.
.
.
EXHIBIT 99.3
INDEX TO FINANCIAL STATEMENTS
PAGE NUMBER
-----------
Audited Financial Statements.................................................................................. F-1
Report of Independent Registered Public Accounting Firm -- Ernst & Young LLP................................ F-2
Consolidated Balance Sheets -- March 31, 2004 and 2003...................................................... F-3
Consolidated Statements of Operations -- Years Ended March 31, 2004, 2003 and 2002.......................... F-4
Consolidated Statements of Shareholders' Equity -- Years Ended March 31, 2004, 2003 and 2002................ F-5
Consolidated Statements of Cash Flows -- Years Ended March 31, 2004, 2003 and 2002.......................... F-6
Notes to Audited Consolidated Financial Statements.......................................................... F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of Lions Gate Entertainment Corp.
We have audited the accompanying consolidated balance sheets of Lions Gate
Entertainment Corp. as of March 31, 2004 and 2003, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended March 31, 2004. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lions Gate
Entertainment Corp. at March 31, 2004 and 2003, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 2004, in conformity with U.S. generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
June 28, 2004
F-2
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
(ALL AMOUNTS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
ASSETS
Cash and cash equivalents .................................................................... $ 7,089 $ 6,851
Accounts receivable, net of reserve for video returns and other allowances of $55,146 (2003 --
$11,364) and provision for doubtful accounts of $11,702 (2003 -- $7,149) ................... 129,245 68,671
Investment in films and television programs .................................................. 406,170 177,689
Property and equipment ....................................................................... 29,661 28,309
Goodwill ..................................................................................... 166,804 32,327
Other assets ................................................................................. 23,714 26,844
--------- ---------
$ 762,683 $ 340,691
========= =========
LIABILITIES
Bank loans ................................................................................... $ 326,174 $ 125,345
Accounts payable and accrued liabilities ..................................................... 129,724 33,798
Film obligations ............................................................................. 114,068 67,383
Production loans ............................................................................. -- 1,273
Subordinated notes ........................................................................... 65,000 --
Debt ......................................................................................... 19,041 24,586
Deferred revenue ............................................................................. 38,932 16,019
Deferred taxes ............................................................................... -- 624
Minority interests ........................................................................... 135 --
--------- ---------
693,074 269,028
Redeemable preferred shares, 200,000,000 shares authorized, issued in series,
including 1,000,000 Series A (nil and 11,830 shares issued and outstanding),
(liquidation preference nil and $30,167) ................................................... -- 28,031
--------- ---------
Commitments and Contingencies
SHAREHOLDERS' EQUITY
Common shares, no par value, 500,000,000 shares authorized, 93,615,896 and 43,231,921 shares
issued and outstanding ..................................................................... 280,501 159,549
Series B preferred shares (10 shares issued and outstanding) ................................. -- --
Accumulated deficit .......................................................................... (203,507) (108,350)
Accumulated other comprehensive loss ......................................................... (7,385) (7,567)
--------- ---------
69,609 43,632
--------- ---------
$ 762,683 $ 340,691
========= =========
See accompanying notes.
F-3
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2004 MARCH 31, 2003 MARCH 31, 2002
-------------- -------------- --------------
(ALL AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
REVENUES ...................................................................... $ 375,910 $ 264,914 $ 234,770
EXPENSES:
Direct operating ............................................................ 181,298 133,922 133,051
Distribution and marketing .................................................. 207,045 87,403 73,763
General and administration .................................................. 42,826 29,267 32,034
Severance and relocation costs .............................................. 5,575 -- --
Write-down of other assets .................................................. 11,686 -- --
Depreciation ................................................................ 3,198 1,846 1,492
--------- --------- ---------
Total expenses ............................................................. 451,628 252,438 240,340
--------- --------- ---------
OPERATING INCOME (LOSS) ....................................................... (75,718) 12,476 (5,570)
--------- --------- ---------
OTHER EXPENSES (INCOME):
Interest .................................................................... 14,042 8,934 8,435
Interest rate swaps mark-to-market .......................................... (206) 3,163 --
Other expenses .............................................................. -- -- 1,351
Minority interests .......................................................... -- -- 91
--------- --------- ---------
Total other expenses, net ................................................ 13,836 12,097 9,877
--------- --------- ---------
INCOME (LOSS) BEFORE ITEMS RELATED TO EQUITY METHOD INVESTEES AND INCOME TAXES (89,554) 379 (15,447)
Write-down of equity interests ................................................ -- -- 24,052
Gain on dilution of equity interests .......................................... -- -- (2,186)
Gain on sale of equity interests .............................................. -- (2,131) --
Other equity interests ........................................................ 2,169 2,112 6,019
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ............................................. (91,723) 398 (43,332)
Income tax provision (benefit) ................................................ 373 1,821 (61)
--------- --------- ---------
NET LOSS ...................................................................... (92,096) (1,423) (43,271)
Modification of warrants ...................................................... (2,031) -- --
Dividends on Series A preferred shares ........................................ (387) (1,584) (1,592)
Accretion and amortization on Series A preferred shares ....................... (643) (1,383) (1,323)
--------- --------- ---------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS ..................................... $ (95,157) $ (4,390) $ (46,186)
========= ========= =========
BASIC AND DILUTED LOSS PER COMMON SHARE ....................................... $ (1.35) $ (0.10) $ (1.08)
========= ========= =========
See accompanying notes.
F-4
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SERIES B ACCUMULATED
COMMON SHARES PREFERRED SHARES OTHER
---------------------- ------------------ ACCUMULATED COMPREHENSIVE COMPREHENSIVE
NUMBER AMOUNT NUMBER AMOUNT DEFICIT LOSS LOSS TOTAL
---------- --------- ------ ------ ----------- ------------- ------------- ----------
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance at March 31, 2001 ..... 42,296,838 $ 157,414 10 $ -- $ (57,774) $ (5,838) $ 93,802
Conversion of Series A
preferred shares ............. 648,000 1,652 1,652
Exercise of stock options ..... 87,083 137 137
Issued pursuant to share
bonus plan ................... 200,000 346 346
Dividends on Series A
preferred shares ............. (1,592) (1,592)
Accretion and amortization on
Series A preferred shares .... (1,323) (1,323)
Comprehensive income (loss):
Net loss .................... (43,271) $(43,271) (43,271)
Foreign currency
translation adjustments .... (1,759) (1,759) (1,759)
Unrealized loss on
securities ................. (259) (259) (259)
--------
Comprehensive loss $(45,289) --
---------- --------- ------ ------ --------- -------- --------- ---------
Balance at March 31, 2002 ..... 43,231,921 $ 159,549 10 $ -- $(103,960) $ (7,856) $ 47,733
Dividends on Series A
preferred shares ............. (1,584) (1,584)
Accretion and amortization on
Series A preferred shares .... (1,383) (1,383)
Comprehensive income (loss):
Net loss .................... (1,423) $ (1,423) (1,423)
Foreign currency
translation adjustments .... 62 62 62
Unrealized gain on
securities ................. 227 227 227
--------
Comprehensive loss $ (1,134) --
---------- --------- ------ ------ --------- -------- --------- ---------
Balance at March 31, 2003 ..... 43,231,921 $ 159,549 10 $ -- $(108,350) $ (7,567) $ 43,632
Issuance of common shares ..... 44,951,056 103,176 103,176
Exercise of stock options ..... 955,562 2,609 2,609
Exercise of warrants .......... 275,400 1,377 1,377
Modification of stock options.. -- 1,740 1,740
Modification of warrants ...... -- 2,031 (2,031) --
Redemption of Series A ........
preferred shares ............. -- 566 566
Conversion of Series A ........
preferred shares ............. 4,201,957 9,453 9,453
Dividends on Series A
preferred shares ............. (387) (387)
Accretion and amortization on..
Series A preferred shares .... (643) (643)
Comprehensive income (loss):
Net loss .................... (92,096) $(92,096) (92,096)
Foreign currency
translation adjustments .... (440) (440) (440)
Unrealized gain on foreign
exchange contracts ......... 622 622 622
--------
Comprehensive loss $(91,914) --
---------- --------- ------ ------ --------- -------- --------- ---------
Balance at March 31, 2004 ..... 93,615,896 $ 280,501 10 $ -- $(203,507) $ (7,385) $ 69,609
========== ========= ====== ====== ========= ========= =========
See accompanying notes.
F-5
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2004 MARCH 31, 2003 MARCH 31, 2002
--------------- -------------- ---------------
(ALL AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net loss....................................................................... $ (92,096) $ (1,423) $ (43,271)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation of property and equipment...................................... 3,198 1,846 1,492
Amortization of deferred financing costs.................................... 4,073 1,572 1,177
Amortization of films and television programs............................... 136,082 106,435 105,418
Modification of stock options............................................... 1,740 -- --
Relocation costs............................................................ 2,131 -- --
Write-down of other assets.................................................. 11,686 -- --
Interest rate swaps mark-to-market.......................................... (206) 3,163 --
Other expenses.............................................................. -- -- 1,351
Minority interests.......................................................... -- -- 91
Gain on sale of equity interests............................................ -- (2,131) --
Gain on dilution of equity interests........................................ -- -- (2,186)
Write-down of equity interests.............................................. -- -- 24,052
Other equity interests...................................................... 2,169 2,112 6,019
Changes in operating assets and liabilities, excluding the effects of
acquisitions:
Accounts receivable......................................................... (17,249) 19,465 2,710
Increase in investment in films and television programs..................... (192,098) (128,640) (139,053)
Other assets................................................................ 6,913 (7,765) (2,290)
Accounts payable and accrued liabilities.................................... 14,197 (7,297) 2,250
Film obligations............................................................ 1,818 26,015 (3,193)
Deferred revenue............................................................ 3,258 4,138 5,012
Deferred taxes.............................................................. (2,027) -- (1,317)
------------ ------------ ---------
NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES...................... (116,411) 17,490 (41,738)
------------ ------------ ---------
FINANCING ACTIVITIES:
Issuance of common shares...................................................... 107,162 -- 137
Redemption of Series A preferred shares........................................ (18,090) -- --
Dividends paid on Series A preferred shares.................................... (387) (1,584) (883)
Financing fees paid............................................................ (11,402) (166) (1,239)
Increase in subordinated notes, net of issue costs............................. 56,347 -- --
Increase (decrease) in bank loans.............................................. 143,033 (16,069) 42,166
Proceeds from production loans................................................. 505 9,564 5,490
Repayment of production loans.................................................. (1,778) (13,782) (5,552)
Proceeds from debt............................................................. 16,148 3,742 1,103
Repayment of debt.............................................................. (24,367) (4,553) (1,034)
------------ ------------ ---------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES...................... 267,171 (22,848) 40,188
------------ ------------ ---------
INVESTING ACTIVITIES:
Cash received from investment in Mandalay Pictures, LLC........................ -- 6,634 5,362
Acquisition of Eaton Entertainment, LLC, net of cash acquired.................. -- -- 472
Acquisition of Artisan Entertainment Inc., net of cash acquired................ (148,870) -- --
Purchase of property and equipment............................................. (860) (1,794) (3,210)
------------ ------------ ---------
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES...................... (149,730) 4,840 2,624
------------ ------------ ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................................ 1,030 (518) 1,074
FOREIGN EXCHANGE EFFECT ON CASH................................................ (792) 859 (1,216)
CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR................................. 6,851 6,510 6,652
------------ ------------ ---------
CASH AND CASH EQUIVALENTS -- END OF YEAR....................................... $ 7,089 $ 6,851 $ 6,510
============ ============ =========
See accompanying notes.
F-6
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Lions Gate Entertainment Corp. ("the Company" or "Lions Gate") is a fully
integrated entertainment company engaged in the development, production and
distribution of feature films, television series, television movies and
mini-series, non-fiction programming and animated programming, as well as the
management of Canadian-based studio facilities and until fiscal 2002 management
services provided to Canadian limited partnerships. As an independent
distribution company, the Company also acquires distribution rights from a wide
variety of studios, production companies and independent producers.
On December 15, 2003, the Company acquired Film Holdings Co., the parent
company of Artisan Entertainment Inc. ("Artisan") as described in note 13. The
acquisition is included in the consolidated balance sheet and all operating
results and cash flows have been included in the consolidated statements of
operations and cash flows from the acquisition date through March 31, 2004.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance
with United States generally accepted accounting principles ("U.S. GAAP") which
conforms, in all material respects, with the accounting principles generally
accepted in Canada ("Canadian GAAP"), except as described in note 20. The
Canadian dollar and the U.S. dollar are the functional currencies of the
Company's Canadian and U.S. based businesses, respectively.
Effective April 1, 2002, the Company adopted the United States dollar as
its reporting currency as a substantial component of its operations are
domiciled in the United States and the dominant market for trading volume of its
common shares was on the American Stock Exchange. Prior to April 1, 2002, the
Company's consolidated financial statements were presented in Canadian dollars.
These consolidated financial statements and those amounts previously reported in
Canadian dollars have been translated from Canadian dollars to United States
dollars by translating the assets and liabilities at the rate in effect at the
respective balance sheet dates and revenues and expenses at the average rate for
the reporting periods. Any resulting translation foreign exchange gains and
losses are recorded as accumulated other comprehensive income (loss), a separate
component of shareholders' equity. The functional currencies of each of the
Company's operations in the United States and Canada are unchanged.
On March 29, 2004, the new British Columbia Business Corporations Act came
into force, which allows the Company to prepare its financial statements either
under Canadian or U.S. GAAP. The Company elected to prepare financial statements
under U.S. GAAP commencing April 1, 2004. Prior to April 1, 2004, the Company's
consolidated financial statements were prepared under Canadian GAAP. These
consolidated financial statements, including amounts presented in prior years,
have been converted to U.S. GAAP. The Company must disclose and quantify
material differences with Canadian GAAP in its interim and annual financial
statements for the next two fiscal years from April 1, 2004.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of the Company include
the accounts of Lions Gate and all of its majority-owned and controlled
subsidiaries, with a provision for minority interests. The Company reviews its
relationships with other entities to identify whether it is the primary
beneficiary of a variable interest entity ("VIE"). If the determination is made
that the Company is the primary beneficiary, then the entity is consolidated in
accordance with Financial Accounting Standards Board ("FASB") Interpretation No.
("FIN") 46, "Consolidation of Variable Interest Entities. FIN 46 is effective
for periods ending after March 15, 2004.
Investments in which the Company exercises significant influence, but does
not control, are accounted for using the equity method of accounting.
Investments in which there is no significant influence are accounted for using
the cost method of accounting.
All significant intercompany balances and transactions have been
eliminated on consolidation.
Acquisitions of controlled entities are accounted for using the purchase
method of accounting.
(c) REVENUE RECOGNITION
F-7
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue from the sale or licensing of films and television programs is
recognized upon meeting all recognition requirements of SoP 00-2. Revenue from
the theatrical release of feature films is recognized at the time of exhibition
based on the Company's participation in box office receipts. Revenue from the
sale of videocassettes and digital video disks ("DVDs") in the retail market,
net of an allowance for estimated returns and other allowances, is recognized on
the later of shipment to 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 the feature film or television
program is available to the distributor for exploitation and no conditions for
delivery exist, which under most sales contracts requires that full payment has
been received from the distributor. For multiple media rights contracts with a
fee for a single film or television program where the contract provides for
media holdbacks, the fee is allocated to the various media based on management's
assessment of the relative fair value of the rights to exploit each media and is
recognized as each holdback is released. For multiple-title contracts with a
fee, the fee is allocated on a title-by-title basis, based on management's
assessment of the relative fair value of each title.
Rental revenue from short-term operating leases of studio facilities is
recognized over the term of the lease. Until fiscal 2002, the Company earned
fees from management services provided to Canadian limited partnerships, whose
purpose is to assist in the financing of films produced in Canada. These fees
were recognized as revenue when the financing was completed.
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. At March 31, 2004, $15.9 million of
accounts receivable mature beyond one year. The accounts receivable mature as
follows: $7.7 million in fiscal 2006, $0.9 million in fiscal 2007, $3.4 million
in fiscal 2008, $1.9 million in fiscal 2009 and $2.0 million in fiscal 2010.
(d) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid debt investments
with original maturities of ninety days or less when purchased, which are
carried at the lower of cost and fair market value. There were no restricted
cash balances at March 31, 2004 and 2003.
