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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-Q
(Mark One) | ||
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 | |
For the quarterly period ended June 30, 2008 | ||
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 | (I.R.S. Employer | |
incorporation or organization) | 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerþ | Accelerated filero | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
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 August 1, 2008 | |
Common Shares, no par value per share | 117,374,945 shares |
TABLE OF CONTENTS
Item | Page | |||||||
Financial Statements | 4 | |||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 36 | |||||||
Quantitative and Qualitative Disclosures About Market Risk | 50 | |||||||
Controls and Procedures | 51 | |||||||
PART II — OTHER INFORMATION | ||||||||
Legal Proceedings | 51 | |||||||
Risk Factors | 51 | |||||||
Unregistered Sales of Equity Securities and Use of Proceeds | 53 | |||||||
Defaults Upon Senior Securities | 53 | |||||||
Submission of Matters to a Vote of Security Holders | 53 | |||||||
Other Information | 53 | |||||||
Exhibits | 53 | |||||||
EXHIBIT 10.51 | ||||||||
EXHIBIT 31.1 | ||||||||
EXHIBIT 31.2 | ||||||||
EXHIBIT 32.1 |
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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,” “expect,” “anticipate,” “potential,” “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 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, 2008, 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.
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PART I — FINANCIAL INFORMATION
Item 1. | Financial Statements. |
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, | March 31, | |||||||
2008 | 2008 | |||||||
(Unaudited) | (Note 1) | |||||||
(Amounts in thousands, except share amounts) | ||||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 230,590 | $ | 371,589 | ||||
Restricted cash | 15,850 | 10,300 | ||||||
Investments | 6,909 | 6,927 | ||||||
Accounts receivable, net of reserve for video returns and allowances of $98,024 (March 31, 2008 — $95,515) and provision for doubtful accounts of $6,302 (March 31, 2008 — $5,978) | 198,440 | 260,284 | ||||||
Investment in films and television programs | 740,480 | 608,942 | ||||||
Property and equipment | 14,836 | 13,613 | ||||||
Goodwill | 224,213 | 224,531 | ||||||
Other assets | 55,429 | 41,572 | ||||||
$ | 1,486,747 | $ | 1,537,758 | |||||
LIABILITIES | ||||||||
Accounts payable and accrued liabilities | $ | 182,985 | $ | 245,430 | ||||
Participation and residuals | 350,952 | 385,846 | ||||||
Film and production obligations | 312,616 | 278,016 | ||||||
Subordinated notes and other financing obligations | 328,718 | 328,718 | ||||||
Deferred revenue | 129,063 | 111,510 | ||||||
1,304,334 | 1,349,520 | |||||||
Commitments and contingencies | ||||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common shares, no par value, 500,000,000 shares authorized, 121,445,965 and 121,081,311 shares issued at June 30, 2008 and March 31, 2008, respectively | 437,990 | 434,650 | ||||||
Series B preferred shares (10 shares issued and outstanding) | — | — | ||||||
Accumulated deficit | (216,524 | ) | (223,619 | ) | ||||
Accumulated other comprehensive loss | (373 | ) | (533 | ) | ||||
221,093 | 210,498 | |||||||
Treasury shares, no par value, 4,072,499 and 2,410,499 shares at June 30, 2008 and March 31, 2008, respectively | (38,680 | ) | (22,260 | ) | ||||
182,413 | 188,238 | |||||||
$ | 1,486,747 | $ | 1,537,758 | |||||
See accompanying notes.
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LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months | Three Months | |||||||
Ended | Ended | |||||||
June 30, | June 30, | |||||||
2008 | 2007 | |||||||
(Amounts in thousands, except per share amounts) | ||||||||
Revenues | $ | 298,459 | $ | 198,742 | ||||
Expenses: | ||||||||
Direct operating | 148,008 | 87,058 | ||||||
Distribution and marketing | 98,975 | 135,501 | ||||||
General and administration | 38,308 | 26,840 | ||||||
Depreciation | 1,062 | 908 | ||||||
Total expenses | 286,353 | 250,307 | ||||||
Operating income (loss) | 12,106 | (51,565 | ) | |||||
Other expenses (income): | ||||||||
Interest expense | 4,311 | 3,860 | ||||||
Interest and other income | (2,155 | ) | (3,803 | ) | ||||
Total other expenses, net | 2,156 | 57 | ||||||
Income (loss) before equity interests and income taxes | 9,950 | (51,622 | ) | |||||
Equity interests loss | (2,186 | ) | (807 | ) | ||||
Income (loss) before income taxes | 7,764 | (52,429 | ) | |||||
Income tax provision | 669 | 689 | ||||||
Net income (loss) | $ | 7,095 | $ | (53,118 | ) | |||
Basic Net Income (Loss) Per Common Share | $ | 0.06 | $ | (0.45 | ) | |||
Diluted Net Income (Loss) Per Common Share | $ | 0.06 | $ | (0.45 | ) | |||
See accompanying notes.
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LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||
Series B | Restricted | Comprehensive | Other | |||||||||||||||||||||||||||||||||||||||||||||
Common Shares | Preferred Shares | Share | Unearned | Accumulated | Income | Comprehensive | Treasury Shares | |||||||||||||||||||||||||||||||||||||||||
Number | Amount | Number | Amount | Units | Compensation | Deficit | (Loss) | Income (Loss) | Number | Amount | Total | |||||||||||||||||||||||||||||||||||||
(Amounts in thousands, except share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2007 | 116,970,280 | 398,836 | 10 | — | — | — | (149,651 | ) | (1,295 | ) | — | — | 247,890 | |||||||||||||||||||||||||||||||||||
Exercise of stock options | 993,772 | (2,492 | ) | (2,492 | ) | |||||||||||||||||||||||||||||||||||||||||||
Stock based compensation, net of share units withholding tax obligations of $1,576 | 666,306 | 12,212 | 12,212 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares to directors for services | 25,970 | 277 | 277 | |||||||||||||||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares related to the Debmar acquisition | 269,978 | 2,500 | 2,500 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares related to the Mandate acquisition | 169,879 | 1,566 | 1,566 | |||||||||||||||||||||||||||||||||||||||||||||
Repurchase of common shares, no par value | (2,410,499 | ) | (22,260 | ) | (22,260 | ) | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive loss Net loss | (73,968 | ) | $ | (73,968 | ) | (73,968 | ) | |||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | 1,168 | 1,168 | 1,168 | |||||||||||||||||||||||||||||||||||||||||||||
Net unrealized loss on foreign exchange contracts | (333 | ) | (333 | ) | (333 | ) | ||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on investments — available for sale | (73 | ) | (73 | ) | (73 | ) | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive loss | $ | (73,206 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2008 | 121,081,311 | 434,650 | 10 | — | — | — | (223,619 | ) | (533 | ) | (2,410,499 | ) | (22,260 | ) | 188,238 | |||||||||||||||||||||||||||||||||
Exercise of stock options | 123,416 | 825 | 825 | |||||||||||||||||||||||||||||||||||||||||||||
Stock based compensation, net of share units withholding tax obligations of $1,113 | 220,175 | 2,310 | 2,310 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares to directors for services | 21,063 | 205 | 205 |
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Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||
Series B | Restricted | Comprehensive | Other | |||||||||||||||||||||||||||||||||||||||||||||
Common Shares | Preferred Shares | Share | Unearned | Accumulated | Income | Comprehensive | Treasury Shares | |||||||||||||||||||||||||||||||||||||||||
Number | Amount | Number | Amount | Units | Compensation | Deficit | (Loss) | Income (Loss) | Number | Amount | Total | |||||||||||||||||||||||||||||||||||||
(Amounts in thousands, except share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of common shares, no par value | (1,662,000 | ) | (16,420 | ) | (16,420 | ) | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive loss | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 7,095 | $ | 7,095 | 7,095 | ||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | 169 | 169 | 169 | |||||||||||||||||||||||||||||||||||||||||||||
Net unrealized gain on foreign exchange contracts | 9 | 9 | 9 | |||||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on investments — available for sale | (18 | ) | (18 | ) | (18 | ) | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | $ | 7,255 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2008 | 121,445,965 | $ | 437,990 | 10 | $ | — | $ | — | $ | — | $ | (216,524 | ) | $ | (373 | ) | (4,072,499 | ) | $ | (38,680 | ) | $ | 182,413 | |||||||||||||||||||||||||
See accompanying notes.
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LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months | Three Months | |||||||
Ended | Ended | |||||||
June 30, | June 30, | |||||||
2008 | 2007 | |||||||
(Amounts in thousands) | ||||||||
Operating Activities: | ||||||||
Net income (loss) | $ | 7,095 | $ | (53,118 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Depreciation of property and equipment | 1,062 | 908 | ||||||
Amortization of deferred financing costs | 933 | 884 | ||||||
Amortization of films and television programs | 69,047 | 49,862 | ||||||
Amortization of intangible assets | 324 | 162 | ||||||
Non-cash stock-based compensation | 3,419 | 2,846 | ||||||
Equity interests loss | 2,186 | 807 | ||||||
Changes in operating assets and liabilities: | ||||||||
Restricted cash | (5,550 | ) | 271 | |||||
Accounts receivable, net | 61,961 | 9,439 | ||||||
Investment in films and television programs | (200,897 | ) | (136,139 | ) | ||||
Other assets | (2,571 | ) | (3,061 | ) | ||||
Accounts payable and accrued liabilities | (62,039 | ) | 20,185 | |||||
Participation and residuals | (34,893 | ) | 15,527 | |||||
Film obligations | (7,445 | ) | 4,361 | |||||
Deferred revenue | 17,551 | 31,486 | ||||||
Net Cash Flows Used In Operating Activities | (149,817 | ) | (55,580 | ) | ||||
Investing Activities: | ||||||||
Purchases of investments — auction rate securities | — | (172,442 | ) | |||||
Proceeds from the sale of investments — auction rate securities | — | 243,491 | ||||||
Purchases of investments — equity securities | — | (3,432 | ) | |||||
Proceeds from the sale of investments — equity securities | — | 16,343 | ||||||
Investment in equity method investees | (11,094 | ) | — | |||||
Loan to equity method investee | (3,100 | ) | ||||||
Purchases of property and equipment | (2,279 | ) | (2,017 | ) | ||||
Net Cash Flows Provided By (Used In) Investing Activities | (16,473 | ) | 81,943 | |||||
Financing Activities: | ||||||||
Exercise of stock options | 825 | 390 | ||||||
Amounts paid to satisfy tax withholding requirements on equity awards | (1,113 | ) | — | |||||
Repurchases of common shares | (16,420 | ) | — | |||||
Borrowings under financing arrangements | — | 3,718 | ||||||
Increase in production obligations | 70,545 | 22,869 | ||||||
Payment of production obligations | (28,505 | ) | (47,660 | ) | ||||
Net Cash Flows Provided By (Used In) Financing Activities | 25,332 | (20,683 | ) | |||||
Net Change In Cash And Cash Equivalents | (140,958 | ) | 5,680 | |||||
Foreign Exchange Effects on Cash | (41 | ) | 1,403 | |||||
Cash and Cash Equivalents — Beginning Of Period | 371,589 | 51,497 | ||||||
Cash and Cash Equivalents — End Of Period | $ | 230,590 | $ | 58,580 | ||||
See accompanying notes.
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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 filmed entertainment studio with a diversified presence in motion pictures, television programming, home entertainment, family entertainment,video-on-demand and digitally delivered content.
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 months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ended March 31, 2009. The balance sheet at March 31, 2008 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, 2008.
Certain amounts presented for fiscal 2008 have been reclassified to conform to the fiscal 2009 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
In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) APB14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB14-1”). FSP APB14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14,Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants. Additionally, FSP APB14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We will adopt FSP APB14-1 beginning in the first quarter of fiscal 2010, and this standard must be applied on a retrospective basis. We are evaluating the impact the adoption of FSP APB14-1 will have on our consolidated financial position and results of operations.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007),Business Combinations(“SFAS No. 141(R)”). SFAS No. 141(R) significantly changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, preacquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under SFAS No. 141(R), changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. We will adopt SFAS No. 141(R) beginning in the first quarter of fiscal 2010, which will change our accounting treatment for business combinations on a prospective basis.
In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51(“SFAS No. 160”). SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. We will adopt SFAS No. 160 beginning in the first quarter of fiscal 2010. We are evaluating the impact the adoption of SFAS No. 160 will have on our consolidated financial position and results of operations.
2. | Restricted Cash and InvestmentsAvailable-For-Sale |
Restricted cash represents amounts on deposit with financial institutions that are contractually designated for certain theatrical marketing obligations, collateral required under a revolving credit facility and for certain production obligations.
At June 30, 2008 and March 31, 2008, the Company held $7.0 million, par value, of a triple A rated taxable Student Auction Rate Security (“ARS”) issued by the Panhandle-Plains Higher Education Authority. The bonds backing the issue provide funds to purchase student loans which are substantially guaranteed under the Higher Education Act of 1965, as amended. This investment is held as collateral for a production obligation pursuant to an escrow agreement.
The par value on these securities is designed to be equal to the securities fair value because the interest rates are reset each month through an auction process. However, due to the recent credit crisis, auctions for this security have not been successful in resetting the applicable interest rates. As a result, these securities do not have a readily determinable market value and are not liquid. The Company has estimated the fair value based on a discounted cash flow analysis using a discount rate reflective of a premium associated with a triple A rated investment, factoring in the change in the liquidity of the investment and the period of time we expect to hold these securities. Based on this analysis and the fact that the Company has the ability to hold these securities until the market recovers, we recorded a temporary impairment of $0.1 million to accumulated other comprehensive loss on the accompanying unaudited condensed consolidated balance sheet at June 30, 2008 and March 31, 2008, respectively (see Note 11).
