vested or expected to vest in the future | 4,602,107 | 600,000 | 5,202,107 | $ | 8.29 | 6.22 | $ | 11,224,815 | ||||||||||||||||
Exercisable at September 30, 2007 | 1,987,314 | 600,000 | 2,587,314 | $ | 6.58 | 3.41 | $ | 9,661,426 | ||||||||||||||||
(1) | Issued under our long-term incentive plans. | |
(2) | On September 10, 2007, in connection with the acquisition of Mandate (see note 8), two executives entered into employment agreements with Lions Gate Films, Inc., a wholly-owned subsidiary of the Company. Pursuant to the employment agreements, the executives were granted an aggregate of 600,000 stock options, which vest over a three- to five-year period. The options were granted outside of our long-term incentive plans. |
The total intrinsic value of options exercised as of each exercise date during the three and six months ended September 30, 2007 were $11.6 million and $11.9 million, respectively (2006 — $5.2 million and $6.0 million, respectively).
22
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted Share Units
A summary of the status of the Company’s restricted share units as of September 30, 2007, and changes during the six months then ended is presented below:
Total | Weighted Average | |||||||||||||||
Number of | Number of | Number of | Grant Date Fair | |||||||||||||
Restricted Share Units: | Shares(1) | Shares(2) | Shares | Value | ||||||||||||
Outstanding at March 31, 2007 | 1,872,243 | — | 1,872,243 | $ | 9.78 | |||||||||||
Granted | 505,833 | — | 505,833 | 11.69 | ||||||||||||
Vested | (195,257 | ) | — | (195,257 | ) | 9.86 | ||||||||||
Forfeited | (5,206 | ) | — | (5,206 | ) | 10.01 | ||||||||||
Outstanding at June 30, 2007 | 2,177,613 | — | 2,177,613 | $ | 10.22 | |||||||||||
Granted | 214,583 | 287,500 | 502,083 | 9.40 | ||||||||||||
Vested | (294,545 | ) | — | (294,545 | ) | 10.13 | ||||||||||
Forfeited | (11,166 | ) | — | (11,166 | ) | 9.93 | ||||||||||
Outstanding at September 30, 2007 | 2,086,485 | 287,500 | 2,373,985 | $ | 10.06 | |||||||||||
(1) | Issued under our long-term incentive plans. | |
(2) | On September 10, 2007, in connection with the acquisition of Mandate (see note 8), two executives entered into employment agreements with Lions Gate Films, Inc., a wholly-owned subsidiary of the Company. Pursuant to the employment agreements, the executives were granted an aggregate of 287,500 restricted share units, which vest over a three- to five-year period. The restricted share units were granted outside of our long-term incentive plans. |
The fair values of restricted share units are determined based on the market value of the shares on the date of grant.
The following table summarizes the total remaining unrecognized compensation cost as of September 30, 2007 related to non-vested stock options and restricted share units and the weighted average remaining years over which the cost will be recognized:
Total | Weighted | |||||||
Unrecognized | Average | |||||||
Compensation | Remaining | |||||||
Cost | Years | |||||||
(Amounts in thousands) | ||||||||
Stock Options | $ | 10,543 | 3.0 | |||||
Restricted Share Units | 18,973 | 2.6 | ||||||
Total | $ | 29,516 | ||||||
Under the Company’s two stock option and long term incentive plans, the Company withholds shares to satisfy minimum statutory federal, state and local tax withholding obligations arising from the vesting of restricted share units. During the six months ended September 30, 2007, 65,131 shares were withheld upon the vesting of restricted share units and 396,904 shares were withheld upon the exercise of stock options to satisfy minimum statutory federal, state and local tax withholding obligations. In addition, 480,382 shares were withheld and cancelled to fund the exercise of certain stock options.
23
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the stock options and restricted share units when vesting or exercise occurs, the restrictions are released and the shares are issued. Restricted share units are forfeited if the employees terminate prior to vesting.
Stock Appreciation Rights
On February 2, 2004, an officer of the Company was granted 1,000,000 stock appreciation rights (“SARs”), which entitles 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 the Company’s common shares on the exercise notice date exceeds the SARs’ price of $5.20 multiplied by the number of SARs exercised. The SARs vested 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 Company’s Employees’ and Directors’ Equity Incentive Plan. Through March 31, 2006, the Company measured compensation expense as the amount by which the market value of common shares exceeded the SARs’ price at each reporting date. Effective April 1, 2006, upon the adoption of SFAS No. 123(R), the Company measures compensation expense based on the fair value of the SARs which is determined by using the Black-Scholes option-pricing model at each reporting date. For the three and six months ended September 30, 2007, the following assumptions were used in the Black-Scholes option-pricing model: Volatility of 45.6%, Risk Free Rate of 4.2%, Expected Term of 1.3 years, and Dividend of 0%. At September 30, 2007, the market price of the Company’s common shares was $10.31, the weighted average fair value of the SARs was $5.53, and all 1,000,000 of the SARs had vested. Due to the decrease in the market price of its common shares, the Company recorded a reduction in stock-based compensation expense in the amount of $0.6 million and $1.0 million in general and administration expenses in the unaudited condensed consolidated statements of operations for the three and six months ended September 30, 2007, respectively (2006 — $0.3 million increase and a reduction of $0.3 million, respectively). The compensation expense amount in the period is calculated by using the fair value of the SARs, multiplied by the remaining 850,000 SARs which have fully vested (150,000 SARs were previously exercised and expensed). At September 30, 2007, the Company has a stock-based compensation liability accrual in the amount of $4.7 million (March 31, 2007 — $5.7 million) included in accounts payable and accrued liabilities on the unaudited condensed consolidated balance sheets relating to these SARs.
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 two reportable business segments: Motion Pictures and Television.
Motion Pictures consists of the development and production of feature films, acquisition of North American and worldwide distribution rights, North American theatrical, video 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.
24
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Segmented information by business unit is as follows:
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Segment revenues | ||||||||||||||||
Motion Pictures | $ | 234,412 | $ | 186,598 | $ | 404,734 | $ | 351,784 | ||||||||
Television | 109,093 | 31,571 | 137,513 | 38,841 | ||||||||||||
$ | 343,505 | $ | 218,169 | $ | 542,247 | $ | 390,625 | |||||||||
Direct operating expenses | ||||||||||||||||
Motion Pictures | $ | 84,640 | $ | 69,549 | $ | 144,270 | $ | 131,502 | ||||||||
Television | 97,847 | 25,174 | 125,275 | 31,766 | ||||||||||||
$ | 182,487 | $ | 94,723 | $ | 269,545 | $ | 163,268 | |||||||||
Distribution and marketing | ||||||||||||||||
Motion Pictures | $ | 184,793 | $ | 110,396 | $ | 317,652 | $ | 195,657 | ||||||||
Television | 4,219 | 2,949 | 6,861 | 4,734 | ||||||||||||
$ | 189,012 | $ | 113,345 | $ | 324,513 | $ | 200,391 | |||||||||
General and administration | ||||||||||||||||
Motion Pictures | $ | 8,284 | $ | 6,378 | $ | 15,699 | $ | 13,192 | ||||||||
Television | 1,879 | 900 | 3,705 | 1,050 | ||||||||||||
$ | 10,163 | $ | 7,278 | $ | 19,404 | $ | 14,242 | |||||||||
Segment profit (loss) | ||||||||||||||||
Motion Pictures | $ | (43,305 | ) | $ | 275 | $ | (72,887 | ) | $ | 11,433 | ||||||
Television | 5,148 | 2,548 | 1,672 | 1,291 | ||||||||||||
$ | (38,157 | ) | $ | 2,823 | $ | (71,215 | ) | $ | 12,724 | |||||||
Acquisition of investment in films and television programs | ||||||||||||||||
Motion Pictures | $ | 81,612 | $ | 60,389 | $ | 137,685 | $ | 99,863 | ||||||||
Television | 29,464 | 43,050 | 109,531 | 64,208 | ||||||||||||
$ | 111,076 | $ | 103,439 | $ | 247,216 | $ | 164,071 | |||||||||
Purchases of property and equipment amounted to $0.4 million and $2.4 million for the three and six months ending September 30, 2007, respectively, and $1.7 million and $3.5 million for the three and six months ending September 30, 2006, respectively, all primarily pertaining to the Company’s corporate headquarters.
25
Table of Contents
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 loss before income taxes is as follows:
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Company’s total segment profit (loss) | $ | (38,157 | ) | $ | 2,823 | $ | (71,215 | ) | $ | 12,724 | ||||||
Less: | ||||||||||||||||
Corporate general and administration | (15,706 | ) | (14,449 | ) | (33,305 | ) | (26,718 | ) | ||||||||
Depreciation | (989 | ) | (581 | ) | (1,897 | ) | (1,125 | ) | ||||||||
Interest expense | (4,213 | ) | (4,904 | ) | (8,073 | ) | (9,580 | ) | ||||||||
Interest and other income | 2,646 | 2,286 | 6,449 | 4,847 | ||||||||||||
Gain on sale on equity securities | 2,785 | — | 2,785 | — | ||||||||||||
Equity interests loss | (1,187 | ) | (435 | ) | (1,994 | ) | (377 | ) | ||||||||
Loss before income taxes | $ | (54,821 | ) | $ | (15,260 | ) | $ | (107,250 | ) | $ | (20,229 | ) | ||||
The following table sets forth significant assets as broken down by segment and other unallocated assets as of September 30, 2007 and March 31, 2007:
September 30, 2007 | March 31, 2007 | |||||||||||||||||||||||
Motion | Motion | |||||||||||||||||||||||
Pictures | Television | Total | Pictures | Television | Total | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Significant assets by segment Accounts receivable | $ | 144,704 | $ | 64,753 | $ | 209,457 | $ | 85,294 | $ | 45,202 | $ | 130,496 | ||||||||||||
Investment in films and television programs | 529,433 | 103,591 | 633,024 | 397,346 | 95,794 | 493,140 | ||||||||||||||||||
Goodwill | 210,606 | 13,961 | 224,567 | 173,530 | 13,961 | 187,491 | ||||||||||||||||||
$ | 884,743 | $ | 182,305 | $ | 1,067,048 | $ | 656,170 | $ | 154,957 | $ | 811,127 | |||||||||||||
Other unallocated assets (primarily cash and available-for-sale investments) | 268,177 | 325,968 | ||||||||||||||||||||||
Total assets | $ | 1,335,225 | $ | 1,137,095 | ||||||||||||||||||||
26
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14. | 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 September 30, 2007, in accordance with SFAS No. 5, “Accounting for Contingencies.”
15. | Consolidating Financial Information |
In October 2004, the Company sold $150.0 million of the 2.9375% Notes, through its wholly owned U.S. subsidiary Lions Gate Entertainment Inc. (the “Issuer”). The 2.9375% Notes, by their terms, are fully and unconditionally guaranteed by the Company.
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.
27
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables present unaudited condensed consolidating financial information as of September 30, 2007 and March 31, 2007 and for the six months ended September 30, 2007 and 2006 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.