(e) INVESTMENT IN FILMS AND TELEVISION PROGRAMS
Investment in films and television programs includes the unamortized costs
of completed films and television programs which have been produced by the
Company or for which the Company has acquired distribution rights, libraries
acquired as part of acquisitions of companies, films and television programs in
progress and in development and home video product inventory.
For films and television programs produced by the Company, capitalized
costs include all direct production and financing costs, capitalized interest
and production overhead. For acquired films and television programs, these
capitalized costs consist of minimum guarantee payments to acquire the
distribution rights.
Costs of acquiring and producing films and television programs and of
acquired libraries are amortized using the individual-film-forecast method,
whereby these costs are amortized and participation and residual costs are
accrued in the proportion that current year's revenue bears to management's
estimate of ultimate revenue at the beginning of the current year expected to be
recognized from the exploitation, exhibition or sale of the films or television
programs.
Ultimate revenue includes estimates over a period not to exceed ten years
following the date of initial release or from the date of delivery of the first
episode for episodic television series. For titles included in acquired
libraries, ultimate revenue includes estimates over a period not to exceed
twenty years following the date of acquisition.
Investment in films and television programs is stated at the lower of
amortized cost or estimated fair value on an individual film basis. The
valuation of investment in films and television programs is reviewed on a title-
by-title basis, when an event or change in circumstances indicate that the fair
value of a film or television program is less than its unamortized cost. The
fair value of the film or television program is determined using management's
future revenue and cost estimates and a discounted cash flow approach.
Additional amortization is recorded in the amount by which the unamortized costs
exceed the estimated fair value of the film or television program. Estimates of
future revenue involve measurement uncertainty and it is therefore possible that
reductions in the
F-8
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
carrying value of investment in films and television programs may be required as
a consequence of changes in management's future revenue estimates.
Films and television programs in progress include the accumulated costs of
productions, which have not yet been completed by the Company.
Films and television programs in development include costs of acquiring
film rights to books, stage plays or original screenplays and costs to adapt
such projects. Such costs are capitalized and, upon commencement of production,
are transferred to production costs. Projects in development are written off at
the earlier of the date determined not to be recoverable or when abandoned, or
three years from the date of the initial investment.
Home video product inventory consists of videocassettes and DVDs and are
stated at the lower of cost or market value.
(f) PROPERTY AND EQUIPMENT
Property and equipment is carried at cost less accumulated depreciation.
Depreciation is provided for using the following rates and methods:
Buildings.............................................. 25 years straight-line
Computer equipment and software........................ 2 - 4 years straight-line and 30% declining balance
Automobiles............................................ 30% declining balance
Furniture and equipment................................ 2 - 10 years straight-line and 20%-30% declining balance
Leasehold improvements................................. Over the lease term or the useful life, whichever is shorter
Equipment under capital lease is amortized using the above rates.
The Company periodically reviews and evaluates the recoverability of
property and equipment. Where applicable, estimates of net future cash flows, on
an undiscounted basis, are calculated based on future revenue estimates, if
appropriate and where deemed necessary, a reduction in the carrying amount is
recorded.
(g) GOODWILL
Beginning April 1, 2001, the Company early-adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets".
Early adoption was permitted for companies with their fiscal year beginning on
or after March 15, 2001, provided the first interim period financial statements
had not been previously issued. Under SFAS 142, goodwill is no longer amortized
but is reviewed annually within each fiscal year, or more frequently if
impairment indicators arise, for impairment, unless certain criteria have been
met. At April 1, 2001, September 30, 2001, December 31, 2002 and December 31,
2003 the Company completed impairment tests required by comparing the fair value
of each of the reporting units to its carrying value including goodwill and
determined that the recognition of impairment losses was not necessary. Goodwill
is also required to be tested for impairment 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.
(h) OTHER ASSETS
Other assets include intangible assets, deferred print costs, an interest
bearing convertible promissory note, deferred debt financing costs, equity
investments and prepaid expenses.
Intangible Assets. Intangible assets acquired in connection with the
purchase of Artisan are amortized over their estimated useful lives of two to
four years from the date of acquisition. These intangible assets will be subject
to periodic impairment tests.
Prints, Advertising and Marketing Expenses. The cost of film prints are
expensed upon theatrical release and are included in operating expenses. The
costs of advertising and marketing expenses are expensed as incurred.
Advertising expenses for the year ended March 31, 2004 were $109.8 (2003 --
$46.3 million, 2002 -- $45.0 million) which were recorded as distribution and
marketing expenses.
F-9
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Financing Costs. Amounts incurred in connection with obtaining debt
financing are deferred and amortized, as a component of interest expense, over
the term to maturity of the related debt obligation.
Equity Method Investees. Other investments include companies, which are
accounted for using the equity method. The Company's equity method investees are
periodically reviewed to determine whether there has been a loss in value that
is other than a temporary decline. Estimates of net future cash flows on an
undiscounted basis are used to assess whether there is a loss in value. Amounts
recorded in the statement of operations related to equity method investees
include gain on sale of equity interest, gain on dilution of equity interests,
write-down of equity interests and other equity interests. For further
discussion of these items refer to note 5.
(i) INCOME TAXES
Income taxes are accounted for using SFAS No. 109, "Accounting for Income
Taxes." SFAS 109 requires an asset and liability approach for financial
accounting and reporting for income taxes and allows recognition and measurement
of deferred assets based upon the likelihood of realization of tax benefits in
future years. Under this method, deferred taxes are provided for the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Valuation allowances are established when management determines that
it is more likely than not that some portion or all of the deferred tax asset
will not be realized. The financial effect of changes in tax laws or rates is
accounted for in the period of enactment. The subsequent realization of net
operating loss and general business credit carry forwards acquired in
acquisitions accounted for using the purchase method of accounting is recorded
as a reduction of goodwill.
(j) GOVERNMENT ASSISTANCE
The Company has access to government programs that are designed to assist
film and television production and distribution in Canada.
Prior to April 1, 2003, all federal and provincial refundable tax credits
earned were included in revenues when the qualifying expenditures had been
incurred provided that there was reasonable assurance that the credits will be
realized. Tax credits earned with respect to expenditures on new productions
commenced after April 1, 2003 are included as an offset to investment in films
and television programs when the qualifying expenditures have been incurred
provided that there is reasonable assurance that the credits will be realized
(refer to note 15). This difference in treatment does not have a significant
impact on the consolidated financial statements for the periods presented.
Government assistance received with respect to the acquisition of
distribution rights is recorded as a reduction of investment in films and
television programs. Amounts received are repayable on a title-by-title basis
once the title has achieved cash break-even to the extent of profit earned on
that title. There are no fixed repayment terms, no interest payments and no
claims on any assets of the Company or for the recovery of the amount invested,
other than those that might be repayable out of future distribution revenue
attached to the film rights. To the extent an individual film does not perform
to pre-agreed levels, no amounts are repayable by the Company. Government
assistance toward distribution and marketing expenses is recorded as a reduction
of those expenses.
(k) FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities denominated in currencies other than the
functional currency are translated at exchange rates in effect at the balance
sheet date. Resulting unrealized translation gains and losses are included in
the consolidated statement of operations.
Foreign company assets and liabilities in foreign currencies are
translated into United States dollars at the exchange rate in effect at the
balance sheet date. Foreign company revenue and expense items are translated at
the average rate of exchange for the year. Gains or losses arising on the
translation of the accounts of foreign companies are included in accumulated
other comprehensive income (loss), a separate component of shareholders' equity.
(l) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Derivative financial instruments are used by the Company in the management
of its foreign currency and interest rate exposures. The Company's policy is not
to use derivative financial instruments for trading or speculative purposes.
F-10
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company enters into interest rate swap contracts in order to reduce
the impact of fluctuating interest rates on its interest-bearing debt. These
swap contracts require the periodic exchange of the difference between
fixed-rate, generally the same rate being paid on the Company's underlying debt
obligations, and floating-rate interest amounts calculated based on the notional
principal amount of the swap contract, which are recorded as interest expense.
The related amount payable to or receivable from counterparties is included as
an adjustment to interest payable or receivable. The Company evaluates whether
the interest rate swap contracts qualify for hedge accounting at the inception
of the contract. The fair value of the swap contracts are reflected as an asset
or liability on the consolidated balance sheet. Changes in the fair value of the
swap contracts that are effective hedges are reflected in accumulated other
comprehensive income (loss), a separate component of shareholders' equity and
changes in the fair value of the swap contracts that are ineffective hedges are
reflected in the consolidated statement of operations. The interest rate swap
contracts entered into by the Company do not qualify for hedge accounting and
accordingly the changes in the fair value of the swaps are recorded in the
consolidated statement of operations.
The Company enters into forward foreign exchange contracts to hedge its
foreign currency exposures on future production expenses denominated in Canadian
dollars. The Company evaluates whether the foreign exchange contracts qualify
for hedge accounting at the inception of the contract. The fair value of the
forward exchange contracts are recorded on the consolidated balance sheet.
Changes in the fair value of the foreign exchange contracts that are effective
hedges are reflected in accumulated other comprehensive income (loss), a
separate component of shareholders' equity and changes in the fair value of
foreign exchange contracts that are ineffective hedges are reflected in the
consolidated statement of operations. Gains and losses realized upon settlement
of the foreign exchange contracts are amortized to the consolidated statement of
operations on the same basis as the production expenses being hedged. The
foreign exchange contracts entered into by the Company are considered effective
cash flow hedges and accordingly the changes in the fair value of the foreign
exchange contracts are included in accumulated other comprehensive income
(loss), a separate component of shareholders' equity until realized.
(m) STOCK-BASED COMPENSATION
The Company elected to use the intrinsic value method in accounting for
stock based compensation set forth in APB No. 25, "Accounting for Stock Issued
to Employees." In accordance with SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of SFAS No. 123"
disclosures are required about the costs of stock based compensation awards
using the fair value method for companies that elect to use the intrinsic value
method. (Refer to note 12(c)).
The Company has elected to use the intrinsic value method in accounting
for stock based compensation. In accordance with SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- an amendment of SFAS
No. 123." The following pro forma disclosures are provided about the costs of
stock based compensation awards using the fair value method.
The weighted average estimated fair value of each stock option granted in
the year ended March 31, 2004 was $0.86 (2003 -- $0.58, 2002 - $0.85). The total
stock compensation expense for disclosure purposes for the year ended March 31,
2004, based on the fair value of the stock options granted, would be $1.6
million (2003 -- $1.7 million, 2002 - $2.5 million) and the fair value of stock
option modifications would be $0.9 million (2003 - nil, 2002 - nil).
For disclosure purposes the fair value of each stock option grant was
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions used for stock options granted: a dividend yield of
0%, expected volatility of 30% (2003 -- 30%, 2002 - 50%), risk-free interest
rate of 3.8 % (2003 -- 2.6%, 2002 - 2.0%) and expected life of five years.
The following pro forma basic loss per common share includes stock-based
compensation expense for stock options issued and modified, as described above:
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2004 MARCH 31, 2003 MARCH 31, 2002
--------------- -------------- --------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Numerator:
Net loss available to common shareholders .............................. $(95,157) $(4,390) $(46,186)
Less: stock compensation expense calculated using intrinsic value method 1,740 -- --
Add: stock compensation expense for options issued and modified
calculated using the fair value method ................................ (2,460) (1,688) (2,470)
-------- ------- --------
F-11
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Adjusted net loss available to common shareholders........................ $ (95,877) $ (6,078) $(48,656)
=========== ========== ========
Denominator:
Weighted average common shares outstanding (thousands) ................... 70,656 43,232 42,753
=========== ========== ========
Adjusted basic and diluted loss per common share............................ $ (1.36) $ (0.14) $ (1.14)
=========== ========== ========
(n) EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128,
"Earnings Per Share". Basic earnings per share is calculated based on the
weighted average common shares outstanding for the period. Diluted earnings per
share includes the impact of convertible securities, share purchase warrants and
stock options, if dilutive. When dilutive, the impact of convertible securities
is computed using the if-converted method.
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2004 2003 2002
------------ ---------- ------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Basic loss per common share is calculated as follows:
Numerator:
Net loss available to common shareholders................................................ $ (95,157) $ (4,390) $ (46,186)
=========== ========= ===========
Denominator:
Weighted average common shares outstanding (thousands)................................... 70,656 43,232 42,753
=========== ========= ===========
Basic and diluted loss per common share.................................................... $ (1.35) $ (0.10) $ (1.08)
=========== ========= ===========
Options to purchase 9,267,163 common shares (2003 -- 8,410,993 common
shares, 2002 -- 8,168,162 common shares) at an average price of $2.77 (2003 --
$2.73, 2002 -- $2.82) and share purchase warrants to purchase 5,249,600 common
shares (2003 -- 5,525,000 common shares, 2002 -- 5,525,000 common shares) at an
exercise price of $5.00 (2003 -- $5.00, 2002 -- $5.00) were outstanding during
the year. Series A preferred share units which were each convertible into 1,000
common shares prior to September 30, 2003 and 1,109 common shares subsequent to
September 30, 2003 for no additional consideration were either redeemed or
converted into common shares during the year ended March 31, 2004 leaving no
outstanding shares at March 31, 2004 (2003 -- 11,830 units outstanding; 2002 --
11,830 units outstanding). Convertible promissory notes with a principal amount
of nil were outstanding at March 31, 2004 (2003 -- $11.2 million; 2002 -- $10.4
million). These notes were convertible into common shares at a price of Cdn$8.10
per share. 4.875% convertible senior subordinated notes with a principal amount
of $60 million were outstanding at March 31, 2004 (2003 -- nil; 2002 -- nil).
These notes are convertible into common shares at a conversion rate of 185.0944
common shares per $1,000 principal amount of notes, which is equal to a
conversion price of approximately $5.40 per share.
Under the "if converted" method of calculating diluted earnings per share,
the share purchase options, the share purchase warrants, the Series A preferred
shares, the convertible promissory notes and the 4.875% convertible senior
subordinated notes, if outstanding, were anti-dilutive in each of the years
presented and were not reflected in diluted loss per common share.
(o) USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. The most significant estimates made by management in the
preparation of the financial statements relate to ultimate revenue and costs for
investment in films and television programs; estimates of sales returns and
other allowances, provision for doubtful accounts, fair value of assets and
liabilities for allocation of the purchase price of companies acquired, current
and future income taxes and accruals for contingent liabilities; and impairment
assessments for investment in films and television programs, intangible assets,
other investments and recoverability of future income taxes and goodwill. Actual
results could differ from such estimates.
(p) RECLASSIFICATIONS
Certain amounts presented in prior years have been reclassified to conform
to the current year's presentation.
(q) RECENT ACCOUNTING PRONOUNCEMENTS
F-12
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Variable Interest Entities-
In January 2003, the FASB issued Interpretation No. ("FIN") 46,
"Consolidation of Variable Interest Entities", which is effective for financial
statements of public companies that have special purpose entities for periods
ending after December 15, 2003 and for public companies without special purpose
entities for periods ending after March 15, 2004. The standard establishes
criteria to identify VIEs and the primary beneficiary of such entities. An
entity that qualifies as a VIE must be consolidated by its primary beneficiary.
Accordingly, the Company has consolidated its VIE Christal Films Distribution
Inc. ("Christal") as of March 31, 2004.
3. INVESTMENT IN FILMS AND TELEVISION PROGRAMS
MARCH 31, MARCH 31,
2004 2003
----------- -----------
(AMOUNTS IN THOUSANDS)
THEATRICAL AND NON-THEATRICAL FILMS
Released, net of accumulated amortization................................................................. $ 111,242 $ 58,465
Acquired libraries, net of accumulated amortization....................................................... 128,559 37,422
Completed and not released................................................................................ 63,158 11,359
In progress............................................................................................... 22,347 26,970
In development............................................................................................ 1,230 1,031
Product inventory......................................................................................... 26,957 11,359
----------- -----------
353,493 146,606
----------- -----------
DIRECT-TO-TELEVISION PROGRAMS
Released, net of accumulated amortization................................................................. 17,640 17,400
In progress............................................................................................... 34,250 12,129
In development............................................................................................ 787 1,554
----------- -----------
52,677 31,083
----------- -----------
$ 406,170 $ 177,689
=========== ===========
Acquired libraries of $128.6 million at March 31, 2004 (March 31, 2003 --
$37.4 million) include the Trimark library acquired October 2000 and the Artisan
library acquired on December 15, 2003 (refer to note 13). The Trimark library is
amortized over its expected revenue stream for a period of twenty years from the
acquisition date. The remaining amortization period on the Trimark library as at
March 31, 2004 is sixteen and one half years on unamortized costs of $30.0
million. The Artisan library includes titles released at least three years prior
to the date of acquisition, which are amortized over its expected revenue
streams for a period of twenty years from the date of acquisition. The remaining
amortization period on the Artisan library at March 31, 2004 is nineteen and
three quarter years on unamortized costs of $98.5 million.
