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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-14880
----------------------
LIONS GATE ENTERTAINMENT CORP.
(Exact name of registrant as specified in its charter)
BRITISH COLUMBIA, CANADA
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
----------------------
SUITE 3123, THREE BENTALL CENTRE
595 BURRARD STREET
VANCOUVER, BRITISH COLUMBIA V7X 1J1
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (604) 609-6100
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No
As of February 7, 2002, 43,175,156 shares of the registrant's no par
value common stock were outstanding.
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TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I
1. FINANCIAL STATEMENTS......................................................4
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.....................................................15
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...............25
PART II
6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..........26
2
Unless the context indicates otherwise, all references herein to "Lions
Gate," "the Company," "we," "us," and "our" refer collectively to Lions Gate
Entertainment Corp. and its subsidiaries.
This report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 that can be identified by
the use of forward-looking terminology such as "may," "will," "expect,"
"anticipate," "estimate," "could," or "continue" or the negative thereof or
other variations thereon or comparable terminology. These forward-looking
statements are subject to numerous assumptions, risks and uncertainties that may
cause our actual results to be materially different from any future results
expressed or implied by us in those statements. The most important factors that
could prevent us from achieving our stated goals include, but are not limited
to, the following:
o lack of public acceptance of films or television programs
resulting in significant write-downs affecting our results of
operations and financial condition;
o dependence on third party financing, government incentive programs
and German tax shelter arrangements that could be reduced, amended
or eliminated;
o the unpredictability of commercial success of films and television
programs;
o actual production costs exceeding budgets due to circumstances
beyond our control;
o operating results fluctuating materially from period-to-period;
o interest rate changes; and
o fluctuating currency rates.
Because these statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the forward
looking statements. We caution you not to place undue reliance on the
statements, which speak only as of the date of this report. We do not undertake
any obligation to release publicly any revision to any forward-looking
statements to reflect events or circumstances after the date of this report or
to reflect the occurrence of unanticipated events. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation" -- "Risks and
Uncertainties" and "Currency Risk Management."
CURRENCY AND EXCHANGE RATES
All dollar amounts set forth in this report are in Canadian dollars,
except where otherwise indicated. The following table sets forth (1) the rate of
exchange for the U.S. dollar, expressed in Canadian dollars, in effect at the
end of each period indicated; (2) the average exchange rate for such period,
based on the rate in effect on the last day of each month during such period;
and (3) the high and low exchange rates during such period, in each case based
on the noon buying rate in New York City for cable transfers in Canadian dollars
as certified for customs purposes by the Federal Reserve Bank of New York.
Nine Months
Ended December 31 Fiscal Year Ended March 31
----------------- ----------------------------------------------------------
2001 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ----
Rate at end of period......... $1.5925 $1.5784 $1.4828 $1.5092 $1.4180 $1.3835
Average rate during period.... 1.5561 1.5041 1.4790 1.5086 1.4060 1.3634
High rate..................... 1.6023 1.5784 1.5140 1.5770 1.4637 1.3835
Low rate...................... 1.5102 1.4515 1.4470 1.4175 1.3705 1.3310
On February 7, 2002, the noon buying rate in New York City for cable
transfer in Canadian dollars as certified for customs purposes by the Federal
Reserve Bank of New York was Canadian $1.5983 = US$1.00.
3
PART I
ITEM 1. FINANCIAL STATEMENTS.
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT FOR THE
THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000
(all amounts in thousands of Canadian dollars, except per share amounts)
For the Three Restated for the For the Nine Restated for the
Months Ended Three Months Ended Months Ended Nine Months Ended
Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 2001 Dec. 31, 2000
$ $ $ $
------------- ------------------ ------------- -----------------
REVENUE
Motion Pictures 46,728 41,452 142,039 113,161
Television 48,492 17,729 87,797 51,497
Animation 13,940 7,656 36,349 20,012
Studio Facilities 1,602 1,281 4,875 4,223
CineGate 300 830 1,860 1,508
-------- -------- -------- --------
111,062 68,948 272,920 190,401
-------- -------- -------- --------
DIRECT OPERATING EXPENSES
Motion Pictures 11,091 17,929 47,975 49,386
Television 41,537 14,819 73,571 46,116
Animation 10,745 5,921 28,447 14,751
Studio Facilities 615 663 2,016 1,934
CineGate -- -- -- --
-------- -------- -------- --------
63,988 39,332 152,009 112,187
-------- -------- -------- --------
GROSS PROFIT
Motion Pictures 35,637 23,523 94,064 63,775
Television 6,955 2,910 14,226 5,381
Animation 3,195 1,735 7,902 5,261
Studio Facilities 987 618 2,859 2,289
CineGate 300 830 1,860 1,508
-------- -------- -------- --------
47,074 29,616 120,911 78,214
-------- -------- -------- --------
OTHER EXPENSES