BALANCE SHEET
As of September 30, 2007 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands ) | ||||||||||||||||||||
BALANCE SHEET | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 2,016 | $ | 144,582 | $ | 12,267 | $ | — | $ | 158,865 | ||||||||||
Restricted cash | — | 2,280 | 10,083 | — | 12,363 | |||||||||||||||
Investments — auction rate securities | — | 30,000 | — | — | 30,000 | |||||||||||||||
Investments — equity securities | — | — | 104 | — | 104 | |||||||||||||||
Accounts receivable, net | 322 | 373 | 208,762 | — | 209,457 | |||||||||||||||
Investment in films and television programs | 1,313 | 6,584 | 625,186 | (59 | ) | 633,024 | ||||||||||||||
Property and equipment | — | 13,164 | 956 | — | 14,120 | |||||||||||||||
Goodwill | 10,173 | — | 214,394 | — | 224,567 | |||||||||||||||
Other assets | 2,063 | 203,540 | 6,682 | (159,560 | ) | 52,725 | ||||||||||||||
Investment in subsidiaries | 229,515 | 524,214 | — | (753,729 | ) | — | ||||||||||||||
$ | 245,402 | $ | 924,737 | $ | 1,078,434 | $ | (913,348 | ) | $ | 1,335,225 | ||||||||||
Liabilities and Shareholders’ Equity (Deficiency) | ||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 477 | $ | 39,462 | $ | 213,429 | $ | — | $ | 253,368 | ||||||||||
Participation and residuals | 193 | 1,623 | 291,806 | — | 293,622 | |||||||||||||||
Film obligations | 80 | — | 211,572 | — | 211,652 | |||||||||||||||
Subordinated notes and other financing obligations | — | 325,000 | 3,718 | — | 328,718 | |||||||||||||||
Deferred revenue | — | — | 92,283 | — | 92,283 | |||||||||||||||
Intercompany payables (receivables) | (230,915 | ) | 481,645 | 9,295 | (260,025 | ) | — | |||||||||||||
Intercompany equity | 319,985 | 93,217 | 331,148 | (744,350 | ) | — | ||||||||||||||
Shareholders’ equity (deficiency) | 155,582 | (16,210 | ) | (74,817 | ) | 91,027 | 155,582 | |||||||||||||
$ | 245,402 | $ | 924,737 | $ | 1,078,434 | $ | (913,348 | ) | $ | 1,335,225 | ||||||||||
28
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
STATEMENT OF OPERATIONS
Six Months Ended September 30, 2007 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands ) | ||||||||||||||||||||
STATEMENT OF OPERATIONS | ||||||||||||||||||||
Revenues | $ | 137 | $ | 7,624 | $ | 536,839 | $ | (2,353 | ) | $ | 542,247 | |||||||||
EXPENSES: | ||||||||||||||||||||
Direct operating | — | — | 269,545 | — | 269,545 | |||||||||||||||
Distribution and marketing | — | 1,155 | 323,358 | — | 324,513 | |||||||||||||||
General and administration | 776 | 30,765 | 21,168 | — | 52,709 | |||||||||||||||
Depreciation | — | 1 | 1,896 | — | 1,897 | |||||||||||||||
Total expenses | 776 | 31,921 | 615,967 | — | 648,664 | |||||||||||||||
OPERATING LOSS | (639 | ) | (24,297 | ) | (79,128 | ) | (2,353 | ) | (106,417 | ) | ||||||||||
Other expenses (income): | ||||||||||||||||||||
Interest expense | — | 7,842 | 231 | — | 8,073 | |||||||||||||||
Interest and other income | (35 | ) | (6,116 | ) | (298 | ) | — | (6,449 | ) | |||||||||||
Gain on sale on equity securities | — | — | (2,785 | ) | — | (2,785 | ) | |||||||||||||
Total other expenses (income) | (35 | ) | 1,726 | (2,852 | ) | — | (1,161 | ) | ||||||||||||
INCOME (LOSS) BEFORE EQUITY INTERESTS AND INCOME TAXES | (604 | ) | (26,023 | ) | (76,276 | ) | (2,353 | ) | (105,256 | ) | ||||||||||
Equity interests income (loss) | (108,827 | ) | (80,358 | ) | (1,898 | ) | 189,089 | (1,994 | ) | |||||||||||
INCOME (LOSS) BEFORE INCOME TAXES | (109,431 | ) | (106,381 | ) | (78,174 | ) | 186,736 | (107,250 | ) | |||||||||||
Income tax provision (benefit) | (99 | ) | 155 | 2,026 | — | 2,082 | ||||||||||||||
NET INCOME (LOSS) | $ | (109,332 | ) | $ | (106,536 | ) | $ | (80,200 | ) | $ | 186,736 | $ | (109,332 | ) | ||||||
29
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
STATEMENT OF CASH FLOWS
Six Months Ended September 30, 2007 | ||||||||||||||||||||
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 | $ | 9,697 | $ | (54,138 | ) | $ | (14,112 | ) | $ | — | $ | (58,553 | ) | |||||||
INVESTING ACTIVITIES: | ||||||||||||||||||||
Purchases of investments — auction rate securities | — | (207,266 | ) | — | — | (207,266 | ) | |||||||||||||
Proceeds from the sale of investments — auction rate securities | — | 414,641 | — | — | 414,641 | |||||||||||||||
Purchases of investments — equity securities | — | — | (4,672 | ) | — | (4,672 | ) | |||||||||||||
Proceeds from the sale of investments — equity securities | — | 16,343 | 7,439 | — | 23,782 | |||||||||||||||
Acquisition of Mandate, net of unrestricted cash acquired | — | (44,802 | ) | 3,952 | — | (40,850 | ) | |||||||||||||
Investment in equity method investees | — | (3,051 | ) | (3,414 | ) | — | (6,465 | ) | ||||||||||||
Loan to equity method investee | — | (3,059 | ) | — | — | (3,059 | ) | |||||||||||||
Purchases of property and equipment | — | (1,935 | ) | (450 | ) | — | (2,385 | ) | ||||||||||||
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES | — | 170,871 | 2,855 | — | 173,726 | |||||||||||||||
FINANCING ACTIVITIES: | ||||||||||||||||||||
Exercise of stock options | 745 | — | — | — | 745 | |||||||||||||||
Repurchase of common shares | (10,736 | ) | — | — | — | (10,736 | ) | |||||||||||||
Borrowings from financing obligation | — | — | 3,718 | — | 3,718 | |||||||||||||||
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES | (9,991 | ) | — | 3,718 | — | (6,273 | ) | |||||||||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | (294 | ) | 116,733 | (7,539 | ) | — | 108,900 | |||||||||||||
FOREIGN EXCHANGE EFFECT ON CASH | 402 | (498 | ) | (1,436 | ) | — | (1,532 | ) | ||||||||||||
CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD | 1,908 | 28,347 | 21,242 | — | 51,497 | |||||||||||||||
CASH AND CASH EQUIVALENTS — END OF PERIOD | $ | 2,016 | $ | 144,582 | $ | 12,267 | $ | — | $ | 158,865 | ||||||||||
30
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
BALANCE SHEET
As of March 31, 2007 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 1,908 | $ | 28,347 | $ | 21,242 | $ | — | $ | 51,497 | ||||||||||
Restricted cash | — | 2,475 | 2,440 | — | 4,915 | |||||||||||||||
Investments — auction rate securities | — | 237,379 | — | — | 237,379 | |||||||||||||||
Investments — equity securities | — | — | 125 | — | 125 | |||||||||||||||
Accounts receivable, net | 281 | 17,261 | 112,954 | — | 130,496 | |||||||||||||||
Investment in films and television programs | — | 6,632 | 486,508 | — | 493,140 | |||||||||||||||
Property and equipment | — | 11,230 | 1,865 | — | 13,095 | |||||||||||||||
Goodwill | — | — | 187,491 | — | 187,491 | |||||||||||||||
Other assets | 59 | 10,675 | 8,223 | — | 18,957 | |||||||||||||||
Investment in subsidiaries | 361,898 | 639,289 | — | (1,001,187 | ) | — | ||||||||||||||
$ | 364,146 | $ | 953,288 | $ | 820,848 | $ | (1,001,187 | ) | $ | 1,137,095 | ||||||||||
Liabilities and Shareholders’ Equity (Deficiency) | ||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 390 | $ | 28,313 | $ | 126,914 | $ | — | $ | 155,617 | ||||||||||
Participation and residuals | — | 229 | 170,927 | — | 171,156 | |||||||||||||||
Film obligations | — | 5,500 | 162,384 | — | 167,884 | |||||||||||||||
Subordinated notes | — | 325,000 | — | — | 325,000 | |||||||||||||||
Deferred revenue | — | — | 69,548 | — | 69,548 | |||||||||||||||
Intercompany payables (receivables) | (204,119 | ) | 555,762 | (126,108 | ) | (225,535 | ) | — | ||||||||||||
Intercompany equity | 319,985 | 93,217 | 364,536 | (777,738 | ) | — | ||||||||||||||
Shareholders’ equity (deficiency) | 247,890 | (54,733 | ) | 52,647 | 2,086 | 247,890 | ||||||||||||||
$ | 364,146 | $ | 953,288 | $ | 820,848 | $ | (1,001,187 | ) | $ | 1,137,095 | ||||||||||
31
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
STATEMENT OF OPERATIONS
Six Months Ended September 30, 2006 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands ) | ||||||||||||||||||||
STATEMENT OF OPERATIONS | ||||||||||||||||||||
Revenues | $ | — | $ | 8,719 | $ | 381,906 | $ | — | $ | 390,625 | ||||||||||
EXPENSES: | ||||||||||||||||||||
Direct operating | — | — | 163,268 | — | 163,268 | |||||||||||||||
Distribution and marketing | — | 534 | 199,857 | — | 200,391 | |||||||||||||||
General and administration | 967 | 25,114 | 14,879 | — | 40,960 | |||||||||||||||
Depreciation | — | 21 | 1,104 | — | 1,125 | |||||||||||||||
Total expenses | 967 | 25,669 | 379,108 | — | 405,744 | |||||||||||||||
OPERATING INCOME (LOSS) | (967 | ) | (16,950 | ) | 2,798 | — | (15,119 | ) | ||||||||||||
Other Expenses (Income): | ||||||||||||||||||||
Interest expense | 104 | 9,368 | 329 | (221 | ) | 9,580 | ||||||||||||||
Interest income | (86 | ) | (4,982 | ) | — | 221 | (4,847 | ) | ||||||||||||
Total other expenses (income), net | 18 | 4,386 | 329 | — | 4,733 | |||||||||||||||
INCOME (LOSS) BEFORE EQUITY INTERESTS AND INCOME TAXES | (985 | ) | (21,336 | ) | 2,469 | — | (19,852 | ) | ||||||||||||
Equity interests income (loss) | (17,277 | ) | 3,802 | (377 | ) | 13,475 | (377 | ) | ||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES | (18,262 | ) | (17,534 | ) | 2,092 | 13,475 | (20,229 | ) | ||||||||||||
Income tax provision (benefit) | (266 | ) | 543 | (2,510 | ) | — | (2,233 | ) | ||||||||||||
NET INCOME (LOSS) | $ | (17,996 | ) | $ | (18,077 | ) | $ | 4,602 | $ | 13,475 | $ | (17,996 | ) | |||||||
32
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
STATEMENT OF CASH FLOWS
Six Months Ended September 30, 2006 | ||||||||||||||||||||
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 | $ | (32,065 | ) | $ | 5,379 | $ | 44,474 | $ | (7,006 | ) | $ | 10,782 | ||||||||
INVESTING ACTIVITIES: | ||||||||||||||||||||
Purchases of investments — auction rate securities | — | (296,043 | ) | — | — | (296,043 | ) | |||||||||||||
Sales of investments — auction rate securities | — | 316,375 | — | — | 316,375 | |||||||||||||||
Acquisition of Redbus, net of cash acquired | — | (44 | ) | — | 44 | — | ||||||||||||||
Acquisition of Debmar, net of cash acquired | — | (24,715 | ) | 603 | — | (24,112 | ) | |||||||||||||
Purchases of property and equipment | — | (1,883 | ) | (1,654 | ) | — | (3,537 | ) | ||||||||||||
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES | — | (6,310 | ) | (1,051 | ) | 44 | (7,317 | ) | ||||||||||||
FINANCING ACTIVITIES: | ||||||||||||||||||||
Exercise of stock options | 2,400 | — | — | 29 | 2,429 | |||||||||||||||
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES | 2,400 | — | — | 29 | 2,429 | |||||||||||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | (29,665 | ) | (931 | ) | 43,423 | (6,933 | ) | 5,894 | ||||||||||||
FOREIGN EXCHANGE EFFECT ON CASH | 35,906 | 931 | (44,203 | ) | 7,256 | (110 | ) | |||||||||||||
CASH AND CASH EQUIVALENTS — BEGINNING OF P ERIOD | 6,370 | — | 40,446 | 162 | 46,978 | |||||||||||||||
CASH AND CASH EQUIVALENTS — END OF PERIOD | $ | 12,611 | $ | — | $ | 39,666 | $ | 485 | $ | 52,762 | ||||||||||
33
Table of Contents
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Overview
Lions Gate Entertainment Corp. (“Lionsgate,” the “Company,” “we,” “us” or “our”) is a diversified independent producer and distributor of motion pictures, television programming, home entertainment, family entertainment,video-on-demand and music content. We release approximately 18 to 22 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 77 hours of television programming on average each of the last three years. Our disciplined approach to acquisition, production, 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 more than 10,000 motion picture titles and television episodes and programs directly to retailers, video rental stores, and pay and free television channels in the U.S., UK and Ireland, and indirectly to other international markets through third parties. We own a minority interest in CinemaNow, Inc. (“CinemaNow”), an internetvideo-on-demand provider, Horror Entertainment, LLC (“FEARnet”), a multiplatform programming and content service provider, NextPoint, Inc. (“Break.com”), an online video entertainment service provider, and in Roadside Attractions, LLC (“Roadside”), an independent theatrical distribution company. Through June 30, 2007, we owned a 10% interest in Maple Pictures Corp. (“Maple”), a Canadian film and television distributor based in Toronto, Canada. During the quarter ended September 30, 2007, we entered into a transaction where we effectively gained control of Maple for financial reporting purposes. We are currently evaluating strategic alternatives as it relates to our investment in Maple. If this control becomes other than temporary, we would consolidate Maple in the future. We have distribution agreements with Maple through which we distribute our library and other titles in 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 theatrical release of motion pictures in the U.S. which are distributed to theatrical exhibitors on a picture by picture basis. The financial terms that we negotiate with our theatrical exhibitors generally provide that we receive a percentage of the box office results and are negotiated on a picture by picture basis. Home entertainment revenues are derived primarily from the sale of video and DVD releases of our own productions and acquired films, including theatrical releases and direct-to-video releases, to retail stores. In addition, we have revenue sharing arrangements with certain rental stores which generally provide that in exchange for a nominal or no upfront sales price we share in the rental revenues generated by each such store on a title by title basis. 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 include revenues from our UK subsidiary and from the licensing of our productions and acquired films to international markets on aterritory-by-territory basis. Our revenues are derived from the U.S., Canada and other foreign countries; none of the foreign countries individually comprised greater than 10% of total revenue. | |