The Company expects approximately 49% of completed films and television
programs, net of accumulated amortization will be amortized during the one-year
period ending March 31, 2005, and approximately 89% of accrued participants'
share will be paid during the one-year period ending March 31, 2005.
Additionally, the Company expects approximately 82% of completed and
released films and television programs, net of accumulated amortization, will be
amortized during the three year period ending March 31, 2007.
Interest capitalized relating to productions during the year ended March
31, 2004 amounted to $1.3 million (2003 -- $0.3 million; 2002 -- $2.2 million).
4. PROPERTY AND EQUIPMENT
MARCH 31, 2004 MARCH 31, 2003
----------------------- ------------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
---------- ------------ ---------- ------------
(AMOUNTS IN THOUSANDS)
Land held for leasing purposes................................................. $ 11,058 $ -- $ 9,879 $ --
Buildings held for leasing purposes............................................ 18,329 3,845 16,375 2,729
Leasehold improvements......................................................... 448 370 449 298
Furniture and equipment........................................................ 3,073 1,831 3,309 1,786
Automobiles.................................................................... 11 10 10 8
F-13
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Computer equipment and software................................................ 6,651 3,853 5,041 1,932
---------- --------- ---------- ---------
$ 39,570 $ 9,909 $ 35,062 $ 6,753
---------- --------- ---------- ---------
Net book value................................................................. $ 29,661 $ 28,309
========= =========
5. OTHER ASSETS
MARCH 31, MARCH 31,
2004 2003
---------- ----------
(AMOUNTS IN THOUSANDS)
Deferred financing costs, net of accumulated amortization.............................................. $ 14,181 $ 2,930
Intangible assets, net................................................................................. 4,370 --
Prepaid expenses and other............................................................................. 4,230 7,430
Deferred print costs................................................................................... 933 1,133
Equity investments..................................................................................... -- 6,409
Convertible debentures................................................................................. -- 5,530
Promissory note, net of provision...................................................................... -- 3,412
---------- ----------
$ 23,714 $ 26,844
========== ==========
Intangible Assets. Intangible assets acquired in connection with the
purchase of Artisan of $5.1 million represent distribution and personal service
agreements and are amortized over a period of two to four years from the date of
acquisition. For the year ended March 31, 2004 $0.7 million amortization was
recorded. Based on the current amount of intangibles subject to amortization,
the estimated amortization expense for each of the succeeding years is $2.2
million for the year ended March 31, 2005 and $2.2 million for the year ended
March 31, 2006.
Equity Method Investees.
Mandalay: At March 31, 2002, the carrying value of the Company's
investment in Mandalay Pictures, LLC ("Mandalay") was written down to its
estimated fair value of $10.0 million as it was expected to be sold by the end
of fiscal 2003. The write-off of the investment in Mandalay of $10.7 million was
disclosed in the consolidated statement of operations as write-down of equity
interests. During fiscal 2003, the Company received distributions of $2.4
million from Mandalay under a prior agreement and also recorded equity losses of
$2.1 million against its remaining investment in Mandalay. On November 8, 2002,
the Company sold its investment in Mandalay for cash of $4.3 million and an
interest bearing convertible promissory note totaling $3.3 million. The gain of
$2.1 million recorded on the sale was disclosed in the consolidated statement of
operations for the year ended March 31, 2003 as gain on sale of equity
interests.
CinemaNow: During the quarter ended March 31, 2002, CinemaNow, Inc.
("CinemaNow") advised the Company of its inability to generate sufficient cash
flows from operations to sustain its operations over the following twelve
months, without raising additional capital. Given the uncertain economic climate
and CinemaNow's recurring losses there was no assurance that further financing
would be forthcoming and, as a result, the Company wrote down its investment in
CinemaNow to nil. The write-off of the investment in CinemaNow of $13.4 million
was disclosed in the consolidated statement of operations for the year ended
March 31, 2002 as write-down of equity interests. During the quarter ending
March 31, 2003, the Company purchased $0.4 million of Series C Convertible
Preferred Shares of CinemaNow as part of CinemaNow's round of financing. The
round of financing and conversion of a debenture decreased the Company's
economic and voting interest to approximately 54%. The investment in CinemaNow
made during the quarter ending March 31, 2003 is accounted for using the equity
method as the Company does not have the ability to control the strategic,
operating, investing and financing decisions of CinemaNow as a consequence of
the Company's inability to elect the majority of the Board of Directors of
CinemaNow. For the year ended March 31, 2004 a loss in the amount of $0.2
million (2003 -- $0.4 million) is recorded in other equity interests in the
consolidated statement of operations. The investment in CinemaNow was reduced to
nil by March 31, 2004 and therefore the Company does not record any additional
losses, as it has no further funding requirements.
Christal: The Company has a 75% economic interest and a 30% voting
interest in Christal, a film distributor and sub-distributor in Quebec, Canada.
The Company has identified Christal as a VIE as the voting rights of some
investors in Christal are not proportional to the economic interests and
substantially all of Christal's activities either involved or were conducted on
behalf of the Company with the disproportionately fewer voting rights as of the
determination date. Additionally, the Company has determined that it is the
primary beneficiary as the Company would have to absorb greater than 50% of
Christal's expected losses and has the right to more than 50% of their expected
residual returns. Under FIN 46, an entity that qualifies as a VIE must be
consolidated by its primary beneficiary and therefore the Company has
consolidated Christal as at March 31, 2004. Prior to March 31, 2004, the
investment in
F-14
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Christal was accounted for using the equity method of accounting. Therefore, for
the year ended March 31, 2004 a loss in the amount of $0.1 million (2003 --
income $0.4 million) is recorded in other equity interests in the consolidated
statements of operations. The investment in Christal was nil at March 31, 2004
as it was consolidated at March 31, 2004 and $2.6 million at March 31, 2003
under the equity method of accounting.
CineGroupe Corporation: The Company has an investment in CineGroupe
Corporation (together with its subsidiaries Animation Cinepix Inc.,
"CineGroupe"), a Canadian animation company. On July 10, 2001, a third party
invested $9.2 million in CineGroupe Corporation to obtain a 35% interest. The
gain on dilution of the Company's investment was $2.2 million, net of income
taxes of nil and resulted in a decrease of $0.1 million in goodwill and is
recorded in the consolidated statements of operations for the year ended March
31, 2002. As a result of the third party investment, the Company's investment
was reduced to a 29.4% equity interest. At March 31, 2003, $5.5 million of
convertible debentures were due from CineGroupe. In December 2003, the Company
evaluated its investment in CineGroupe as CineGroupe was unable to meet its
financial obligations in the ordinary course of business and sought protection
under the Companies' Creditors Arrangement Act ("CCAA"). As a result of the CCAA
filing, the Company determined that it no longer has the ability to
significantly influence CineGroupe and began accounting for CineGroupe under the
cost method of accounting. The Company wrote off $8.1 million of convertible
debentures and other receivables due from CineGroupe which was disclosed in the
consolidated statement of operations for the year ended March 31, 2004 as
write-down of other assets. For the year ended March 31, 2004, prior to cost
accounting for CineGroupe, a loss in the amount of $1.9 million (2003 - nil,
2002 - income $0.4 million) was recorded in other equity interests in the
consolidated statements of operations. The investment in CineGroupe was nil at
March 31, 2004 under the cost method of accounting and $3.6 million at March 31,
2003 under the equity method of accounting.
Promissory Note. On November 8, 2002, the Company sold its investment in
Mandalay for cash of $4.3 million and an interest bearing convertible promissory
note totaling $3.3 million. The note, bearing interest at 6%, is payable $1.3
million on December 31, 2005, $1.0 million on December 31, 2006 and $1.0 million
on December 31, 2007. At March 31, 2004 it was determined that the note may not
be collectible and accordingly, the Company recorded a provision of $3.6 million
against its promissory note and accrued interest. The provision was disclosed in
the consolidated statement of operations for the year ended March 31, 2004 as
write-down of other assets.
6. BANK LOANS
The Company has a $350 million credit facility (2003 -- $200 million)
consisting of a $200 million U.S. dollar-denominated revolving credit facility
(2003 -- $175 million), a $15 million Canadian dollar-denominated revolving
credit facility (2003 -- $25 million) and a $135 million U.S. dollar-denominated
term-loan (2003 -- nil). The credit facility expires December 31, 2008 and bears
interest in the case of revolving credit facility loans at 2.75% over the
Adjusted LIBOR or the Canadian Bankers Acceptance rate, or 1.75% over the U.S.
or Canadian prime rates and in the case of the term loan at 3.25% over the
Adjusted LIBOR, or 2.25% over the U.S. prime rates. The principal amount of the
term loan is payable in four annual installments of $20 million commencing in
December 2004 and a fifth installment of $55 million payable in December 2008.
Once repaid, amounts constituting the term loan commitment may not be
re-borrowed. The availability of funds under the credit facility is limited by
the borrowing base, which is calculated on a monthly basis. The borrowing base
assets at March 31, 2004 totaled $390.9 million (March 31, 2003 -- $166.4
million). At March 31, 2004, the revolving credit facility had an average
variable interest rate of 4.28% on principal of $189.7 million under the U.S.
dollar credit facility, and an average variable interest rate of 4.36% on
principal of $135.0 million under the term loan. The Company had not drawn on
the Canadian dollar credit facility as of March 31, 2004. The Company is
required to pay a monthly commitment fee of 0.50% on the total credit facility
of $350.0 million less the amount drawn. Right, title and interest in and to all
personal property of Lions Gate Entertainment Corp. and Lions Gate Entertainment
Inc. is being pledged as security for the credit facility. The credit facility
is senior to the Company's film obligations, subordinated notes and debt. The
credit facility restricts the Company from paying cash dividends on its common
shares. The Company entered into a $100 million interest rate swap at an
interest rate of 3.08%, commencing January 2003 and ending September 2005. The
swap is in effect as long as three month LIBOR is less than 5.0%. Fair market
value of the interest rate swap at March 31, 2004 is negative $2.3 million
(March 31, 2003 -- negative $3.2 million). The fair valuation gain for the year
ended March 31, 2004 is $0.8 million (2003 -- loss of $3.2 million). Financing
fees of $11.4 million incurred in connection with the credit facility are
deferred and amortized to interest expense over the term of the credit facility.
The Company also has a $2.2 million operating line of credit available to
Christal, an entity consolidated under FIN 46, which is renewable annually. At
March 31, 2004, $1.5 million was drawn on the operating line of credit.
The weighted average interest rate on bank loans at March 31, 2004 was
4.31% (2003 -- 4.12%).
F-15
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FILM OBLIGATIONS
MARCH 31, MARCH 31,
2004 2003
--------- ---------
(AMOUNTS IN THOUSANDS)
Minimum guarantees................................................................................... $ 10,705 $10,431
Minimum guarantees initially incurred for a term of more than one year............................... 16,189 25,352
Participation and residual costs..................................................................... 79,033 26,157
Film productions..................................................................................... 8,141 5,442
-------- -------
$114,068 $67,383
======== =======
8. SUBORDINATED NOTES
On October 3, 2003, the Company filed a shelf registration statement to
potentially offer for sale common shares, preferred shares, debt securities,
warrants, purchase contracts, units and depository shares. The Company may sell
any combination of the foregoing securities in one or more offerings up to an
aggregate initial offering price of $250,000,000 during the period that the
registration statement remains effective.
On December 3, 2003, the Company sold $60.0 million of 4.875% Convertible
Senior Subordinated Notes ("4.875% Notes"). In December 2003, the Company
received $57.0 million of net proceeds, after paying placement agents' fees. The
offering expenses were $0.7 million. Interest on the Notes is due semi-annually
on June 15 and December 15 commencing on June 15, 2004 and the Notes mature on
December 15, 2010. The Company may redeem all or a portion of the Notes at its
option on or after December 15, 2006 at 100% of their principal amount, together
with accrued and unpaid interest through the date of redemption; provided,
however, that the Notes will only be redeemable if the closing price of the
Company's common shares equals or exceeds 175% of the conversion price then in
effect for at least 20 trading days within a period of 30 consecutive trading
days ending on the day before the date of the notice of optional redemption. The
Notes are convertible, at the option of the holder, at any time before the close
of business on the business day immediately preceding the maturity date of the
Notes, unless previously redeemed, into common shares of the Company at a
conversion rate of 185.0944 shares per $1,000 principal amount of Notes, which
is equal to a conversion price of approximately $5.40 per share.
On December 15, 2003, the Company assumed, as part of the purchase of
Artisan Entertainment Inc. ("Artisan"), a $5.0 million subordinated promissory
note to Vialta, Inc ("Promissory Note") issued by Artisan which bears interest
at 7.5% per annum compounded quarterly. The Promissory Note matures on April 1,
2005.
The Company believes that the carrying value of the notes approximates
fair value at March 31, 2004.
9. DEBT
MARCH 31, MARCH 31,
2004 2003
---------- ----------
(AMOUNTS IN THOUSANDS)
Promissory notes, bearing interest at 6.0%, paid July 31, 2003. The principal was convertible
at the option of the holder into common shares of the Company at Cdn $8.10 per share(1)............... $ -- $ 11,233
Loans bearing interest at 5.62% to 7.51%, due in fiscal 2006, 2008 and 2009, with property, buildings
and equipment with carrying values of approximately $26.0 million provided as collateral(1)(2)........ 19,041 13,353
---------- ----------
$ 19,041 $ 24,586
========== ==========
The Company believes the carrying value of the debt approximates fair
value at March 31, 2004.
(1) Payable in Canadian dollars.
(2) A subsidiary of the Company entered into a CDN$20 million interest rate
swap at a fixed interest rate of 5.62%, commencing September 2003 and
ending September 2008. The subsidiary does not require collateral or other
security to support this contract. The subsidiary entered into the
interest rate swap as a condition of its loan which states the interest
rates under the facility are to be fixed either by way of a fixed rate
term loan or by way of an interest rate swap. During fiscal 2004, the
subsidiary recorded
F-16
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interest expense of $1.0 million, including amounts incurred under the
interest rate swap, that approximates the amount they would have paid if
they had entered into a fixed rate loan agreement. Fair market value of
the interest rate swap at March 31, 2004 is negative $0.6 million. The
fair valuation loss recorded as a component of other income (expense) for
the year ended March 31, 2004 is $0.6 million.
10. SERIES A PREFERRED SHARES AND SHARE WARRANTS
The Company's Series A preferred shares were redeemable by the holder
following certain events outside the control of the Company and accordingly are
presented outside of shareholders' equity on the consolidated balance sheet.
On December 21, 1999, the Company issued 13,000 units at a price of $2,550
per unit. Each unit consisted of one 5.25% convertible, non-voting (except for
the right to elect between one and three directors, depending on the number of
preferred shares outstanding) redeemable Series A preferred share and 425
detachable common share purchase warrants (for a total of 5,525,000 common share
purchase warrants). The proceeds received on the offering were allocated as
follows: common share purchase warrants were valued at fair value, using the
Black-Scholes option pricing model, of $0.706 per warrant or $3.9 million (which
have been included in common shares in the consolidated statements of
shareholders' equity) and the basic preferred shares were valued at the residual
value of $27.6 million, after deducting $1.7 million of share issue costs. On or
after January 1, 2003, the Company could convert the preferred shares, in whole
or in part, to common shares on the same terms as the holders, subject to
certain conditions. The preferred shares were entitled to cumulative dividends,
as and when declared by the Board, payable semi-annually on the last day of
March and September of each year. The Company could pay the dividends in cash or
additional preferred shares. On September 30, 2003, and March 31, 2004 the
Company declared and paid cash dividends of $0.3 million or $66.94 per share and
$0.1 million or $66.94 per share, respectively. On September 30, 2002, and March
31, 2003 the Company declared and paid cash dividends of $0.8 million or $66.94
per share and $0.8 million or $66.94 per share, respectively. On September 30,
2001, the Company declared and paid cash dividends of $0.8 million or $66.94 per
share. On March 31, 2002, the Company declared dividends of $0.8 million or
$66.94 per share, which were paid in cash and 273 additional with a value of
$0.7 million. The number of shares to be issued was calculated by using the
semi-annual dividend rate of 2.625% multiplied by the number of outstanding
preferred shares at March 31, 2002, less applicable withholding taxes. The
withholding taxes and fractional shares were paid in cash of $0.1 million.