Distribution and marketing costs 33,551 10,674 74,603 45,683
General and administration 14,579 10,342 38,688 23,879
Amortization 2,368 2,458 6,195 6,028
Interest 3,140 3,630 9,844 5,651
Unusual losses 1,272 -- 1,918 --
Minority interests 215 55 864 385
-------- -------- -------- --------
55,125 27,159 132,112 81,626
-------- -------- -------- --------
Gain on sale of interest in subsidiary -- -- 3,375 --
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND EQUITY INTERESTS (8,051) 2,457 (7,826) (3,412)
Income taxes (4,247) 558 (6,062) (2,307)
-------- -------- -------- --------
INCOME (LOSS) BEFORE EQUITY INTERESTS (3,804) 1,899 (1,763) (1,105)
Equity interest in Mandalay Pictures, LLC (566) (1,736) (1,761) (4,455)
Equity interest in CinemaNow, Inc. (623) (639) (1,764) (639)
-------- -------- -------- --------
Net loss (4,993) (476) (5,290) (6,199)
Dividends on preferred shares (616) (605) (1,874) (1,814)
Accretion on Series A preferred shares (805) (777) (2,407) (2,333)
Adjusted deficit, beginning of period (83,057) (91,504) (79,900) (83,016)
-------- -------- -------- --------
DEFICIT, END OF PERIOD (89,471) (93,362) (89,471) (93,362)
-------- -------- -------- --------
BASIC AND DILUTED OPERATING LOSS
PER COMMON SHARE $ (0.12) $ (0.01) $ (0.12) $ (0.18)
-------- -------- -------- --------
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.15) $ (0.05) $ (0.22) $ (0.30)
-------- -------- -------- --------
See notes to condensed consolidated financial statements
4
LIONS GATE ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 2001 AND MARCH 31, 2001
(all amounts in thousands of Canadian dollars)
UNAUDITED (Note 2)
DECEMBER 31, March 31,
2001 2001
$ $
------------ --------
ASSETS
Cash and equivalents 10,816 10,485
Accounts receivable 184,908 183,787
Investment in films and television programs 329,866 228,349
Long term investments 69,931 77,230
Capital assets 50,818 44,212
Goodwill, net of accumulated amortization 36,477 34,924
Other assets 16,145 15,233
Future income taxes 1,384 --
-------- --------
700,345 594,220
======== ========
LIABILITIES
Bank loans 225,825 159,765
Accounts payable and accrued liabilities 129,860 123,370
Production and distribution loans 37,506 24,045
Long-term debt 75,228 65,987
Deferred revenue 31,380 22,283
Future income taxes -- 757
Minority interests 12,472 1,224
-------- --------
512,271 397,431
Commitments and contingencies
SHAREHOLDERS' EQUITY
Capital stock 269,303 266,523
Accumulated deficit (89,471) (79,900)
Cumulative translation adjustments 8,242 10,166
-------- --------
188,074 196,789
-------- --------
700,345 594,220
======== ========
See notes to condensed consolidated financial statements
5
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000
(all amounts in thousands of Canadian dollars)
Restated
For the Nine For the Nine
Months Ended Months Ended
Dec. 31, 2001 Dec. 31, 2000
$ $
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (5,290) (6,199)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Amortization of capital assets 3,231 2,242
Amortization of goodwill -- 2,189
Write-off of projects in development 1,010 427
Amortization of pre-operating costs 722 722
Amortization of deferred financing costs 1,232 448
Amortization of films and television programs 151,552 110,253
Minority interests 864 385
Unusual losses 1,918 --
Gain on dilution of investment in subsidiary (3,375) --
Equity interest in Mandalay Pictures, LLC 1,761 4,455
Equity interest in CinemaNow, Inc. 1,765 639
CHANGES IN OPERATING ASSETS AND LIABILITIES,
EXCLUDING THE EFFECTS OF ACQUISITIONS:
Accounts receivable (3,167) (11,965)
Increase in investment in films and television programs (253,783) (122,723)
Other assets (5,597) (6,091)
Future income taxes (1,854) (974)
Accounts payable and accrued liabilities 11,327 (6,121)
Deferred revenue 8,872 210
-------- --------
(88,812) (32,103)
-------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Issuance of capital stock 182 14
Dividends paid on Series A Preferred Shares (1,258) (1,209)
Increase in bank loans 63,306 27,165
Increase (decrease) in production and distribution loans 13,365 (20,616)
Increase in long-term debt 8,839 15,235
-------- --------
84,434 20,589
-------- --------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Issuance of capital stock in subsidiary 14,000 --
Cash received from investment in Mandalay Pictures, LLC 3,890 --
Acquisition of Eaton Entertainment, LLC, net of cash acquired 745 --
Purchase of capital assets (10,542) (1,829)
-------- --------
8,093 (1,829)
-------- --------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 3,715 (13,343)
FOREIGN EXCHANGE EFFECT ON CASH (3,384) 2,356
CASH AND EQUIVALENTS - BEGINNING OF PERIOD 10,485 19,283
-------- --------
CASH AND EQUIVALENTS - END OF PERIOD 10,816 8,296
======== ========
See notes to condensed consolidated financial statements
6
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED 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
theatrical, video, television, and international 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 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.
2. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the accounts
of Lions Gate and its subsidiary companies, with a provision for non-controlling
interests, and the Company's proportionate share of assets, liabilities,
revenues and expenses of jointly controlled companies. The Company controls its
subsidiary companies through a combination of existing voting interests and an
ability to exercise various rights under certain shareholder agreements and
debentures to acquire common shares.
On December 20, 2001, the Company acquired the remaining 50% interest in Eaton
Entertainment LLC for $0.2 million. Additionally, the Company recorded an
unusual loss of $1.3 million relating to the non-continuing assets acquired in
the transaction.