Investments classified asavailable-for-sale as of June 30, 2008 and March 31, 2008 are set forth below:
June 30, 2008 | ||||||||||||
Unrealized | Fair | |||||||||||
Cost | Gains (Losses) | Value | ||||||||||
(Amounts in thousands) | ||||||||||||
Auction rate — student loans | $ | 7,000 | $ | (91 | ) | $ | 6,909 | |||||
March 31, 2008 | ||||||||||||
Unrealized | Fair | |||||||||||
Cost | Gains (Losses) | Value | ||||||||||
(Amounts in thousands) | ||||||||||||
Auction rate — student loans | $ | 7,000 | $ | (73 | ) | $ | 6,927 | |||||
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interest and dividend income earned on available for sale investments during the three months ended June 30, 2008 and 2007 were $0.8 million and $2.6 million, respectively.
3. | Investment in Films and Television Programs |
June 30, | March 31, | |||||||
2008 | 2008 | |||||||
(Amounts in thousands) | ||||||||
Motion Picture Segment — Theatrical and Non-Theatrical Films | ||||||||
Released, net of accumulated amortization | $ | 221,610 | $ | 218,898 | ||||
Acquired libraries, net of accumulated amortization | 76,110 | 80,674 | ||||||
Completed and not released | 36,207 | 13,187 | ||||||
In progress | 250,159 | 188,108 | ||||||
In development | 7,207 | 6,513 | ||||||
Product inventory | 44,811 | 33,147 | ||||||
636,104 | 540,527 | |||||||
Television Segment —Direct-to-Television Programs | ||||||||
Released, net of accumulated amortization | 57,241 | 55,196 | ||||||
In progress | 44,367 | 12,608 | ||||||
In development | 2,768 | 611 | ||||||
104,376 | 68,415 | |||||||
$ | 740,480 | $ | 608,942 | |||||
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 | Amortization | Amortization | June 30, | March 31, | ||||||||||||||
Library | Acquisition Date | Period | Period | 2008 | 2008 | |||||||||||||
(In years) | (Amounts in thousands) | |||||||||||||||||
Trimark | October 2000 | 20.00 | 12.25 | $ | 11,911 | $ | 12,318 | |||||||||||
Artisan | December 2003 | 20.00 | 15.50 | 55,124 | 58,533 | |||||||||||||
Modern | August 2005 | 20.00 | 17.00 | 3,530 | 3,953 | |||||||||||||
Lionsgate UK | October 2005 | 20.00 | 17.25 | 1,546 | 1,827 | |||||||||||||
Mandate | September 2007 | 3.00 | 2.25 | 3,999 | 4,043 | |||||||||||||
Total Acquired Libraries | $ | 76,110 | $ | 80,674 | ||||||||||||||
The Company expects approximately 44% of completed films and television programs, net of accumulated amortization, will be amortized during the one-year period ending June 30, 2009. 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 June 30, 2011.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. | Goodwill |
The changes in the carrying amount of goodwill by reporting segment were as follows in the three months ended June 30, 2008:
Motion | ||||||||||||
Pictures | Television | Total | ||||||||||
(Amounts in thousands) | ||||||||||||
Balance as of March 31, 2008 | $ | 210,570 | $ | 13,961 | $ | 224,531 | ||||||
Mandate Pictures, LLC | (318 | ) | — | (318 | ) | |||||||
Balance as of June 30, 2008 | $ | 210,252 | $ | 13,961 | $ | 224,213 | ||||||
During the three months ended June 30, 2008, goodwill decreased by $0.3 million due to changes in the estimated fair value of the assets acquired and liabilities assumed from the acquisition of Mandate Pictures, LLC.
5. | Other Assets |
June 30, | March 31, | |||||||
2008 | 2008 | |||||||
(Amounts in thousands) | ||||||||
Deferred financing costs, net of accumulated amortization | $ | 7,304 | $ | 7,200 | ||||
Prepaid expenses and other | 7,455 | 5,239 | ||||||
Loan receivables | 6,248 | 3,382 | ||||||
Intangible assets | 1,965 | 2,317 | ||||||
Equity method investments | 32,457 | 23,434 | ||||||
$ | 55,429 | $ | 41,572 | |||||
Deferred Financing Costs
Deferred financing costs primarily include costs incurred in connection with a credit facility (see Note 6) and the issuance of the 2.9375% Notes (as hereafter defined) and the 3.625% Notes (as hereafter defined) (see Note 8) that are deferred and amortized to interest expense.
Loan Receivables
Loan receivables at June 30, 2008 and March 31, 2008 consist of note receivables, including accrued interest, of $6.2 million and $3.4 million, respectively, from NextPoint, Inc. (“Break.com”), an equity method investee, as described below.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Intangible Assets
Intangible assets consists primarily of trademarks and distribution agreements. The composition of the Company’s acquired intangible assets and the associated accumulated amortization is as follows as of June 30, 2008 and March 31, 2008:
Weighted | ||||||||||||||||||||||||||
Average | June 30, 2008 | March 31, 2008 | ||||||||||||||||||||||||
Remaining | Gross | Net | Gross | Net | ||||||||||||||||||||||
Life in | Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | ||||||||||||||||||||
Years | Amount | Amortization | Amount | Amount | Amortization | Amount | ||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||
Intangible assets: | ||||||||||||||||||||||||||
Trademarks | 4 | $ | 1,600 | $ | 290 | $ | 1,310 | $ | 1,625 | $ | 200 | $ | 1,425 | |||||||||||||
Distribution agreements | 3 | 1,273 | 618 | 655 | 1,273 | 454 | 819 | |||||||||||||||||||
Music license | 0 | 1,304 | 1,304 | — | 1,304 | 1,231 | 73 | |||||||||||||||||||
Total intangible assets | $ | 4,177 | $ | 2,212 | $ | 1,965 | $ | 4,202 | $ | 1,885 | $ | 2,317 | ||||||||||||||
The aggregate amount of amortization expense associated with the Company’s intangible assets for the three month period ending June 30, 2008 was approximately $0.3 million. Estimated amortization expense for each of the years ending March 31, 2009 through 2014 is approximately $0.7 million, $0.5 million, $0.3 million, $0.3 million, $0.1 million and nil, respectively.
Equity Method Investments
The carrying amount of significant equity method investments at June 30, 2008 and March 31, 2008 were as follows:
June 30, | March 31, | |||||||
2008 | 2008 | |||||||
(Amounts in thousands) | ||||||||
Horror Entertainment, LLC (“FEARnet”) | $ | 2,245 | $ | 789 | ||||
NextPoint, Inc. (“Break.com”) | 19,166 | 19,979 | ||||||
Roadside Attractions, LLC | 1,907 | 2,201 | ||||||
Elevation Sales Limited | 466 | 465 | ||||||
Premium Television Channel | 8,673 | — | ||||||
$ | 32,457 | $ | 23,434 | |||||
Equity interests in equity method investments in our unaudited condensed consolidated statements of operations represent our portion of the income or loss of our equity method investee based on our percentage
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ownership. Equity interests in equity method investments for the three months ended June 30, 2008 and 2007 were as follows (income (loss)):
Three Months | Three Months | |||||||
Ended | Ended | |||||||
June 30, | June 30, | |||||||
2008 | 2007 | |||||||
(Amounts in thousands) | ||||||||
Maple Pictures Corp. | $ | — | $ | 61 | ||||
Horror Entertainment, LLC (“FEARnet”) | (1,066 | ) | (868 | ) | ||||
NextPoint, Inc. (“Break.com”) | (826 | ) | — | |||||
Roadside Attractions, LLC | (294 | ) | — | |||||
$ | (2,186 | ) | $ | (807 | ) | |||
Maple Pictures Corp. Represents the Company’s interest in Maple Pictures Corp. (“Maple Pictures”), a motion picture, television and home entertainment distributor in Canada. Maple Pictures was formed by a director of the Company, a former Lionsgate executive and a third-party equity investor. Through July 17, 2007, the Company owned 10% of the common shares of Maple Pictures and accounted for its investment in Maple Pictures under the equity method of accounting. Accordingly, during the three months ended June 30, 2007, the Company recorded 10% of the loss incurred by Maple Pictures. On July 18, 2007, Maple Pictures repurchased all of the outstanding shares held by a third party investor, which increased the Company’s ownership of Maple Pictures requiring the Company to consolidate Maple Pictures for financial reporting purposes beginning on July 18, 2007. Accordingly, the results of operations of Maple Pictures are reflected in the Company’s consolidated results since July 18, 2007.
Horror Entertainment, LLC. Represents the Company’s 33.33% interest in Horror Entertainment, LLC (“FEARnet”), a multiplatform programming and content service provider of horror genre films operating under the branding of “FEARnet.” The Company entered into a five-year license agreement with FEARnet for 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, $2.6 million in July 2007, and $2.5 million in April 2008. As of June 30, 2008, the Company has a remaining commitment for additional capital contributions totaling $3.2 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 interest in FEARnet and its license agreement with FEARnet could be terminated. The Company is recording its share of the FEARnet results on a one quarter lag and, accordingly, during the three months ended June 30, 2008, the Company recorded 33.33% of the loss incurred by FEARnet during the three months ended March 31, 2008.
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 home 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 included $0.5 million of transaction costs, by issuing 1,890,189 of the Company’s common shares. The value assigned to the shares for purposes of recording the investment of $20.9 million was based on the average price of the Company’s common shares a few days prior and subsequent to the date of the closing of the acquisition. The Company has a call option which is exercisable at any time from June 29, 2007 until the earlier of (i) 30 months after June 29, 2007 or (ii) one year after a change of control, as narrowly defined, to purchase all of the remaining 58% equity interests (excluding any subsequent dilutive events) of Break.com, includingin-the-money stock options, warrants and other rights of Break.com for $58.0 million in cash or common stock, at the Company’s option. The estimated initial cost of the call option was $1.2 million and is included within the investment balance. This call option is accounted for at cost and is evaluated for other than temporary impairment each reporting period. The Company is recording its share of the Break.com results on a one quarter lag and, accordingly, during the three
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
months ended June 30, 2008, the Company recorded 42% of the loss incurred by Break.com during the three months ended March 31, 2008.
Roadside Attractions, LLC. Represents the Company’s 43% equity interest acquired on July 26, 2007 in Roadside Attractions, LLC (“Roadside”), an independent theatrical releasing company. 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 the three years ended July 26, 2010, 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 estimated initial cost of the call option was de minimus since the option price is designed to be representative of the then fair value and is included within the investment balance. The Company is recording its share of the Roadside results on a one quarter lag and, accordingly, during the three months ended June 30, 2008, the Company recorded 43% of the loss incurred by Roadside during the three months ended March 31, 2008.
Elevation Sales Limited. Represents the Company’s 50% equity interest in Elevation Sales Limited (“Elevation”), a UK based home entertainment distributor. At June 30, 2008, the Company was owed $9.6 million in account receivables from Elevation (March 31, 2008 $29.0 million). The amounts receivable from Elevation represent amounts due our wholly-owned subsidiary, Lionsgate UK Limited (“Lionsgate UK”), located in the United Kingdom for accounts receivable arising from the sale and rental of DVD products. The credit period extended to Elevation is 60 days.
Premium Television Channel. In April 2008, the Company formed a joint venture with Viacom Inc. (“Viacom”), Paramount Pictures Unit (“Paramount Pictures”) andMetro-Goldwyn-Mayer Studios Inc. (“MGM”) to create a premium television channel and subscriptionvideo-on-demand service. The new venture will have access to the Company’s titles released theatrically on or after January 1, 2009. Viacom will provide operational support to the venture, including marketing and affiliate services through its MTV Networks division. Upon its expected launch in the fall of 2009, the joint venture will provide the Company with an additional platform to distribute its library of motion picture titles and television episodes and programs. Currently, the Company has invested $8.6 million as of June 30, 2008, which represents 28.57% or its proportionate share of investment in the joint venture. The Company has a mandatory commitment of $31.4 million increasing to $42.9 million if certain performance targets are achieved. The Company is recording its share of the joint venture results on a one quarter lag, beginning in the second quarter of the current fiscal year.
CinemaNow, Inc. The Company holds an 18.6%, on a fully diluted basis, or 21.0%, on an undiluted basis, equity interest in CinemaNow, Inc. (“CinemaNow”), an internet-video-on-demand provider. 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.
6. | Bank Loans |
At June 30, 2008, 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 June 30, 2008, the Company had no borrowings (March 31, 2008 — 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 (each 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 $22.7 million at June 30, 2008. At June 30, 2008, there was $192.3 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, and restricts the Company from paying cash dividends on its
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
common shares. In July 2008, this credit facility was amended and restated, as further described in the Subsequent Events Note 17.