In June 2003, the Company repurchased 8,040 Series A Preferred Shares at a
per share purchase price of $2,250, or total purchase price of $18.1 million.
The difference of $0.6 million, between the purchase price of the Series A
Preferred Shares and the assigned value of the Series A Preferred Shares at the
time of repurchase, represents a contribution by the preferred shareholders
which accrues to the benefit of the remaining common shareholders and is
classified on the consolidated balance sheet as accumulated paid in capital.
When the preferred shares were originally issued each holder of the
preferred shares could convert all, but not less than all, of the preferred
shares at any time into common shares at a rate of 1,000 common shares for each
preferred share, subject to certain anti-dilution adjustments. During the years
ended March 31, 2002, and 2000, 648 and 795 preferred shares were converted by
the preferred shareholders, respectively. In September 2003, the Shareholders
approved a special resolution resolving that the preferred shares would be
convertible at the option of the holder into common shares at a rate of 1,109
common shares for each preferred share, subject to certain anti-dilution
adjustments. During the year ended March 31, 2004, 1,804 preferred shares were
converted by the preferred shareholders into common shares at this amended rate.
The Company exercised its right to convert the remaining 1,986 preferred shares
to common shares on February 27, 2004. At March 31, 2004 there were no preferred
shares outstanding.
The difference between the initial carrying value of the preferred shares
of $27.6 million and the redemption price of $34.8 million, after giving effect
to conversions and repurchases through March 31, 2004, was accreted as a charge
to accumulated deficit using the effective interest method over the five-year
period from the date of issuance to the first available redemption date. The
Company ceased accreting this charge to accumulated deficit when all remaining
preferred shares were converted to common shares in February 2004.
Each share purchase warrant entitles the holder to purchase one common
share at a price of $5.00. The warrants are not transferable except with the
consent of the Company. On December 15, 2003, the Board of Directors of the
Company resolved that the term of the Company's 5,525,000 warrants issued in
December 1999 would be extended by one year. The warrants will expire January 1,
2005 instead of January 1, 2004. The modification of these warrants is treated
as an exchange of the original warrant for a new warrant. The fair value of the
new warrant is measured at the date the new warrant is issued and the value of
the old warrant is its fair value immediately before its terms were modified.
The additional incremental fair value of the new warrant is $2.0 million for the
year
F-17
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ended March 31, 2004 and is considered a distribution to preferred shareholders
and therefore is included in net loss available to common shareholders. On March
4, 2004, 275,400 warrants were exercised and 275,400 common shares were issued.
The Company received $1.4 million of proceeds. As at March 31, 2004, there were
5,249,600 warrants outstanding.
11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Components of accumulated other comprehensive income (loss) are as
follows:
FOREIGN UNREALIZED GAIN ACCUMULATED
CURRENCY UNREALIZED GAIN ON FOREIGN OTHER
TRANSLATION (LOSS) ON EXCHANGE COMPREHENSIVE
ADJUSTMENTS SECURITIES CONTRACTS INCOME (LOSS)
------------ --------------- --------------- --------------
(AMOUNTS IN THOUSANDS)
Balance at March 31, 2002....................................... $ (7,597) $ (259) $ - $ (7,856)
Current year change............................................. 62 227 - 289
----------- --------- -------- ---------
Balance at March 31, 2003....................................... (7,535) (32) - (7,567)
Current year change............................................. (440) - 622 182
----------- --------- -------- ---------
Balance at March 31, 2004....................................... $ (7,975) $ (32) $ 622 $ (7,385)
=========== ========= ======== =========
12. CAPITAL STOCK
(a) COMMON SHARES
On October 3, 2003, the Company filed a shelf registration statement to
potentially offer for sale common shares, preferred shares, debt securities,
warrants, purchase contracts, units and depository shares. The Company may sell
any combination of the foregoing securities in one or more offerings up to an
aggregate initial offering price of $250 million during the period that the
registration statement remains effective.
In October 2003, the Company sold 28,750,000 common shares at a public
offering price of $2.70 per share and received $73.5 million of net proceeds,
after deducting underwriting expenses. The Company incurred offering expenses of
$0.5 million.
In June 2003, the Company sold 16,201,056 common shares at a public
offering price of $2.05 per share and received $31.2 million of net proceeds,
after deducting underwriting expenses. The Company incurred offering expenses of
$1.0 million.
(b) SERIES B PREFERRED SHARES
As a condition of the purchase of a subsidiary, on October 13, 2000, the
Company issued ten shares at $10 per share to the principal shareholder of
Trimark. The shares are non-transferable and are not entitled to dividends. The
shares are non-voting except that the holder, who was a principal of the
subsidiary acquired, has the right to elect himself to the Board of Directors.
The shares are redeemable by the Company if certain events occur. The shares
have a liquidation preference equal to the stated value of $10 per share.
The Company's Series B preferred shares have been included in
shareholders' equity.
(c) STOCK-BASED COMPENSATION PLAN
The shareholders approved an Employees' and Directors' Equity Incentive
Plan (the "Plan") that provides for the issue of up to 8.0 million common shares
of the Company to eligible employees, directors and service providers of the
Company and its affiliates. On July 25, 2003, the Board of Directors increased
the number of shares authorized for stock options from 8.0 million to 9.0
million. Of the 9.0 million common shares allocated for issuance, up to a
maximum of 250,000 common shares may be issued as discretionary bonuses in
accordance with the terms of a share bonus plan. During fiscal 2004, no shares
were issued under the share bonus plan. The shareholders approved an additional
1.4 million options to be issued outside of the Plan to a certain principal of
an acquired company upon acquisition of that subsidiary. These shares were
issued in fiscal 2001 and are included in the total number of stock options
granted and outstanding at March 31, 2004.
The Plan authorizes the granting of options to purchase shares of the
Company's common shares at an option price at least equal to the weighted
average price of the shares for the five trading days prior to the grant. The
options generally vest with the recipient
F-18
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
within three years of grant, and have a maximum term of five years. At March 31,
2004, 177,275 common shares were available for grant under the plan.
On November 13, 2001, the Board of Directors of the Company resolved that
750,000 options, granted to certain officers of the Company to purchase common
shares of the Company, be revised to entitle the holders to receive cash only
and not common shares. The amount of cash received will be equal to the amount
by which the trading price of common shares on the exercise notice date exceeds
the option price of $5.00 multiplied by the number of options exercised. The
twenty-day average trading price of common shares prior to the exercise notice
date has to be $6.00 or above in order for the officers to exercise their
options. These revised options are not considered part of the Employees' and
Directors' Equity Incentive Plan. The Company measures compensation cost as the
amount by which the market value of common shares exceeds the option price. At
March 31, 2004 the market price of common shares was $6.25 and the options were
expected to vest. The Company has recorded stock compensation expense in the
amount of $0.9 million in general and administration expenses in the
consolidated statement of operations for the year ended March 31, 2004. The
expense is calculated by using the market price of common shares on March 31,
2004 less the option price, multiplied by the 750,000 options expected to vest.
Changes in stock options granted and outstanding for fiscal 2002, 2003 and
2004 were as follows:
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- ----------------
Outstanding at March 31, 2001.................................................................. 8,895,417 $ 3.06
Granted........................................................................................ 1,000,498 2.73
Exercised...................................................................................... (87,083) 1.51
Forfeited...................................................................................... (979,839) 4.57
Expired........................................................................................ (660,831) 3.27
---------- -------
Outstanding at March 31, 2002.................................................................. 8,168,162 2.82
Granted........................................................................................ 1,523,000 2.52
Exercised...................................................................................... -- --
Forfeited...................................................................................... (223,177) 3.39
Expired........................................................................................ (1,056,992) 3.52
---------- -------
Outstanding at March 31, 2003.................................................................. 8,410,993 2.73
Granted........................................................................................ 2,215,500 2.98
Exercised...................................................................................... (955,562) 2.72
Forfeited...................................................................................... (260,022) 2.77
Expired........................................................................................ (143,746) 3.72
---------- -------
Outstanding at March 31, 2004.................................................................. 9,267,163 $ 2.77
========== =======
Outstanding and exercisable options at March 31, 2004 were as follows:
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
CONTRACTUAL LIFE EXERCISE PRICE OF EXERCISE PRICE OF
PRICE RANGE OF OUTSTANDING OPTIONS OUTSTANDING EXERCISABLE OUTSTANDING OPTIONS EXERCISABLE OPTIONS
- ----------- ---------------------- ----------- ----------- ------------------- -------------------
$1.75 to $2.55 2.51 Years 6,414,997 4,693,443 $ 2.53 $ 2.53
$2.67 to $4.00 3.34 Years 2,626,833 1,441,830 $ 3.16 $ 3.00
$4.26 to $6.02 4.54 Years 225,333 46,666 $ 5.01 $ 5.01
---------- --------- --------- ------ ------
2.80 Years 9,267,163 6,181,939 $ 2.77 $ 2.66
========= ========= ====== ======
During the quarter ending September 30, 2003, the Company modified the
terms of 3,048,000 options of certain officers of the Company, extending the
expiry dates to coincide with their employment contract dates. The vesting
period and exercise prices were unchanged.
Intrinsic value: The modification of these options is treated as an exchange of
the original award for a new award and the resulting expense is recorded as
stock-based compensation in general and administration expenses in the
consolidated statement of operations. The additional compensation cost for the
year ended March 31, 2004 of $0.7 million (2003 -- nil, 2002 -- nil), is
calculated by multiplying the market price on the date of the modification times
the number of options vested less the original exercise price times the number
of options vested. The additional compensation cost is attributed over the
remaining service period. In the case of the options modified the options are
fully vested, there are no additional service requirements and the additional
compensation is expensed immediately.
Fair value: For disclosure purposes, under the fair value method, the value of
the new award is measured as the fair value at the date
F-19
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the new award is granted and the value of the old award is its fair value
immediately before its terms were modified. The additional compensation cost for
the incremental fair value of the new award plus unallocated compensation costs
for the old award is attributed over the remaining service period. In the case
of the options modified the total additional compensation to be expensed over
the service period is $0.8 million. At March 31, 2004, there are no additional
service requirements on these options and the $0.8 million incremental fair
value relating to these options would be expensed for disclosure purposes for
the year ending March 31, 2004.
During the quarter ending December 31, 2003, the Company modified the
terms of 250,000 options of a certain past director of the Company, amending the
price of the options to be consistent with those granted to other Directors. The
expiry date and vesting period were unchanged.
Intrinsic value: The modification of these options is treated as an exchange of
the original award for a new award. The additional compensation cost at the date
of modification is calculated by multiplying the market price on the date of the
modification times the number of options vested less the original exercise price
times the number of options vested. The market price on the date of the
modification was less than the exercise price resulting in no additional
compensation cost. The options are valued using variable accounting for stock
based compensation until they are exercised, forfeited or expire. The additional
compensation cost for the year ended March 31, 2004 is $0.9 million.
Fair value: For disclosure purposes, under the fair value method, the value of
the new award is measured as the fair value at the date the new award is granted
and the value of the old award is its fair value immediately before its terms
were modified. The additional compensation cost for the incremental fair value
of the new award plus unallocated compensation costs for the old award is
attributed over the remaining service period. In the case of the options
modified the total additional compensation to be expensed over the service
period is not material. At March 31, 2004, there are no additional service
requirements on these options and the incremental fair value relating to these
options, which is not material, would be expensed for disclosure purposes for
the year ending March 31, 2004.
Options were granted to a certain employee of the Company with an exercise
price determined at a future date. These options are valued using variable
accounting for stock-based compensation and the resulting expense is recorded as
stock-based compensation in general and administration expenses in the
consolidated statements of operations. The additional compensation cost for the
year ended March 31, 2004 of $0.1 million (2003 -- nil, 2002 -- nil), is
calculated by multiplying the market price on March 31, 2004 times the number of
options vested less the market price on the date the options were granted times
the number of options vested. The additional compensation cost is expensed in
the current reporting period and adjusted each reporting period until such time
as the exercise price is determined.
13. ACQUISITIONS
On October 24, 2003, the Company entered into a definitive merger
agreement with Film Holdings Co., the parent company of Artisan, an independent
distributor and producer of film and entertainment content. Under the terms of
the merger agreement, the Company acquired 100% of the shares of Film Holdings
Co. by means of a merger of a subsidiary of the Company with and into Film
Holding Co., pursuant to which Film Holdings Co. became a subsidiary of the
Company. On December 15, 2003, the Company completed its acquisition of Film
Holdings Co. for a total purchase price of $168.8 million consisting of $160.0
million in cash and direct transaction costs of $8.8 million. In addition, the
Company assumed debt of $59.9 million and other obligations (including accounts
payable and accrued liabilities, accrued participation and residual costs and
other advances) of $140.6 million. Direct transaction costs are considered
liabilities assumed in the acquisition, and as such, are included in the
purchase price. Direct transaction costs include: amounts totaling $3.9 million
paid to lawyers, accountants and other consultants; involuntary termination
benefits totaling $4.8 million payable to certain Artisan employees terminated
under a severance plan and various other amounts totaling $0.1 million. At March
31, 2004, the remaining liabilities under the severance plan are $1.7 million.
The purchase price may be adjusted for the payment of additional
consideration of up to $7.5 million contingent upon the results of specified
feature films to be released at a future date. At March 31, 2004, the contingent
consideration cannot be reasonably estimated and the outcome cannot be
determined without reasonable doubt. When the contingency is resolved and if
additional consideration becomes payable, the consideration will be recognized
as an additional cost of the purchase.
The acquisition was accounted for as a purchase, with the results of
operations of Artisan consolidated from December 15, 2003 onwards. Goodwill of
$134.5 million represents the excess of the purchase price over the fair value
of the net identifiable tangible and intangible assets acquired. The preliminary
allocation of the purchase price to the tangible and intangible assets acquired
and liabilities assumed based on their fair values was as follows:
F-20
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN
THOUSANDS)
-------------
Cash and cash equivalents........................................................................ $ 19,946
Accounts receivable, net......................................................................... 38,664
Investment in films and television programs...................................................... 166,661
Intangible assets................................................................................ 5,100
Other tangible assets acquired................................................................... 4,471
Goodwill......................................................................................... 134,478
Bank loans....................................................................................... (54,900)
Subordinated note................................................................................ (5,000)
Other liabilities assumed........................................................................ (140,604)
------------
Total.......................................................................................... $ 168,816
============
In the quarter ended March 31, 2004, the initial purchase price was
amended for a decrease in direct transaction costs of $0.7 million. The initial
allocation of the purchase price was amended resulting in an increase in
accounts receivable of $7.0 million, a decrease in investment in films and
television programs of $62.3 million, an addition of intangible assets of $5.1
million, an increase in other tangible assets of $0.9 million, a decrease in
other liabilities of $16.5 million and an increase in goodwill of $32.1 million.
The initial allocation to investment in films and television programs and
intangible assets was amended as a result of a more detailed valuation analysis
performed on these assets.
Severance and relocation costs incurred by Lions Gate, associated with the
acquisition of Artisan, are not included in the purchase price, and as such, are
recorded in the consolidated statements of operations. Severance and relocation
costs of $5.6 million include property lease abandonment costs of $2.5 million,
the write-off of capital assets no longer in use of $2.1 million and severance
of $1.0 million. At March 31, 2004 the remaining liabilities under the severance
plan and for the property lease abandonment are $0.4 million and $2.3 million,
respectively.
The following unaudited pro forma condensed consolidated statements of
operations presented below illustrate the results of operations of the Company
as if the following transactions occurred at April 1, 2002:
(a) sold 28,750,000 common shares at a public offering price of
$2.70 per share for which the Company received $73.5 million of net
proceeds, after deducting underwriting expenses, and incurred offering
expenses of $0.5 million. (Refer to note 12(a)).
(b) issued $60.0 million of 4.875% Convertible Senior Subordinated
Notes by Lions Gate Entertainment Inc., a wholly owned subsidiary of the
Company. The Company received $57 million of net proceeds, after paying
placement agents' fees, and incurred offering expenses of $0.3 million.
(Refer to note 8).