• | Television Productions, which includes the licensing to domestic and international markets ofone-hour andhalf-hour drama series, television movies and mini-series and non-fiction programming and revenues from the sale of television production movies or series in other media including home entertainment. |
Our primary operating expenses include the following:
• | Direct Operating Expenses, which include amortization of production or acquisition costs, participation and residual expenses and provision for doubtful accounts. Participation costs represent contingent consideration payable based on the performance of the film to parties associated with the film, including producers, writers, directors or actors, etc. Residuals represent amounts payable to various unions or “guilds” such as the Screen Actors Guild, Directors Guild of America, and Writers Guild of America, based on the performance of the film in certain ancillary markets or based on the individual’s (i.e., actor, director, writer) salary level in the television market. | |
• | Distribution and Marketing Expenses, which primarily include the costs of theatrical “prints and advertising” and of video and DVD duplication and marketing. Theatrical print and advertising represent the costs of the theatrical prints delivered to theatrical exhibitors and advertising includes the advertising and |
34
Table of Contents
marketing cost associated with the theatrical release of the picture. Video and DVD duplication represent the cost of the video and DVD product and the manufacturing costs associated with creating the physical products. Video and DVD marketing costs represent the cost of advertising the product at or near the time of its release or special promotional advertising.
• | General and Administration Expenses, which include salaries and other overhead. |
Recent Developments
On November 1, 2007, the television business’ collective bargaining agreement with the Writers Guild of America (East and West) (the “WGA”) covering freelance writers expired. On November 5, 2007, the WGA began an industry-wide strike. We do not expect the strike to have a significant effect on our operating results for the remainder of 2008 fiscal year. Thereafter, we are currently unable to estimate the impact of the strike, if any.
Mandate Pictures, LLC. On September 10, 2007, the Company purchased all of the membership interests in Mandate Pictures, LLC, a Delaware limited liability company (“Mandate”). Mandate is an independent film producer and distributor. The Mandate acquisition brings to the Company additional experienced management personnel working within the motion picture business segment. In addition, the Mandate acquisition adds an independent film and distribution business to the Company’s motion picture business. The aggregate purchase price was approximately $60.2 million, comprised of $48.3 million in cash and 1,282,999 million in shares of the Company’s common stock to be issued and delivered over a period of 18 months pursuant to certain holdback provisions. Of the $48.3 million cash portion of the purchase price, $44.3 million was paid at closing, $1.2 million represented estimated direct transaction costs (to be paid to lawyers, accountants and other consultants), and $2.8 million represented the remaining estimated cash consideration that will be paid within the next 12 month period. The value assigned to the shares for purposes of recording the acquisition was $11.8 million and was based on the closing price of the Company’s common stock on the date of acquisition. In addition, the Company may be obligated to pay additional amounts pursuant to the purchase agreement should certain films or derivative works meet certain target performance thresholds. This contingent consideration, which is directly based on the performance of these films, will be accounted for similar to other film participation arrangements. The amount of contingent consideration ultimately estimated to be paid, if anything, will be amortized to direct operating expense in the proportion that the year’s revenue bears to management’s estimate of ultimate revenue at the beginning of the year.
The Mandate acquisition was accounted for as a purchase, with the results of operations of Mandate consolidated from September 10, 2007. Goodwill of $37.1 million represents the excess of purchase price over the fair value of the net identifiable tangible and intangible assets acquired.
SGF. On July 30, 2007, the Company entered into a four-year filmed entertainment slate financing agreement with Société Générale de Financement du Québec (“SGF”), the Québec provincial government’s investment arm. SGF will finance up to 35% of production costs of television and feature film productions produced in Québec for a four year period for an aggregate investment of up to $140 million, and the Company will advance all amounts necessary to fund the remaining budgeted costs. The maximum aggregate of budgeted costs over the four-year period will be $400 million, including the Company’s portion, but no more than $100 million per year. In connection with this agreement, the Company and SGF will proportionally share in the proceeds derived from the funded productions after the Company deducts a distribution fee, recoups all distribution expenses and releasing costs, and pays all applicable participations and residuals.
NextPoint, Inc. On June 29, 2007, the Company purchased a 42% equity interest or 21,000,000 shares of the Series B Preferred Stock of NextPoint, Inc. (“Break.com”), an online video entertainment service provider operating under the branding of “Break.com.” The aggregate purchase price was approximately $21.4 million, which included $0.5 million of transaction costs, consisted of the issue of 1,890,189 of the Company’s common shares. The Company is accounting for the investment in Break.com using the equity method. The Company has a call option which is exercisable at any time from June 29, 2007 until the earlier of 30 months after June 29, 2007 or a year after a change of control, as narrowly defined, to purchase all, but not less than all, of the remaining 58% equity interests (excluding any subsequent dilutive events), including in-the-money stock options, warrants and other rights, of Break.com for $58 million in cash or common stock, at the Company’s option. Due to the timing in availability of financial statements from Break.com, the Company is recording its share of the Break.com results on a one quarter
35
Table of Contents
lag. The Company recorded a loss of less than $0.1 million in its equity interests associated with Break.com’s operations through June 30, 2007 in the consolidated statement of operations for the three and six months ended September 30, 2007. The investment in Break.com is $21.4 million as of September 30, 2007 (2006 — nil).
Theatrical Slate Financing. On May 25, 2007, the Company, through a series of agreements, closed a theatrical slate funding arrangement. Under this arrangement, Pride Pictures LLC (“Pride”), an unrelated entity, will fund, generally, 50% of the Company’s production, acquisition, marketing and distribution costs of theatrical feature films up to an aggregate of approximately $196 million, net of transaction costs. The funds available from Pride are generated from the issuance by Pride of $35 million of subordinated debt instruments, $35 million of equity and $134 million from a senior credit facility, which is subject to a borrowing base. The Company is not a party to the Pride debt obligations or their senior credit facility, and provides no guarantee of repayment of these obligations. The percentage of the contribution may vary on certain pictures. The slate of films covered by the arrangement is expected to be comprised of 23 films over the next three years. Pride will participate in a pro rata portion of the pictures net profits or losses similar to a co-production arrangement based on the portion of costs funded. The Company continues to distribute the pictures covered by the arrangement with a portion of net profits after all costs and the Company’s distribution fee being distributed to Pride based on their pro rata contribution to the applicable costs similar to a back-end participation on a film.
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. As described more fully below, these estimates bear the risk of change due to the inherent uncertainty attached to the estimate. For example, accounting for films and television programs requires the Company to estimate future revenue and expense amounts which, due to the inherent uncertainties involved in making such estimates, are likely to differ to some extent from actual results. For a summary of all of our accounting policies, including the accounting policies discussed below, see note 2 to our March 31, 2007 audited consolidated financial statements.
Generally Accepted Accounting Principles (“GAAP”). Our consolidated financial statements have been prepared in accordance with U.S. GAAP.
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 Position00-2 “Accounting by Producers or Distributors of Films” (“SoP00-2”). SoP00-2 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 SoP00-2. 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 20 years from the date of acquisition.
The Company’s 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 residualsand/or write-down of all or a portion of the unamortized costs of the film or television program to its estimated fair value. The Company’s management estimates the ultimate revenue based on experience with similar titles or title genre, the general public appeal of the cast, actual performance (when available) at the box office or in markets currently being exploited, and other factors such as the quality and acceptance of motion pictures or programs that our competitors release into the marketplace at or near the same time, critical reviews, general economic conditions and other tangible and intangible factors, many of which we do not control and which may change. In the normal course of our business, some films and titles are more successful than anticipated and some are less successful. Accordingly, we update our estimates of ultimate
36
Table of Contents
revenue and participation costs based upon the actual results achieved or new information as to anticipated revenue performance such as (for home video revenues) initial orders and demand from retail stores when it becomes available. An increase in the ultimate revenue will generally result in a lower amortization rate while a decrease in the ultimate revenue will generally result in a higher amortization rate and periodically results in an impairment requiring a write down of the film cost to the title’s fair value. These write downs are included in amortization expense within direct operating expenses in our consolidated statements of operations.
Revenue Recognition. Revenue from the sale or licensing of films and television programs is recognized upon meeting all recognition requirements of SoP00-2. 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 (defined as contractual media release restrictions), 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 atitle-by-title basis, based on management’s assessment of the relative fair value of each title.
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.
Reserves. Revenues are recorded net of estimated returns and other allowances. We estimate reserves for video returns based on previous returns and our estimated expected future returns related to current period sales on atitle-by-title basis in each of the video businesses. Factors affecting actual returns include limited retail shelf space at various times of the year, success of advertising or other sales promotions, the near term release of competing titles, among other factors. We believe that our estimates have been materially accurate in the past; however, due to the judgment involved in establishing reserves, we may have adjustments to our historical estimates in the future.
We estimate provisions for accounts receivable based on historical experience and relevant facts and information regarding the collectability of the accounts receivable. In performing this evaluation, significant judgments and estimates are involved, including an analysis of specific risks on acustomer-by-customer basis for our larger customers and an analysis of the length of time receivables have been past due. The financial condition of a given customer and its ability to pay may change over time and could result in an increase or decrease to our allowance for doubtful accounts, which, when the impact of such change is material, is disclosed in our discussion on direct operating expenses elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Income Taxes. The Company is subject to federal and state income taxes in the U.S., and in several foreign jurisdictions in which we operate. We account for income taxes according to SFAS No. 109, “Accounting for Income Taxes” (SFAS No. 109). SFAS No. 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. Because of our historical operating losses, we have provided a valuation allowance against our net deferred tax assets. When we have a history of profitable operations sufficient to demonstrate that it is more likely than not that our deferred tax assets will be realized, the valuation allowance will be reversed. However, this assessment of our planned use of our deferred tax assets is an estimate which could change in the future depending upon the generation of taxable income in amounts sufficient to realize our deferred tax assets.