These unaudited condensed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles in Canada ("Canadian
GAAP") which conforms, in all material respects, with the accounting principles
generally accepted in the United States ("U.S."), except as described in note
12, for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by Canadian or U.S. GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been reflected in these condensed consolidated financial
statements. Operating results for the three and nine month periods are not
necessarily indicative of the results that may be expected for the year ending
March 31, 2002. Certain reclassifications have been made in the fiscal 2001
financial statements to conform to the fiscal 2002 presentation, as described in
note 13. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Annual Report on Form 10-K for the year
ended March 31, 2001.
The balance sheet at March 31, 2001 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The unaudited condensed consolidated financial statements as at and for the
three and nine months ended December 31, 2000 have been restated to take into
account the adoption of SoP 00-2, the redesignation of the Company's U.S.
operations as self-sustaining both as of April 1, 2000 and the reversal of a
gain on sale of interest in subsidiary recorded in the periods ended December
31, 2000.
7
3. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
GOODWILL-
On June 29, 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 142, "Goodwill and Other Intangible
Assets" which is applicable under Canadian GAAP. Under SFAS 142, goodwill and
indefinite lived intangible assets are no longer amortized but are reviewed
annually, or more frequently if impairment indicators arise, for impairment.
Goodwill is required to be tested for impairment between the annual tests if an
event occurs or circumstances change that more-likely-than-not reduce the fair
value of a reporting unit below its carrying value. The amortization provisions
of SFAS 142 apply to goodwill and intangible assets acquired after June 30,
2001. With respect to goodwill and intangible assets acquired prior to July 1,
2001, the amortization and impairment provisions of SFAS 142 are effective upon
adoption of SFAS 142. The Company elected to adopt SFAS 142 on April 1, 2001.
(Refer to note 6 for additional information.)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES-
On April 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities", as amended in June 2000 by SFAS 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
which requires companies to recognize all derivatives as either assets or
liabilities in the balance sheet and measure such instruments at fair value. The
adoption of these standards did not have a material impact on the Company's
unaudited condensed consolidated financial statements.
4. INVESTMENT IN FILMS AND TELEVISION PROGRAMS
(all amounts in thousands of Canadian dollars)
DEC. 31, March 31,
2001 2001
-------- ---------
THEATRICAL FILMS
Released, net of accumulated amortization $136,491 $ 58,378
Acquired library, net of accumulated amortization 62,976 77,827
In progress 21,449 30,690
In development 2,124 4,972
-------- --------
223,040 171,867
-------- --------
NON-THEATRICAL FILMS AND DIRECT-TO-TELEVISION
Released, net of accumulated amortization 43,478 24,343
In progress 57,490 27,221
In development 5,858 4,918
-------- --------
106,826 56,482
-------- --------
$329,866 $228,349
======== ========
The Company expects that 86% of released films and television programs net of
amortization will be amortized over the three-year period ending December 31,
2004.
8
5. LONG-TERM INVESTMENTS
Long-term investments is comprised of the Company's investments in Mandalay
Pictures, LLC and CinemaNow, Inc.
The Company's investment in Mandalay Pictures is comprised of a 45% common stock
interest, and a 100% interest in preferred stock with a stated value of US$50.0
million. The Company records 100% of the operating results of Mandalay Pictures
as equity interest in Mandalay Pictures, LLC.
Summarized financial information of Mandalay Pictures is as follows:
(all amounts in thousands of Canadian dollars)
DEC. 31, March 31,
2001 2001
-------- ---------
ASSETS
Cash and equivalents $ 16,008 $ 25,399
Restricted cash 22,593 33,336
Accounts receivable 17,533 69,878
Investment in films 101,065 209,848
Other assets 134 127
-------- --------
157,333 338,588
-------- --------
LIABILITIES
Accounts payable and accrued liabilities 8,533 16,901
Production and bank loans 34,211 151,659
Contractual obligations 14,648 57,653
Deferred revenue 56,427 65,032
-------- --------
113,819 291,245
-------- --------
NET ASSETS $ 43,514 $ 47,343
======== ========
THREE MONTHS Restated three NINE MONTHS Restated nine
ENDED months ended ENDED months ended
DEC. 31, 2001 Dec. 31, 2000 DEC. 31, 2001 Dec. 31, 2000
------------- -------------- ------------- -------------
Revenue $ 22,372 $ 87,086 $ 110,313 $ 119,949
Direct operating expenses 22,290 88,047 108,444 120,056
--------- --------- --------- ---------
Gross profit 82 (961) 1,869 (107)
Indirect operating expenses (487) (1,582) (2,971) (4,910)
Interest income, net of interest
expense 317 193 800 1,653
--------- --------- --------- ---------
LOSS BEFORE PROVISION FOR INCOME
TAXES $ (88) $ (2,350) $ (302) $ (3,364)
========= ========= ========= =========
Mandalay Pictures is a non-taxable entity. Accordingly, all tax effects
attributable to the operations of Mandalay are included directly in the
Company's tax provision.