(c) entered into an Amended and Restated Credit, Security, Guaranty
and Pledge Agreement for a $350 million credit facility consisting of a
$135 million five-year term loan and a $215 million five-year revolving
credit facility. (Refer to note 6).
(d) acquired Artisan as described above.
YEAR ENDED YEAR ENDED
MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
Revenues.................................................................................. $ 589,339 $ 650,186
Operating Income (Loss)................................................................... $ (59,623) $ 79,253
Net Income (Loss)......................................................................... $ (85,061) $ 40,458
Net Income (Loss) Available to Common Shareholders........................................ $ (88,122) $ 37,491
Basic and Diluted Income (Loss) Per Common Share.......................................... $ (1.02) $ 0.52
Weighted Average Common Shares Outstanding................................................ 86,271 71,982
14. INCOME TAXES
The Company's Canadian and United States pretax income (loss) are as
follows:
F-21
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2004 MARCH 31, 2003 MARCH 31, 2002
-------------- -------------- ---------------
(AMOUNTS IN THOUSANDS)
Canada ............................................................ (14,477) (3,162) 9,664
United States ..................................................... $ (77,246) $ 3,560 $ (52,996)
-------------- -------------- --------------
$ (91,723) $ 398 $ (43,332)
============== ============== ==============
The Company's current and deferred income tax provision (benefits) are as
follows:
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2004 MARCH 31, 2003 MARCH 31, 2002
-------------- -------------- ---------------
(AMOUNTS IN THOUSANDS)
Current ........................................................... $ 373 $ 1,821 $ 1,279
Deferred .......................................................... -- -- (1,340)
-------------- -------------- --------------
$ 373 $ 1,821 $ (61)
============== ============== ==============
CANADA
Current ........................................................... 373 1,438 1,279
Deferred .......................................................... -- -- (382)
-------------- -------------- --------------
373 1,438 897
-------------- -------------- --------------
UNITED STATES
Current ........................................................... $ -- $ 383 $ --
Deferred .......................................................... -- -- (958)
-------------- -------------- --------------
-- 383 (958)
-------------- -------------- --------------
Total ............................................................. $ 373 $ 1,821 $ (61)
============== ============== ==============
The differences between income taxes expected at Canadian statutory income
tax rates and the income tax provision (benefit) are as set forth below:
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2004 MARCH 31, 2003 MARCH 31, 2002
-------------- -------------- ---------------
(AMOUNTS IN THOUSANDS)
Income taxes (tax benefits) computed at Canadian statutory rate
of 34%.............................................................. $ (31,186) $ 135 $ (14,733)
Foreign and provincial operations subject to different income
tax rates ........................................................ 150 (18,104) (3,611)
Expenses not deductible for income tax purposes .................... 1,000 168 1,476
Write-down of equity interests...................................... -- -- 8,178
Increase (decrease) in valuation allowance.......................... 30,409 19,622 8,598
Minority interests ................................................. -- -- 31
-------------- -------------- --------------
$ 373 $ 1,821 $ (61)
============== ============== ==============
The income tax effects of temporary differences between the book value and
tax basis of assets and liabilities are as follows:
MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
(AMOUNTS IN THOUSANDS)
CANADA
Assets
Net operating losses ......................... $ 9,182 $ 9,067
Accounts payable ............................. 588 191
Property and equipment ....................... 1,056 371
Other......................................... 27 884
Valuation allowance........................... (5,228) (9,681)
-------------- --------------
5,625 832
Liabilities
Property and equipment ....................... (5,611) (1,911)
Other ........................................ (14) (11)
-------------- --------------
Net Canada...................................... -- (1,090)
-------------- --------------
UNITED STATES
Assets
Net operating losses.......................... 68,004 24,246
Accounts payable ............................. 9,849 6,050
Other assets ................................. 6,202 1,814
Investment in Mandalay ....................... -- 9,254
Reserves ..................................... 33,250 --
Property and equipment ....................... 3,093 --
Other ........................................ 3,408 --
Valuation allowance .......................... (76,627) (32,211)
-------------- --------------
47,179 9,153
Liabilities
Investment in film and television programs.... (41,937) (8,687)
Accounts receivable .......................... (3,960) --
Property and equipment ....................... (484) --
Other ........................................ (798) --
-------------- --------------
Net United States............................... -- 466
-------------- --------------
TOTAL .......................................... $ -- $ (624)
============== ==============
F-22
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has certain U.S. federal tax attribute carry forwards, the
benefits of which have not been recognized and an estimated valuation allowance
has been provided for in the financial statements. At March 31, 2004, the
Company had U.S. net operating loss carry forwards of approximately $162.9
million (2003 -- $66.4 million). The utilization of these carry forwards as an
available offset to future taxable income is subject to limitations under U.S.
federal income tax laws. If the net operating losses are not utilized, they
expire in varying amounts, starting in 2007 and continuing through 2024.
Finally, at March 31, 2004, approximately $14.1 million of the valuation
allowance attributable to U.S. loss carry forwards would, to the extent those
losses were utilized reduce goodwill. The Company also has U.S. capital loss
carry forwards of $25.8 million which expire in 2008. At March 31, 2004, the
Company had Canadian loss carry forwards of Cdn$29.0 million (U.S. $21.5
million) (2003 -- Cdn$47.2 million, $30.2 million) which expire in varying
amounts, starting in 2006 and continuing through 2012. At March 31, 2004 and
2003, the Company has determined that deferred tax assets in the amount of $80.4
million and $40.2 million do not satisfy the recognition criteria set forth in
SFAS No. 109, "Accounting for Income Taxes." Accordingly, the Company has
recorded a valuation allowance for these amounts.
15. GOVERNMENT ASSISTANCE
Tax credits earned for the year ended March 31, 2004 totaled $16.7 million
(2003 -- $4.1 million; 2002 -- $7.1 million) of which $14.7 million is recorded
as an offset to investment in films and television programs and $2.0 million
(2003 -- $4.1 million, 2002 -- $7.1 million) is recorded as revenue. Accounts
receivable at March 31, 2004 includes $16.8 million with respect to tax credits
receivable (2003 -- $11.8 million).
The Company is subject to routine inquiries and review by Regulatory
authorities of its various incentive claims which have been received or are
receivable. Adjustments of claims, if any, as a result of such inquiries or
reviews, will be recorded at the time of such determination.
16. SEGMENT INFORMATION
SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information" requires the Company to make certain disclosures about each
reportable segment. The Company's reportable segments are determined based on
the distinct nature of their operations and each segment is a strategic business
unit that offers different products and services and is managed separately. The
Company evaluates performance of each segment using segment profit (loss) as
defined below. The Company has four reportable business segments: Motion
Pictures; Television; Studio Facilities; and CineGate.
Motion Pictures consists of the development and production of feature
films, acquisition of North American and worldwide distribution rights, North
American theatrical, video and television distribution of feature films produced
and acquired and worldwide licensing of distribution rights to feature films
produced and acquired.
Television consists of the development, production and worldwide
distribution of television productions including television series, television
movies and mini-series and non-fiction programming.
Studio Facilities consists of ownership and management of an
eight-soundstage studio facility in Vancouver, Canada. Rental revenue is earned
from soundstages, office and other services such as furniture, telephones and
lighting equipment to tenants that produce or support the production of feature
films, television series, movies and commercials. Tenancies vary from a few days
to five years depending on the nature of the project and the tenant.
Until fiscal 2002, CineGate provided management services to Canadian
limited partnerships, including accessing tax credits to finance production in
Canada. CineGate ceased operations in fiscal 2002 upon the rescission of the tax
shelter business by the Canadian government.
Segmented information by business is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2004 MARCH 31, 2003 MARCH 31, 2002
-------------- -------------- ---------------
(AMOUNTS IN THOUSANDS)
Segment revenues
Motion Pictures ................................................. $ 308,922 $ 200,095 $ 158,318
Television ...................................................... 60,714 59,413 70,710
Studio Facilities ............................................... 6,274 5,406 4,243
F-23
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CineGate ........................................................ -- -- 1,499
-------------- -------------- --------------
$ 375,910 $ 264,914 $ 234,770
============== ============== ==============
Segment profit (loss)
Motion Pictures ................................................. $ (45,317) $ 24,178 $ (706)
Television ...................................................... 1,526 (1,738) 1,520
Studio Facilities ............................................... 4,021 3,497 2,288
CineGate ........................................................ -- -- 1,499
-------------- -------------- --------------
$ (39,770) $ 25,937 $ 4,601
============== ============== ==============
Segment profit (loss) is defined as segment revenue less segment direct
operating, distribution and marketing and general and administration expenses
and severance and relocation costs. The reconciliation of total segment profit
(loss) to the Company's income (loss) before income taxes is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2004 MARCH 31, 2003 MARCH 31, 2002
-------------- -------------- ---------------
(AMOUNTS IN THOUSANDS)
Company's total segment profit (loss) ............................. $ (39,770) $ 25,937 $ 4,601
Less:
Corporate general and administration ............................ (16,577) (11,615) (8,679)
Corporate severance and relocation costs ........................ (4,487) -- --
Write-down of other assets ...................................... (11,686) -- --
Depreciation .................................................... (3,198) (1,846) (1,492)
Interest ........................................................ (14,042) (8,934) (8,435)
Interest rate swaps mark-to-market .............................. 206 (3,163) --
Other expenses .................................................. -- -- (1,351)
Minority interests .............................................. -- -- (91)
Write-down of equity interests .................................. -- -- (24,052)
Gain on dilution of equity interests ............................ -- -- 2,186
Gain on sale of equity interests ................................ -- 2,131 --
Other equity interests .......................................... (2,169) (2,112) (6,019)
-------------- -------------- --------------
Income (loss) before income taxes ................................. $ (91,723) $ 398 $ (43,332)
============== ============== ==============
Revenue by geographic location, based on the location of the customers,
with no other foreign country individually comprising greater than 10% of total
revenue, is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2004 MARCH 31, 2003 MARCH 31, 2002
-------------- -------------- ---------------
(AMOUNTS IN THOUSANDS)
Canada ............................................................ $ 24,620 $ 24,027 $ 34,088
United States ..................................................... 307,400 210,153 161,324
Other foreign ..................................................... 43,890 30,734 39,358
-------------- -------------- --------------
$ 375,910 $ 264,914 $ 234,770
============== ============== ==============
Assets by geographic location are as follows:
MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
(AMOUNTS IN THOUSANDS)
Canada ............. $ 57,160 $ 65,608
United States ...... 705,523 275,083
-------------- --------------
$ 762,683 $ 340,691
============== ==============
Goodwill by reportable business segment is as follows:
MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
(AMOUNTS IN THOUSANDS)
Motion Pictures .... $ 161,395 $ 26,918
Television ......... 5,409 5,409
-------------- --------------
$ 166,804 $ 32,327
============== ==============
F-24
Revenue from transactions with a single customer amount to greater than
10% of consolidated revenues for the year ended March 31, 2004. The total amount
of revenue from the customer for the year ended March 31, 2004 was $42.5 million
and was included in the motion pictures reporting segment. Accounts receivable
due from a single customer amount to greater than 10% of consolidated accounts
receivable at March 31, 2004. The total amount of gross accounts receivable due
from the customer at March 31, 2004 was $38.2 million.
17. COMMITMENTS AND CONTINGENCIES
Debt Maturity. Future annual principal debt repayments as of March 31,
2004 are as follows:
YEAR ENDED MARCH 31,
----------------------------------------------------------------------------------------
2005 2006 2007 2008 2009 THEREAFTER TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
Bank loans ............................. $ 21,474 $ 20,000 $ 20,000 $ 20,000 $ 244,700 $ -- $ 326,174
Film obligations - Minimum guarantees
initially incurred for a term of
more than one year ................... 2,556 5,513 8,120 -- -- -- 16,189
Film obligations - Film productions .... 8,141 -- -- -- -- -- 8,141
Subordinated notes ..................... -- 5,000 -- -- -- 60,000 65,000
Debt ................................... 2,317 2,446 908 1,747 11,623 -- 19,041
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 34,488 $ 32,959 $ 29,028 $ 21,747 $ 256,323 $ 60,000 $ 434,545
========== ========== ========== ========== ========== ========== ==========
Contractual Commitments. Future annual commitments under contractual obligations
as of March 31, 2004 are as follows:
2005 2006 2007 2008 2009 THEREAFTER TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
Operating leases ..................... $ 3,306 $ 2,564 $ 2,018 $ 2,010 $ 427 $ -- $ 10,325
Employment and consulting contracts .. 12,554 5,598 2,807 1,031 -- -- 21,990
Unconditional purchase obligations ... 45,823 1,525 -- -- -- -- 47,348
Distribution and marketing commitments 33,149 -- -- -- -- -- 33,149
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 94,832 $ 9,687 $ 4,825 $ 3,041 $ 427 $ -- $ 112,812
========== ========== ========== ========== ========== ========== ==========
Unconditional purchase obligations relate to the purchase of film rights
for future delivery and advances to producers.
Litigation. We are currently involved in an arbitration proceeding
relating to our distribution of a motion picture. The plaintiff alleges that we
did not release the film in accordance with the contract and has claimed damages
for up to $35 million. Closing arguments were held in October 2003. The
arbitrator rendered an award in favor of the claimant for $0.3 million that was
paid by the Company in December 2003. The claimant made a motion to vacate the
award with a Superior Court of the State of California. The motion was denied.
The claimant has until July 2004 to file an appeal with the Appellate Court of
the State of California. If the claimant does file the appeal and the appeal is
granted, the matter is retried and we fail to prevail as we did in the first
hearing on the key issues, this matter could have a material adverse effect on
the results of operations of future periods. We deny these allegations and
maintain that we acted within our rights.
The Company is from time to time involved in various other claims, legal
proceedings and complaints arising in the ordinary course of business. The
Company does not believe that adverse decisions in any such pending or
threatened proceedings, or any amount which the Company might be required to pay
by reason thereof, would have a material adverse effect on the financial
condition or future results of the Company.
The Company has provided an accrual for estimated losses under the above
proceedings as of March 31, 2004, in accordance with FAS 5 "Accounting for
Contingencies."
Operating Leases. The Company incurred rental expense of $2.3 million
during the year ended March 31, 2004 (2003 -- $1.7 million, 2002 -- $2.1
million). The Company earned sublease income of $0.7 million during the year
ended March 31, 2004 (2003 -- $0.6 million, 2002 -- $0.3 million).
F-25
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. FINANCIAL INSTRUMENTS
(a) CREDIT RISK
Accounts receivable include amounts receivable from Canadian governmental
agencies in connection with government assistance for productions as well as
amounts due from customers.
Amounts receivable from governmental agencies amounted to 13.0% of
accounts receivable at March 31, 2004 (2003 -- 17.2%). Concentration of credit
risk with the Company's customers is limited due to the Company's customer base
and the diversity of its sales throughout the world. The Company performs
ongoing credit evaluations and maintains a provision for potential credit
losses. The Company generally does not require collateral for its trade accounts
receivable.
(b) FORWARD CONTRACTS
The Company enters into forward foreign exchange contracts to hedge its
foreign currency exposures on future production expenses denominated in Canadian
dollars. As of March 31, 2004, the Company had outstanding contracts to sell
US$25.8 million in exchange for CDN$34.5 million over a period of twenty weeks
at a weighted average exchange rate of CDN$1.3344. Changes in the fair value
representing an unrealized fair value gain on foreign exchange contracts
outstanding during the year ended March 31, 2004 amounted to $0.6 million and
are included in accumulated other comprehensive income (loss), a separate
component of shareholders' equity. 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. Gains and losses
realized upon settlement of the foreign exchange contract are recorded as a
component of the production costs being hedged. During the year ended March 31,
2004, the Company completed foreign exchange contracts denominated in Canadian
dollars and gains resulting from the completed contracts of $1.1 million are
amortized to the consolidated statement of operations on the same basis as the
production expenses being hedged.
(c) INTEREST RATE SWAPS
The Company has a $350 million credit facility consisting of a $200
million U.S. dollar-denominated revolving credit facility, a $15 million
Canadian dollar-denominated revolving credit facility and a $135 million U.S.
dollar-denominated term-loan. The credit facility bears interest in the case of
the revolving credit facility loan at 2.75% over the Adjusted LIBOR or the
Canadian Bankers Acceptance rate and in the case of the term loan at 3.25% over
the Adjusted LIBOR. The Company entered into a $100 million interest rate swap
at an interest rate of 3.08%, commencing January 2003 and ending September 2005.