Goodwill. 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
37
Table of Contents
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, 2006. 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. The estimates of fair value include consideration of the future projected operating results and cash flows of the reporting unit. Such projections could be different than actual results. Should actual results be significantly less than estimates, the value of our goodwill could be impaired in the future.
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. These estimates and assumptions are refined with adjustments recorded to goodwill as information is gathered and final appraisals are completed over the allocation period allowed under SFAS No. 141. The changes in these estimates could impact the amount of assets, including goodwill and liabilities, ultimately recorded on our balance sheet as a result of an acquisition and could impact our operating results subsequent to such acquisition. We believe that our estimates have been materially accurate in the past.
Recent Accounting Pronouncements
FASB Issued Interpretation No. 48. On July 13, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN No. 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN No. 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006.
Statement of Financial Accounting Standards No. 157. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. The Company will be required to adopt the provisions on SFAS No. 157 on April 1, 2008. The Company is currently evaluating the impact of adopting the provisions of SFAS No. 157 but does not believe that the adoption of SFAS No. 157 will materially impact its financial position, cash flows, or results of operations.
Statement of Financial Accounting Standards No. 159. In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115,” (“SFAS No. 159”), which is effective for fiscal years beginning after November 15, 2007. SFAS No. 159 permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The Company is currently evaluating the potential impact of SFAS No. 159.
Results of Operations
Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
Consolidated revenues of $343.5 million this quarter increased $125.3 million, or 57.4%, compared to $218.2 million in the prior year’s quarter. Motion pictures revenue of $234.4 million this quarter increased $47.8 million, or 25.6%, compared to $186.6 million in the prior year’s quarter. Television revenues of
38
Table of Contents
$109.1 million this quarter increased $77.5 million, or 245.3%, compared to $31.6 million in the prior year’s quarter.
Motion Pictures Revenue
The increase in motion pictures revenue this quarter was mainly attributable to increases in theatrical revenue, international revenue, and video revenue. The following table sets forth the components of revenue for the motion pictures reporting segment for the three-month periods ended September 30, 2007 and 2006:
Three Months | Three Months | |||||||||||||||||||
Ended | Ended | |||||||||||||||||||
September 30, | September 30, | Increase (Decrease) | ||||||||||||||||||
2007 | 2006 | Amount | Percent | |||||||||||||||||
(Amounts in millions) | ||||||||||||||||||||
Motion Pictures | ||||||||||||||||||||
Theatrical | $ | 42.4 | $ | 20.5 | $ | 21.9 | 106.8 | % | ||||||||||||
Video | 122.3 | 115.1 | 7.2 | 6.3 | % | |||||||||||||||
Television | 37.3 | 33.4 | 3.9 | 11.7 | % | |||||||||||||||
International | 31.1 | 17.1 | 14.0 | 81.9 | % | |||||||||||||||
Other | 1.3 | 0.5 | 0.8 | 160.0 | % | |||||||||||||||
$ | 234.4 | $ | 186.6 | $ | 47.8 | 25.6 | % | |||||||||||||
The following table sets forth the titles contributing significant motion pictures revenue for the three-month periods ended September 30, 2007 and 2006:
Three Months Ended September 30, | ||||||
2007 | 2006 | |||||
Theatrical and Video | Theatrical and Video | |||||
Title | Release Date | Title | Release Date | |||
Theatrical: | Theatrical: | |||||
3:10 to Yuma Bratz Good Luck Chuck War | September 2007 August 2007 September 2007 August 2007 | Crank The Descent | September 2006 August 2006 | |||
Video: | Video: | |||||
Bratz Kidz Sleepover Adventure Bug Delta Farce Doctor Strange Pride The Condemned | July 2007 September 2007 September 2007 August 2007 June 2007 September 2007 | Akeelah and the Bee Crash Lord of War Madea Goes to Jail Madea’s Family Reunion Ultimate Avengers 2 Waiting Why Did I Get Married (Stage Play) | August 2006 September 2005 January 2006 June 2006 June 2006 August 2006 February 2006 June 2006 |
39
Table of Contents
Television: | Television: | |
Crank | In the Mix | |
Diary of A Mad Black Woman | Lord of War | |
Employee of the Month | Saw 2 | |
Saw 3 | Waiting | |
International: | International: | |
Saw 2 | Crank | |
Saw 3 | Dirty Dancing - Stage Play | |
The U.S. vs. John Lennon | Hard Candy | |
War | Saw 2 The Lost City Undiscovered |
Theatrical revenue of $42.4 million increased $21.9 million, or 106.8%, in this quarter as compared to the prior year’s quarter due to the performance of the significant theatrical releases in the current quarter, as well as an increase in the number of theatrical releases in the current quarter. In this quarter, the titles listed in the above table as contributing significant theatrical revenue in the current quarter represented individually between 8% and 42% of total theatrical revenue and, in the aggregate, approximately 92% of total theatrical revenue. In the prior year’s quarter, the titles listed in the above table as contributing significant theatrical revenue represented, in the aggregate, approximately 99% of total theatrical revenue.
Video revenue of $122.3 million increased $7.2 million, or 6.3%, in this quarter as compared to the prior year’s quarter. The increase is primarily due to an increase in revenue from titles that individually contributed less than 2% of total video revenue and to a lesser extent, titles which contributed individually more than 2% of total video revenue in the current quarter as compared to the prior year’s quarter. The titles listed above as contributing significant video revenue in the current quarter represented individually between 2% to 12% of total video revenue and, in the aggregate, 35%, or $42.9 million of total video revenue for the quarter. In the prior year’s quarter, the titles listed above as contributing significant video revenue represented individually between 2% to 12% of total video revenue and, in the aggregate, 36%, or $41.7 million of total video revenue for the quarter. In the current quarter, $79.4 million, or 65%, of total video revenue was contributed by titles that individually make up less than 2% of total video revenue, and in the prior year’s quarter, this amounted to $73.4 million, or 64%, of total video revenue.
Television revenue included in motion pictures revenue of $37.3 million in this quarter increased $3.9 million, or 11.7%, compared to the prior year’s quarter. The increase is due to the performance of the significant titles listed in the table above in the current quarter as compared to the prior year’s quarter. In this quarter, the titles listed above as contributing significant television revenue represented individually between 11% to 33% of total television revenue and, in the aggregate, 83% of total television revenue for the quarter. In the prior year’s quarter, the titles listed above as contributing significant television revenue represented individually between 8% to 34% of total television revenue and, in the aggregate, 73% of total television revenue for the quarter.
International revenue of $31.1 million increased $14.0 million, or 81.9%, in this quarter as compared to the prior year’s quarter. Lionsgate UK, established from the acquisition of Redbus Film Distribution Ltd. and Redbus Pictures Ltd. (“Redbus”) in fiscal 2006, contributed $6.9 million, or 22.2% of international revenue in the current quarter, which included revenues from3:10 to Yuma,Saw III,The Contract,The Lives of Others, andThe Hamiltons, compared to $6.1 million, or 35.7% , of total international revenue in the prior year’s quarter. In this quarter, the titles listed in the table above as contributing significant international revenue, excluding revenue generated from these titles by Lionsgate UK, represented individually between 4% to 18% of total international revenue and, in the aggregate, 38% of total international revenue for the quarter. In the prior year’s quarter, the titles listed in the table above as contributing significant revenue represented individually between 3% to 9% of total international revenue and, in the aggregate, 32% of total international revenue for the quarter.
40
Table of Contents
Television Revenue
The following table sets forth the components and the changes in the components of revenue that make up television production revenue for the three-month periods ended September 30, 2007 and 2006:
Three Months | Three Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | Increase (Decrease) | ||||||||||||||
2007 | 2006 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
Television Production | ||||||||||||||||
Domestic series licensing | $ | 75.9 | $ | 25.0 | $ | 50.9 | 203.6 | % | ||||||||
Domestic television movies and miniseries | 15.8 | 0.2 | 15.6 | NM | ||||||||||||
International | 9.3 | 1.4 | 7.9 | 564.3 | % | |||||||||||
Video releases of television production | 7.9 | 4.9 | 3.0 | 61.2 | % | |||||||||||
Other | 0.2 | 0.1 | 0.1 | 100.0 | % | |||||||||||
$ | 109.1 | $ | 31.6 | $ | 77.5 | 245.3 | % | |||||||||
(NM) | Percentage not meaningful. |
Domestic series licensing includes revenues from episodic television deliveries and revenues from the Company’s television syndication subsidiary Debmar-Mercury, LLC (“Debmar-Mercury”). The following table sets forth the number of television episodes and hours delivered in the three months ended September 30, 2007 and 2006, respectively, included in domestic series licensing:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||
September 30, 2007 | September 30, 2006 | |||||||||||||||||||||||||
Episodes | Hours | Episodes | Hours | |||||||||||||||||||||||
The Dead Zone Season 5 | 1hr | 10 | 10.0 | Dirty Dancing Reality TV Series | 1hr | 5 | 5.0 | |||||||||||||||||||
Mad Men | 1hr | 11 | 11.0 | Lovespring International | 1/2hr | 9 | 4.5 | |||||||||||||||||||
Wildfire Season 4 | 1hr | 7 | 7.0 | I Pity The Fool | 1/2hr | 3 | 1.5 | |||||||||||||||||||
Weeds Season 3 | 1/2hr | 11 | 5.5 | Weeds Season 2 | 1/2hr | 10 | 5.0 | |||||||||||||||||||
39 | 33.5 | 27 | 16.0 | |||||||||||||||||||||||
In addition to the above, revenues included in domestic series licensing from the Company’s television syndication subsidiary, Debmar-Mercury, increased $13.5 million to $17.8 million from $4.3 million in the prior year’s quarter due to television series such asHouse of PayneandSouth Park.
Domestic television movies and miniseries increased primarily due to the delivery of eight episodes of the miniseriesThe Kill Pointin the current quarter as compared to nil in the prior year’s quarter.
International revenue of $9.3 million increased by $7.9 million in the current quarter mainly due to international revenue fromThe Dead Zone,The Lost Roomminiseries, andThe Dresden Files, compared to international revenue of $1.4 million in the prior year’s quarter fromWildfire Seasons 1and2.
41
Table of Contents
Direct Operating Expenses
The following table sets forth direct operating expenses by segment for the three months ended September 30, 2007 and 2006:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 30, 2007 | September 30, 2006 | |||||||||||||||||||||||
Motion | Motion | |||||||||||||||||||||||
Pictures | Television | Total | Pictures | Television | Total | |||||||||||||||||||
(Amounts in millions) | ||||||||||||||||||||||||
Direct operating expenses | ||||||||||||||||||||||||
Amortization of films and television programs | $ | 44.3 | $ | 81.4 | $ | 125.7 | $ | 28.7 | $ | 20.1 | $ | 48.8 | ||||||||||||
Participation and residual expense | 39.7 | 16.3 | 56.0 | 38.9 | 4.9 | 43.8 | ||||||||||||||||||
Amortization of acquired intangible assets | 0.2 | — | 0.2 | 0.2 | — | 0.2 | ||||||||||||||||||
Other expenses | 0.5 | 0.1 | 0.6 | 1.7 | 0.2 | 1.9 | ||||||||||||||||||
$ | 84.7 | $ | 97.8 | $ | 182.5 | $ | 69.5 | $ | 25.2 | $ | 94.7 | |||||||||||||
Direct operating expenses as a percentage of segment revenues | 36.1 | % | 89.6 | % | 53.1 | % | 37.2 | % | 79.7 | % | 43.4 | % |
Direct operating expenses include amortization, participation and residual expenses and other expenses. Direct operating expenses of the motion pictures segment of $84.7 million for this quarter were 36.1% of motion pictures revenue, compared to $69.5 million, or 37.2% of motion pictures revenue for the prior year’s quarter. The slight decrease in direct operating expense of the motion pictures segment in the quarter as a percent of revenue is due to the change in the mix of titles generating revenue compared to the prior year’s quarter. Direct operating expenses of the motion pictures segment included charges for write downs and reserves related to investments in film of $4.2 million and $0.9 million in the current quarter and prior year quarter, respectively, due to the lower than anticipated actual performance or previously expected performance of certain titles. Included in these write downs and reserves is a $2.0 million charge resulting from concerns over the collectability of amounts due pursuant to a distribution agreement. Other expenses in the three month period ended September 30, 2006 included a provision for bad debt of approximately $1.7 million related to a large retail customer that declared bankruptcy.