7. | Film and Production Obligations and Participation and Residuals |
June 30, | March 31, | |||||||
2008 | 2008 | |||||||
(Amounts in thousands) | ||||||||
Film obligations(1) | $ | 22,682 | $ | 29,905 | ||||
Production obligations(2) | 289,934 | 248,111 | ||||||
Total film and production obligations | 312,616 | 278,016 | ||||||
Less film and production obligations expected to be paid within one year | (169,655 | ) | (193,699 | ) | ||||
Film and production obligations expected to be paid after one year | $ | 142,961 | $ | 84,317 | ||||
Participation and residuals | $ | 350,952 | $ | 385,846 | ||||
(1) | Film obligations include minimum guarantees, which represent amounts payable for film rights that the Company has acquired and theatrical marketing obligations, which represent amounts that are contractually committed for theatrical marketing expenditures associated with specific titles. | |
(2) | 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 $199.5 million incur interest at rates ranging from 3.96% to 5.18%; one production loan of $1.7 million bears interest of 11.45%, and approximately $83.7 million of production obligations are non-interest bearing. Also included in production obligations is $5.0 million in long term production obligations with an interest rate of 2.5% that is part of a $66.0 million funding agreement with the State of Pennsylvania, as more fully described below. | |
On April 9, 2008, the Company entered into a loan agreement with the Pennsylvania Regional Center, which provides for the availability of production loans up to $66,000,000 on a five year term for use in film and television productions in the State of Pennsylvania. The amount that can be borrowed is generally limited to approximately one half of the qualified production costs incurred in the State of Pennsylvania through the two year period ended April 2010, and is subject to certain other limitations. Under the terms of the loan, for every dollar borrowed, the Company’s production companies are required (within a two year period) to either create a specified number of jobs, or spend a specified amount in certain geographic regions in the State of Pennsylvania. Amounts borrowed under the agreement carry an interest rate of 2.5% which is payable semi-annually and the principal amount is due on the five year anniversary date of the first borrowing under the agreement (April 2013). The loan is secured by a first priority security interest in our film library pursuant to an intercreditor agreement with our senior lender under our revolving credit facility. Pursuant to the terms of our credit facility, the Company is required to maintain a balance equal to the loans outstanding plus 5% under this facility in a bank account with our senior lender under our credit facility. Accordingly, included in restricted cash is $5.3 million (on deposit with our senior lenders), related to amounts received under the Pennsylvania agreement. |
The Company expects approximately 73% of accrued participations and residuals will be paid during theone-year period ending June 30, 2009.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Theatrical Slate Participation
On May 25, 2007, the Company closed a theatrical slate participation arrangement, as amended on January 30, 2008. Under this arrangement, Pride Pictures, LLC (“Pride”), an unrelated entity, will participate in, 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 were generated from the issuance by Pride of $35 million of subordinated debt instruments, $35 million of equity and $134 million from a senior revolving credit facility, which is subject to a borrowing base. The borrowing base calculation is generally based on 90% of the estimated ultimate amounts due to Pride on previously released films, as defined in the applicable agreements. 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. 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.
Amounts provided from Pride are reflected as a participation liability. The difference between the ultimate participation expected to be paid to Pride and the amount provided by Pride is amortized as a charge to or a reduction of participation expense under the individual film forecast method. At June 30, 2008, $86.3 million (March 31, 2008, $134.3 million) was payable to Pride and is included in the participation liability in the unaudited condensed consolidated balance sheet, and $93.2 million was available to be provided by Pride under the terms of the arrangement.
Société Générale de Financement du Québec Filmed Entertainment Participation
On July 30, 2007, the Company entered into a four-year filmed entertainment slate participation agreement with Société Générale de Financement du Québec (“SGF”), the Québec provincial government’s investment arm. SGF will provide up to 35% of production costs of television and feature film productions produced in Québec for a four-year period for an aggregate participation 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 productions after the Company deducts a distribution fee, recoups all distribution expenses and releasing costs, and pays all applicable third party participations and residuals.
Amounts provided from SGF are reflected as a participation liability. The difference between the ultimate participation expected to be paid to SGF and the amount provided by SGF is amortized as a charge to or a reduction of participation expense under the individual film forecast method. At June 30, 2008, $9.3 million (March 31, 2008, $9.3 million) was payable to SGF and is included in the participation liability in the unaudited condensed consolidated balance sheet, and $124.5 million was available to be provided by SGF under the terms of the arrangement.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8. | Subordinated Notes and Other Financing Obligations |
The following table sets forth the subordinated notes and other financing obligations outstanding at June 30, 2008 and March 31, 2008:
June 30, | March 31, | |||||||
2008 | 2008 | |||||||
(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 | 3,718 | ||||||
$ | 328,718 | $ | 328,718 | |||||
Subordinated Notes
3.625% Notes. In February 2005, Lions Gate Entertainment Inc. (“LGEI”) 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 sale of the 3.625% Notes. Interest on the 3.625% Notes is payable semi-annually on March 15 and September 15, from September 15, 2005 until March 15, 2012. 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 until maturity on March 15, 2025. LGEI 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 LGEI 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 LGEI 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 Company’s common shares on the effective date of the change in control. No make whole premium will be paid if the price of the Company’s common shares at such time 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 equal to 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 the Company’s common shares prior to maturity if the notes have been called for redemption, a change in control occurs or certain other corporate transactions occur.
2.9375% Notes. In October 2004, LGEI 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 $0.7 million of offering expenses incurred in connection with the sale of 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, LGEI may redeem the 2.9375% Notes at 100.839%; from October 15, 2010 to October 14, 2011, LGEI may redeem the 2.9375% Notes at 100.420%; and thereafter, LGEI may redeem the notes at 100%.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The holder may require LGEI 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 LGEI 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 Company’s common shares on the effective date of the change in control. No make whole premium will be paid if the price of the Company’s common shares at such time is less than $8.79 per share or exceeds $50.00 per share.
The holder may convert the 2.9375% Notes into the Company’s common shares prior to maturity only if the price of the Company’s common shares 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 other 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 the Company’s common shares at a conversion rate equal to 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.
9. | Acquisitions |
Acquisition of 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 a worldwide 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 cost of the acquisition was approximately $128.8 million including liabilities assumed of $70.2 million with amounts paid or to be paid to the selling shareholders of approximately $58.6 million, comprised of $46.8 million in cash and 1,282,999 of the Company’s common shares, 169,879 of which were issued during the quarter ended March 31, 2008 and the balance of 1,113,120 to be issued and delivered in September 2008 and March 2009, pursuant to certain holdback provisions. Of the $46.8 million cash portion of the purchase price, $44.3 million was paid at closing, $0.9 million represented estimated direct transaction costs (paid to lawyers, accountants and other consultants), and $1.6 million represented the remaining cash consideration paid during the current quarter. In addition, immediately prior to the transaction, the Company loaned Mandate $2.9 million. The value assigned to the shares for purposes of recording the acquisition was $11.8 million and was based on the average price of the Company’s common shares a few days prior and subsequent to the date of the closing of the acquisition, which is when it was publicly announced.
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. Such amounts, to the extent they relate to films or derivative works of films identified at the acquisition date will be charged to goodwill if the target thresholds are achieved, and such amounts, to the extent they relate to other qualifying films produced in the
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
future, will be accounted for similar to other film participation arrangements. The amount to be paid is the excess of the sum of the following amounts over the performance threshold (i.e. the “Hurdle Amount”):
• | 80% of the earnings of certain films for the longer of 5 years from the closing or 5 years from the release of the pictures, plus | |
• | 20% of the earnings of certain pictures which commence principal photography within 5 years from the closing date for a period up to 10 years, plus | |
• | certain fees designated for derivative works which commence principal photography within 7 years of the initial release of the original picture. |
The Hurdle Amount is the purchase price of approximately $56 million plus an interest cost accruing until such hurdle is reached, and certain other costs the Company agreed to pay in connection with the acquisition. Accordingly, the additional consideration is the total of the above in excess of the Hurdle Amount. As of June 30, 2008, the total earnings and fees from identified projects in process are not projected to reach the Hurdle Amount. However, as additional projects are identified in the future and the current projects are released in the market place the total projected earnings and fees from these projects could increase causing additional payments to the sellers to become payable.
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. Goodwill of $36.8 million represents the excess of purchase price over the 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 allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values was as follows:
Allocation | ||||
(Amounts in | ||||
thousands) | ||||
Cash and cash equivalents | $ | 3,952 | ||
Restricted cash | 5,157 | |||
Accounts receivable, net | 17,031 | |||
Investment in films and television programs | 61,580 | |||
Definite life intangible assets | 1,400 | |||
Other assets acquired | 2,626 | |||
Goodwill | 36,784 | |||
Accounts payable and accrued liabilities | (11,039 | ) | ||
Participation and residuals | (3,641 | ) | ||
Film obligations | (50,565 | ) | ||
Deferred revenue | (4,658 | ) | ||
Total | $ | 58,627 | ||
The $36.8 million of goodwill was assigned to the motion pictures reporting segment.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following pro forma unaudited 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, 2007, based on the purchase price allocation:
Three Months | ||||
Ended | ||||
June 30, | ||||
2007 | ||||
(Amounts in | ||||
thousands, except | ||||
per share amounts) | ||||
Revenues | $ | 213,630 | ||
Operating loss | $ | (50,200 | ) | |
Net loss | $ | (52,055 | ) | |
Basic Net Loss Per Common Share | $ | (0.44 | ) | |
Diluted Net Loss Per Common Share | $ | (0.44 | ) | |
Weighted average number of common shares outstanding — Basic | 118,390 | |||
Weighted average number of common shares outstanding — Diluted | 118,390 |
Acquisition of Debmar-Mercury LLC
On July 3, 2006, the Company acquired all of the capital stock of Debmar-Mercury, LLC (“Debmar-Mercury”), a leading syndicator of film and television packages. Consideration for the Debmar-Mercury acquisition was $27.0 million, comprised of a combination of $24.5 million in cash paid on July 3, 2006 and $2.5 million in common shares of the Company issued in January 2008, and assumed liabilities of $10.5 million. Goodwill of $8.7 million represents the excess of the purchase price over the fair value of the net identifiable tangible and intangible assets acquired.
Pursuant to the purchase agreement, if the aggregate earnings before interest, taxes, depreciation and amortization adjusted to add back 20% of the overhead expense of Debmar-Mercury (“Adjusted EBITDA”) of Debmar-Mercury LLC (“Debmar-Mercury”) for the five year period ending after the closing date exceeds the target amount, then up to 40% of the excess Adjusted EBITDA over the target amount is payable as additional consideration. The percentage of the excess Adjusted EBITDA over the target amount ranges from 20% of such excess up to an excess of $3 million, 25% of such excess over $3 million and less than $6 million, 30% of such excess over $6 million and less than $10 million and 40% of such excess over $10 million. The target amount is $32.2 million plus adjustments for interest on certain funding provided by Lions Gate and adjustments for certain overhead and other items. If the Adjusted EBITDA of Debmar-Mercury is proportionately on track to exceed the target amount after three years from the date of closing, Lions Gate will pay a recoupable advance against the five year payment.
In addition, up to 40% (percentage is determined based on how much the cumulative Adjusted EBITDA exceeds the target amount) of Adjusted EBITDA of Debmar-Mercury generated subsequent to the five year period from the assets existing as of the fifth anniversary date of the close is also payable as additional consideration on a quarterly basis (i.e., the Continuing Earnout Payment) unless the substitute earn out option is exercised by either the seller or the Company. The substitute earn out option is only available if the aggregate Adjusted EBITDA for the five year period ending after the closing date exceeds the target amount. Under the substitute earn out option, the seller can elect to receive an amount equal to $2.5 million in lieu of the Continuing Earnout Payments and the Company can elect to pay an amount equal to $15 million in lieu of the Continuing Earnout Payments.
Amounts paid, if any, under the above additional consideration provisions will be recorded as additional goodwill.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. | Direct Operating Expenses |
Three Months | Three Months | |||||||
Ended | Ended | |||||||
June 30, | June 30, | |||||||
2008 | 2007 | |||||||
(Amounts in thousands) | ||||||||
Amortization of films and television programs | $ | 69,047 | $ | 49,862 | ||||
Participation and residual expense | 78,112 | 38,011 | ||||||
Amortization of acquired intangible assets | 324 | 162 | ||||||
Other expenses | 525 | (977 | ) | |||||
$ | 148,008 | $ | 87,058 | |||||
Other expenses primarily consist of the provision (benefit) for doubtful accounts and foreign exchange gains and losses. The provision (benefit) for doubtful accounts included in other expenses for the three months ended June 30, 2008 and 2007 was $0.2 million and a benefit of ($0.5) million, respectively. Foreign exchange losses (gains) included in other expenses for the three months ended June 30, 2008 and 2007 were $0.3 million and ($0.5) million, respectively.