The swap is in effect as long as three month LIBOR is less than 5.0%. During the
year ended March 31, 2004, the Company recorded interest expense of $1.9 million
(2003 -- $0.4 million) associated with the interest swap agreement. Fair value
of the interest rate swap at March 31, 2004 is negative $2.3 million (March 31,
2003 -- negative $3.2 million). Change in the fair value representing a fair
valuation gain on the interest rate swap during the year ended March 31, 2004
amount to $0.8 million (2003 -- loss of $3.2 million) and is included in the
consolidated statements of operations. This contract is 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 contract, at current market rates. The Company does not
require collateral or other security to support this contract.
A subsidiary of the Company entered into a CDN$20 million interest rate
swap at a fixed interest rate of 5.62%, commencing September 2003 and ending
September 2008. The subsidiary entered into the interest rate swap as a
condition of its loan which states the interest rates under the facility are to
be fixed either by way of a fixed rate term loan or by way of an interest rate
swap. During the year ended March 31, 2004, the subsidiary recorded interest
expense of $1.0 million, including amounts incurred under the interest rate
swap, that approximates the amount they would have paid if they had entered into
a fixed rate loan agreement. Fair value of the interest rate swap at March 31,
2004 is negative $0.6 million. Change in the fair value representing a fair
valuation loss on the interest rate swap during the year ended March 31, 2004
amount to $0.6 million (2003 -- nil) and is included in the consolidated
statements of operations. This contract is entered into with a major financial
institution as counterparty. The subsidiary is exposed to credit loss in the
event of nonperformance by the counterparty, which is limited to the cost of
replacing the contract, at current market rates.
19. SUPPLEMENTARY CASH FLOW STATEMENT INFORMATION
(a) Interest paid during the year ended March 31, 2004 amounted to $11.7
million (2003 -- $8.6 million; 2002 -- $9.9 million).
F-26
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) Income taxes paid during the year ended March 31, 2004 amounted to
$1.9 million (2003 -- $1.2 million; 2002 -- $0.4 million).
20. RECONCILIATION TO CANADIAN GAAP
The consolidated financial statements of the Company have been prepared in
accordance with U.S. GAAP. The material differences between the accounting
policies used by the Company under U.S. GAAP and Canadian GAAP are disclosed
below in accordance with the provisions of the Securities and Exchange
Commission and the National Instrument adopted by certain securities authorities
in Canada.
Under Canadian GAAP, the net income (loss) and loss per share figures for
the years ended March 31, 2004, 2003 and 2002, and the shareholders' equity as
at March 31, 2004 and 2003 are as follows:
NET INCOME (LOSS)
----------------------------------- SHAREHOLDERS' EQUITY
YEAR ENDED YEAR ENDED YEAR ENDED --------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2004 2003 2002 2004 2003
---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
AS REPORTED UNDER U.S. GAAP ................................... $(92,096) $ (1,423) $(43,271) $ 69,609 $ 43,632
Accounting for capitalized pre-operating costs -- Mandalay(a).. -- -- (3,074) -- --
Adjustment for capitalized pre-operating costs(b) ............. (614) (614) (614) -- 614
Interest rate swaps mark-to-market(c) ......................... (206) 3,163 -- 2,957 3,163
Adjustment for consolidation of CineGroupe(l) ................. (2,333) -- -- -- --
Accounting for business combinations(d) ....................... -- -- -- 1,145 1,145
Accounting for income taxes(e) ................................ -- -- -- (1,900) (1,900)
Accounting for stock-based compensation(j) .................... 1,740 -- -- -- --
Adjustment for accretion on subordinated notes(g) ............. (809) -- -- (809) --
Adjustment for amortization of subordinated note issue costs(g) 48 -- -- 48 --
Adjustment for amortization of debt financing costs(h) ........ 98 -- -- 98 --
Reclassification of conversion feature of subordinated notes to
shareholders' equity(g) ..................................... -- -- -- 16,269 --
Reclassification of Series A preferred shares to shareholders'
equity(f) ................................................... -- -- -- -- 28,031
Other comprehensive income (loss) (net of tax of nil)(i) ...... -- -- -- (590) 32
-------- -------- -------- -------- --------
NET INCOME (LOSS)/SHAREHOLDERS' EQUITY UNDER CANADIAN GAAP .... $(94,172) $ 1,126 $(46,959) $ 86,827 $ 74,717
======== ======== ======== ======== ========
BASIC AND DILUTED LOSS PER COMMON SHARE UNDER CANADIAN GAAP ... $ (1.35) $ 0.06 $ (1.18)
======== ======== ========
Reconciliation of movement in Shareholders' Equity under Canadian GAAP:
MARCH 31, MARCH 31, MARCH 31,
2004 2003 2002
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
BALANCE AT BEGINNING OF THE YEAR ............................ $ 74,717 $ 75,394 $ 124,843
Increase in common shares ................................... 117,894 -- 2,135
Increase (decrease) in preferred shares ..................... (32,519) 1,768 815
Increase in additional paid in capital ...................... 20,528 -- --
Deconsolidation of CineGroupe's net deficiency in equity .... 2,333 -- --
Dividends paid on Series A preferred shares ................. (387) (1,584) (1,592)
Accretion on Series A preferred shares(g) ................... (1,127) (2,049) (2,089)
Net income (loss) under Canadian GAAP ....................... (94,172) 1,126 (46,959)
Adjustment to cumulative translation adjustments account(i).. (440) 62 (1,759)
--------- --------- ---------
BALANCE AT END OF THE YEAR .................................. $ 86,827 $ 74,717 $ 75,394
========= ========= =========
(a) ACCOUNTING FOR CAPITALIZED PRE-OPERATING COSTS -- MANDALAY
Under U.S. GAAP, all start-up costs are required to be expensed as
incurred. Under Canadian GAAP, pre-operating costs incurred by Mandalay were
deferred and amortized to income until March 31, 2002. The remaining unamortized
pre-operating costs of $1.2 million at March 31, 2002 were included in loss from
discontinued operation under Canadian GAAP. The amounts are presented net of
income taxes of nil until March 31, 2002.
(b) ACCOUNTING FOR CAPITALIZED PRE-OPERATING PERIOD COSTS -- ONE-HOUR
SERIES BUSINESS
F-27
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under U.S. GAAP, all start-up costs are required to be expensed as
incurred. Under Canadian GAAP, the Company deferred certain pre-operating costs
related to the launch of the television one-hour series business amounting to
$3.0 million. This amount is being amortized over five years commencing in the
year ended March 31, 2000 and was fully amortized at March 31, 2004.
(c) INTEREST SWAPS MARK-TO-MARKET
Under U.S. GAAP, the interest swaps do not meet the criteria of effective
hedges and therefore the fair valuation gain of $0.8 million for the year ended
March 31, 2004 (2003 -- loss of $3.2 million) on the Company's interest swap and
fair valuation loss of $0.6 million for the year ended March 31, 2004 (2003 --
nil) on a subsidiary company's interest swap are recorded in the consolidated
statement of operations. Under Canadian GAAP, the interest swaps are effective
hedges and no fair valuation adjustments are recorded.
(d) ACCOUNTING FOR BUSINESS COMBINATIONS
Under U.S. GAAP, costs related to the acquiring company must be expensed
as incurred. Under Canadian GAAP, prior to January 1, 2001, costs related to
restructuring activities of an acquiring company were considered in the purchase
price allocation. In fiscal 2001, the Company included $1.4 million of such
costs in the purchase price for an acquired company under Canadian GAAP. The
amount is presented net of income taxes of $0.3 million.
(e) ACCOUNTING FOR INCOME TAXES
SFAS 109 requires deferred tax assets and liabilities be recognized for
temporary differences, other than non-deductible goodwill, arising in a business
combination. In the year ended March 31, 2000, under U.S. GAAP, goodwill was
increased to reflect the additional deferred tax liability resulting from
temporary differences arising on the acquisition of Lions Gate Studios in fiscal
1999. Under Canadian GAAP, the Company recorded a charge to retained earnings
when the deferred tax liability was established upon adoption of the applicable
accounting standard in 2001; accordingly, there is a difference in the carrying
amount of goodwill arising in the business combination of $1.9 million as at
March 31, 2004 (March 31, 2003 -- $1.9 million).
(f) RECLASSIFICATION OF SERIES A PREFERRED SHARES AND ACCRETION ON SERIES A
PREFERRED SHARES
Under U.S. GAAP, the Company's preferred shares would be presented outside
of shareholders' equity. Under Canadian GAAP, the preferred shares have been
included in shareholders' equity as the Company considered the likelihood of
redemption by the holders to be remote. During the year ended March 31, 2004 all
preferred shares were repurchased or converted to common shares.
Under U.S. GAAP, the carrying amount of the preferred shares at the date
of the offering of $27.6 million is the residual value arrived at by taking the
$33.2 million proceeds less the fair value of the share purchase warrants of
$3.9 million less share issue costs of $1.7 million. Under Canadian GAAP, the
fair value of the basic preferred shares of $25.9 million was determined using
the residual value method arrived at by taking the $33.2 million proceeds less
the fair value of the common share purchase warrants of $3.9 million and the
preferred share conversion feature of $3.4 million.
Under US GAAP, the difference between the initial carrying value and the
redemption price of $34.8 million was being accreted as a charge to accumulated
deficit using the effective interest method over five years whereas, under
Canadian GAAP, the difference was being accreted as a charge to accumulated
deficit on a straight-line basis over five years. During the year ended March
31, 2004 all preferred shares were repurchased or converted to common shares and
the Company is no longer calculating an accretion charge to accumulated deficit.
(g) RECLASSIFICATION OF CONVERSION FEATURE OF SUBORDINATED NOTES, ACCRETION ON
SUBORDINATED NOTES AND AMORTIZATION OF SUBORDINATED NOTES ISSUE COSTS
Under U.S. GAAP, the conversion feature of the Notes, as explained in note
8, is not accounted for separately. Under Canadian GAAP, the conversion feature
of the Notes is valued at $16.3 million, net of placement agents' fees and
offering expenses of $1.0 million and, accordingly, shareholders' equity is
increased by $16.3 million.
F-28
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under U.S. GAAP the principal amount and the carrying amount of the Notes
are the same and therefore no accretion is required whereas, under Canadian
GAAP, the difference between the principal amount of $60.0 million and the
original net carrying amount of $42.7 million is being accreted on a
straight-line basis over seven years as a charge to interest expense.
Under U.S. GAAP all of the placement agents' fees and offering expenses
are capitalized and amortized over seven years as a charge to interest expense
whereas, under Canadian GAAP, the placement agents' fees and offering expenses
have been allocated to the conversion feature and to debt. The portion allocated
to debt is being amortized on a straight-line basis over seven years, as a
charge to interest expense.
(h) ACCOUNTING FOR AMORTIZATION OF DEBT FINANCING COSTS
Under U.S. GAAP, capitalized debt financing in the amount of $4.3 million
allocated to the Company's term loan is being amortized using the effective
interest method over the term of the loan as a charge to interest expense
whereas, under Canadian GAAP, the same amount is being amortized on a
straight-line basis over the term of the loan.
(i) COMPREHENSIVE INCOME (LOSS)
Comprehensive loss consists of net income (loss) and other gains and
losses affecting shareholders' equity that, under U.S. GAAP are excluded from
the determination of net income (loss). Under U.S. GAAP, comprehensive income
(loss) includes cumulative translation adjustments, unrealized gains (losses) on
securities and unrealized gains on foreign exchange contracts, net of income
taxes of nil. Under Canadian GAAP, cumulative translation adjustments are
included as a separate component of shareholders' equity and unrealized gains or
losses on foreign exchange contracts are not recorded.
(j) ACCOUNTING FOR STOCK BASED COMPENSATION
The Company has elected to use the intrinsic value method in accounting
for stock based compensation. In accordance with CICA Section 3870, the
following pro forma disclosures are provided about the costs of stock-based
compensation awards using the fair value method.
The weighted average estimated fair value of each stock option granted in
the year ended March 31, 2004 was $0.86 (2003 -- $0.58). The total stock
compensation expense for disclosure purposes for the year ended March 31, 2004,
based on the fair value of the stock options granted, would be $0.7 million
(2003 -- $0.2 million). This disclosure is prospective and therefore does not
include the fair value of stock options granted prior to April 1, 2002.
For disclosure purposes the fair value of each stock option grant was
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions used for stock options granted: a dividend yield of
0%, expected volatility of 30% (2003 -- 30%), risk-free interest rate of 3.8 %
(2003 -- 2.6%) and expected life of five years.
The following pro forma basic loss per common share includes stock
compensation expense for stock options issued, stock options modified and
warrants modified:
YEAR ENDED YEAR ENDED
MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
The resulting pro forma basic loss per common share is calculated as follows:
Numerator:
Net loss available to common shareholders under Canadian GAAP ............. $(95,686) $ (2,507)
Less: stock compensation expense calculated using intrinsic value method .. -- --
Add: stock compensation expense for options issued and modified calculated
using fair value method .................................................. (1,539) (198)
Add: incremental fair value of modified warrants .......................... (2,031) --
-------- --------
Adjusted net loss available to common shareholders ........................ $(99,256) $ (2,705)
======== ========
Denominator:
Weighted average common shares outstanding (thousands) ................... 70,656 43,232
======== ========
Adjusted basic and diluted loss per common share ............................ $ (1.40) $ (0.06)
======== ========
F-29
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the quarter ended September 30, 2003 the Company modified terms of
3,048,000 options of certain officers of the Company. Under U.S. GAAP, the
modification of these options is treated as an exchange of the original award
for a new award and the resulting expense of $0.7 million for the year ended
March 31, 2004 (2003 -- nil, 2002 -- nil) is recorded as stock-based
compensation. Under Canadian GAAP, the Company has elected to use the intrinsic
value method in accounting for stock-based compensation, which did not result in
additional compensation expense under Canadian GAAP. Under Canadian GAAP, under
the fair value method, the value of the new award is measured as the fair value
at the date the new award is granted and the value of the old award is its fair
value immediately before its terms were modified. The additional compensation
cost for the incremental fair value of the new award plus unallocated
compensation costs for the old award is attributed over the remaining service
period. In the case of the options modified the total additional compensation to
be expensed over the service period is $0.8 million. At March 31, 2004, there
are no additional service requirements on these options and the $0.8 million
incremental fair value relating to these options would be expensed for
disclosure purposes for the year ending March 31, 2004.
During the quarter ending December 31, 2003, the Company modified the terms of
250,000 options of a certain past director of the Company, amending the price of
the options to be consistent with those granted to other Directors. The expiry
date and vesting period were unchanged. Under U.S. GAAP, the modification of
these options is treated as an exchange of the original award for a new award
and the options are valued using variable accounting for stock-based
compensation until they are exercised, forfeited or expire. Under U.S. GAAP,
this resulted in additional compensation cost for the year ended March 31, 2004
of $0.9 million. Under Canadian GAAP, the Company has elected to use the
intrinsic value method in accounting for stock-based compensation, which did not
result in additional compensation expense under Canadian GAAP. Under Canadian
GAAP, under the fair value method the value of the new award is measured as the
fair value at the date the new award is granted and the value of the old award
is its fair value immediately before its terms were modified. The additional
compensation cost for the incremental fair value of the new award plus
unallocated compensation costs for the old award is attributed over the
remaining service period. In the case of the options modified the total
additional compensation to be expensed over the service period is not material.
At March 31, 2004, there are no additional service requirements on these options
and the incremental fair value relating to these options would be expensed for
disclosure purposes for the year ending March 31, 2004.
Options were granted to a certain employee of the Company with an exercise
price determined at a future date. Under U.S. GAAP, these options are valued
using variable accounting for stock-based compensation and the resulting expense
of $0.1 million for the year ended March 31, 2004 (2003 -- nil, 2002 -- nil) is
recorded as stock-based compensation. Under Canadian GAAP, the Company has
elected to use the intrinsic value method in accounting for stock based
compensation and these options did not result in additional compensation
expense.
On December 15, 2003, the Board of Directors of the Company resolved that
the term of the Company's 5,525,000 warrants issued in December 1999 would be
extended by one year. The warrants will expire January 1, 2005 instead of
January 1, 2004. The modification of these warrants is treated as an exchange of
the original warrant for a new warrant. The fair value of the new warrant is
measured at the date the new warrant is issued and the value of the old warrant
is its fair value immediately before its terms were modified. Under U.S. GAAP,
the additional incremental fair value of the new warrant is $2.0 million for the
year ended March 31, 2004 and is considered a distribution to preferred
shareholders and therefore is included in net loss available to common
shareholders. Under Canadian GAAP, the additional incremental fair value of the
new warrant is included for disclosure purposes only in the pro forma basic loss
per common share table above.