9
6. GOODWILL
The net carrying value of goodwill recorded through acquisitions is $34.9
million as at March 31, 2001. Effective April 1, 2001, the Company adopted SFAS
142 which is applicable under Canadian GAAP. This asset will be assessed for
impairment at least annually or upon an adverse change in operations. Prior to
the adoption of SFAS 142 the assets were amortized using the straight-line
method over periods ranging from five to twenty years. The Company completed an
impairment test required under SFAS 142 at September 30, 2001 and determined
that the recognition of an impairment loss was not necessary. The following is
the proforma effect had the nine months and quarter ended December 31, 2000 been
subject to SFAS 142:
(all amounts in thousands of THREE MONTHS Three months NINE MONTHS Nine months
Canadian dollars) ENDED ended ENDED ended
DEC. 31, 2001 Dec. 31, 2000 DEC. 31, 2001 Dec. 31, 2000
------------- ------------- ------------- -------------
Reported net loss $ (4,993) $ (476) $ (5,290) $ (6,199)
Amortization -- 909 -- 2,189
--------- ---------- ------------ ------------
Adjusted net income/(loss) $ (4,993) $ 433 $ (5,290) $ (4,010)
========= ========== ============ ============
Reported net loss
per share $ (0.15) $ (0.05) $ (0.22) $ (0.30)
Amortization per share $ 0.00 $ 0.02 $ 0.00 $ 0.06
--------- ---------- ------------ ------------
Adjusted net loss
per share $ (0.15) $ (0.03) $ (0.22) $ (0.24)
========= ========== ============ ============
7. BANK LOANS
The Company has credit facilities available of US$200.0 million (Cdn.$318.6
million) and Cdn.$2.0 million as at December 31, 2001 (March 31, 2001 - US$200.0
million (Cdn$315.3 million) and Cdn $2.0 million)), expiring September 25, 2005
and July 31, 2002 respectively. The availability of funds under the US$200.0
million credit facility is limited by the borrowing base, which is calculated on
a monthly basis. The borrowing base assets at December 31, 2001 totaled US$148.2
million (Cdn$236.2 million). As at December 31, 2001, US$140.9 million
(Cdn$224.3 million) and $1.5 million was drawn on the facilities. The Company is
required to pay a monthly commitment fee of 0.375% on the US$200.0 million less
the amount drawn.
8. GAIN ON SALE OF INTEREST IN SUBSIDIARY
On July 10, 2001, a third party invested $14.0 million in the Company's
animation partner to obtain a 35% interest. The gain on dilution of the
Company's investment was $3.4 million (net of income taxes $nil) and resulted in
a decrease of $0.2 million in goodwill.
9. INCOME PER SHARE
Basic income per share is calculated after adjusting net income for dividends
and accretion on the preferred shares and using the weighted average number of
common shares outstanding during the three and nine months ended December 31,
2001 of 42,976,000 shares and 42,611,000 shares, respectively,
10
(December 31 , 2000 - 40,212,000 shares and 34,361,000 shares, respectively).
The exercise of common share equivalents including employee stock options, share
purchase warrants, convertible promissory notes and Series A preferred shares
could potentially dilute earnings per share in the future, but were not
reflected in fully diluted income per share because to do so would be
anti-dilutive.
10. SUPPLEMENTARY CASH FLOW STATEMENT INFORMATION
Interest paid during the three and nine months ended December 31, 2001 amounted
to $5.5 million and $13.4 million, respectively, (December 31, 2000 - $2.6
million and $6.0 million, respectively).
Income taxes paid during the three and nine months ended December 31, 2001
amounted to $1.2 million and $1.7 million, respectively, (December 31, 2000 -
$0.1 million and $1.2 million, respectively).
11. COMMITMENTS AND CONTINGENT LIABILITIES
(a) Minimum future payments under operating lease commitments are as
follows: (all amounts in thousands of Canadian dollars)
Year ending
March 31,
2003 $2,458
2004 2,285
2005 1,997
2006 1,931
2007 1,434
Thereafter 2,332
(b) Under the normal course of business, as at December 31, 2001,
subsidiaries of the Company have entered into unconditional
purchase obligations relating to the purchase of film rights for
future delivery and to pay advances to producers amounting to
approximately $30.0 million that are payable over the next twelve
months (March 31, 2001- $39.1 million).
(c) A subsidiary of the Company has provided guarantees up to a
maximum of $1.9 million (March 31, 2001 - $6.8 million) for bank
loans used to finance production costs of unrelated production
companies.
(d) Pre-sales of the future revenue from certain television series and
motion pictures totaling $16.8 million (March 31, 2001 - $26.0
million) are pledged as collateral against certain accounts
payable.
(e) The Company is from time to time involved in various claims, legal
proceedings and complaints arising in the ordinary course of
business. The Company does not believe that adverse decisions in
any pending or threatened proceedings, or any amount which the
Company may be required to pay by reason thereof, would have a
material adverse effect on the financial condition or future
results of the Company.
11
12. RECONCILIATION TO UNITED STATES GAAP
The condensed consolidated financial statements of the Company have been
prepared in accordance with Canadian GAAP. The material differences between the
accounting policies used by the Company under Canadian GAAP and U.S. GAAP are
disclosed below in accordance with the rules and regulations of the Securities
and Exchange Commission.