Direct operating expenses of the television segment of $97.8 million for this quarter were 89.6% of television revenue, compared to $25.2 million, or 79.7% of television revenue for the prior year’s quarter. The increase in direct operating expense of the television segment in the current quarter is due primarily to the increase in television production revenue in this quarter compared to the prior year’s quarter. In addition the increase in direct operating expense of the television segment in the quarter as a percent of revenue is also due to the change in the mix of titles generating revenue compared to the prior year’s quarter.
42
Table of Contents
Distribution and Marketing Expenses
The following table sets forth distribution and marketing expenses by segment for the three months ended September 30, 2007 and 2006
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 30, 2007 | September 30, 2006 | |||||||||||||||||||||||
Motion | Motion | |||||||||||||||||||||||
Pictures | Television | Total | Pictures | Television | Total | |||||||||||||||||||
(Amounts in millions) | ||||||||||||||||||||||||
Distribution and marketing expenses | ||||||||||||||||||||||||
Theatrical | $ | 122.5 | $ | — | $ | 122.5 | $ | 57.1 | $ | — | $ | 57.1 | ||||||||||||
Home Entertainment | 49.8 | 2.1 | 51.9 | 42.8 | 1.0 | 43.8 | ||||||||||||||||||
Television | 0.7 | 0.8 | 1.5 | 0.2 | 1.2 | 1.4 | ||||||||||||||||||
International | 11.8 | 1.3 | 13.1 | 9.8 | 0.7 | 10.5 | ||||||||||||||||||
Other | — | — | — | 0.5 | — | 0.5 | ||||||||||||||||||
$ | 184.8 | $ | 4.2 | $ | 189.0 | $ | 110.4 | $ | 2.9 | $ | 113.3 | |||||||||||||
The majority of distribution and marketing expenses relate to the motion pictures segment. Theatrical prints and advertising (“P&A”) in the motion pictures segment in this quarter of $122.5 million increased $65.4 million, or 114.5%, compared to $57.1 million in the prior year’s quarter. Domestic theatrical P&A from the motion pictures segment in this quarter included P&A incurred on the release of titles such as3:10 to Yuma, Bratz, Good Luck Chuck andWar, which individually represented between 16% and 28% of total theatrical P&A and, in the aggregate, accounted for 85% of the total theatrical P&A. Theatrical P&A in the prior year’s quarter included P&A incurred on the release of titles such asCrank, The Descent,andEmployee of the Monthdomestically, which individually represented between 22% and 37% of total theatrical P&A and, in the aggregate, accounted for 90% of total theatrical P&A.Employee of the Monthwas released theatrically subsequent to the quarter ended September 30, 2006, on October 6, 2006.
Home entertainment distribution and marketing costs on motion pictures and television product in this quarter of $51.9 million increased $8.1 million, or 18.5%, compared to $43.8 million in the prior year’s quarter. Home entertainment distribution and marketing costs as a percentage of video revenues was 39.9% and 36.5% in the current quarter and prior year’s quarter, respectively. This increase is mainly due to higher video marketing costs in relation to revenues generated in the current quarter in comparison to the prior year’s quarter.
International distribution and marketing expenses in this quarter included $9.9 million of distribution and marketing costs from Lionsgate UK, compared to $8.0 million in the prior year’s quarter. Current quarter distribution and marketing expenses of the television segment included $0.6 million from the July 3, 2006 acquisition of Debmar-Mercury, compared to $1.2 million in the prior year’s quarter.
General and Administrative Expenses
The following table sets forth general and administrative expenses by segment for the three months ended September 30, 2007 and 2006:
Three Months Ended | Three Months Ended | Increase (Decrease) | ||||||||||||||
September 30, 2007 | September 30, 2006 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
General and Administrative Expenses | ||||||||||||||||
Motion Pictures | $ | 8.3 | $ | 6.4 | $ | 1.9 | 29.7 | % | ||||||||
Television | 1.9 | 0.9 | 1.0 | 111.1 | % | |||||||||||
Corporate | 15.7 | 14.4 | 1.3 | 9.0 | % | |||||||||||
$ | 25.9 | $ | 21.7 | $ | 4.2 | 19.4 | % | |||||||||
43
Table of Contents
The increase in motion pictures general and administrative expenses is primarily due to an increase in salary and related expenses of approximately $1.6 million.
The increase in television general and administrative expenses is primarily due to an increase in salary and related expenses of approximately $0.6 million, and an increase of professional fees and other general overhead costs of approximately $0.4 million.
The increase in corporate general and administrative expenses is primarily due to an increase in professional fees of approximately $1.3 million. Salaries and related expenses increased approximately $0.2 million, offset by a decrease in rent and facility expenses of $0.2 million. In this quarter, $1.5 million of production overhead was capitalized, compared to $1.6 million in the prior year’s quarter.
The following table sets forth corporate stock based compensation expense (benefit) for the three months ended September 30, 2007 and 2006:
Three Months Ended | Three Months Ended | Increase (Decrease) | ||||||||||||||
September 30, 2007 | September 30, 2006 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
Corporate Stock Based Compensation Expense (Benefit): * | ||||||||||||||||
Stock options | $ | 0.9 | $ | 0.4 | $ | 0.5 | 125.0 | % | ||||||||
Restricted share units | 2.9 | 0.9 | 2.0 | 222.2 | % | |||||||||||
Stock appreciation rights | (0.6 | ) | 1.9 | (2.5 | ) | (131.6 | )% | |||||||||
$ | 3.2 | $ | 3.2 | $ | — | NM | ||||||||||
(NM) | Percentage not meaningful. | |
(*) | The above table reflects only corporate stock based compensation expense (benefit) and not motion picture or television stock based compensation expense (benefit), which amounted to $0.1 million and nil, respectively. |
At September 30, 2007, as disclosed in note 12 to the unaudited condensed consolidated financial statements, there were unrecognized compensation costs of approximately $29.5 million related to stock options and restricted stock units previously granted, including the first annual installment of share grants that were subject to performance targets, which will be expensed over the remaining vesting periods. At September 30, 2007 there are 881,666 shares of restricted stock units awarded to four key executive officers which will be subject to performance targets to be set by the Company’s compensation committee. These restricted stock units will vest in three, four, and five annual installments assuming annual performance targets to be set by the Company’s compensation committee have been met. The fair value of the 881,666 shares whose performance targets have not been set was $9.1 million, based on the market price of the Company’s common stock as of September 30, 2007. The market value will be remeasured when the performance criteria are set and the value will be expensed over the remaining vesting periods once it becomes probable that the performance targets will be satisfied.
Depreciation and Other Expenses (Income)
Depreciation of $1.0 million this quarter increased $0.4 million, or 66.7%, from $0.6 million in the prior year’s quarter.
Interest expense of $4.2 million this quarter decreased $0.7 million, or 14.3%, from prior year’s quarter of $4.9 million.
Gain on sale of equity securities of $2.8 million for this quarter resulted primarily from the sale of shares held and purchased in Magna, an Australian film distributor.
Interest and other income was $2.6 million for the quarter ended September 30, 2007, compared to $2.3 million in the prior year’s quarter. Interest and other income this quarter was earned on the cash balance and
44
Table of Contents
available-for-sale investments held during the three months ended September 30, 2007, which were higher than in the prior year’s quarter.
The equity interests in this quarter included a $1.0 million loss from the Company’s 33.33% equity interests in Horror Entertainment, LLC, a $0.2 million loss from the Company’s 10% equity interest in Maple, and a less than $0.1 million loss from the Company’s 42% equity interest in Break.com. For the three months ended September 30, 2006, the equity interests consisted of a loss of $0.1 million from the Company’s 10% equity interest in Maple and a loss of $0.3 million from the Company’s 18.8% equity interest in CinemaNow.
The Company had an income tax expense of $1.4 million or (2.6%) of loss before income taxes in the three months ended September 30, 2007, compared to a benefit of $0.9 million in the three months ended September 30, 2006. The tax expense reflected in the current quarter is primarily attributable to U.S. state taxes. The Company’s actual annual effective tax rate will differ from the statutory federal rate as a result of several factors, including changes in the valuation allowance against net deferred tax assets, non-temporary differences, foreign income taxed at different rates, and state and local income taxes. Income tax loss carryforwards amount to approximately $116.4 million for U.S. federal income tax purposes available to reduce income taxes over twenty years, $80.4 million for U.S. state income tax purposes available to reduce income taxes over future years with varying expirations, $29.2 million for Canadian income tax purposes available to reduce income taxes over eight years, and $13.7 million for UK income tax purposes available indefinitely to reduce future income taxes.
Net loss for the three months ended September 30, 2007 was $56.2 million, or basic and diluted net loss per common share of $0.47 on 119.2 million weighted average shares outstanding. This compares to net loss for the three months ended September 30, 2006 of $14.4 million or basic and diluted net loss per common share of $0.14 on 104.9 million weighted average common shares outstanding.
Six Months Ended September 30, 2007 Compared to Six Months Ended September 30, 2006
Consolidated revenues for the six months ended September 30, 2007 of $542.2 million increased $151.6 million, or 38.8%, compared to $390.6 million in the six months ended September 30, 2006. Motion pictures revenue of $404.7 million for the current six-month period increased $52.9 million, or 15.0%, compared to $351.8 million in the prior year’s period. Television revenues of $137.5 million this period increased $98.7 million, or 254.4%, compared to $38.8 million in the prior year’s period.
Motion Pictures Revenue
The increase in motion pictures revenue this period was mainly attributable to increases in theatrical revenue, international revenue, and television revenue, slightly offset by a small decrease in video revenue. The following table sets forth the components of revenue for the motion pictures reporting segment for the six-month periods ended September 30, 2007 and 2006:
Six Months | Six Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | Increase (Decrease) | ||||||||||||||
2007 | 2006 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
Motion Pictures | ||||||||||||||||
Theatrical | $ | 61.4 | $ | 39.1 | $ | 22.3 | 57.0 | % | ||||||||
Video | 226.1 | 229.8 | (3.7 | ) | (1.6 | )% | ||||||||||
Television | 59.7 | 48.2 | 11.5 | 23.9 | % | |||||||||||
International | 53.8 | 32.7 | 21.1 | 64.5 | % | |||||||||||
Other | 3.7 | 2.0 | 1.7 | 85.0 | % | |||||||||||
$ | 404.7 | $ | 351.8 | $ | 52.9 | 15.0 | % | |||||||||
45
Table of Contents
The following table sets forth the titles contributing significant motion pictures revenue for the six-month periods ended September 30, 2007 and 2006:
Six Months Ended September 30, | ||||||
2007 | 2006 | |||||
Theatrical and Video | Theatrical and Video | |||||
Title | Release Date | Title | Release Date | |||
Theatrical: | Theatrical: | |||||
3:10 to Yuma Bratz Delta Farce Good Luck Chuck Hostel 2 War | September 2007 August 2007 May 2007 September 2007 June 2007 August 2007 | Akeelah and the Bee Crank Larry the Cable Guy See No Evil The Descent | April 2006 September 2006 March 2006 May 2006 August 2006 | |||
Video: | Video: | |||||
Bug Daddy’s Little Girls Delta Farce Happily N’Ever After Pride The Condemned | September 2007 June 2007 September 2007 May 2007 June 2007 September 2007 | Akeelah and the Bee Crash Lord of War Madea Goes to Jail Madea’s Family Reunion Saw 2 Ultimate Avengers 2 Waiting Why Did I Get Married (Stage Play) | August 2006 September 2005 January 2006 June 2006 June 2006 February 2006 August 2006 February 2006 June 2006 |
Television: | Television: | |
Crank | Crash | |
Diary of a Mad Black Woman | Devil’s Rejects | |
Employee of the Month | Lord of War | |
Saw 3 | Saw 2 | |
The Descent | Waiting | |
International: | International: | |
Saw 2 | Crank | |
Saw 3 | Hard Candy | |
The Punisher | Saw 2 | |
War | Undiscovered |
Theatrical revenue of $61.4 million increased $22.3 million, or 57.0%, in this period as compared to the prior year’s period due to the performance of the significant titles listed above, as well as the mix of titles generating theatrical revenue for the current six-month period. The titles listed in the above table as contributing significant theatrical revenue in the current six-month period represented individually between 6% and 29% of total theatrical revenue and, in the aggregate, approximately 81% of total theatrical revenue. In the prior year’s period, the titles listed in the above table as contributing significant theatrical revenue represented individually between 7% and 26% of total theatrical revenue and, in the aggregate, approximately 95% of total theatrical revenue.