(k) INCOME (LOSS) PER SHARE
Basic income (loss) per share under Canadian GAAP is calculated as
follows:
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 2004 MARCH 31, 2003 MARCH 31, 2002
---------------- ---------------- ---------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Numerator:
Net income (loss) .................................... $(94,172) $ 1,126 $(46,959)
Less:
Dividends on Series A preferred shares ............. (387) (1,584) (1,592)
Accretion on Series A preferred shares ............. (1,127) (2,049) (2,089)
-------- -------- --------
Net loss available to common shareholders ............ $(95,686) $ (2,507) $(50,640)
======== ======== ========
Denominator:
F-30
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted average common shares outstanding (thousands)... 70,656 43,232 42,753
======== ======== ========
Basic and diluted loss per share ........................ $ (1.35) $ (0.06) $ (1.18)
======== ======== ========
(l) CONSOLIDATED FINANCIAL STATEMENTS
On July 10, 2001, as a condition of a $9.2 million equity financing with a
third party, CineGroupe's Shareholders' Agreement was amended to allow for
certain participatory super-majority rights to be granted to the shareholders.
Therefore, under U.S. GAAP, the Company was precluded from consolidating
CineGroupe and accounted for its 29.4% ownership of CineGroupe, commencing April
1, 2001, using the equity method. Under Canadian GAAP, CineGroupe was
consolidated. For the years ended March 31, 2003 and 2002, there is no impact on
net income (loss) under Canadian GAAP. During the year ended March 31, 2004,
under U.S. GAAP, the Company's investment in CineGroupe was reduced to nil and
therefore the Company did not record any additional losses under the equity
method as it had no further funding requirements. However, under Canadian GAAP,
under the consolidation method, the Company continued to consolidate
CineGroupe's results until January 1, 2004 when the Company deconsolidated the
assets and liabilities of CineGroupe as described below.
During the year ended March 31, 2004, the Company evaluated its investment
in CineGroupe as CineGroupe was unable to meet its financial obligations in the
ordinary course of business and sought protection under the Companies Creditors
Arrangement Act ("CCAA") in December 2003. Under U.S. GAAP the Company recorded
a provision of $8.1 million against debentures and other receivables due from
CineGroupe at December 31, 2003. On January 1, 2004, the Company determined that
as a result of a CCAA filing it no longer had the ability to control or to
significantly influence CineGroupe. Under U.S. GAAP, this determination had no
effect as the investment in CineGroupe was nil and debentures and other
receivables due from CineGroupe had been provided for at December 31, 2003.
Under Canadian GAAP, effective January 1, 2004, the Company deconsolidated the
assets and liabilities of CineGroupe, resulting in a net deficiency in equity of
$2.3 million which was recorded as an adjustment to accumulated deficit, and
wrote-off $8.1 million of convertible debentures and other receivables due from
CineGroupe, which as intercompany debentures and receivables, were previously
eliminated on consolidation.
Accounting for CineGroupe using the consolidation method for the period
April 1, 2003 to December 31, 2003 and for the year ending March 31, 2003 under
Canadian GAAP would increase the unaudited condensed consolidated statements of
operations items to the following amounts:
YEAR ENDED YEAR ENDED
MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
(AMOUNTS IN THOUSANDS)
Revenues.......................................................... $ 384,891 $ 293,073
Direct operating expenses......................................... $ 191,849 $ 155,369
Distribution and marketing expenses............................... $ 207,065 $ 87,752
General and administration expenses............................... $ 45,446 $ 32,252
At March 31, 2004, CineGroupe is being accounted for at cost and the
investment is nil under Canadian and U.S. GAAP and therefore there are no
differences on the consolidated balance sheet at March 31, 2004. The impact of
using the consolidation method under Canadian GAAP on the consolidated balance
sheet at March 31, 2003 would be an increase in total assets to $386.7 million
and an increase in total liabilities to $315.0 million.
(m) VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation No. ("FIN") 46,
"Consolidation of Variable Interest Entities", which is effective for financial
statements of public companies that have special purpose entities for periods
ending after December 15, 2003 and for public companies without special purpose
entities for periods ending after March 15, 2004. The standard establishes
criteria to identify variable interest entities ("VIE") and the primary
beneficiary of such entities. An entity that qualifies as a VIE must be
consolidated by its primary beneficiary. Accordingly, under U.S. GAAP the
Company has consolidated its VIE and special purpose entities as of March 31,
2004. In June 2003, the CICA released AcG-15, "Consolidation of Variable
Interest Entities", to be applied by companies for periods beginning on or after
November 1, 2004. Accordingly, under Canadian GAAP, the Company will apply this
standard when it becomes effective.
Under U.S. GAAP, the Company has identified Christal Films Distribution
Inc. ("Christal") as a VIE as the voting rights of some investors in Christal
are not proportional to the economic interests and substantially all of
Christal's activities either involved or were
F-31
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
conducted on behalf of the Company with the disproportionately fewer voting
rights as of the determination date. Additionally, the Company has determined
that it is the primary beneficiary as the Company would have to absorb greater
than 50% of Christal's expected losses and has the right to more than 50% of
their expected residual returns. Under FIN 46, an entity that qualifies as a VIE
must be consolidated by its primary beneficiary and therefore the Company has
consolidated Christal under U.S. GAAP.
Only the balance sheet information of Christal is consolidated under U.S.
GAAP because the effective date is March 31, 2004 and restatement or early
adoption is not required. The impact of deconsolidating Christal under Canadian
GAAP on the consolidated balance sheet at March 31, 2004 would be to decrease
total assets to $755.0 million and to decrease liabilities to $685.4 million.
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
Certain quarterly information is presented below:
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
-------------- -------------- ------------- --------------
(AMOUNTS IN THOUSANDS)
2004
Revenues....................................... $ 53,335 $ 93,051 $ 70,619 $ 158,905
Direct operating expenses...................... $ 22,456 $ 48,140 $ 42,535 $ 68,167
Net loss....................................... $ (12,752) $ (274) $ (35,744) $ (43,326)
Basic and diluted loss per share............... $ (0.28) $ (0.01) $ (0.43) $ (0.50)
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
-------------- -------------- ------------- --------------
(AMOUNTS IN THOUSANDS)
2003
Revenues....................................... $ 81,507 $ 66,891 $ 56,021 $ 60,495
Direct operating expenses...................... $ 35,506 $ 38,740 $ 25,520 $ 34,156
Net income (loss).............................. $ 2,227 $ (589) $ 476 $ (3,537)
Basic and diluted income (loss) per share...... $ 0.03 $ (0.03) $ (0.01) $ (0.10)
Basic and diluted income (loss) per share is based on the weighted average
common shares outstanding at the end of each quarter.
22. CONSOLIDATING FINANCIAL INFORMATION
On December 3, 2003, the Company sold $60.0 million of 4.875% Convertible
Senior Subordinated Notes ("4.875% Notes"), through its wholly owned U.S.
subsidiary Lions Gate Entertainment Inc. (the "Issuer"). The Notes, by their
terms, are fully and unconditionally guaranteed by the Company. On April 2,
2004, the Company filed a registration statement on Form S-3 to register the
resale of Notes and common shares issuable on conversion of the Notes. On April
29, 2004, the registration statement was declared effective by the Securities
and Exchange Commission.
The following tables present condensed consolidating financial information
as of March 31, 2004 and 2003 and for the years ended March 31, 2004, 2003 and
2002 for (1) the Company, on a stand-alone basis, (2) the Issuer, on a
stand-alone basis, (3) the non-guarantor subsidiaries of the Company (including
the subsidiaries of the Issuer) on a combined basis (collectively, the "Other
Subsidiaries") and (4) the Company on a consolidated basis.
AS OF MARCH 31, 2004
-------------------------------------------------------------------------------
LIONS GATE LIONS GATE OTHER CONSOLIDATING LIONS GATE
ENTERTAINMENT CORP. ENTERTAINMENT INC. SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------------------ ------------------ ----------- ------------ ------------
(AMOUNTS IN THOUSANDS)
BALANCE SHEET
ASSETS
Cash and cash equivalents ....................... $ 1,005 $ (9) $ 6,093 $ -- $ 7,089
Accounts receivable, net ........................ 180 75 128,990 -- 129,245
Investment in films and television programs ..... -- -- 406,170 -- 406,170
Property and equipment .......................... 87 236 29,338 -- 29,661
Goodwill ........................................ -- -- 166,804 -- 166,804
Other assets .................................... 141 14,246 9,327 -- 23,714
Investment in subsidiaries ...................... 226,691 210,688 -- (437,379) --
Future income taxes ............................. 1,824 -- (1,824) -- --
--------- --------- --------- --------- ---------
$ 229,928 $ 225,236 $ 744,898 $(437,379) $ 762,683
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
F-32
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bank loans ...................................... $ -- $ 324,700 $ 1,474 $ -- $ 326,174
Accounts payable and accrued liabilities ........ 1,183 8,850 119,691 -- 129,724
Film obligations ................................ -- -- 114,068 -- 114,068
Subordinated notes .............................. 60,000 5,000 65,000
Debt ............................................ -- -- 19,041 -- 19,041
Deferred revenue ................................ -- -- 38,932 -- 38,932
Minority interests .............................. -- -- 135 -- 135
Intercompany payables (receivables) ............. (103,124) (144,035) 262,738 (15,579) --
Intercompany equity ............................. 262,260 93,217 306,545 (662,022) --
Shareholders' equity (deficiency) ............... 69,609 (117,496) (122,726) 240,222 69,609
--------- --------- --------- --------- ---------
$ 229,928 $ 225,236 $ 744,898 $(437,379) $ 762,683
========= ========= ========= ========= =========
YEAR ENDED MARCH 31, 2004
----------------------------------------------------------------------------------
LIONS GATE LIONS GATE OTHER CONSOLIDATING LIONS GATE
ENTERTAINMENT CORP. ENTERTAINMENT INC. SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------------------- ------------------ ------------ ----------- ------------
(AMOUNTS IN THOUSANDS)
STATEMENT OF OPERATIONS
REVENUES .................................... $ 1,328 $ -- $ 375,329 $ (747) $ 375,910
EXPENSES:
Direct operating .......................... -- -- 181,298 -- 181,298
Distribution and marketing ................ -- -- 207,045 -- 207,045
General and administration ................ 3,561 13,289 26,723 (747) 42,826
Severance and relocation costs ............ 119 4,946 510 -- 5,575
Write-down of other assets ................. 5,409 -- 6,277 -- 11,686
Depreciation .............................. 146 606 2,446 -- 3,198
--------- --------- --------- --------- ---------
Total expenses ............................. 9,235 18,841 424,299 (747) 451,628
--------- --------- --------- --------- ---------
OPERATING LOSS .............................. (7,907) (18,841) (48,970) -- (75,718)
--------- --------- --------- --------- ---------
OTHER EXPENSES (INCOME):
Interest .................................. (124) 11,655 2,511 -- 14,042
Interest rate swaps mark-to-market ........ -- (833) 627 -- (206)
--------- --------- --------- --------- ---------
Total other expenses (income), net ......... (124) 10,822 3,138 -- 13,836
--------- --------- --------- --------- ---------
LOSS BEFORE EQUITY INTERESTS AND INCOME
TAXES ..................................... (7,783) (29,663) (52,108) -- (89,554)
Equity interests ............................ 84,313 50,358 2,169 (134,671) 2,169
--------- --------- --------- --------- ---------
LOSS BEFORE INCOME TAXES .................... (92,096) (80,021) (54,277) 134,671 (91,723)
Income tax provision ........................ -- -- 373 -- 373
--------- --------- --------- --------- ---------
NET LOSS .................................... $ (92,096) $ (80,021) $ (54,650) $ 134,671 $ (92,096)
========= ========= ========= ========= =========
YEAR ENDED MARCH 31, 2004
----------------------------------------------------------------------------------
LIONS GATE LIONS GATE OTHER CONSOLIDATING LIONS GATE
ENTERTAINMENT CORP. ENTERTAINMENT INC. SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------------------- ------------------ ------------ ----------- ------------
(AMOUNTS IN THOUSANDS)
STATEMENT OF CASH FLOWS
NET CASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES ................................ $ (63,538) $(113,964) $ 61,091 $ -- $(116,411)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Issuance of common shares ................. 107,162 -- -- -- 107,162
Redemption of Series A preferred shares ... (18,090) -- -- -- (18,090)
Dividends paid on Series A preferred
shares ................................... (387) -- -- -- (387)
Financing fees paid ....................... (67) (11,335) -- -- (11,402)
Increase in subordinated notes, net of
issue costs .............................. -- 56,347 -- 56,347
Increase (decrease) in bank loans ......... (18,184) 216,116 (54,899) -- 143,033
Decrease in production loans .............. -- -- (1,273) -- (1,273)
Increase (decrease) in debt ............... (12,186) -- 3,967 -- (8,219)
--------- --------- --------- --------- ---------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES ................................ 58,248 261,128 (52,205) -- 267,171
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Acquisition of Artisan Entertainment Inc.,
net of cash acquired ...................... -- (148,870) -- -- (148,870)
Purchase of property and equipment ......... -- (201) (659) -- (860)
--------- --------- --------- --------- ---------
NET CASH FLOWS USED IN INVESTING ACTIVITIES.. -- (149,071) (659) -- (149,730)
--------- --------- --------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS ..... (5,290) (1,907) 8,227 -- 1,030
FOREIGN EXCHANGE EFFECT ON CASH ............. 6,421 192 (7,405) -- (792)
CASH AND CASH EQUIVALENTS -- BEGINNING OF
YEAR ........................................ (126) 1,706 5,271 -- 6,851
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS -- END OF YEAR .... $ 1,005 $ (9) $ 6,093 $ -- $ 7,089
========= ========= ========= ========= =========
F-33
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2004
-----------------------------------------------------------------------------------
LIONS GATE LIONS GATE OTHER CONSOLIDATING LIONS GATE
ENTERTAINMENT CORP. ENTERTAINMENT INC. SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------------------- ------------------ ------------ ----------- ------------
(AMOUNTS IN THOUSANDS)
RECONCILIATION OF NET LOSS TO CANADIAN GAAP
AS REPORTED UNDER U.S. GAAP ................. $(92,096) $(80,021) $(54,650) $ 134,671 $(92,096)
Adjustment for capitalized pre-operating
costs ...................................... (614) (614) (614) 1,228 (614)
Interest rate swaps mark-to-market .......... (206) (833) 627 206 (206)
Adjustment for consolidation of
CineGroupe (m) ............................. (2,333) -- (2,333) 2,333 (2,333)
Accounting for stock-based compensation ..... 1,740 815 -- (815) 1,740
Adjustment for accretion on subordinated
notes ...................................... (809) (809) -- 809 (809)
Adjustment for amortization of subordinated
note issue costs ........................... 48 48 -- (48) 48
Adjustment for amortization of debt
financing costs ............................ 98 98 -- (98) 98
-------- -------- -------- --------- --------
NET LOSS UNDER CANADIAN GAAP ................ $(94,172) $(81,316) $(56,970) $ 138,286 $(94,172)
======== ======== ======== ========= ========
AS OF MARCH 31, 2004
-----------------------------------------------------------------------------
LIONS GATE LIONS GATE OTHER CONSOLIDATING LIONS GATE
ENTERTAINMENT CORP. ENTERTAINMENT INC. SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------------------- ------------------ ------------ ----------- ------------
(AMOUNTS IN THOUSANDS)
RECONCILIATION OF SHAREHOLDERS' EQUITY
(DEFICIENCY) TO CANADIAN GAAP
AS REPORTED UNDER U.S. GAAP ................... $ 69,609 $(117,496) $(122,726) $ 240,222 $ 69,609
Interest rate swaps mark-to-market ............ 2,957 2,957 (2,957) 2,957