Under U.S. GAAP, the net loss and loss per share figures for the three and nine
months ended December 31, 2001 and 2000 and the shareholders' equity as at
December 31, 2001 and March 31, 2001 was:
NET LOSS SHAREHOLDERS' EQUITY
--------------------------------------------------------- ------------------------
(all amounts in thousands of THREE MONTHS Three months NINE MONTHS Nine months
Canadian dollars, except per ENDED ended ENDED ended
share amounts) DEC. 31, Dec. 31, DEC. 31, Dec. 31, DEC. 31, March 31,
2001 2000 2001 2000 2001 2001
------------ ------------ ----------- ---------- --------- ----------
AS REPORTED UNDER CANADIAN GAAP $ (4,992) $ (476) $ (5,289) $ (6,199) $ 188,074 $ 196,789
Equity interest in loss of
Mandalay Pictures (a) 287 287 861 861 (3,708) (4,569)
Adjustment for capitalized
pre-operating costs (b) 145 145 435 435 (2,820) (3,255)
Restructuring costs (c) -- -- -- -- (1,733) (1,733)
Accounting for income taxes (d) -- -- -- -- 2,754 2,754
Reclassification of Series A
Preferred Shares outside
shareholders' equity (e) -- -- -- -- (40,076) (38,986)
--------- --------- --------- --------- --------- ---------
NET LOSS BEFORE ACCOUNTING
CHANGE/ SHAREHOLDERS' EQUITY
UNDER U.S. GAAP (4,560) (44) (3,993) (4,903) 142,491 151,000
--------- --------- --------- --------- --------- ---------
Cumulative effect of accounting
changes, net of income taxes
(f) -- -- -- (58,942) -- --
--------- --------- --------- --------- --------- ---------
NET LOSS/SHAREHOLDERS' EQUITY
UNDER U.S. GAAP (4,560) (44) (3,993) (63,845) 142,491 151,000
Adjustment to cumulative
translation adjustments
account (net of tax of $nil)
(g) 42 (779) (1,872) 2,786 -- --
Other comprehensive loss (g) 116 -- (269) -- (269) --
--------- --------- --------- --------- --------- ---------
COMPREHENSIVE LOSS ATTRIBUTABLE
TO COMMON SHAREHOLDERS'
UNDER U.S. GAAP $ (4,402) $ (823) $ (6,134) $ (61,059) $ 142,222 $ 151,000
========= ========= ========= ========= ========= =========
BASIC AND FULLY DILUTED LOSS PER
COMMON SHARE UNDER U.S. GAAP
BEFORE ACCOUNTING CHANGES $ (0.13) $ (0.03) $ (0.17) $ (0.24)
========= ========= ========= =========
BASIC AND FULLY DILUTED LOSS PER
COMMON SHARE UNDER U.S. GAAP $ (0.13) $ (0.03) $ (0.17) $ (1.95)
========= ========= ========= =========
12
Reconciliation of movement in Shareholders' Equity under U.S. GAAP:
(all amounts in thousands of Canadian dollars)
DEC. 31, 2001 March 31, 2001
------------- --------------
BALANCE AT BEGINNING OF THE PERIOD $ 151,000 $ 158,974
Increase in capital stock 715 37,573
Dividends paid on preferred shares (1,874) (2,497)
Accretion on preferred shares (e) (1,432) (1,555)
Net income (loss) under U.S. GAAP (3,993) (50,217)
Adjustment to cumulative translation
adjustments account Comprehensive loss (269) --
Other comprehensive loss (1,924) 8,722
--------- ---------
BALANCE AT END OF THE PERIOD $ 142,223 $ 151,000
========= =========
(A) EQUITY INTEREST IN LOSS OF MANDALAY PICTURES, LLC
The Company accounts for Manadalay Pictures using the equity method. Under
Canadian GAAP, pre-operating costs incurred by Mandalay Pictures were
deferred and are being amortized to income. Under U.S. GAAP, all start-up
costs are required to be expensed as incurred. The amounts are presented
net of income taxes for the three and nine months ended December 31, 2001
of $0.3 million and $0.9 million, respectively, (December 31, 2000 - $0.3
million and $0.9 million, respectively).
(B) ACCOUNTING FOR CAPITALIZED PRE-OPERATING PERIOD COSTS
In the year ended March 31, 1999, under Canadian GAAP, the Company deferred
certain pre-operating costs related to the launch of the television
one-hour series business amounting to $4.8 million. This amount is being
amortized over five years commencing in the year ended March 31, 2000.
Under U.S. GAAP, all start-up costs are expensed as incurred. The amounts
are presented net of income taxes for the three and nine months ended
December 31, 2001 of $0.1 million and $0.4 million, respectively, (December
31, 2000 - $0.1 million and $0.4 million, respectively).
(C) ACCOUNTING FOR BUSINESS COMBINATIONS
Under Canadian GAAP, costs related to activities or employees of an
acquiring company are included in the purchase price allocation. The
Company included $2.1 million of such costs in the purchase equation for
Trimark. Under U.S. GAAP, costs related to the acquiring Company are
expensed as incurred. The amount is presented net of income taxes of $0.3
million.