11. | Comprehensive Income (Loss) |
Three Months | Three Months | |||||||
Ended | Ended | |||||||
June 30, | June 30, | |||||||
2008 | 2007 | |||||||
(Amounts in thousands) | ||||||||
Net income (loss) | $ | 7,095 | $ | (53,118 | ) | |||
Add (Deduct): Foreign currency translation adjustments | 169 | 2,434 | ||||||
Add (Deduct): Net unrealized gain (loss) on foreign exchange contracts | 9 | (12 | ) | |||||
Add (Deduct): Unrealized gain (loss) on investments — available for sale | (18 | ) | 1,280 | |||||
Comprehensive income (loss) | $ | 7,255 | $ | (49,416 | ) | |||
12. | Income (Loss) Per Share and Treasury Shares |
The Company calculates income (loss) per share in accordance with SFAS No. 128, “Earnings Per Share.” Basic income (loss) per share is calculated based on the weighted average common shares outstanding for the period. Basic income (loss) per share for the three months ended June 30, 2008 and 2007 is presented below:
Three Months | Three Months | |||||||
Ended | Ended | |||||||
June 30, | June 30, | |||||||
2008 | 2007 | |||||||
(Amounts in thousands) | ||||||||
Basic Net Income (Loss) Per Share: | ||||||||
Numerator: | ||||||||
Net income (loss) | $ | 7,095 | $ | (53,118 | ) | |||
Denominator: | ||||||||
Weighted average common shares outstanding | 118,443 | 117,107 | ||||||
Basic Net Income (Loss) Per Common Share | $ | 0.06 | $ | (0.45 | ) | |||
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Diluted net income (loss) per common share reflects the potential dilutive effect, if any, of the 2.9375% Notes and the 3.625% Notes sold by the Company in October 2004 and February 2005, respectively, under the “if converted” method, the share purchase options and restricted share units using the treasury stock method when dilutive, and any contingently issuable shares. For the three month period ended June 30, 2008, the 12,252,328 and 13,043,475 shares issuable on the potential conversion of the 3.625% Notes and the 2.9375% Notes, respectively, 3,424,340 equivalent shares of stock options, and 15,000 restricted share units were not included in the computation of diluted net income per common share because their inclusion would have had an anti-dilutive effect. For the three months ended June 30, 2007, the 12,252,328 and 13,043,475 shares issuable on the potential conversion of the 3.625% Notes and the 2.9375% Notes, respectively, 2,303,646 equivalent shares of stock options, and 668,924 restricted share units were excluded from diluted loss per common share for the period because their inclusion would have had an anti-dilutive effect. Diluted net income (loss) per common share for the three months ended June 30, 2008 and 2007 is presented below:
Three Months | Three Months | |||||||
Ended | Ended | |||||||
June 30, | June 30, | |||||||
2008 | 2007 | |||||||
(Amounts in thousands) | ||||||||
Diluted Net Income (Loss) Per Share: | ||||||||
Numerator: | ||||||||
Net income (loss) | $ | 7,095 | $ | (53,118 | ) | |||
Denominator: | ||||||||
Weighted average common shares outstanding | 118,443 | 117,107 | ||||||
Effect of dilutive securities: | ||||||||
Share purchase options | 836 | — | ||||||
Restricted share units | 684 | — | ||||||
Contingently issuable shares | 1,113 | — | ||||||
Adjusted weighted average common shares outstanding | 121,076 | 117,107 | ||||||
Diluted Net Income (Loss) Per Common Share | $ | 0.06 | $ | (0.45 | ) | |||
The Company had 500,000,000 authorized common shares at June 30, 2008 and March 31, 2008. The table below outlines common shares reserved for future issuance:
June 30, | March 31, | |||||||
2008 | 2008 | |||||||
(Amounts in thousands) | ||||||||
Stock options outstanding | 4,994 | 5,137 | ||||||
Restricted share units — unvested | 2,285 | 2,325 | ||||||
Share purchase options and restricted share units available for future issuance | 6,749 | 6,859 | ||||||
Shares issuable upon conversion of 2.9375% Notes at conversion price of $11.50 per share | 13,043 | 13,043 | ||||||
Shares issuable upon conversion of 3.625% Notes at conversion price of $14.28 per share | 12,252 | 12,252 | ||||||
Shares reserved for future issuance | 39,323 | 39,616 | ||||||
On May 31, 2007, the Company’s Board of Directors authorized the repurchase of up to $50 million of the Company’s common shares and, on May 29, 2008, an additional $50 million repurchase was authorized by the Company’s Board of Directors, with the timing, price, quantity, and manner of the purchases to be made at the
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
discretion of management, depending upon market conditions. During the period from the authorization date through June 30, 2008, 3,860,635 shares have been repurchased pursuant to the plan at a cost of approximately $36.7 million, including commission costs. During the three months ended June 30, 2008, 1,662,000 shares have been repurchased pursuant to the plan at a cost of approximately $16.4 million. 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.
13. | Accounting for Stock-Based Compensation |
Share-Based Compensation
The Company accounts for stock-based compensation in accordance with the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“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 weighted-average grant-date fair values for options granted during the three months ended June 30, 2007 was $4.75. No options were granted during the three months ended June 30, 2008. The following table represents the assumptions used in the Black-Scholes option-pricing model for stock options granted during the three months ended June 30, 2007:
Three Months | ||
Ended | ||
June 30, | ||
2007 | ||
Risk-free interest rate | 4.7% - 4.8% | |
Expected option lives (in years) | 5.6 to 6.3 years | |
Expected volatility for options | 31% | |
Expected dividend yield | 0% |
The Company recognized the following share-based compensation expense during the three months ended June 30, 2008 and 2007:
Three Months | Three Months | |||||||
Ended | Ended | |||||||
June 30, | June 30, | |||||||
2008 | 2007 | |||||||
(Amounts in thousands) | ||||||||
Compensation Expense (Benefit): | ||||||||
Stock Options | $ | 797 | $ | 785 | ||||
Restricted Share Units | 2,622 | 2,061 | ||||||
Stock Appreciation Rights | 466 | (380 | ) | |||||
Total | $ | 3,885 | $ | 2,466 | ||||
There was no income tax benefit recognized in the statements of operations for share-based compensation arrangements during the three months ended June 30, 2008 and 2007.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Options
A summary of option activity as of June 30, 2008 and changes during the three 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 | June 30, | |||||||||||||||||||
Options: | Shares(1) | Shares(2) | Shares | Price | Term in Years | 2008 | ||||||||||||||||||
Outstanding at March 31, 2008 | 4,537,363 | 600,000 | 5,137,363 | $ | 8.32 | |||||||||||||||||||
Granted | — | — | — | — | ||||||||||||||||||||
Exercised | (123,416 | ) | — | (123,416 | ) | 6.68 | ||||||||||||||||||
Forfeited or expired | (20,334 | ) | — | (20,334 | ) | 2.93 | ||||||||||||||||||
Outstanding at June 30, 2008 | 4,393,613 | 600,000 | 4,993,613 | $ | 8.39 | 5.69 | $ | 10,531,692 | ||||||||||||||||
Outstanding as of June 30, 2008, vested or expected to vest in the future | 4,392,030 | 600,000 | 4,992,030 | $ | 8.39 | 5.69 | $ | 10,531,484 | ||||||||||||||||
Exercisable at June 30, 2008 | 2,451,529 | — | 2,451,529 | $ | 6.86 | 2.73 | $ | 8,764,667 | ||||||||||||||||
(1) | Issued under our long-term incentive plans | |
(2) | On September 10, 2007, in connection with the acquisition of Mandate (see Note 9), 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 months ended June 30, 2008 was approximately $0.5 million (2007 — $0.3 million).
Restricted Share Units
A summary of the status of the Company’s restricted share units as of June 30, 2008, and changes during the three 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, 2008 | 2,037,125 | 287,500 | 2,324,625 | $ | 10.09 | |||||||||||
Granted | 294,875 | — | 294,875 | 9.89 | ||||||||||||
Vested | (332,331 | ) | — | (332,331 | ) | 10.80 | ||||||||||
Forfeited | (1,791 | ) | — | (1,791 | ) | 10.67 | ||||||||||
Outstanding at June 30, 2008 | 1,997,878 | 287,500 | 2,285,378 | $ | 9.96 | |||||||||||
(1) | Issued under our long-term incentive plans | |
(2) | On September 10, 2007, in connection with the acquisition of Mandate (see Note 9), two executives entered into employment agreements with Lions Gate Films, Inc. 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. |
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 June 30, 2008 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 | $ | 8,036 | 2.6 | |||||
Restricted Share Units | 16,159 | 2.3 | ||||||
Total | $ | 24,195 | ||||||
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 three months ended June 30, 2008, 112,156 shares were withheld upon the vesting of restricted share units.
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 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 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 stock option and long term incentive plans. 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 months ended June 30, 2008, the following assumptions were used in the Black-Scholes option-pricing model: Volatility of 47.7%, Risk Free Rate of 2.09%, Expected Term of 0.6 years, and Dividend of 0%. At June 30, 2008, the market price of the Company’s common shares was $10.36, the weighted average fair value of the SARs was $5.25, and all 1,000,000 of the SARs had vested. Due to the increase in the market price of its common shares during the quarter, the Company recorded a stock-based compensation expense in the amount of $0.5 million in general and administration expenses in the unaudited condensed consolidated statements of operations for the three months ended June 30, 2008 (2007 — decrease of expense of $0.4 million). 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 June 30, 2008, the Company has a stock-based compensation liability accrual in the amount of $4.5 million (March 31, 2008 — $4.0 million) included in accounts payable and accrued liabilities on the unaudited condensed consolidated balance sheets relating to these SARs.
14. | 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
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, DVD 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.
Segmented information by business unit is as follows:
Three Months | Three Months | |||||||
Ended | Ended | |||||||
June 30, | June 30, | |||||||
2008 | 2007 | |||||||
(Amounts in thousands) | ||||||||
Segment revenues | ||||||||
Motion Pictures | $ | 257,374 | $ | 170,322 | ||||
Television | 41,085 | 28,420 | ||||||
$ | 298,459 | $ | 198,742 | |||||
Direct operating expenses | ||||||||
Motion Pictures | $ | 115,051 | $ | 59,630 | ||||
Television | 32,957 | 27,428 | ||||||
$ | 148,008 | $ | 87,058 | |||||
Distribution and marketing | ||||||||
Motion Pictures | $ | 92,385 | $ | 132,859 | ||||
Television | 6,590 | 2,642 | ||||||
$ | 98,975 | $ | 135,501 | |||||
General and administration | ||||||||
Motion Pictures | $ | 13,118 | $ | 7,629 | ||||
Television | 2,656 | 1,492 | ||||||
$ | 15,774 | $ | 9,121 | |||||
Segment profit (loss) | ||||||||
Motion Pictures | $ | 36,820 | $ | (29,796 | ) | |||
Television | (1,118 | ) | (3,142 | ) | ||||
$ | 35,702 | $ | (32,938 | ) | ||||
Acquisition of investment in films and television programs | ||||||||
Motion Pictures | $ | 146,187 | $ | 56,073 | ||||
Television | 54,710 | 80,066 | ||||||
$ | 200,897 | $ | 136,139 | |||||
Purchases of property and equipment amounted to $2.3 million and $2.0 million for the three months ending June 30, 2008 and 2007, respectively, all primarily pertaining to purchases for the Company’s corporate headquarters.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Segment profit (loss) is defined as segment revenue less segment direct operating, distribution and marketing, and general and administration expenses. The reconciliation of total segment profit (loss) to the Company’s income (loss) before income taxes is as follows:
Three Months | Three Months | |||||||
Ended | Ended | |||||||
June 30, | June 30, | |||||||
2008 | 2007 | |||||||
(Amounts in thousands) | ||||||||
Company’s total segment profit (loss) | $ | 35,702 | $ | (32,938 | ) | |||
Less: | ||||||||
Corporate general and administration | (22,534 | ) | (17,719 | ) | ||||
Depreciation | (1,062 | ) | (908 | ) | ||||
Interest expense | (4,311 | ) | (3,860 | ) | ||||
Interest and other income | 2,155 | 3,803 | ||||||
Equity interests loss | (2,186 | ) | (807 | ) | ||||
Income (loss) before income taxes | $ | 7,764 | $ | (52,429 | ) | |||
The following table sets forth significant assets as broken down by segment and other unallocated assets as of June 30, 2008 and March 31, 2008:
June 30, 2008 | March 31, 2008 | |||||||||||||||||||||||
Motion | Motion | |||||||||||||||||||||||
Pictures | Television | Total | Pictures | Television | Total | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Significant assets by segment Accounts receivable | $ | 121,811 | $ | 76,629 | $ | 198,440 | $ | 193,810 | $ | 66,474 | $ | 260,284 | ||||||||||||
Investment in films and television programs | 636,104 | 104,376 | 740,480 | 540,527 | 68,415 | 608,942 | ||||||||||||||||||
Goodwill | 210,252 | 13,961 | 224,213 | 210,570 | 13,961 | 224,531 | ||||||||||||||||||
$ | 968,167 | $ | 194,966 | $ | 1,163,133 | $ | 944,907 | $ | 148,850 | $ | 1,093,757 | |||||||||||||
Other unallocated assets (primarily cash and available-for-sale investments) | 323,614 | 444,001 | ||||||||||||||||||||||
Total assets | $ | 1,486,747 | $ | 1,537,758 | ||||||||||||||||||||
15. | 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.
16. | Consolidating Financial Information |
In October 2004, the Company sold $150.0 million of the 2.9375% Notes through LGEI. 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 LGEI. The 3.625% Notes, by their terms, are fully and unconditionally guaranteed by the Company.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables present unaudited condensed consolidating financial information as of June 30, 2008 and March 31, 2008, and for the three months ended June 30, 2008 and 2007 for (1) the Company, on a stand-alone basis, (2) LGEI, on a stand-alone basis, (3) the non-guarantor subsidiaries of the Company (including the subsidiaries of LGEI), on a combined basis (collectively, the “Other Subsidiaries”) and (4) the Company, on a consolidated basis.