Accounting for business combinations .......... 1,145 1,145 1,145 (2,290) 1,145
Accounting for income taxes ................... (1,900) -- (1,900) 1,900 (1,900)
Adjustment for accretion on subordinated
notes ........................................ (809) (809) -- 809 (809)
Adjustment for amortization of subordinated
note issue costs ............................. 48 48 -- (48) 48
Adjustment for amortization of debt financing
costs ........................................ 98 98 -- (98) 98
Reclassification of conversion feature of
subordinated notes to shareholders' equity .. 16,269 -- -- -- 16,269
Other comprehensive loss ...................... (590) (590) (590) 1,180 (590)
-------- --------- --------- --------- --------
SHAREHOLDERS' EQUITY (DEFICIENCY) UNDER
CANADIAN GAAP ................................ $ 86,827 $(114,647) $(124,071) $ 238,718 $ 86,827
======== ========= ========= ========= ========
AS OF MARCH 31, 2003
-----------------------------------------------------------------------------
LIONS GATE LIONS GATE OTHER CONSOLIDATING LIONS GATE
ENTERTAINMENT CORP. ENTERTAINMENT INC. SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------------------- ------------------ ------------ ----------- ------------
(AMOUNTS IN THOUSANDS)
BALANCE SHEET
ASSETS
Cash and cash equivalents ................... $ (126) $ 1,706 $ 5,271 $ -- $ 6,851
Accounts receivable, net .................... 192 69 68,410 -- 68,671
Investment in films and television programs . -- -- 177,689 -- 177,689
Property and equipment ...................... 322 2,137 25,850 -- 28,309
Goodwill .................................... -- -- 32,327 -- 32,327
Other assets ................................ 4,665 5,984 22,795 (6,600) 26,844
Investment in subsidiaries .................. 145,340 97,216 -- (242,556) --
--------- --------- --------- --------- --------
$ 150,393 $ 107,112 $ 332,342 $(249,156) $340,691
========= ========= ========= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY)
Bank loans .................................. $ 16,761 $ 108,584 -- $ -- $125,345
Accounts payable and accrued liabilities .... 898 5,345 27,555 -- 33,798
Film obligations ............................ -- -- 67,383 -- 67,383
Production loans ............................ -- -- 1,273 -- 1,273
Debt ........................................ 11,233 -- 13,353 -- 24,586
Deferred revenue ............................ -- -- 16,019 -- 16,019
Future income taxes ......................... (1,630) -- 2,254 -- 624
Intercompany payables (receivables) ......... (42,917) (67,164) 121,314 (11,233) --
Intercompany equity ......................... 94,385 93,217 146,454 (334,056) --
Preferred shares ............................ 28,031 -- -- -- 28,031
Shareholders' equity (deficiency) ........... 43,632 (32,870) (63,263) 96,133 43,632
--------- --------- --------- --------- --------
$ 150,393 $ 107,112 $ 332,342 $(249,156) $340,691
========= ========= ========= ========= ========
YEAR ENDED MARCH 31, 2003
---------------------------------------------------------------------------
LIONS GATE LIONS GATE
ENTERTAINMENT ENTERTAINMENT OTHER CONSOLIDATING LIONS GATE
CORP. INC. SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
----- ---- ------------ ----------- ------------
(AMOUNTS IN THOUSANDS)
STATEMENT OF OPERATIONS
REVENUES .................................... $ 1,135 $ -- $ 264,278 $ (499) $ 264,914
EXPENSES:
Direct operating .......................... -- -- 133,922 -- 133,922
F-34
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Distribution and marketing ................ -- -- 87,403 -- 87,403
General and administration ................ 2,895 8,803 18,068 (499) 29,267
Depreciation .............................. 157 370 1,319 -- 1,846
------- -------- --------- -------- ---------
Total expenses ............................ 3,052 9,173 240,712 (499) 252,438
------- -------- --------- -------- ---------
OPERATING INCOME (LOSS) ..................... (1,917) (9,173) 23,566 -- 12,476
------- -------- --------- -------- ---------
OTHER EXPENSES:
Interest .................................. 505 6,380 2,049 -- 8,934
Interest rate swaps mark-to-market ........ -- 3,163 -- -- 3,163
------- -------- --------- -------- ---------
Total other expenses ...................... 505 9,543 2,049 -- 12,097
------- -------- --------- -------- ---------
INCOME (LOSS) BEFORE ITEMS RELATED TO
EQUITY METHOD INVESTEES AND INCOME TAXES .... (2,422) (18,716) 21,517 -- 379
Gain on sale of equity interests ............ -- -- (2,131) -- (2,131)
Other equity interests ...................... (999) (18,403) 2,112 19,402 2,112
------- -------- --------- -------- ---------
INCOME BEFORE INCOME TAXES .................. (1,423) (313) 21,536 (19,402) 398
Income tax provision (benefit) .............. -- 9 1,812 -- 1,821
------- -------- --------- -------- ---------
NET INCOME (LOSS) ........................... $(1,423) $ (322) $ 19,724 $(19,402) $ (1,423)
======= ======== ========= ======== =========
YEAR ENDED MARCH 31, 2003
-------------------------------------------------------------------------
LIONS GATE LIONS GATE
ENTERTAINMENT ENTERTAINMENT OTHER CONSOLIDATING LIONS GATE
CORP. INC. SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
----- ---- ------------ ----------- ------------
(AMOUNTS IN THOUSANDS)
STATEMENT OF CASH FLOWS
NET CASH FLOWS PROVIDED BY OPERATING
ACTIVITIES ................................. $ 3,915 $ 9,724 $ 3,851 $ -- $ 17,490
------- ------- ------- ---- --------
FINANCING ACTIVITIES:
Dividends paid on Series A preferred
shares ................................... (1,584) -- -- -- (1,584)
Financing fees paid ....................... (16) (150) -- -- (166)
Decrease in bank loans .................... (8,069) (8,000) -- -- (16,069)
Decrease in production loans .............. -- -- (4,218) -- (4,218)
Decrease in debt .......................... -- -- (811) -- (811)
------- ------- ------- ---- --------
NET CASH FLOWS USED IN FINANCING ACTIVITIES.. (9,669) (8,150) (5,029) -- (22,848)
------- ------- ------- ---- --------
INVESTING ACTIVITIES:
Cash received from investment in Mandalay
Pictures, LLC ............................. -- -- 6,634 -- 6,634
Purchase of property and equipment ......... (3) (1,270) (521) -- (1,794)
------- ------- ------- ---- --------
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING
ACTIVITIES ................................. (3) (1,270) 6,113 -- 4,840
------- ------- ------- ---- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ..... (5,757) 304 4,935 -- (518)
FOREIGN EXCHANGE EFFECT ON CASH ............. 4,980 162 (4,283) -- 859
CASH AND CASH EQUIVALENTS -- BEGINNING OF
YEAR ....................................... 651 1,240 4,619 -- 6,510
------- ------- ------- ---- --------
CASH AND CASH EQUIVALENTS -- END OF YEAR .... $ (126) $ 1,706 $ 5,271 $ -- $ 6,851
======= ======= ======= ==== ========
YEAR ENDED MARCH 31, 2003
---------------------------------------------------------------------
LIONS GATE LIONS GATE
ENTERTAINMENT LIONS GATE OTHER CONSOLIDATING CONSOLIDATED
CORP. ENTERTAINMENT SUBSIDIARIES ADJUSTMENTS INC.
----- ------------- ------------ ----------- ----
(AMOUNTS IN THOUSANDS)
RECONCILIATION OF NET INCOME (LOSS) TO CANADIAN GAAP
AS REPORTED UNDER U.S. GAAP.............................. $ (1,423) $ (322) $ 19,724 $ (19,402) $ (1,423)
Adjustment for capitalized pre- operating costs.......... (614) (614) (614) 1,228 (614)
Interest rate swaps mark-to-market....................... 3,163 3,163 -- (3,163) 3,163
-------- -------- -------- ---------- --------
NET INCOME UNDER CANADIAN GAAP........................... $ 1,126 $ 2,227 $ 19,110 $ (21,337) $ 1,126
======== ======== ======== ========= ========
AS OF MARCH 31, 2003
---------------------------------------------------------------------
LIONS GATE LIONS GATE
ENTERTAINMENT ENTERTAINMENT OTHER CONSOLIDATING LIONS GATE
CORP. INC. SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
----- ---- ------------ ----------- ------------
(AMOUNTS IN THOUSANDS)
RECONCILIATION OF SHAREHOLDERS' EQUITY (DEFICIENCY) TO
CANADIAN GAAP
AS REPORTED UNDER U. S. GAAP.............................. $ 43,632 $ (32,870) $ (63,263) $ 96,133 $ 43,632
Adjustment for capitalized pre- operating costs........... 614 614 614 (1,228) 614
Interest rate swaps mark-to-market........................ 3,163 3,163 -- (3,163) 3,163
Accounting for business combinations...................... 1,145 1,145 1,145 (2,290) 1,145
Accounting for income taxes............................... (1,900) -- (1,900) 1,900 (1,900)
Reclassification of Series A preferred shares to
shareholders' equity ................................... 28,031 -- -- -- 28,031
Other comprehensive income................................ 32 32 32 (64) 32
--------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY (DEFICIENCY) UNDER CANADIAN GAAP..... $ 74,717 $ (27,916) $ (63,372) $ 91,288 $ 74,717
========= ========= ========= ========= =========
F-35
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2002
--------------------------------------------------------------------
LIONS GATE LIONS GATE
ENTERTAINMENT ENTERTAINMENT OTHER CONSOLIDATING LIONS GATE
CORP. INC. SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
----- ---- ------------ ----------- ------------
(AMOUNTS IN THOUSANDS)
STATEMENT OF OPERATIONS
REVENUES................................................... $ 2,298 $ -- $ 232,979 $ (507) $ 234,770
EXPENSES:
Direct operating......................................... -- -- 133,051 -- 133,051
Distribution and marketing............................... -- -- 73,763 -- 73,763
General and administration............................... 3,294 5,384 23,863 (507) 32,034
Depreciation............................................. 212 25 1,255 -- 1,492
--------- --------- --------- --------- ---------
Total expenses............................................ 3,506 5,409 231,932 (507) 240,340
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS).................................... (1,208) (5,409) 1,047 -- (5,570)
--------- --------- --------- --------- ---------
OTHER (INCOME) EXPENSES:
Interest................................................. (1,696) 4,893 5,238 -- 8,435
Other expenses........................................... 121 -- 1,230 -- 1,351
Minority interests....................................... -- -- 91 -- 91
--------- --------- --------- --------- ---------
Total other (income) expenses........................... (1,575) 4,893 6,559 -- 9,877
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE ITEMS RELATING TO EQUITY METHOD
INVESTEES AND INCOME TAXES............................... 367 (10,302) (5,512) -- (15,447)
Write-down of equity interests............................. -- -- 24,052 -- 24,052
Gain on dilution of equity interests....................... -- -- (2,186) -- (2,186)
Other equity interests..................................... 43,638 39,353 6,019 (82,991) 6,019
--------- --------- --------- --------- ---------
LOSS BEFORE INCOME TAXES................................... (43,271) (49,655) (33,397) 82,991 (43,332)
Income tax benefit......................................... -- -- (61) -- (61)
--------- --------- --------- --------- ---------
NET LOSS................................................... $ (43,271) $ (49,655) $ (33,336) $ 82,991 $ (43,271)
========= ========= ========= ========= =========
YEAR ENDED MARCH 31, 2002
--------------------------------------------------------------------
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 USED IN OPERATING ACTIVITIES................... $ (2,754) $ (38,550) $ (434) $ -- $ (41,738)
-------- --------- --------- ---- ---------
FINANCING ACTIVITIES:
Issuance of common shares................................... 137 -- -- -- 137
Dividends paid on Series A preferred shares................. (883) -- -- -- (883)
Financing fees paid......................................... (242) (997) -- -- (1,239)
Increase (decrease) in bank loans........................... 1,631 41,150 (615) -- 42,166
Decrease in production loans................................ -- -- (62) -- (62)
Increase (decrease) in long-term debt....................... (346) -- 415 -- 69
-------- --------- --------- ---- ---------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES..... 297 40,153 (262) -- 40,188
-------- --------- --------- ---- ---------
INVESTING ACTIVITIES:
Cash received from investment in Mandalay Pictures, LLC..... -- -- 5,362 -- 5,362
Acquisition of Eaton Entertainment, LLC, net of cash
acquired................................................... -- -- 472 -- 472
Purchase of property and equipment........................... 172 (1,263) (2,119) -- (3,210)
-------- --------- --------- ---- ---------
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES..... 172 (1,263) 3,715 -- 2,624
-------- --------- --------- ---- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS....................... (2,285) 340 3,019 -- 1,074
FOREIGN EXCHANGE EFFECT ON CASH............................... (884) (32) (300) -- (1,216)
CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR................ 3,820 932 1,900 -- 6,652
-------- --------- --------- ---- ---------
CASH AND CASH EQUIVALENTS -- END OF YEAR...................... $ 651 $ 1,240 $ 4,619 $ -- $ 6,510
======== ========= ========= ==== =========
F-36
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2002
--------------------------------------------------------------------
LIONS GATE LIONS GATE
ENTERTAINMENT ENTERTAINMENT OTHER CONSOLIDATING LIONS GATE
CORP. INC. SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
----- ---- ------------ ----------- ------------
(AMOUNTS IN THOUSANDS)
RECONCILIATION OF NET LOSS TO CANADIAN GAAP
AS REPORTED UNDER U.S. GAAP................................... $ (43,271) $ (49,655) $ (33,336) $ 82,991 $ (43,271)
Accounting for capitalized pre- operating costs -- Mandalay... (3,074) (3,074) (3,074) 6,148 (3,074)
Adjustment for capitalized pre- operating costs............... (614) (614) (614) 1,228 (614)
--------- --------- --------- --------- ---------
NET LOSS UNDER CANADIAN GAAP................................. $ (46,959) $ (53,343) $ (37,024) $ 90,367 $ (46,959)
========= ========= ========= ========= =========
23. SUBSEQUENT EVENTS (UNAUDITED)
U.S. GAAP. On March 29, 2004, the new British Columbia Business
Corporations Act came into force, which allows the Company to prepare its
financial statements either under Canadian or U.S. GAAP. The Company has elected
to prepare financial statements under U.S. GAAP commencing April 1, 2004. The
Company must disclose and quantify material differences with Canadian GAAP in
its interim and annual financial statements for the next two years. The effect
of adopting U.S. GAAP as at March 31, 2004 on the Company's net income (loss)
and shareholders' equity is included in note 20.
CinemaNow. In July 2004, we purchased $0.2 million Series D Convertible
Preferred Shares as part of an $11 million round of financing secured by
CinemaNow. The round of financing decreased our voting and economic interests
from approximately 54% to 30%.
Stock-Based Compensation Plan. On September 14, 2004, the shareholders
approved the 2004 Performance Incentive Plan that provides for the issue of 2.0
million common shares of the Company to eligible employees, directors, officers
and other eligible persons of the Company and its affiliates.
Exercise of warrants. Subsequent to March 31, 2004, 2,168,350 warrants
were exercised and the Company issued 2,168,350 common shares and received
proceeds of $10.8 million. In December 2004, the Company amended the outstanding
warrants to allow the holders, at their option, to exercise by cashless
exercise. During December 2004, an additional 1,993,250 warrants were exercised
by cashless exercise resulting in the issuance of 1,052,517 common shares. Any
remaining warrants expired January 1, 2005 and therefore no warrants are
outstanding.
Convertible Senior Subordinated Notes. On October 4, 2004, Lions Gate
Entertainment Inc., a wholly owned subsidiary of the Company, sold $150.0
million of 2.9375% Convertible Senior Subordinated Notes ("2.9375% Notes") with
a maturity date of October 15, 2024. The Company received $146.0 million of net
proceeds, after paying placement agents' fees. The Company estimated offering
expenses to be $0.5 million. The 2.9375% Notes are convertible, at the option of
the holder, at any time prior to maturity, upon satisfaction of one of the
conversion contingencies into common shares of Lions Gate Entertainment Corp. at
a conversion rate of 86.9565 shares per $1,000 principal amount of the 2.9375%
Notes, which is equal to a conversion price of approximately $11.50 per share.
The Company used the net proceeds for repayment of outstanding indebtedness
under the existing U.S. dollar revolving credit facility and term loan, and may
also use the net proceeds for other general business purposes, which may include
the financing of a portion of any future acquisitions.
Credit Facility. The Company repaid $60 million of the term loan with the
revolving credit facility on September 30, 2004, thereby reducing the term loan
to $75 million. On December 31, 2004, the Company repaid the $75 million term
loan in full with the revolving credit facility. Therefore, at December 31, 2004
only the revolving credit facility remains.
F-37