(D) ACCOUNTING FOR INCOME TAXES
Under Canadian GAAP, for the year ended March 31, 2001, the Company used
the asset and liability method to recognize future income taxes which is
consistent with the US GAAP method required under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", ("SFAS 109")
except that Canadian GAAP requires use of the substantively enacted tax
rates and legislation, whereas US GAAP only permits use of enacted tax
rates and legislation. For the years ended March 31, 2000 and March 31,
1999, the Company used the deferral method for accounting for deferred
income taxes, which differs from the requirements of SFAS 109. The use of
substantively
13
enacted tax rates under Canadian GAAP to measure future income tax assets
and liabilities resulted in an increase in Canadian net future income tax
assets (before valuation allowances) by $2.3 million, with a corresponding
increase in valuation allowances by $1.7 million.
SFAS 109 requires deferred tax assets and liabilities be recognized for
temporary differences, other than non-deductible goodwill, arising in a
business combination. As a result of the acquisition of Lions Gate Studios
in the year ended March 31, 2000, under US GAAP, goodwill was increased to
reflect the additional deferred tax liability resulting from temporary
differences arising on the acquisition. Under Canadian GAAP, the company
did not restate income taxes for years prior to March 31, 2001,
accordingly, there is a difference in the carrying amount of goodwill of
$2.8 million as at March 31, 2000, (March 31, 1999 - $2.9 million) and
amortization expense relating to goodwill was $0.1 million higher under US
GAAP.
(E) ACCRETION ON PREFERRED SHARES
Under Canadian GAAP, the Company's preferred shares have been included in
shareholders' equity as the Company considers the likelihood of redemption
by the holders to be remote. Under U.S. GAAP, the preferred shares would be
presented outside of shareholders equity.
Under Canadian GAAP, the fair value of the basic preferred shares was
determined using the residual value method after determining the fair value
of the common share purchase warrants and the preferred share conversion
feature. Under U.S. GAAP, the proceeds received would be allocated to the
common share purchase warrants and the preferred shares based on the
relative fair values of the two instruments. Under U.S. GAAP, the preferred
shares would have been valued at $42.4 million and the warrants at $5.7
million. As the conversion feature of the preferred shares was beneficial,
an amount of $2.4 million was allocated to the conversion feature based on
the intrinsic value of the conversion feature resulting in a carrying value
for the preferred shares of $40.0 million.
Under Canadian GAAP, the difference between the carrying amount and the
redemption value of $50.5 million is being accreted as a charge to retained
earnings on a straight line basis over five years whereas, under US GAAP,
the difference is being accreted using the effective interest method over
the five year period to the first available date that the preferred shares
are redeemable.
(F) ACCOUNTING CHANGES
In the year ended March 31, 2001, the Company elected early adoption of
Statement of Position 00-2 "Accounting by Producers or Distributors of
Films" ("SoP 00-2"). Under Canadian GAAP, the one-time after-tax adjustment
for the initial adoption of SoP 00-2 was made to opening retained earnings.
Under SoP 00-2, the cumulative effect of changes in accounting principles
caused by adopting the provisions of SoP 00-2 should be included in the
determination of net earnings for GAAP purposes. The cumulative effect
adjustment comprised $40.1 million net of income taxes of $15.5 million for
the Company and its subsidiaries as well as $3.3 million, net of income
taxes of $2.2 million for the Company's equity investee Mandalay Pictures.
(G) COMPREHENSIVE LOSS
Comprehensive loss consists of net income (loss) and other gains and losses
affecting shareholders' equity that, under U.S. GAAP are excluded from net
income. Adjustment to cumulative translation adjustments comprises foreign
currency translation gains and losses. Other comprehensive loss comprises
unrealized losses on investments available for sale based on the market
price of the shares at December 31, 2001 net of income taxes of $0.4
million.
14
(H) ACCOUNTING FOR TAX CREDITS
Under Canadian GAAP, tax credits earned are included in revenue. Accounting
Principles Board Opinion No. 4, "Accounting for the Investment Credit"
requires tax credits to be presented as reduction of income tax expense.
The corresponding impact would be a reduction of revenue and credit to
income tax expense of $4.0 million (December 31, 2000 - $3.7 million).
13. COMPARATIVE FIGURES
The unaudited condensed Consolidated Financial Statements as at and for the
three months and nine months ended December 31, 2000 have been restated to take
into account the interim effect of the adoption of SoP 00-2 and the
reclassification of the Company's U.S. operations as self-sustaining both as of
April 1, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
We develop, produce and distribute a targeted range of film and
television content in North America and around the world. To reflect our core
businesses, this discussion focuses on Motion Pictures, Television, Animation
and Studio Facilities.
The following discussion and analysis for the three and nine months
ended December 31, 2001 and 2000 should be read in conjunction with the
unaudited condensed Consolidated Financial Statements included in this report.
The unaudited condensed Consolidated Financial Statements have been prepared in
accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The
material differences between the accounting policies used by Lions Gate under
Canadian GAAP and United States ("U.S.") GAAP are disclosed in note 12 to the
unaudited condensed Consolidated Financial Statements.
The functional currency of our business, defined as the economic
environment in which we primarily generate and expend cash, is the Canadian
dollar and the U.S. dollar for the Canadian and U.S.-based businesses
respectively. In accordance with GAAP in both Canada and the U.S., the financial
statements of U.S.-based subsidiaries are translated for consolidation purposes
using current exchange rates, with translation adjustments accumulated in a
separate component of shareholders' equity.