Video revenue of $226.1 million decreased $3.7 million, or 1.6%, in this period as compared to the prior year’s period. The decrease is due to a decrease in revenues generated from the significant titles listed in the above table as compared to the prior year’s period. The titles listed above as contributing significant video revenue in the current period represented individually between 2% to 9% of total video revenue, and in the aggregate, 36% or $81.6 million of total video revenue for the period. In the prior year’s period, the titles listed above as contributing significant video revenue represented individually between 2% to 15% of total video revenue and, in the aggregate, 46% or $104.9 million of total video revenue for the period. In the current period $144.5 million, or 64%, of total
46
Table of Contents
video revenue was contributed by titles that individually make up less than 2% of total video revenue, and in the prior year’s period this amounted to $124.9 million, or 54%, of total video revenue.
Television revenue included in motion pictures revenue of $59.7 million in this period increased $11.5 million, or 23.9%, compared to the prior year’s period. The increase is due to the performance of the significant titles listed above in the current period as compared to the prior year’s period. In this period, the titles listed above as contributing significant television revenue represented individually between 7% to 23% of total television revenue and, in the aggregate, 75% of total television revenue for the period. In the prior year’s period the titles listed above as contributing significant television revenue represented individually between 6% to 24% of total television revenue and, in the aggregate, 64% of total television revenue for the period.
International revenue of $53.8 million increased $21.1 million or 64.5% in this period as compared to the prior year’s period. Lionsgate UK, established from the acquisition of Redbus in fiscal 2006, contributed $15.0 million, or 27.9% of international revenue in the current period, which included revenues fromEmployee of the Month, Saw III, The Lives of Others,andThe Contract, compared to $12.3 million, or 37.6%, of total international revenue in the prior year’s period. In this period, the titles listed in the table above as contributing significant international revenue, excluding revenue generated from these titles by Lionsgate UK, represented individually between 4% to 13% of total international revenue and, in the aggregate, 28% of total international revenue for the period. In the prior year’s period the titles listed in the table above as contributing significant revenue represented individually between 3% to 14% of total international revenue and, in the aggregate, 25% of total international revenue for the period.
Television Revenue
The following table sets forth the components of revenue that make up television production revenue for the six-month periods ended September 30, 2007 and 2006:
Six Months | Six Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | Increase (Decrease) | ||||||||||||||
2007 | 2006 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
Television Production | ||||||||||||||||
Domestic series licensing | $ | 95.9 | $ | 30.5 | $ | 65.4 | 214.4 | % | ||||||||
Domestic television movies and miniseries | 15.8 | 0.3 | 15.5 | NM | ||||||||||||
International | 15.5 | 1.6 | 13.9 | 868.8 | % | |||||||||||
Video releases of television production | 10.1 | 6.2 | 3.9 | 62.9 | % | |||||||||||
Other | 0.2 | 0.2 | — | 0.0 | % | |||||||||||
$ | 137.5 | $ | 38.8 | $ | 98.7 | 254.4 | % | |||||||||
(NM) | Percentage not meaningful. |
47
Table of Contents
Domestic series licensing includes revenues from episodic television deliveries and revenues from the Company’s television syndication subsidiary Debmar-Mercury. The following table sets forth the number of television episodes and hours delivered in the six months ended September 30, 2007 and 2006, respectively, included in domestic series licensing:
Six Months | Six Months | |||||||||||||||||||||||||
Ended | Ended | |||||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||||||||
Episodes | Hours | Episodes | Hours | |||||||||||||||||||||||
The Dead Zone Season 5 | 1hr | 13 | 13.0 | Dirty Dancing Reality TV Series | 1hr | 5 | 5.0 | |||||||||||||||||||
Dresden Files | 1hr | 2 | 2.0 | Wildfire Season 2 | 1hr | 1 | 1.0 | |||||||||||||||||||
Mad Men | 1hr | 11 | 11.0 | Lovespring International | 1/2hr | 13 | 6.5 | |||||||||||||||||||
Wildfire Season 4 | 1hr | 11 | 11.0 | I Pity The Fool | 1/2hr | 3 | 1.5 | |||||||||||||||||||
Weeds Season 3 | 1/2hr | 12 | 6.0 | Weeds Season 2 | 1/2hr | 12 | 6.0 | |||||||||||||||||||
49 | 43.0 | 34 | 20.0 | |||||||||||||||||||||||
In addition to the above, revenues included in domestic series licensing from the Company’s television syndication subsidiary Debmar-Mercury increased $22.0 million to $26.3 million from $4.3 million in the prior year’s quarter due to television series such asHouse of PayneandSouth Park.
Domestic television movies and miniseries increased primarily due to the delivery of eight episodes of the miniseriesThe Kill Pointin the current six-month period, as compared to nil in the prior year period.
International revenue of $15.5 million increased by $13.9 million in the current period mainly due to international revenue fromHidden Palms, Lovespring International, The Dresden FilesandThe Dead Zone, compared to international revenue of $1.6 million in the prior year’s period fromWildfire Seasons 1and2.
Direct Operating Expenses
The following table sets forth direct operating expenses by segment for the six months ended September 30, 2007 and 2006:
Six Months Ended | Six Months Ended | |||||||||||||||||||||||
September 30, 2007 | September 30, 2006 | |||||||||||||||||||||||
Motion | Motion | |||||||||||||||||||||||
Pictures | Television | Total | Pictures | Television | Total | |||||||||||||||||||
(Amounts in millions) | ||||||||||||||||||||||||
Direct operating expenses | ||||||||||||||||||||||||
Amortization of films and television programs | $ | 73.5 | $ | 102.1 | $ | 175.6 | $ | 55.7 | $ | 26.3 | $ | 82.0 | ||||||||||||
Participation and residual expense | 71.0 | 23.0 | 94.0 | 75.3 | 5.7 | 81.0 | ||||||||||||||||||
Amortization of acquired intangible assets | 0.3 | — | 0.3 | 0.5 | — | 0.5 | ||||||||||||||||||
Other expenses | (0.6 | ) | 0.2 | (0.4 | ) | — | (0.2 | ) | (0.2 | ) | ||||||||||||||
$ | 144.2 | $ | 125.3 | $ | 269.5 | $ | 131.5 | $ | 31.8 | $ | 163.3 | |||||||||||||
Direct operating expenses as a percentage of segment revenues | 35.6 | % | 91.1 | % | 49.7 | % | 37.4 | % | 82.0 | % | 41.8 | % |
Direct operating expenses include amortization, participation and residual expenses and other expenses. Direct operating expenses of the motion pictures segment of $144.2 million for this period were 35.6% of motion pictures revenue, compared to $131.5 million, or 37.4% of motion pictures revenue for the prior year’s period. The decrease in direct operating expense of the motion pictures segment in the current period as a percent of revenue is due to the change in the mix of titles generating revenue compared to the prior year’s period. The benefit in other expense in the current period resulted primarily from foreign exchange gains of approximately $0.4 million. Direct operating expenses of the motion pictures segment included charges for write downs of investment in film costs of
48
Table of Contents
$6.7 million and $1.2 million in the current period and prior year period, respectively, due to the lower than anticipated actual performance or previously expected performance of certain titles. In the current period, approximately $1.5 million of the write down related to the unanticipated poor performance at the box office on one motion picture and $2.0 million charge resulting from a distribution partner resulting from concerns over the collectability of amounts due pursuant to a distribution agreement. The remaining write downs were each under $1.0 million.
Direct operating expenses of the television segment of $125.3 million for this period were 91.1% of television revenue, compared to $31.8 million, or 82.0% of television revenue for the prior year’s period. The increase in direct operating expense of the television segment in the current period is due to the increase in television production revenue in this period compared to prior year’s period, and to the write off of film costs associated with a television pilot of approximately $1.2 million in the first quarter. The increase in direct operating expense of the television segment in the current period as a percent of revenue is due to the change in the mix of titles generating revenue compared to the prior year’s period.
Distribution and Marketing Expenses
The following table sets forth distribution and marketing expenses by segment for the six months ended September 30, 2007 and 2006:
Six Months Ended | Six Months Ended | |||||||||||||||||||||||
September 30, 2007 | September 30, 2006 | |||||||||||||||||||||||
Motion | Motion | |||||||||||||||||||||||
Pictures | Television | Total | Pictures | Television | Total | |||||||||||||||||||
(Amounts in millions) | ||||||||||||||||||||||||
Distribution and marketing expenses | ||||||||||||||||||||||||
Theatrical | $ | 205.7 | $ | — | $ | 205.7 | $ | 93.2 | $ | 0.7 | $ | 93.9 | ||||||||||||
Home Entertainment | 92.4 | 3.3 | 95.7 | 82.6 | 1.6 | 84.2 | ||||||||||||||||||
Television | 1.0 | 1.5 | 2.5 | 0.6 | 1.3 | 1.9 | ||||||||||||||||||
International | 18.5 | 2.0 | 20.5 | 19.4 | 1.1 | 20.5 | ||||||||||||||||||
Other | 0.1 | — | 0.1 | (0.1 | ) | — | (0.1 | ) | ||||||||||||||||
$ | 317.7 | $ | 6.8 | $ | 324.5 | $ | 195.7 | $ | 4.7 | $ | 200.4 | |||||||||||||
The majority of distribution and marketing expenses relate to the motion pictures segment. Theatrical P&A in the motion pictures segment in this period of $205.7 million increased $112.5 million, or 120.7%, compared to $93.2 million in the prior year’s period. Domestic theatrical P&A from the motion pictures segment in the current period included P&A incurred on the release of titles such asBug,Delta Farce,The Condemned,3:10 to Yuma, Bratz,Hostel 2, Good Luck Chuck,andWar, which individually represented between 5% and 17% of total theatrical P&A and, in the aggregate, accounted for 83% of the total theatrical P&A. Theatrical P&A in the prior year’s period included P&A incurred on the release of titles such asAkeelah and the Bee, Crank, The Descent, Employee of the Month,andSee No Evildomestically, which individually represented between 10% and 22% of total theatrical P&A and, in the aggregate, accounted for 89% of total theatrical P&A.Employee of the Monthwas released theatrically subsequent to the six-month period ended September 30, 2006 on October 6, 2006.BugandThe Condemned, released theatrically during the six months ended September 30, 2007 individually contributed less than 5% of total theatrical revenue in the current period.
Home entertainment distribution and marketing costs on motion pictures and television product in this period of $95.7 million increased $11.5 million, or 13.7%, compared to $84.2 million in the prior year’s period. Home entertainment distribution and marketing costs as a percentage of video revenues was 40.5% and 35.7% in the current period and prior year’s period, respectively. This increase is mainly due to higher video marketing costs in relation to revenues generated in the six-month period ended September 30, 2007 and partially due to the decline in video revenue from the significant releases noted in the table above in the current period in comparison to the prior year’s period.