As of June 30, 2008 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
BALANCE SHEET | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 1,716 | $ | 183,106 | $ | 45,768 | $ | — | $ | 230,590 | ||||||||||
Restricted cash | — | 15,850 | — | — | 15,850 | |||||||||||||||
Investments | — | 6,909 | — | — | 6,909 | |||||||||||||||
Accounts receivable, net | 344 | — | 198,096 | — | 198,440 | |||||||||||||||
Investment in films and television programs | 426 | 6,651 | 733,462 | (59 | ) | 740,480 | ||||||||||||||
Property and equipment | — | 13,759 | 1,077 | — | 14,836 | |||||||||||||||
Goodwill | 10,173 | — | 214,040 | — | 224,213 | |||||||||||||||
Other assets | 1,989 | 273,801 | 3,482 | (223,843 | ) | 55,429 | ||||||||||||||
Investment in subsidiaries | 271,693 | 621,183 | — | (892,876 | ) | — | ||||||||||||||
$ | 286,341 | $ | 1,121,259 | $ | 1,195,925 | $ | (1,116,778 | ) | $ | 1,486,747 | ||||||||||
Liabilities and Shareholders’ | ||||||||||||||||||||
Equity (Deficiency) | ||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 286 | $ | 22,928 | $ | 159,776 | $ | (5 | ) | $ | 182,985 | |||||||||
Participation and residuals | 188 | 1,072 | 349,692 | — | 350,952 | |||||||||||||||
Film and production obligations | 78 | — | 312,537 | 1 | 312,616 | |||||||||||||||
Subordinated notes and other financing obligations | — | 325,000 | 3,718 | — | 328,718 | |||||||||||||||
Deferred revenue | 4 | 647 | 128,412 | — | 129,063 | |||||||||||||||
Intercompany payables (receivables) | (216,613 | ) | 752,296 | (119,752 | ) | (415,931 | ) | — | ||||||||||||
Intercompany equity | 319,985 | 93,217 | 329,591 | (742,793 | ) | — | ||||||||||||||
Shareholders’ equity (deficiency) | 182,413 | (73,901 | ) | 31,951 | 41,950 | 182,413 | ||||||||||||||
$ | 286,341 | $ | 1,121,259 | $ | 1,195,925 | $ | (1,116,778 | ) | $ | 1,486,747 | ||||||||||
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Three Months Ended June 30, 2008 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
STATEMENT OF OPERATIONS | ||||||||||||||||||||
Revenues | $ | 416 | $ | 4,780 | $ | 300,365 | $ | (7,102 | ) | $ | 298,459 | |||||||||
EXPENSES: | ||||||||||||||||||||
Direct operating | 416 | 4 | 147,877 | (289 | ) | 148,008 | ||||||||||||||
Distribution and marketing | — | — | 98,677 | 298 | 98,975 | |||||||||||||||
General and administration | 307 | 22,250 | 15,750 | 1 | 38,308 | |||||||||||||||
Depreciation | — | — | 1,062 | — | 1,062 | |||||||||||||||
Total expenses | 723 | 22,254 | 263,366 | 10 | 286,353 | |||||||||||||||
OPERATING INCOME (LOSS) | (307 | ) | (17,474 | ) | 36,999 | (7,112 | ) | 12,106 | ||||||||||||
Other expenses (income): | ||||||||||||||||||||
Interest expense | — | 3,965 | 346 | — | 4,311 | |||||||||||||||
Interest and other income | (55 | ) | (1,856 | ) | (243 | ) | (1 | ) | (2,155 | ) | ||||||||||
Total other expenses (income) | (55 | ) | 2,109 | 103 | (1 | ) | 2,156 | |||||||||||||
INCOME (LOSS) BEFORE EQUITY INTERESTS AND INCOME TAXES | (252 | ) | (19,583 | ) | 36,896 | (7,111 | ) | 9,950 | ||||||||||||
Equity interests income (loss) | 7,364 | 25,527 | (1,065 | ) | (34,012 | ) | (2,186 | ) | ||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES | 7,112 | 5,944 | 35,831 | (41,123 | ) | 7,764 | ||||||||||||||
Income tax provision (benefit) | 17 | — | 731 | (79 | ) | 669 | ||||||||||||||
NET INCOME (LOSS) | $ | 7,095 | $ | 5,944 | $ | 35,100 | $ | (41,044 | ) | $ | 7,095 | |||||||||
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Three Months Ended June 30, 2008 | ||||||||||||||||||||
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 | $ | 13,891 | $ | (153,586 | ) | $ | (10,122 | ) | $ | — | $ | (149,817 | ) | |||||||
INVESTING ACTIVITIES: | ||||||||||||||||||||
Investment in equity method investees | — | (8,571 | ) | (2,523 | ) | — | (11,094 | ) | ||||||||||||
Note to equity method investee | — | (3,100 | ) | — | (3,100 | ) | ||||||||||||||
Purchases of property and equipment | — | (2,218 | ) | (61 | ) | — | (2,279 | ) | ||||||||||||
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES | — | (13,889 | ) | (2,584 | ) | — | (16,473 | ) | ||||||||||||
FINANCING ACTIVITIES: | ||||||||||||||||||||
Exercise of stock options | 825 | — | — | — | 825 | |||||||||||||||
Amounts paid to satisfy tax withholding requirements on equity awards | (1,113 | ) | — | — | — | (1,113 | ) | |||||||||||||
Repurchases of common shares | (16,420 | ) | — | — | — | (16,420 | ) | |||||||||||||
Increase in production obligations | — | — | 70,545 | 70,545 | ||||||||||||||||
Payment of production obligations | — | — | (28,505 | ) | (28,505 | ) | ||||||||||||||
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES | (16,708 | ) | — | 42,040 | — | 25,332 | ||||||||||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | (2,817 | ) | (167,475 | ) | 29,334 | — | (140,958 | ) | ||||||||||||
FOREIGN EXCHANGE EFFECT ON CASH | 59 | — | (100 | ) | — | (41 | ) | |||||||||||||
CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD | 4,474 | 350,581 | 16,534 | — | 371,589 | |||||||||||||||
CASH AND CASH EQUIVALENTS — END OF PERIOD | $ | 1,716 | $ | 183,106 | $ | 45,768 | $ | — | $ | 230,590 | ||||||||||
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of March 31, 2008 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
BALANCE SHEET | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 4,474 | $ | 350,581 | $ | 16,534 | $ | — | $ | 371,589 | ||||||||||
Restricted cash | — | 10,300 | — | — | 10,300 | |||||||||||||||
Investments | — | 6,927 | — | — | 6,927 | |||||||||||||||
Accounts receivable, net | 344 | — | 260,635 | (695 | ) | 260,284 | ||||||||||||||
Investment in films and television programs | 871 | 6,683 | 601,246 | 142 | 608,942 | |||||||||||||||
Property and equipment | — | 12,428 | 1,185 | — | 13,613 | |||||||||||||||
Goodwill | 10,173 | — | 214,358 | — | 224,531 | |||||||||||||||
Other assets | 1,983 | 268,070 | 4,217 | (232,698 | ) | 41,572 | ||||||||||||||
Investment in subsidiaries | 264,329 | 594,542 | — | (858,871 | ) | — | ||||||||||||||
$ | 282,174 | $ | 1,249,531 | $ | 1,098,175 | $ | (1,092,122 | ) | $ | 1,537,758 | ||||||||||
Liabilities and Shareholders’ Equity (Deficiency) | ||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 540 | $ | 31,913 | $ | 212,980 | $ | (3 | ) | $ | 245,430 | |||||||||
Participation and residuals | 187 | 1,567 | 384,228 | (136 | ) | 385,846 | ||||||||||||||
Film and production obligations | 78 | — | 277,938 | — | 278,016 | |||||||||||||||
Subordinated notes and other financing obligations | — | 325,000 | 3,718 | — | 328,718 | |||||||||||||||
Deferred revenue | — | 1,026 | 110,484 | — | 111,510 | |||||||||||||||
Intercompany payables (receivables) | (226,854 | ) | 852,748 | (218,788 | ) | (407,106 | ) | — | ||||||||||||
Intercompany equity | 319,985 | 93,217 | 329,597 | (742,799 | ) | — | ||||||||||||||
Shareholders’ equity (deficiency) | 188,238 | (55,940 | ) | (1,982 | ) | 57,922 | 188,238 | |||||||||||||
$ | 282,174 | $ | 1,249,531 | $ | 1,098,175 | $ | (1,092,122 | ) | $ | 1,537,758 | ||||||||||
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Three Months Ended June 30, 2007 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
STATEMENT OF OPERATIONS | ||||||||||||||||||||
Revenues | $ | 47 | $ | 2,207 | $ | 197,881 | $ | (1,393 | ) | $ | 198,742 | |||||||||
EXPENSES: | ||||||||||||||||||||
Direct operating | — | 93 | 86,965 | — | 87,058 | |||||||||||||||
Distribution and marketing | — | — | 135,501 | — | 135,501 | |||||||||||||||
General and administration | 452 | 16,235 | 10,153 | — | 26,840 | |||||||||||||||
Depreciation | — | 1 | 907 | — | 908 | |||||||||||||||
Total expenses | 452 | 16,329 | 233,526 | — | 250,307 | |||||||||||||||
OPERATING LOSS | (405 | ) | (14,122 | ) | (35,645 | ) | (1,393 | ) | (51,565 | ) | ||||||||||
Other Expense (Income): | ||||||||||||||||||||
Interest expense | — | 3,855 | 5 | — | 3,860 | |||||||||||||||
Interest income | (14 | ) | (3,790 | ) | 1 | — | (3,803 | ) | ||||||||||||
Total other expenses (income) | (14 | ) | 65 | 6 | — | 57 | ||||||||||||||
INCOME (LOSS) BEFORE EQUITY INTERESTS AND INCOME | ||||||||||||||||||||
TAXES | (391 | ) | (14,187 | ) | (35,651 | ) | (1,393 | ) | (51,622 | ) | ||||||||||
Equity interests income (loss) | (52,727 | ) | (37,288 | ) | (867 | ) | 90,075 | (807 | ) | |||||||||||
INCOME (LOSS) BEFORE INCOME TAXES | (53,118 | ) | (51,475 | ) | (36,518 | ) | 88,682 | (52,429 | ) | |||||||||||
Income tax provision (benefit) | — | 48 | 641 | — | 689 | |||||||||||||||
NET INCOME (LOSS) | $ | (53,118 | ) | $ | (51,523 | ) | $ | (37,159 | ) | $ | 88,682 | $ | (53,118 | ) | ||||||
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Three Months Ended June 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 | $ | (333 | ) | $ | (69,241 | ) | $ | 13,994 | $ | — | $ | (55,580 | ) | |||||||
INVESTING ACTIVITIES: | ||||||||||||||||||||
Purchases of investments — auction rate securities | — | (172,442 | ) | — | — | (172,442 | ) | |||||||||||||
Sales of investments — auction rate securities | — | 243,491 | — | — | 243,491 | |||||||||||||||
Purchases of equity securities | — | — | (3,432 | ) | — | (3,432 | ) | |||||||||||||
Proceeds from sale of equity securities | — | 16,343 | — | — | 16,343 | |||||||||||||||
Purchases of property and equipment | — | (1,746 | ) | (271 | ) | — | (2,017 | ) | ||||||||||||
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES | — | 85,646 | (3,703 | ) | — | 81,943 | ||||||||||||||
FINANCING ACTIVITIES: | ||||||||||||||||||||
Exercise of stock options | 390 | — | — | — | 390 | |||||||||||||||
Borrowings under financing arrangements | — | — | 3,718 | — | 3,718 | |||||||||||||||
Increase in production obligations | — | — | 22,869 | — | 22,869 | |||||||||||||||
Payment of production obligations | — | — | (47,660 | ) | — | (47,660 | ) | |||||||||||||
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES | 390 | — | (21,073 | ) | — | (20,683 | ) | |||||||||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | 57 | 16,405 | (10,782 | ) | — | 5,680 | ||||||||||||||
FOREIGN EXCHANGE EFFECT ON CASH | 162 | (689 | ) | 1,930 | — | 1,403 | ||||||||||||||
CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD | 1,908 | 28,347 | 21,242 | — | 51,497 | |||||||||||||||
CASH AND CASH EQUIVALENTS — END OF PERIOD | $ | 2,127 | $ | 44,063 | $ | 12,390 | $ | — | $ | 58,580 | ||||||||||
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
17. | Subsequent Event |
Amended Credit Facility
In July 2008, the Company entered into an amended credit facility, which provides for a $340 million secured revolving credit facility, of which $30 million may be utilized by two of the Company’s wholly owned foreign subsidiaries. The amended credit facility expires July 25, 2013 and bears interest at 2.25% over the Adjusted LIBOR rate. The availability of funds under the credit facility is limited by a borrowing base, and also reduced by outstanding letters of credit. This amended credit facility amends and restates the Company’s original $215 million credit facility described in Note 6. The proceeds of the credit facility may be used (i) to finance the development, production, distribution or acquisition of feature films, television, DVD product and other product lines (ii) to operate physical production facilities, (iii) to acquire and operate television channels and internet distribution platforms and (iv) for other general corporate purposes, including acquisitions, permitted stock repurchases and dividends. Obligations under the credit facility are secured by collateral (as defined) granted by the Company and certain subsidiaries of the Company, as well as pledge of equity interests in certain of the Company’s subsidiaries. The amended credit facility contains a number of affirmative covenants and a number of negative covenants that, among other things, require the Company to satisfy certain financial covenants and restrict the ability of the Company, to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, repurchase its stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of its business, enter into sale-leaseback transactions, transfer and sell material assets and merge or consolidate.
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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 leading next generation filmed entertainment studio with a diversified presence in motion pictures, television programming, home entertainment, family entertainment,video-on-demand and digitally delivered content. We release approximately 18 to 20 motion pictures theatrically per year, which include films we develop and produce in-house, as well as films that we acquire from third parties. We also have produced approximately 76 hours of television programming on average for the last three years, primarily prime time television series for the cable and broadcast networks. We currently distribute our library of approximately 8,000 motion picture titles and approximately 4,000 television episodes and programs directly to retailers, DVD rental stores, and pay and free television channels in the United States (the “U.S.”), Canada, the United Kingdom (the “UK”) and Ireland, through various digital media platforms, and indirectly to other international markets through our subsidiaries and various third parties.
We own interests in CinemaNow, Inc., an internetvideo-on-demand provider (“CinemaNow”), Horror Entertainment, LLC, a multiplatform programming and content service provider (“FEARnet”), NextPoint, Inc., an online home entertainment service provider (“Break.com”), Roadside Attractions, LLC, an independent theatrical distribution company (“Roadside”), Elevation Sales Limited, a UK based home entertainment distributor (“Elevation”), Maple Pictures Corp., a Canadian film, television and home entertainment distributor (“Maple Pictures”), and a premium television channel (“Premium TV Channel”).