On June 29, 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") 142, "Goodwill and Other
Intangible Assets" which is applicable under Canadian GAAP. Under SFAS 142,
goodwill and indefinite lived intangible assets are no longer amortized but are
reviewed annually, or more frequently if impairment indicators arise, for
impairment. Goodwill is required to be tested for impairment between the annual
tests if an event occurs or circumstances change that more-likely-than-not
reduce the fair value of a reporting unit below its carrying value. We adopted
SFAS 142 as of April 1, 2001. In accordance with the adoption provisions of SFAS
142, within six months of adoption, goodwill is required to be tested for
impairment as of the beginning of the year. At September 30, 2001 it was
determined that the fair value of each of the reporting units was in excess of
its carrying value including goodwill and, therefore, no further work was
required and an impairment loss was not required. Note 6 to the unaudited
condensed Consolidated Financial Statements includes additional information
relating to the net carrying value of goodwill and the proforma effect of the
adoption of SFAS 142 on the prior year's unaudited condensed Consolidated
Statement of Operations for the nine months ended December 31, 2000.
On July 1, 2001, we adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 requires that all derivative
instruments be reported on the balance sheet at fair
15
value and establishes criteria for the designation and effectiveness of hedging
relationships. The cumulative effect of adopting SFAS 133 was not material to
the financial statements.
It should be noted that the unaudited condensed Consolidated Financial
Statements as at and for the three and nine months ended December 31, 2000 have
been restated to take into account the adoption of SoP 00-2 and the
reclassification of our U.S. operations as self-sustaining, both as of April 1,
2000 and the reversal of a gain on dilution of investment in a subsidiary
recorded in the periods ended December 31, 2000. The impact on fiscal 2001 of
the adoption of SoP 00-2 and the reclassification of the U.S. operations was
recorded in the fourth quarter of fiscal 2001, and has been apportioned to each
of the four quarters in fiscal 2001 for comparative purposes. In addition,
distribution and marketing costs, which were previously disclosed as a component
of direct operating expenses, are now separately disclosed as a component of
other expenses under SoP 00-2. The following is a comparison of the line items
in the unaudited condensed Consolidated Statements of Operations that have been
restated:
AS REPORTED AS RESTATED
------------------------------------ ----------------------------------
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, 3 Months 9 Months 3 Months 9 Months
EXCEPT PER SHARE AMOUNTS) ended ended ended ended
Dec. 31, 2000 Dec. 31, 2000 Dec. 31, 2000 Dec. 31, 2000
------------- ------------- ------------- -------------
Revenues $ 68,686 $ 189,612 $ 68,948 $ 190,401
Direct operating expenses 50,953 149,650 39,332 112,188
--------- --------- --------- ---------
Gross profit $ 17,733 $ 39,962 $ 29,616 $ 78,213
========= ========= ========= =========
Distribution and marketing costs $ -- $ -- $ 10,674 $ 45,683
========= ========= ========= =========
General and administration expenses $ 10,287 $ 22,484 $ 10,342 $ 23,879
========= ========= ========= =========
Gain on dilution of investment in a subsidiary $ 3,399 $ 4,108 $ -- $ --
========= ========= ========= =========
Income taxes $ 77 $ 668 $ 558 $ (2,307)
========= ========= ========= =========
Income (loss) before equity interests $ 4,859 $ 9,089 $ 1,899 $ (1,105)
========= ========= ========= =========
Net income (loss) for the period $ 3,123 $ 4,634 $ (476) $ (6,199)
========= ========= ========= =========
BASIC AND DILUTED OPERATING INCOME (LOSS)
PER SHARE $ 0.08 $ 0.13 $ (0.01) $ (0.18)
========= ========= ========= =========
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ 0.04 $ 0.01 $ (0.05) $ (0.30)
========= ========= ========= =========
OVERVIEW
Net loss for the three months ended December 31, 2001 was $5.0 million,
representing a loss of $0.15 per share (after giving effect to the Series A
preferred share dividends and accretion on the Series A preferred shares) on
43.0 million weighted average common shares outstanding compared to net loss of
$0.5 million (as restated) or $0.05 per share (as restated) (after giving effect
to the Series A preferred share dividends and accretion on the Series A
preferred shares) on 40.2 million weighted average common shares outstanding for
the three months ended December 31, 2000.
Net loss for the nine months ended December 31, 2001 was $5.3 million,
representing a loss of $0.22 per share (after giving effect to the Series A
preferred share dividends and accretion on the Series A preferred shares) on
42.6 million weighted average common shares outstanding compared to net loss of
$6.2 million (as restated) or a loss of $0.30 per share (as restated) (after
giving effect to the Series A
16
preferred share dividends and accretion on the Series A preferred shares) on
34.4 million weighted average common shares outstanding for the nine months
ended December 31, 2000.
Before equity interests in Mandalay Pictures and CinemaNow, the loss
for the three months ended December 31, 2001 was $3.8 million compared to income
of $1.9 million (as restated) in the same period in the prior year. Before
equity interests in Mandalay Pictures and CinemaNow, the loss for the nine
months ended December 31, 2001 was $1.8 million, compared to a loss of $1.1
million (as restated) in the same period in the prior year.