49
Table of Contents
International distribution and marketing expenses in this period includes $14.8 million of distribution and marketing costs from Lionsgate UK, compared to $15.4 million in the prior year’s period. Current period distribution and marketing expenses of the television segment include $1.3 million from the July 3, 2006 acquisition of Debmar-Mercury, compared to $1.2 million in the prior year’s period.
General and Administrative Expenses
The following table sets forth general and administrative expenses by segment for the six months ended September 30, 2007 and 2006:
Six Months | Six Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | Increase (Decrease) | ||||||||||||||
2007 | 2006 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
General and Administrative Expenses | ||||||||||||||||
Motion Pictures | $ | 15.7 | $ | 13.2 | $ | 2.5 | 18.9 | % | ||||||||
Television | 3.7 | 1.1 | 2.6 | 236.4 | % | |||||||||||
Corporate | 33.3 | 26.7 | 6.6 | 24.7 | % | |||||||||||
$ | 52.7 | $ | 41.0 | $ | 11.7 | 28.5 | % | |||||||||
The increase in general and administrative expenses of the motion pictures segment of $2.5 million, or 18.9%, is primarily due to an increase in salaries and related expenses of approximately $2.0 million.
The increase in general and administrative expenses of the television segment of $2.6 million or 236.4% is primarily due to an increase in salaries and related expenses of approximately $2.2 million, an increase of approximately $0.3 million in professional fees, and an increase of approximately $0.2 million in rent and facility costs offset by a decrease in other general overhead costs of approximately $0.1 million.
The increase in corporate general and administrative expenses is primarily due to an increase in stock-based compensation of approximately $2.7 million (see table below), an increase in salaries and related expenses of approximately $1.9 million and an increase of $2.0 million in other general overhead costs. The increase in salaries and related expenses of $1.9 million includes a $1.5 million special bonus related to the closing of the Company’s theatrical slate financing agreement on May 25, 2007. In this period, $3.3 million of production overhead was capitalized compared to $2.9 million in the prior year’s period.
The following table sets forth corporate stock based compensation expense (benefit) for the six months ended September 30, 2007 and 2006:
Six Months | Six Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | Increase (Decrease) | ||||||||||||||
2007 | 2006 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
Corporate Stock Based Compensation Expense (Benefit):* | ||||||||||||||||
Stock options | $ | 1.6 | $ | 0.9 | $ | 0.7 | 77.8 | % | ||||||||
Restricted share units | 4.9 | 1.4 | 3.5 | 250.0 | % | |||||||||||
Stock appreciation rights | (1.0 | ) | 0.5 | (1.5 | ) | (300.0 | )% | |||||||||
$ | 5.5 | $ | 2.8 | $ | 2.7 | 96.4 | % | |||||||||
(NM) | Percentage not meaningful. | |
(*) | The above table reflects only corporate stock based compensation expense (benefit) and not motion picture or television stock based compensation expense (benefit), which amounted to $0.2 million and nil, respectively. |
50
Table of Contents
At September 30, 2007, as disclosed in note 12 to the unaudited condensed consolidated financial statements, there were unrecognized compensation costs of approximately $29.5 million related to stock options and restricted stock units previously granted, including the first annual installment of share grants that were subject to performance targets, which will be expensed over the remaining vesting periods. At September 30, 2007, there are 881,666 shares of restricted stock units awarded to four key executive officers which will be subject to performance targets to be set by the Company’s compensation committee. These restricted stock units will vest in three, four, and five annual installments assuming annual performance targets to be set by the Company’s compensation committee have been met. The fair value of the 881,666 shares whose performance targets have not been set was $9.1 million, based on the market price of the Company’s common stock as of September 30, 2007. The market value will be remeasured when the performance criteria are set and the value will be expensed over the remaining vesting periods once it becomes probable that the performance targets will be satisfied.
Depreciation and Other Expenses (Income)
Depreciation of $1.9 million this period increased $0.8 million, or 72.7% from $1.1 million in the prior year’s period.
Interest expense of $8.1 million this period decreased $1.5 million, or 15.6%, from prior year’s period of $9.6 million.
Interest and other income was $6.4 million for the period ended September 30, 2007, compared to $4.8 million in the prior year’s period. Interest and other income this period was earned on the cash balance and available-for-sale investments held during the six months ended September 30, 2007, which were higher than in the prior year’s period.
Gain on sale of equity securities of $2.8 million for the period ended September 30, 2007 resulted primarily from the sale of shares held and purchased in Magna, an Australian film distributor.
The equity interests in this period included a $1.9 million loss from the Company’s 33.33% equity interests in Horror Entertainment, LLC, a $0.1 million loss from the Company’s 10% equity interest in Maple, and a less than $0.1 million loss from the Company’s 42% equity interest in Break.com. For the six months ended September 30, 2006, the equity interests consisted of a loss of less than $0.1 million from the Company’s 10% equity interest in Maple and a loss of $0.3 million from the Company’s 18.8% equity interest in CinemaNow.
The Company had an income tax expense of $2.1 million or (1.9%) of loss before income taxes in the six months ended September 30, 2007, compared to a benefit of $2.2 million in the six months ended September 30, 2006. The tax expense reflected in the current period is primarily attributable to U.S. state taxes. The Company’s actual annual effective tax rate will differ from the statutory federal rate as a result of several factors, including changes in the valuation allowance against net deferred tax assets, non-temporary differences, foreign income taxed at different rates, and state and local income taxes. Income tax loss carryforwards amount to approximately $116.4 million for U.S. federal income tax purposes available to reduce income taxes over twenty years, $80.4 million for U.S. state income tax purposes available to reduce income taxes over future years with varying expirations, $29.2 million for Canadian income tax purposes available to reduce income taxes over eight years, and $13.7 million for UK income tax purposes available indefinitely to reduce future income taxes.
Net loss for the six months ended September 30, 2007 was $109.3 million, or basic and diluted net loss per common share of $0.93 on 118.1 million weighted average shares outstanding. This compares to net loss for the six months ended September 30, 2006 of $18.0 million or basic and diluted net loss per common share of $0.17 on 104.7 million weighted average common shares outstanding.
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.
In October 2004, Lions Gate Entertainment Inc. sold $150.0 million of the 2.9375% Notes that mature on October 15, 2024. We received $146.0 million of net proceeds after paying placement agents’ fees. Offering
51
Table of Contents
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, Lions Gate Entertainment Inc. may redeem the notes at 100%.
In February 2005, Lions Gate Entertainment Inc. sold $175.0 million of 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. At September 30, 2007, the Company had a $215 million revolving line of credit, of which $10 million is available for borrowing by Lionsgate UK in either U.S. dollars or British pounds sterling. At September 30, 2007, the Company had no borrowings (March 31, 2007 — nil) under the credit facility. The credit facility expires December 31, 2008 and bears interest at 2.75% over the “Adjusted LIBOR” or the “Canadian Bankers Acceptance” rate, or 1.75% over the U.S. or Canadian prime rates. The availability of funds under the credit facility is limited by the borrowing base. Amounts available under the credit facility are also limited by outstanding letters of credit which amounted to $15.2 million at September 30, 2007. At September 30, 2007 there was $199.8 million available under the credit facility. 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 pledged as security for the credit facility. The credit facility is senior to the Company’s film obligations and senior subordinated notes. The credit facility restricts the Company from paying cash dividends on its common shares.
Theatrical Slate Financing. On May 25, 2007, the Company, through a series of agreements, closed a theatrical slate funding arrangement. Under this arrangement Pride, an unrelated entity, will fund, generally, 50% of the Company’s production, acquisition, marketing and distribution costs of theatrical feature films up to an aggregate of approximately $196 million, net of transaction costs. The funds available from Pride are generated from the issuance by Pride of $35 million of subordinated debt instruments, $35 million of equity and $134 million from a senior credit facility, which is subject to a borrowing base. The Company is not a party to the Pride debt obligations or their senior credit facility, and provides no guarantee of repayment of these obligations. The percentage of the contribution may vary on certain pictures. The slate of films covered by the arrangement is expected to be comprised of 23 films over the next three years. Pride will participate in a pro rata portion of the pictures net profits or losses similar to a co-production arrangement based on the portion of costs funded. The Company continues to distribute the pictures covered by the arrangement with a portion of net profits after all costs and the Company’s distribution fee being distributed to Pride based on their pro rata contribution to the applicable costs similar to a back-end participation on a film.
SGF. On July 30, 2007, the Company entered into a four-year filmed entertainment slate financing agreement with SGF, the Québec provincial government’s investment arm. SGF will finance up to 35% of production costs of television and feature film productions produced in Québec for a four year period for an aggregate investment of up to $140 million, and the Company will advance all amounts necessary to fund the remaining budgeted costs. The maximum aggregate of budgeted costs over the four-year period will be $400 million, including the Company’s portion, but no more than $100 million per year. In connection with this agreement the Company and SGF will proportionally share in the proceeds derived from the funded productions after the Company deducts a distribution fee, recoups all distribution expenses and releasing costs, and pays all applicable participations and residuals.
52
Table of Contents
Filmed Entertainment Backlog. Backlog represents the amount of future revenue not yet recorded from contracts for the licensing of films and television product for television exhibition and in international markets. Backlog at September 30, 2007 and March 31, 2007 is $315.8 million and $320.2 million, respectively.
Cash Flows Provided by/Used in Operating Activities. Cash flows used in operating activities for the six months ended September 30, 2007 were $58.6 million compared to cash flows provided by operating activities in the six months ended September 30, 2006 of $10.8 million. The change in cash used in operating activities was primarily due to the increase in the net loss incurred in the six months ended September 30, 2007, increases in accounts receivables, increases in investment in film, offset by greater amortization expense, and decreases in film obligations. The above decrease in cash was offset by increases in accounts payable and participations and residuals.
Cash Flows Provided by/Used In Investing Activities. Cash flows provided by investing activities of $173.7 million for the six months ended September 30, 2007 consisted of net proceeds from the sale of $207.4 million of auction rate securities, $19.1 million in net proceeds from the sale of equity securities, $2.4 million for purchases of property and equipment, $6.5 million for the investment in equity method investees, $3.1 million for a note receivable from Break.com and $40.9 million for the acquisition of Mandate, net of cash acquired. Cash flows used in investing activities of $7.3 million in the six months ended September 30, 2006 included the net proceeds of $20.3 million of investments available-for-sale, offset by $3.5 million for purchases of property and equipment and $24.1 million for the acquisition of Debmar-Mercury, net of cash acquired.
Cash Flows Provided by/Used In Financing Activities. Cash flows used in financing activities of $6.3 million in the six months ended September 30, 2007 consisted of cash received from borrowings and the issuance of common shares of $4.5 million, offset by $10.7 million paid for the repurchase of the Company’s common shares. Cash flows provided by financing activities of $2.4 million in the six months ended September 30, 2006 consisted of cash received from the issuance of common shares.
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-efficient financing 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 credit worthiness.
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, film funds, 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.