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. and Canada 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 DVD releases of our own productions and acquired films, including theatrical releases and direct-to-video releases, to retail stores and through digital media platforms. 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 international subsidiaries from the licensing and sale of our productions, acquired films, our catalog product or libraries of acquired titles and revenue from our direct distribution to international markets on aterritory-by-territory basis. Our revenues are derived from the U.S., Canada, UK, Australia and many other foreign countries; none of the foreign countries individually comprised greater than 10% of total revenue.
• | Television Productions, which includes the licensing and syndication 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 and through digital media platforms. |
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 |
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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 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 marketing cost associated with the theatrical release of the picture. DVD duplication represent the cost of the DVD product and the manufacturing costs associated with creating the physical products. 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
Premium Television Channel. In April 2008, the Company formed a joint venture with Viacom Inc. (“Viacom”), Paramount Pictures Unit (“Paramount Pictures”) andMetro-Goldwyn-Mayer Studios Inc. (“MGM”) to create a premium television channel and subscriptionvideo-on-demand service. The new venture will have access to the Company’s titles released theatrically on or after January 1, 2009. Viacom will provide operational support to the venture, including marketing and affiliate services through its MTV Networks division. Upon its expected launch in the fall of 2009, the joint venture will provide the Company with an additional platform to distribute its library of motion picture titles and television episodes and programs. Currently, the Company has invested $8.6 million as of June 30, 2008, which represents 28.57% or its proportionate share of investment in the joint venture. The Company has a mandatory commitment of $31.4 million increasing to $42.9 million if certain performance targets are achieved. The Company is recording its share of the joint venture results on a one quarter lag, beginning in the second quarter of the current fiscal year.
Amended Credit Facility. In July 2008, the Company entered into an amended credit facility, which provides for a $340 million secured revolving credit facility, of which $30 million may be utilized by two of the Company’s wholly owned foreign subsidiaries. The amended credit facility expires July 25, 2013 and bears interest at 2.25% over the Adjusted LIBOR rate. The availability of funds under the credit facility is limited by a borrowing base, and also reduced by outstanding letters of credit. This amended credit facility amends and restates the Company’s original $215 million credit facility described in Note 6. The proceeds of the credit facility may be used (i) to finance the development, production, distribution or acquisition of feature films, television, DVD product and other product lines (ii) to operate physical production facilities, (iii) to acquire and operate television channels and internet distribution platforms and (iv) for other general corporate purposes, including acquisitions, permitted stock repurchases and dividends. Obligations under the credit facility are secured by collateral (as defined) granted by the Company and certain subsidiaries of the Company, as well as pledge of equity interests in certain of the Company’s subsidiaries. The amended credit facility contains a number of affirmative covenants and a number of negative covenants that, among other things, require the Company to satisfy certain financial covenants and restrict the ability of the Company, to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, repurchase its stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of its business, enter into sale-leaseback transactions, transfer and sell material assets and merge or consolidate.
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, 2008 audited consolidated financial statements.
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Generally Accepted Accounting Principles (“GAAP”). Our consolidated financial statements have been prepared in accordance with U.S. GAAP.
Accounting for Films and Television Programs. 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 Statement of Position00-2 “Accounting by Producers or Distributors of Films” (“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 revenue and participation costs based upon the actual results achieved or new information as to anticipated revenue performance such as (for home entertainment 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 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 DVD 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 DVD 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
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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. 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 full 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 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, 2007. 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 in our balance sheet 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
In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) APB14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB14-1”). FSP APB14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14,Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants. Additionally, FSP APB14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We will adopt FSP APB14-1 beginning in the first quarter of fiscal 2010, and this standard must be applied on a retrospective basis. We are
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evaluating the impact the adoption of FSP APB14-1 will have on our consolidated financial position and results of operations.
In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007),Business Combinations(“SFAS No. 141(R)”). SFAS No. 141(R) significantly changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, preacquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under SFAS No. 141(R), changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. We will adopt SFAS No. 141(R) beginning in the first quarter of fiscal 2010, which will change our accounting treatment for business combinations on a prospective basis.
In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51(“SFAS No. 160”). SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. We will adopt SFAS No. 160 beginning in the first quarter of fiscal 2010. We are evaluating the impact the adoption of SFAS No. 160 will have on our consolidated financial position and results of operations.
Results of Operations
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
Consolidated revenues this quarter of $298.5 million increased $99.8 million, or 50.2%, compared to $198.7 million in the prior year’s quarter. Motion pictures revenue of $257.4 million this quarter increased $87.1 million, or 51.1%, compared to $170.3 million in the prior year’s quarter. Television revenues of $41.1 million this quarter increased $12.7 million, or 44.7%, compared to $28.4 million in the prior year’s quarter.
Motion Pictures Revenue
The increase in motion pictures revenue this quarter was mainly attributable to increases in DVD, theatrical, international, Mandate Pictures and television revenue. The following table sets forth the components of revenue for the motion pictures reporting segment for the three-month periods ended June 30, 2008 and 2007:
Three Months | Three Months | |||||||||||||||
Ended | Ended | |||||||||||||||
June 30, | June 30, | Increase (Decrease) | ||||||||||||||
2008 | 2007 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
Motion Pictures | ||||||||||||||||
Theatrical | $ | 30.5 | $ | 19.0 | $ | 11.5 | 60.5 | % | ||||||||
DVD | 152.2 | 103.8 | 48.4 | 46.6 | % | |||||||||||
Television | 28.9 | 22.4 | 6.5 | 29.0 | % | |||||||||||
International | 34.3 | 22.7 | 11.6 | 51.1 | % | |||||||||||
Mandate Pictures | 8.5 | — | 8.5 | 100.0 | % | |||||||||||
Other | 3.0 | 2.4 | 0.6 | 25.0 | % | |||||||||||
$ | 257.4 | $ | 170.3 | $ | 87.1 | 51.1 | % | |||||||||
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The following table sets forth the titles contributing significant motion pictures revenue for the three-month periods ended June 30, 2008 and 2007:
Three Months Ended June 30, | ||||||
2008 | 2007 | |||||
Theatrical and DVD | Theatrical and DVD | |||||
Title | Release Date | Title | Release Date | |||
Theatrical: | Theatrical: | |||||
Meet The Browns | March 2008 | Away From Her | May 2007 | |||
The Bank Job | March 2008 | Bug | May 2007 | |||
The Forbidden Kingdom | April 2008 | Delta Farce | May 2007 | |||
Hostel II | June 2007 | |||||
The Condemned | April 2007 | |||||
DVD: | DVD: | |||||
3:10 to Yuma | January 2008 | Daddy’s Little Girls | June 2007 | |||
Bella | May 2008 | Employee of the Month | January 2007 | |||
Rambo | May 2008 | Happily N’Ever After | May 2007 | |||
The Eye | June 2008 | Pride | June 2007 | |||
Witless Protection | June 2008 | Saw III | January 2007 | |||
Television: | Television: | |||||
3:10 to Yuma | Crank | |||||
Bratz: The Movie | Employee of the Month | |||||
Good Luck Chuck | Saw III | |||||
Saw IV | The Descent | |||||
War | ||||||
International: | International: | |||||
Saw IV | Dirty Dancing - Stage Play | |||||
The Eye | Right at Your Door | |||||
Saw III | ||||||
Mandate Pictures: | The Punisher | |||||
30 Days of Night | ||||||
Harold and Kumar Escape from Guantanamo Bay | ||||||
Juno | ||||||
Messengers | ||||||
Passengers |
Theatrical revenue of $30.5 million increased $11.5 million, or 60.5%, in this quarter as compared to the prior year’s quarter due to the performance of the significant titles listed above. In this quarter, the titles listed in the above table as contributing significant theatrical revenue represented individually between 7% and 79% of total theatrical revenue and, in the aggregate, approximately 97% of total theatrical revenue. In the prior year’s quarter, the titles listed in the above table as contributing significant theatrical revenue represented individually between 7% and 36% of total theatrical revenue and, in the aggregate, approximately 90%, or $17.1 million of total theatrical revenue.
DVD revenue of $152.2 million increased $48.4 million, or 46.6%, in this quarter as compared to the prior year’s quarter. The increase is primarily due to an increase in the amount of DVDs sold. The amount of DVDs sold increased due to the performance of the titles listed in the above table and to a lesser extent titles not listed above. The titles listed above as contributing significant DVD revenue in the current quarter represented individually between 2% to 25% of total DVD revenue and, in the aggregate, 49% , or $73.9 million of total DVD revenue for the quarter. In the prior year’s quarter, the titles listed above as contributing significant DVD revenue represented individually between 2% to 19% of total DVD revenue and, in the aggregate, 44%, or $45.6 million of total DVD
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revenue for the quarter. In the current quarter $78.3 million, or 51% , of total DVD revenue was contributed by titles that individually make up less than 2% of total DVD revenue, and in the prior year’s quarter this amounted to $58.3 million, or 56%, of total DVD revenue.
Television revenue included in motion pictures revenue of $28.9 million in this quarter increased $6.5 million, or 29.0%, compared to the prior year’s quarter. In this quarter, the titles listed above as contributing significant television revenue represented individually between 6% to 15% of total television revenue and, in the aggregate, 55% or $16.0 million 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 7% to 31% of total television revenue and, in the aggregate, 59%, or $13.2 million of total television revenue for the quarter. In the current quarter, $12.9 million, or 45% , of total television revenue was contributed by titles that individually make up less than 5% of total television revenue, and in the prior year’s quarter, this amounted to $9.2 million, or 41% , of total television revenue for the year.
International revenue of $34.3 million increased $11.6 million, or 51.1%, in this quarter as compared to the prior year’s quarter. Lionsgate UK, established from the acquisition of Redbus in fiscal 2006, contributed $16.1 million, or 46.9% of international revenue in the current quarter, which included revenues from3:10 to Yuma, The Bank Job, The Condemned, The Eye, Revolver, Saw IV,andWar,compared to $8.0 million, or 35.2% , 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 10% to 14% of total international revenue and, in the aggregate, 25%, or $8.4 million, 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 5% to 10% of total international revenue and, in the aggregate, 27%, or $6.0 million, of total international revenue for the quarter.
Mandate Pictures revenue includes revenue from the sales and licensing of domestic and worldwide rights of titles developed or acquired by Mandate Pictures to third-party distributors as well as various titles sold by Mandate International, LLC, one of the Company’s international divisions, to international sub-distributors. International revenue from Mandate titles is included in the Mandate Picture revenue in the table above. In the current quarter, Mandate Pictures revenue amounted to $8.5 million, as compared to nil in the prior year’s quarter.
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 June 30, 2008 and 2007:
Three Months | Three Months | |||||||||||||||
Ended | Ended | |||||||||||||||
June 30, | June 30, | Increase (Decrease) | ||||||||||||||
2008 | 2007 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
Television Production | ||||||||||||||||
Domestic series licensing | $ | 27.1 | $ | 20.0 | $ | 7.1 | 35.5 | % | ||||||||
International | 5.8 | 6.1 | (0.3 | ) | (4.9 | )% | ||||||||||
DVD releases of television production | 8.2 | 2.3 | 5.9 | 256.5 | % | |||||||||||
$ | 41.1 | $ | 28.4 | $ | 12.7 | 44.7 | % | |||||||||
Revenues included in domestic series licensing from the Company’s television syndication subsidiary, Debmar-Mercury, LLC (“Debmar-Mercury”) increased $5.0 million to $13.6 million from $8.6 million in the prior year’s quarter due to increased revenue from television series such asHouse of Payne andFamily Feud.In
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addition, the following table sets forth the number of television episodes and hours delivered in the three months ended June 30, 2008 and 2007, respectively, excluding television episodes delivered by Debmar-Mercury:
Three Months Ended June 30, 2008 | Three Months Ended June 30, 2007 | |||||||||||||||||||||
Episodes | Hours | Episodes | Hours | |||||||||||||||||||
Fear Itself | 1hr | 5 | 5.0 | The Dead Zone Season 5 | 1hr | 3 | 3.0 | |||||||||||||||
Mad Men Season 2 | 1hr | 2 | 2.0 | The Dresden Files | 1hr | 2 | 2.0 | |||||||||||||||
Weeds Season 4 | 1/2hr | 4 | 2.0 | Wildfire Season 4 | 1hr | 4 | 4.0 | |||||||||||||||
Weeds Season 3 | 1/2hr | 1 | 0.5 | |||||||||||||||||||
11 | 9.0 | 10 | 9.5 | |||||||||||||||||||
In the three months ended June 30, 2008, the television episodes, not including pilot episodes, listed in the table above represented individually between 9% to 23% of domestic series revenue and, in the aggregate, 47% , or $12.7 million of total television revenue for the quarter. In the three months ended June 30, 2007, the television episodes listed above represented individually between 7% to 21% of domestic series revenue and, in the aggregate, 57% , or $11.4 million of total television revenue for the year.
International revenue of $5.8 million decreased by $0.3 million in the current quarter mainly due to international revenue fromKill Point, Mad Men Season 1andWildfire Season 4, compared to international revenue of $6.1 million in the prior year’s quarter fromHidden Palms, Lovespring International, The Dresden FilesandThe Dead Zone.
The increase in revenue from DVD releases of television production is primarily driven by DVD revenue fromWeeds Seasons 2and3.