53
Table of Contents
Future commitments under contractual obligations as of September 30, 2007 are as follows:
Year Ended March 31, | ||||||||||||||||||||||||||||
2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | Total | ||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||
Future annual repayment of debt and other film obligations recorded as of September 30, 2007 | ||||||||||||||||||||||||||||
Film obligations(1) | $ | 56,436 | $ | 91,547 | $ | 3,706 | $ | 29,975 | $ | 29,988 | $ | — | $ | 211,652 | ||||||||||||||
Subordinated notes and other financing obligations | — | — | — | — | — | 328,718 | 328,718 | |||||||||||||||||||||
$ | 56,436 | $ | 91,547 | $ | 3,706 | $ | 29,975 | $ | 29,988 | $ | 328,718 | $ | 540,370 | |||||||||||||||
Contractual commitments by expected repayment date | ||||||||||||||||||||||||||||
Distribution and marketing commitments(2) | $ | 13,552 | $ | 92,474 | $ | — | $ | — | $ | 19,963 | $ | — | $ | 125,989 | ||||||||||||||
Minimum guarantee commitments(3) | 88,360 | 66,063 | 5,300 | 2,900 | — | — | 162,623 | |||||||||||||||||||||
Production obligation commitments(3) | 3,170 | 40,885 | — | — | — | — | 44,055 | |||||||||||||||||||||
Operating lease commitments | 2,857 | 6,920 | 6,763 | 6,160 | 2,460 | 710 | 25,871 | |||||||||||||||||||||
Other contractual obligations | 5,465 | 4,741 | 257 | 221 | 185 | — | 10,869 | |||||||||||||||||||||
Employment and consulting contracts | 13,988 | 18,076 | 10,700 | 6,673 | 883 | — | 50,320 | |||||||||||||||||||||
Interest payments on subordinated notes and other financing obligations | 5,498 | 11,046 | 11,046 | 11,046 | 11,046 | 135,394 | 185,076 | |||||||||||||||||||||
$ | 132,890 | $ | 240,205 | $ | 34,066 | $ | 27,000 | $ | 34,537 | $ | 136,104 | $ | 604,803 | |||||||||||||||
Total future commitments under contractual obligations | $ | 189,326 | $ | 331,752 | $ | 37,772 | $ | 56,975 | $ | 64,525 | $ | 464,822 | $ | 1,145,173 | ||||||||||||||
(1) | Film obligations include minimum guarantees, theatrical marketing obligations and production obligations as disclosed in note 6 of our unaudited condensed consolidated financial statements. Repayment dates are based on anticipated delivery or release date of the related film or contractual due dates of the obligation. | |
(2) | Distribution and marketing commitments represent contractual commitments for future expenditures associated with distribution and marketing of films which the Company will distribute. The payment dates of these amounts are primarily based on the anticipated release date of the film. | |
(3) | Minimum guarantee commitments represent contractual commitments related to the purchase of film rights for future delivery. Production obligation commitments represent amounts committed for future film production and development to be funded through production financing and recorded as a production obligation liability. Future payments under these obligations are based on anticipated delivery or release dates of the related film or contractual due dates of the obligation. The amounts include future interest payments associated with the obligations. |
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 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
54
Table of Contents
between Canadian and U.S. dollars. The Company enters into forward foreign exchange contracts to hedge its foreign currency exposures on future production expenses denominated in Canadian dollars and on future tax credits to be received in Canadian dollars. As of September 30, 2007, we had outstanding contracts to sell US$12.9 million in exchange for CDN$13.5 million over a period of five weeks at a weighted average exchange rate of CDN$1.0498, and outstanding contracts to sell CDN$5.8 million in exchange for US$5.1 million over a period of five weeks at a weighted average exchange rate of US$0.8878. Changes in the fair value representing an unrealized fair value loss on foreign exchange contracts outstanding during both the three and six months ended September 30, 2007 amounted to $0.2 million, and are included in accumulated other comprehensive loss, a separate component of shareholders’ equity. During the three and six months ended September 30, 2007, we completed foreign exchange contracts denominated in Canadian dollars. The net gains resulting from the completed contracts were $0.2 million and $1.0 million, 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 is interest rate risk. 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. Our credit facility has a nil balance at September 30, 2007. Other financing obligations subject to variable interest rates include $110.6 million owed to film production entities on delivery of titles.
The table below presents repayments and related weighted average interest rates for our interest-bearing debt and production obligations and subordinate notes and other financing obligations as of September 30, 2007.
Year Ended March 31, | ||||||||||||||||||||||||||||
2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | Total | ||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||
Revolving Credit Facility: | ||||||||||||||||||||||||||||
Variable(1) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Production Obligations: | ||||||||||||||||||||||||||||
Variable(2) | 32,024 | 78,562 | — | — | — | — | 110,586 | |||||||||||||||||||||
Subordinated Notes and | ||||||||||||||||||||||||||||
Other Financing Obligations: | ||||||||||||||||||||||||||||
Fixed(3) | — | — | — | — | — | 150,000 | 150,000 | |||||||||||||||||||||
Fixed(4) | — | — | — | — | — | 175,000 | 175,000 | |||||||||||||||||||||
Fixed(5) | — | — | — | — | — | 3,718 | 3,718 | |||||||||||||||||||||
$ | 32,024 | $ | 78,562 | $ | — | $ | — | $ | — | $ | 328,718 | $ | 439,304 | |||||||||||||||
(1) | Revolving credit facility, which expires December 31, 2008. At September 30, 2007, the Company had no borrowings under this facility. | |
(2) | Amounts owed to film production entities on anticipated delivery date or release date of the titles or the contractual due dates of the obligation. Production obligations of $108.1 million incur interest at rates ranging from 6.72% to 8.02% and one production loan of $2.5 million bears interest of 14.08%. Not included in the table above are approximately $80.9 million of production obligations which are non-interest bearing. | |
(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) | Other financing obligation with fixed interest rate equal to 8.02%. |
Item 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures” is defined inRules 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
55
Table of Contents
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 September 30, 2007, 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 effective as of September 30, 2007.
Changes in Internal Control over Financial Reporting
As required byRule 13a-15(d) of the Exchange Act, the Company, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, also evaluated whether any changes occurred to the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, such control. Based on that evaluation, there has been no such change during the period covered by this report.
Item 1. | Legal Proceedings. |
None.
Item 1A. | Risk Factors. |
The following updates the risk factor entitled “Our success depends on external factors in the motion picture and television industry”in the “Risk Factors” section of our Annual Report onForm 10-K for the fiscal year ended March 31, 2007. Other than the update below, there were no other material changes to the risk factors previously reported in our Annual Report onForm 10-K for the fiscal year ended March 31, 2007.
We could be adversely affected by strikes or other union job actions. We are directly or indirectly dependent upon highly specialized union members who are essential to the production of motion pictures and television programs. A strike by, or a lockout of, one or more of the unions that provide personnel essential to the production of motion pictures or television programs could delay or halt our ongoing production activities. Such a halt or delay, depending on the length of time, could cause a delay or interruption in our release of new motion pictures and television programs, which could have a material adverse effect on our business, results of operations and financial condition.
On November 1, 2007, the television business’ collective bargaining agreement with the Writers Guild of America (East and West) (the “WGA”) covering freelance writers expired. On November 5, 2007, the WGA began an industry-wide strike. We do not expect the strike to have a significant effect on our operating results for the remainder of 2008 fiscal year. Thereafter, we are currently unable to estimate the impact of the strike, if any.
56
Table of Contents
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
The following table sets forth information with respect to shares of the Company’s common stock purchased by the Company during the three months ended September 30, 2007:
Issuer Purchases of Equity Securities(1) | ||||||||||||||||
(d) Approximate | ||||||||||||||||
(c) Total Number of | Dollar Value of | |||||||||||||||
Shares Purchased as | Shares that May Yet | |||||||||||||||
Part of Publicly | be Purchased Under | |||||||||||||||
(a) Total Number of | (b) Average Price | Announced Plans or | the Plans or | |||||||||||||
Period | Shares Purchased | Paid per Share | Programs | Programs | ||||||||||||
July 1, 2007 — July 31, 2007 | — | — | — | $ | 50,000,000 | |||||||||||
August 1, 2007 — August 31, 2007 | 300,000 | $ | 9.13 | 300,000 | $ | 47,200,000 | ||||||||||
September 1, 2007 — September 30, 2007 | 869,835 | $ | 9.15 | 869,835 | $ | 39,200,000 | ||||||||||
Total | 1,169,835 | $ | 9.15 | 1,169,835 | $ | 39,200,000 | ||||||||||
(1) | On May 31, 2007, the Company’s Board of Directors authorized the repurchase of up to $50 million of its common shares, with the timing, price, quantity, and manner of the purchases to be made at the discretion of management, depending upon market conditions. Such purchases are structured as permitted by securities laws and other legal requirements. During the period from the authorization date through September 30, 2007, 1,169,835 million shares have been repurchased at a cost of approximately $10.7 million (including commission costs). The share repurchase program has no expiration date. |
Item 3. | Defaults Upon Senior Securities. |
None
Item 4. | Submission of Matters to a Vote of Security Holders. |
On September 11, 2007, the Company held its Annual General Meeting of Shareholders (the “Annual Meeting”). Below is a summary of the matters voted on at the Annual Meeting.
1. The Company’s stockholders voted to elect twelve (12) directors to the Board of Directors of the Company to serve for a term of one year. The votes for the director nominees were as follows:
Nominees | For | Abstain | Not Voted | |||||||||
Norman Bacal | 98,540,668 | 4,828,478 | 15,832,561 | |||||||||
Michael Burns | 99,132,104 | 4,237,042 | 15,832,561 | |||||||||
Arthur Evrensel | 96,292,777 | 7,076,369 | 15,832,561 | |||||||||
Jon Feltheimer | 96,689,317 | 6,679,829 | 15,832,561 | |||||||||
Morley Koffman | 100,735,574 | 2,633,572 | 15,832,561 | |||||||||
Harald Ludwig | 100,751,735 | 2,617,411 | 15,832,561 | |||||||||
Laurie May | 98,539,046 | 4,830,100 | 15,832,561 | |||||||||
G. Scott Paterson | 69,684,392 | 33,684,754 | 15,832,561 | |||||||||
Daryl Simm | 95,500,582 | 7,868,564 | 15,832,561 | |||||||||
Hardwick Simmons | 96,094,662 | 7,274,484 | 15,832,561 | |||||||||
Brian V. Tobin | 98,540,668 | 4,828,478 | 15,832,561 |
Additionally, the Company’s Series B preferred stockholder, Mark Amin, elected himself as a director.
57
Table of Contents
2. Ernst & Young LLP was re-appointed as the Company’s independent registered public accounting firm for the fiscal year ending March 31, 2008, and the Audit Committee of the Board of Directors was authorized to determine the remuneration to be paid to Ernst & Young LLP. The vote was as follows:
For | 103,186,226 | |||
Abstain | 182,920 | |||
Not Voted | 15,832,561 |
3. The Company’s stockholders approved an increase in the number of common shares reserved for issuance under the Lions Gate Entertainment Corp. 2004 Performance Incentive Plan. The vote was as follows:
For | 71,987,750 | |||
Against | 31,328,997 | |||
Abstain | 52,399 | |||
Broker Non-votes | 15,832,561 |
Under applicable law, the proposals before the Company’s stockholders — for the election of each of the nominated directors (Proposal 1), the re-appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm (Proposal 2), and approval of an increase in the number of common shares reserved for issuance under the Lions Gate Entertainment Corp. 2004 Performance Incentive Plan (Proposal 3) — each required the affirmative vote of a majority of the common shares present or represented by proxy. With respect to Proposals 1 and 2, abstentions and broker non-votes were not counted in determining the number of shares necessary for approval. With respect to Proposal 3, broker non-votes and abstentions were given the effect of a vote against the approval of the amendment to increase the shares reserved for issuance.
Item 5. | Other Information. |
On September 10, 2007, the Company filed a Current Report onForm 8-K reporting that the Company had entered into a purchase agreement to acquire all of the membership interests of Mandate Pictures, LLC, a Delaware limited liability company. Since that time, the Company has determined that the business acquired did not meet the lowest significance threshold level as prescribed in theRule 3-05(b) ofRegulation S-X promulgated by the Securities and Exchange Commission and, therefore, the Company is not required to file audited financial statements or pro forma financial statements pursuant toRule 3-05 andRule 3-11 ofRegulation S-X with respect to the acquisition.
Item 6. | Exhibits. |
Exhibit | ||||
Number | Description of Documents | |||
3 | .1(1) | Articles | ||
3 | .2(2) | Notice of Articles | ||
3 | .3(2) | Vertical Short Form Amalgamation Application | ||
3 | .4(2) | Certificate of Amalgamation | ||
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 |
(1) | Incorporated by reference to the Company’s Annual Report onForm 10-K for the fiscal year ended March 31, 2005 as filed on June 29, 2005. | |
(2) | Incorporated by reference to the Company’s Annual Report onForm 10-K for the fiscal year ended March 31, 2007 as filed on May 30, 2007. |
58
Table of Contents
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: | Duly Authorized Officer and |
Chief Financial Officer
Date: November 9, 2007
59