Direct Operating Expenses
The following table sets forth direct operating expenses by segment for the three months ended June 30, 2008 and 2007:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
June 30, 2008 | June 30, 2007 | |||||||||||||||||||||||
Motion | Motion | |||||||||||||||||||||||
Pictures | Television | Total | Pictures | Television | Total | |||||||||||||||||||
(Amounts in millions) | ||||||||||||||||||||||||
Direct operating expenses | ||||||||||||||||||||||||
Amortization of films and television programs | $ | 47.4 | $ | 21.6 | $ | 69.0 | $ | 29.2 | $ | 20.7 | $ | 49.9 | ||||||||||||
Participation and residual expense | 67.0 | 11.1 | 78.1 | 31.2 | 6.8 | 38.0 | ||||||||||||||||||
Amortization of acquired intangible assets | 0.3 | — | 0.3 | 0.2 | — | 0.2 | ||||||||||||||||||
Other expenses | 0.4 | 0.2 | 0.6 | (1.0 | ) | — | (1.0 | ) | ||||||||||||||||
$ | 115.1 | $ | 32.9 | $ | 148.0 | $ | 59.6 | $ | 27.5 | $ | 87.1 | |||||||||||||
Direct operating expenses as a percentage of segment revenues | 44.7 | % | 80.0 | % | 49.6 | % | 35.0 | % | 96.8 | % | 43.8 | % |
Direct operating expenses include amortization, participation and residual expenses and other expenses. Direct operating expenses of the motion pictures segment of $115.1 million for this quarter were 44.7% of motion pictures revenue, compared to $59.6 million, or 35.0% of motion pictures revenue for the prior year’s quarter. The increase in direct operating expense of the motion pictures segment in the current quarter as a percent of revenue is due to the change in the mix of titles primarily from the fiscal 2008 and 2009 theatrical releases and certain older titles generating revenue in the current quarter as compared to the prior year’s quarter. The benefit in other expense in the prior year’s quarter resulted primarily from foreign exchange gains of approximately $0.5 million and adjustments to the provision for bad debts due to collection of accounts previously reserved. Direct operating
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expenses of the motion pictures segment included charges for write downs of investment in film costs of $4.7 million and $2.4 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. In the current quarter, approximately $4.2 million of the write down related to the change in the release strategy of one motion picture that was completed in the current quarter. In the prior year’s quarter, approximately $1.5 million of the write down related to the unanticipated poor performance at the box office of one motion picture.
Direct operating expenses of the television segment of $32.9 million for this quarter were 80.0% of television revenue, compared to $27.5 million, or 96.8% of television revenue for the prior year’s quarter. The increase in direct operating expense of the television segment in the quarter is due to higher television production revenue. The decrease in direct operating expenses of the television segment in the current quarter as a percent of revenue is due to a greater portion of revenue attributed to more successful shows, such asWeeds, House of PayneandMad Men. In the current quarter, $1.8 million of write downs of investment in film costs was included in amortization of television programs, compared to write downs of investment in film costs of $2.4 million in the prior year’s quarter.
Distribution and Marketing Expenses
The following table sets forth distribution and marketing expenses by segment for the three months ended June 30, 2008 and 2007:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
June 30, 2008 | June 30, 2007 | |||||||||||||||||||||||
Motion | Motion | |||||||||||||||||||||||
Pictures | Television | Total | Pictures | Television | Total | |||||||||||||||||||
(Amounts in millions) | ||||||||||||||||||||||||
Distribution and marketing expenses | ||||||||||||||||||||||||
Theatrical | $ | 20.2 | $ | 1.5 | $ | 21.7 | $ | 83.3 | $ | — | $ | 83.3 | ||||||||||||
Home Entertainment | 60.3 | 3.1 | 63.4 | 42.5 | 1.2 | 43.7 | ||||||||||||||||||
Television | 0.8 | 0.6 | 1.4 | 0.3 | 0.7 | 1.0 | ||||||||||||||||||
International | 10.0 | 1.3 | 11.3 | 6.7 | 0.7 | 7.4 | ||||||||||||||||||
Other | 1.1 | 0.1 | 1.2 | 0.1 | — | 0.1 | ||||||||||||||||||
$ | 92.4 | $ | 6.6 | $ | 99.0 | $ | 132.9 | $ | 2.6 | $ | 135.5 | |||||||||||||
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 the current quarter of $20.2 million decreased $63.1 million, or 75.8%, compared to $83.3 million in the prior year’s quarter. The decrease in theatrical P&A from the motion pictures segment is primarily due to a decrease in the number of significant releases during the quarter. In the current quarter, there was only one significant theatrical release, as compared to five significant theatrical releases 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 ofForbidden Kingdom,and P&A incurred in advance of the release of titles such asMy Best Friend’s Girl, Bangkok Dangerous,andThe Spirit, which individually represented between 5% and 71% of total theatrical P&A and in the aggregate accounted for 95% of the total theatrical P&A. Domestic theatrical P&A from the motion pictures segment in the prior year’s quarter included P&A incurred on the release of titles such asHostel 2, Bug, Delta Farce, The Condemned, andSlow Burn, which individually represented between 12% and 25% of total theatrical P&A and in the aggregate accounted for 86% of the total theatrical P&A.Slow Burn, released theatrically during the three months ended June 30, 2007, individually contributed less than 3% of total theatrical revenue in the prior year’s quarter.
Home entertainment distribution and marketing costs on motion pictures and television product in this quarter of $63.4 million increased $19.7 million, or 45.1%, compared to $43.7 million in the prior year’s quarter. The increase in home entertainment distribution and marketing costs is mainly due to the increase in the volume and the size of marketing campaigns in the current quarter compared to the prior year’s quarter and an increase in distribution costs associated with the increase in revenue. Home entertainment distribution and marketing costs as a percentage of DVD revenues was 39.5% and 41.2% in the current quarter and prior year’s quarter, respectively.
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International distribution and marketing expenses in this quarter includes $9.0 million of distribution and marketing costs from Lionsgate UK, compared to $4.9 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 June 30, 2008 and 2007:
Three Months | Three Months | |||||||||||||||
Ended | Ended | Increase (Decrease) | ||||||||||||||
June 30, 2008 | June 30, 2007 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
General and Administrative Expenses | ||||||||||||||||
Motion Pictures | $ | 13.1 | $ | 7.6 | $ | 5.5 | 72.4 | % | ||||||||
Television | 2.7 | 1.5 | 1.2 | 80.0 | % | |||||||||||
Corporate | 22.5 | 17.7 | 4.8 | 27.1 | % | |||||||||||
$ | 38.3 | $ | 26.8 | $ | 11.5 | 42.9 | % | |||||||||
The increase in general and administrative expenses of the motion pictures segment of $5.5 million, or 72.4%, is primarily due to general and administrative expenses of Mandate Pictures which was acquired in September 2007, of approximately $1.0 million, general and administrative expenses of Maple Pictures of $1.2 million consolidated since July 18, 2007, and increases in general and administrative expenses from Lionsgate UK of approximately $0.5 million associated with the growth in revenue in our UK operations. The remaining increase in general and administrative expenses of the motion pictures segment is due to an increase in salaries and related expenses of $1.4 million, an increase in professional fees of $0.3 million and an increase in other general overhead costs of $1.1 million. In the current quarter, $0.9 million of motion picture production overhead was capitalized compared to $0.7 million in the prior year’s quarter.
The increase in general and administrative expenses of the television segment of $1.2 million, or 80.0%, is primarily due to an increase in salaries and related expenses of approximately $0.7 million and an increase in other general overhead costs of approximately $0.5 million. In the current quarter, $1.0 million of television production overhead was capitalized compared to $1.1 million in the prior year’s quarter.
The increase in corporate general and administrative expenses of $4.8 million, or 27.1%, is primarily due to an increase in salaries and related expenses of approximately $4.1 million, an increase in stock-based compensation of approximately $1.5 million, an increase in other general overhead costs of $0.6 million, offset by a decrease in professional fees of approximately $1.4 million. The increase in salaries and related expenses of $4.1 million was partly due to higher salaries and increases in the number of full-time employees.
The following table sets forth stock based compensation expense (benefit) for the three months ended June 30, 2008 and 2007:
Three Months | Three Months | |||||||||||||||
Ended | Ended | Increase (Decrease) | ||||||||||||||
June 30, 2008 | June 30, 2007 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
Stock Based Compensation Expense (Benefit): | ||||||||||||||||
Stock options | $ | 0.8 | $ | 0.8 | $ | — | 0.0 | % | ||||||||
Restricted share units | 2.6 | 2.0 | 0.6 | 30.0 | % | |||||||||||
Stock appreciation rights | 0.5 | (0.4 | ) | 0.9 | (225.0 | )% | ||||||||||
$ | 3.9 | $ | 2.4 | $ | 1.5 | 62.5 | % | |||||||||
At June 30, 2008, as disclosed in Note 13 to the unaudited condensed consolidated financial statements, there were unrecognized compensation costs of approximately $24.2 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 June 30, 2008, 748,542 shares of restricted
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stock units have been awarded to four key executive officers, the vesting of which will be subject to performance targets to be set annually by the Compensation Committee of the Board of Directors of the Company. These restricted stock units will vest in three, four, and five annual installments assuming annual performance targets to be set annually have been met. The fair value of the 748,542 shares whose future annual performance targets have not been set was $7.8 million, based on the market price of the Company’s common shares as of June 30, 2008. The market value will be remeasured when the annual 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 $1.1 million this quarter increased $0.2 million, or 22.2% from $0.9 million in the prior year’s quarter.
Interest expense of $4.3 million this quarter increased $0.4 million, or 10.3%, from the prior year’s quarter of $3.9 million.
Interest and other income was $2.2 million for the quarter ended June 30, 2008, compared to $3.8 million in the prior year’s quarter. Interest and other income this quarter was earned on the cash balance and available-for-sale investments held during the three months ended June 30, 2008.
The Company’s equity interests in this quarter included a $1.1 million loss from the Company’s 33.33% equity interest in FEARnet, a loss of $0.8 million from the Company’s 42% equity interest in Break.com, and a $0.3 million loss from the Company’s 43% equity interest in Roadside. For the three months ended June 30, 2007, equity interests included a $0.9 million loss from the Company’s 33.33% equity interest in FEARnet and a $0.1 million gain from the Company’s 10% equity interest in Maple Pictures.
The Company had an income tax expense of $0.7 million, or 8.6% of income before income taxes in the three months ended June 30, 2008, compared to an expense of $0.7 million, or (1.3%) of loss before income taxes in the three months ended June 30, 2007. The tax expense reflected in the current quarter is primarily attributable to U.S. and Canadian income taxes and foreign withholding 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 $87.5 million for U.S. federal income tax purposes available to reduce income taxes over twenty years, $73.3 million for U.S. state income tax purposes available to reduce income taxes over future years with varying expirations, $21.6 million for Canadian income tax purposes available to reduce income taxes over 19 years with varying expirations, and $19.8 million for UK income tax purposes available indefinitely to reduce future income taxes.
Net income for the three months ended June 30, 2008 was $7.1 million, or basic net income per common share of $0.06 on 118.4 million weighted average shares outstanding. Diluted net income per common share for the three months ended June 30, 2008 was $0.06 on 121.1 million weighted average shares outstanding. This compares to net loss for the three months ended June 30, 2007 of $53.1 million or basic and diluted net loss per common share of $0.45 on 117.1 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, LGEI sold $150.0 million of the 2.9375% Notes that mature on October 15, 2024. The Company received $146.0 million of net proceeds after paying placement agents’ fees from the sale of the 2.9375% Notes. Offering expenses were $0.7 million. The 2.9375% Notes are convertible at the option of the holder, at any time prior to maturity, upon satisfaction of certain conversion contingencies, into common shares of the Company at a conversion rate of 86.9565 shares per $1,000 principal amount of the 2.9375% Notes, which is equal to a conversion price of approximately $11.50 per share, subject to adjustment upon certain events. From October 15, 2009 to October 14, 2010, LGEI may redeem the 2.9375% Notes at 100.839%; from October 15, 2010
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to October 14, 2011, LGEI may redeem the 2.9375% Notes at 100.420%; and thereafter, LGEI may redeem the notes at 100%.
In February 2005, LGEI sold $175.0 million of the 3.625% Notes that mature on March 15, 2025. The Company received $170.2 million of net proceeds after paying placement agents’ fees from the sale of the 3.625% Notes. 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. LGEI 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.
Amended Credit Facility. In July 2008, the Company entered into an amended credit facility, which provides for a $340 million secured revolving credit facility, of which $30 million may be utilized by two of the Company’s wholly owned foreign subsidiaries. The amended credit facility expires July 25, 2013 and bears interest at 2.25% over the Adjusted LIBOR rate. The availability of funds under the credit facility is limited by a borrowing base, and also reduced by outstanding letters of credit. This amended credit facility amends and restates the Company’s original $215 million credit facility described in Note 6. The proceeds of the credit facility may be used (i) to finance the development, production, distribution or acquisition of feature films, television, DVD product and other product lines (ii) to operate physical production facilities, (iii) to acquire and operate television channels and internet distribution platforms and (iv) for other general corporate purposes, including acquisitions, permitted stock repurchases and dividends. Obligations under the credit facility are secured by collateral (as defined) granted by the Company and certain subsidiaries of the Company, as well as pledge of equity interests in certain of the Company’s subsidiaries. The amended credit facility contains a number of affirmative covenants and a number of negative covenants that, among other things, require the Company to satisfy certain financial covenants and restrict the ability of the Company, to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, repurchase its stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of its business, enter into sale-leaseback transactions, transfer and sell material assets and merge or consolidate.
Theatrical Slate Participation. On May 25, 2007, the Company closed a theatrical slate participation arrangement, as amended on January 30, 2008. Under this arrangement Pride, an unrelated entity, will participate in, 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 were 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. 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 its 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 participation agreement with SGF, the Québec provincial government’s investment arm. SGF will provide up to 35% of production costs of television and feature film productions produced in Québec for a four-year period for an aggregate participation 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 productions after the Company deducts a distribution fee, recoups all distribution expenses and releasing costs, and pays all applicable third party participations and residuals.
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 June 30, 2008 and March 31, 2008 is $441.2 million and $437.4 million, respectively.
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Cash Flows Used in Operating Activities. Cash flows used in operating activities for the three months ended June 30, 2008 were $149.8 million compared to cash flows used in operating activities in the three months ended June 30, 2007 of $55.6 million. The increase in cash used in operating activities was primarily due to increases in investment in film, decreases in accounts payable and accrued liabilities, participation and residuals, offset by net income generated in the three months ended June 30, 2008 and decreases in accounts receivable.
Cash Flows Provided by/Used in Investing Activities. Cash flows used in investing activities of $16.5 million for the three months ended June 30, 2008 consisted of $2.3 million for purchases of property and equipment, $11.1 million for the investment in equity method investees and $3.1 million for an increase in a loan receivable from Break.com. Cash flows provided by investing activities of $81.9 million in the three months ended June 30, 2007 included net proceeds from the sale of $83.9 million of investments available-for-sale, offset by $2.0 million for purchases of property and equipment.
Cash Flows Provided by/Used in Financing Activities. Cash flows provided by financing activities of $25.3 million for the three months ended June 30, 2008 resulted from increased production obligations of $70.5 million and the exercise of stock options of $0.8 million, offset by $28.5 million payment of production obligations, $16.4 million paid for the repurchase of the Company’s common shares and $1.1 million paid for tax withholding requirements associated with the vesting of shares. Cash flows used in financing activities of $20.7 million in the three months ended June 30, 2007 consisted of cash received from borrowings of $26.6 million and the exercise of stock options of $0.4 million, offset by $47.7 million repayment of production obligations.
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 DVD 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.
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Future commitments under contractual obligations as of June 30, 2008 are as follows:
Year Ended March 31, | ||||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | Total | ||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||
Future annual repayment of debt and other financing obligations as of June 30, 2008 | ||||||||||||||||||||||||||||
Production obligations(1) | $ | 146,973 | $ | 65,593 | $ | 42,352 | $ | 29,988 | $ | — | $ | 5,028 | $ | 289,934 | ||||||||||||||
Interest payments on subordinated notes and other financing obligations | 8,285 | 11,046 | 11,046 | 11,046 | 10,776 | 124,594 | 176,793 | |||||||||||||||||||||
Subordinated notes and other financing obligations | — | — | — | — | 3,718 | 325,000 | 328,718 | |||||||||||||||||||||
$ | 155,258 | $ | 76,639 | $ | 53,398 | $ | 41,034 | $ | 14,494 | $ | 454,622 | $ | 795,445 | |||||||||||||||
Contractual commitments by expected repayment date | ||||||||||||||||||||||||||||
Film obligations(1) | $ | 22,682 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 22,682 | ||||||||||||||
Distribution and marketing commitments(2) | 112,640 | 28,659 | 200 | — | — | — | 141,499 | |||||||||||||||||||||
Minimum guarantee commitments(3) | 135,482 | 65,679 | 43,300 | 1,900 | — | — | 246,361 | |||||||||||||||||||||
Production obligation commitments(3) | 20,734 | 23,659 | 5,450 | — | — | — | 49,843 | |||||||||||||||||||||
Operating lease commitments | 5,957 | 8,518 | 7,631 | 4,349 | 2,672 | 1,689 | 30,816 | |||||||||||||||||||||
Other contractual obligations | 28,714 | 257 | 221 | 185 | — | — | 29,377 | |||||||||||||||||||||
Employment and consulting contracts | 23,727 | 19,986 | 10,061 | 2,334 | 378 | — | 56,486 | |||||||||||||||||||||
$ | 349,936 | $ | 146,758 | $ | 66,863 | $ | 8,768 | $ | 3,050 | $ | 1,689 | $ | 577,064 | |||||||||||||||
Total future commitments under contractual obligations | $ | 505,194 | $ | 223,397 | $ | 120,261 | $ | 49,802 | $ | 17,544 | $ | 456,311 | $ | 1,372,509 | ||||||||||||||
(1) | Film and production obligations include minimum guarantees, theatrical marketing obligations and production obligations as disclosed in Note 7 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. |
Off-Balance Sheet Arrangements
We do not have any transactions, arrangements and other relationships with unconsolidated entities that will affect our liquidity or capital resources. We have no special purpose entities that provided off-balance sheet financing, liquidity or market or credit risk support, nor do we engage in leasing, hedging or research and development services, that could expose us to liability that is not reflected in our financial statements.
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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. The Company enters into forward foreign exchange contracts to hedge its foreign currency exposures on future production expenses denominated in Canadian dollars. As of June 30, 2008, the Company had outstanding contracts to buy CDN$2.1 million in exchange for US$2.1 million over a period of three weeks at a weighted average exchange rate of CDN$1.02, and to sell CDN$0.2 million in exchange for US$0.2 million over a period of four weeks at a weighted average exchange rate of CDN$1.02. Changes in the fair value representing a net unrealized fair value gain on foreign exchange contracts that qualified as effective hedge contracts outstanding during the three months ended June 30, 2008 amounted to less than $0.1 million and are included in accumulated other comprehensive income (loss), a separate component of shareholders’ equity. During the three months ended June 30, 2008, the Company completed foreign exchange contracts denominated in Canadian dollars, including a contract that did not qualify as an effective hedge. The net losses resulting from the completed contracts were $0.2 million. These contracts are entered into with a major financial institution as counterparty. The Company is exposed to credit loss in the event of nonperformance by the counterparty, which is limited to the cost of replacing the contracts, at current market rates. The Company does not require collateral or other security to support these contracts.
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 June 30, 2008. Other financing obligations subject to variable interest rates include $201.2 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 June 30, 2008.
Year Ended March 31, | ||||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | Total | ||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||
Revolving Credit Facility: | ||||||||||||||||||||||||||||
Variable(1) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Production Obligations: | ||||||||||||||||||||||||||||
Variable(2) | 133,991 | 61,886 | 5,339 | — | — | — | 201,216 | |||||||||||||||||||||
Fixed(3) | — | — | — | — | — | 5,028 | 5,028 | |||||||||||||||||||||
Subordinated Notes and Other Financing Obligations: | ||||||||||||||||||||||||||||
Fixed(4) | — | — | — | — | — | 150,000 | 150,000 | |||||||||||||||||||||
Fixed(5) | — | — | — | — | — | 175,000 | 175,000 | |||||||||||||||||||||
Fixed(6) | — | — | — | — | 3,718 | — | 3,718 | |||||||||||||||||||||
$ | 133,991 | $ | 61,886 | $ | 5,339 | $ | — | $ | 3,718 | $ | 330,028 | $ | 534,962 | |||||||||||||||
(1) | Revolving credit facility, which expires December 31, 2008. At June 30, 2008, 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 $199.5 million incur interest at rates ranging |
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from approximately 3.96% to 5.18% and one production loan of $1.7 million bears interest of approximately 11.45%. Not included in the table above are approximately $83.7 million of production obligations which are non-interest bearing. | ||
(3) | Long term production obligations of $5.0 million with a fixed interest rate equal to 2.50%. | |
(4) | 2.9375% Notes with fixed interest rate equal to 2.9375%. | |
(5) | 3.625% Notes with fixed interest rate equal to 3.625%. | |
(6) | 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 as amended (the “Exchange Act”). These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of June 30, 2008, 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 June 30, 2008.
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.
PART II — OTHER INFORMATION
Item 1. | Legal Proceedings. |
None
Item 1A. | Risk Factors. |
The following updates the risk factor entitled “We face substantial capital requirements and financial risks— Our credit facility contains certain covenants and financial tests that limit the way we conduct business” in the “Risk Factors” section of our Annual Report onForm 10-K for the fiscal year ended March 31, 2008.
Our credit facility contains certain covenants and financial tests that limit the way we conduct business. On July 25, 2008, we entered into a Second Amended and Restated Credit, Security, Guaranty and Pledge Agreement with JPMorgan Chase Bank, N.A., for a $340 million five-year secured credit facility. Our credit facility contains various covenants limiting our ability to incur or guarantee additional indebtedness, pay dividends and make other distributions, pre-pay any subordinated indebtedness, make investments and other restricted payments, make capital expenditures, make acquisitions and sell assets. These covenants may prevent us from raising additional financing, competing effectively or taking advantage of new business opportunities. Under our credit facility, we are also required to maintain specified financial ratios and satisfy certain financial tests. If we cannot comply with these covenants or meet these ratios and other tests, it could result in a default under our credit facility, and unless we are able to negotiate an amendment, forbearance or waiver, we could be required to repay all amounts then outstanding, which could have a material adverse effect on our business, results of operations and financial condition, depending upon our outstanding balance at the time.
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Borrowings under our credit facility also are secured by liens on substantially all of our assets and the assets of certain of our subsidiaries. If we are in default under our credit facility, the lenders could foreclose upon all or substantially all of our assets and the assets of these subsidiaries. We cannot assure you that we will generate sufficient cash flow to repay our indebtedness, and we further cannot assure you that, if the need arises, we will be able to obtain additional financing or to refinance our indebtedness on terms acceptable to us, if at all. Accordingly, any such failure could have a material adverse effect on our business, results of operations and financial condition.
The following updates the risk factor entitled “We face substantial capital requirements and financial risks— Substantial leverage could adversely affect our financial condition” in the “Risk Factors” section of our Annual Report onForm 10-K for the fiscal year ended March 31, 2008.
Substantial leverage could adversely affect our financial condition. Historically, we have been highly leveraged and may be highly leveraged in the future. We have access to capital through our $340 million credit facility with JPMorgan Chase Bank, N.A. and a balance under letters of credit for $22.7 million. In addition, we have $325 million Convertible Senior Subordinated Notes outstanding, with $150 million maturing October 15, 2024 and $175 million maturing March 15, 2025. At March 31, 2008, we had approximately $371.6 million in cash and cash equivalents. While we have not currently drawn down on our credit facility, we could borrow some or all of the permitted amount in the future. The amount we have available to borrow under this facility depends upon our borrowing base, which in turn depends on the value of our existing library of films and television programs, as well as accounts receivable and cash held in collateral accounts. If several of our larger motion picture releases are commercial failures or our library declines in value, our borrowing base could decrease. Such a decrease could have a material adverse effect on our business, results of operations and financial condition. For example, it could:
• | require us to dedicate a substantial portion of our cash flow to the repayment of our indebtedness, reducing the amount of cash flow available to fund motion picture and television production, distribution and other operating expenses; | |
• | limit our flexibility in planning for or reacting to downturns in our business, our industry or the economy in general; | |
• | limit our ability to obtain additional financing, if necessary, for operating expenses, or limit our ability to obtain such financing on terms acceptable to us; and | |
• | limit our ability to pursue strategic acquisitions and other business opportunities that may be in our best interests. |
The following updates the risk factor entitled“Our success depends on external factors in the motion picture and television industry —We could be aversely affected by strikes or other union job actions”in the “Risk Factors” section of our Annual Report onForm 10-K for the fiscal year ended March 31, 2008.
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. In November 2007, the members of the Writer’s Guild of America went on strike, and a new agreement was not approved until February 2008. Additionally, the Directors Guild of America and Screen Actors Guild collective bargaining agreements expired in 2008, and while an agreement has been reached with the Directors Guild, negotiations with the Screen Actors Guild, which agreement expired on June 30, 2008, are ongoing. 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.
Other than the updates 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, 2008.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
The following table sets forth information with respect to shares of our common stock purchased by us during the three months ended June 30, 2008:
Issuer Purchases of Equity Securities(1) | ||||||||||||||||
(d) | ||||||||||||||||
(c) | Approximate | |||||||||||||||
Total Number of | Dollar Value of | |||||||||||||||
(a) | Shares Purchased as | shares That may | ||||||||||||||
Total | (b) | Part of Publicly | yet be Purchased | |||||||||||||
Number of | Average Price | Announced Plans or | Under the Plans or | |||||||||||||
Period | Shares Purchased | Paid per Share | Programs | Programs | ||||||||||||
April 1, 2008 - April 30, 2008 | — | — | — | $ | 79,700,000 | |||||||||||
May 1, 2008 - May 31, 2008 | — | — | — | $ | 79,700,000 | |||||||||||
June 1, 2008 - June 30, 2008 | 1,612,000 | $ | 9.85 | 1,612,200 | $ | 63,700,000 | ||||||||||
Total | 1,612,200 | $ | 9.85 | 1,612,200 | $ | 63,700,000 |
(1) | On May 31, 2007, our Board of Directors authorized the repurchase of up to $50 million of our common shares. On May 29, 2008, as part of its regularly scheduled year-end meeting, our Board of Directors authorized the repurchase of up to an additional $50 million of our common shares, subject to market conditions. The common shares may be purchased, from time to time, at the Company’s discretion, including the quantity, timing and price thereof. Such purchases will be structured as permitted by securities laws and other legal requirements. During the period from the authorization date through June 30, 2008, 3,860,635 shares have been repurchased at a cost of approximately $36.3 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. |
None
Item 5. | Other Information. |
None
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 | ||
10 | .51* | Second Amended and Restated Credit, Security, Guaranty and Pledge Agreement by and among Lions Gate Entertainment Inc., Lions Gate UK Limited, Lions Gate Australia Pty Limited, the Guarantors referred to therein, the Lenders referred to therein, JPMorgan Chase Bank, N.A. and Wachovia Bank, N.A., dated of July 25, 2008. | ||
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. |
* | Confidential treatment has been requested for portions of this exhibit. Portions of this document have been omitted and submitted separately to the Securities and Exchange Commission. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LIONS GATE ENTERTAINMENT CORP.
By: | /s/ James Keegan |
Name: James Keegan
Title: Duly Authorized Officer and
Chief Financial Officer
Date: August 8, 2008
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