EBITDA (defined as earnings before interest, provision for income
taxes, amortization, minority interests, unusual losses and equity interests in
losses) of negative $1.1 million for the three months ended December 31, 2001
decreased $9.7 million compared to $8.6 million (as restated) for the three
months ended December 31, 2000. EBITDA for the nine months ended December 31,
2001 of $7.6 million decreased $1.1 million compared to $8.7 million (as
restated) for the nine months ended December 31, 2000. Revenues and gross profit
for the three and nine months ended December 31, 2001 increased significantly
from the corresponding periods in the prior year. EBITDA in the current year was
adversely impacted by increased distribution and marketing costs in both the
theatrical and video divisions of the Motion Pictures business. Distribution and
marketing costs of $33.6 million and $74.6 million for the three and nine months
ended December 31, 2001, respectively, increased significantly from $10.7
million and $45.7 million in the respective corresponding periods in the prior
year (both as restated). EBITDA should be considered in addition to, but not as
a substitute for, net income and other measures of financial performance
reported in accordance with generally accepted accounting principles. Not all
companies calculate EBITDA in the same manner and the measure as presented may
not be comparable to similarly titled measures presented by other companies.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2000
Revenue for the three months ended December 31, 2001 of $111.1 million
increased $42.2 million or 61.2% compared to $68.9 million (as restated) in the
same period in the prior year. Revenue increased significantly in all businesses
quarter-over-quarter with the exception of CineGate where revenue decreased by
$0.5 million to $0.3 million.
Motion Pictures revenue of $46.7 million increased $5.2 million or
12.5% from $41.5 million (as restated). The majority of the increase is due to a
$6.8 million increase in theatrical revenue from $1.9 million in the prior
period. Significant theatrical releases in the current quarter included The Wash
with revenue of $4.8 million and Les Boys (released in Quebec) with revenue of
$2.4 million. Video revenue of $26.0 million increased $4.1 million from $21.9
million in the prior period. Significant current quarter video releases included
Golden Bowl, Songcatcher and Dancing at the Blue Iguana. Television revenue from
motion pictures of $2.2 million decreased $5.1 million from $7.3 million in the
prior period due to the timing of the commencement of the television license
windows and international revenue of $8.0 million decreased $2.1 million from
$10.1 million in the prior period.
Television production revenue of $48.5 million increased $30.8 million
or 174.0% from $17.7 million in the prior period. Current quarter deliveries
included seven one-hour episodes of "Mysterious Ways" to Pax TV in the U.S., CTV
in Canada and Sony worldwide, six one-hour episodes of "Tracker" to the
syndication market in the U.S., City TV in Canada, Telemunchen in Germany and
other international territories, two one-hour episodes of "Iron Chef" to UPN in
the U.S., City TV in Canada and international territories, a one-hour episode of
"Dead Zone" to UPN in the U.S., the television movie "Attack on the Queen" to
TBS in the U.S. and the four hour mini-series `Superfire" to ABC and several
international
17
territories. In the prior year's third quarter seven one-hour episodes of
"Mysterious Ways" were delivered. Termite Art contributed revenue of $5.3
million compared to $4.2 million in the prior period. In the current quarter
Termite Art delivered 20.5 hours of programming, compared to 18.5 hours
delivered in the prior period. Current quarter deliveries included: five hours
of "Amazing Animal Videos" to Animal Planet and four hours each of "Incredible
Vacation Videos" to Travel Channel and "A Day in the Life" to History Channel.
Trimark television contributed library revenue of $0.7 million in the current
period compared to $0.9 in the prior period.
In Animation, CineGroupe's revenue of $13.9 million increased $6.2
million or 80.5% compared to $7.7 million in the prior year's third quarter. In
the current quarter a total of 29 half-hours were delivered, including 12
half-hours each of "What's With Andy" to Fox Family in the U.S. and Teletoon in
Canada and "Big Wolf on Campus" to Fox Family in the U.S. and YTV in Canada and
five half-hours of "Sagwa" to PBS in the U.S. and TVO in Canada. In the prior
period, 26 half-hours were delivered, consisting of 14 half-hours of
"Wunchpunch" and 12 half-hours of "Kids From Room 402". Other revenues including
library sales, sales of multi-media products and technical services revenues
increased in the current quarter to $1.8 million from $1.0 million in the prior
period.
Studio Facilities revenue of $1.6 million increased $0.3 million or
23.1% from $1.3 million in the prior year's third quarter due to the inclusion
of revenue earned at Eagle Creek Studios of $0.1 million and favourable stage
and office occupancy levels. In the current quarter, stage and office occupancy
levels averaged 99% and 94% respectively, compared to 100% and 83% respectively
in the prior period.
Gross profit for the three months ended December 31, 2001 was $47.1
million representing a 42.4% gross margin compared to gross profit of $29.6
million (as restated) representing a gross margin of 43.0% (as restated) in the
prior year's third quarter.
The gross margin in Motion Pictures of 76.3% in the current quarter was
favourable compared to the gross margin of 56.7% (as restated) in the prior
year's third quarter. The improvement in the gross margin is due to significant
theatrical and international revenues earned on Lions Gate proprietary
productions such as The Wash and Frailty, and significant Trimark library sales.
The gross margin in Television of 14.3% in the current quarter
decreased compared to the gross margin of 16.4% (as restated) in the prior
period. Excluding Termite, the television production gross margin is unchanged
from the prior period. Termite Art's gross margin of 5.3% in the current quarter
declined from the gross margin of 9.4% in the prior period primarily due to the
write-off of certain production costs where a series pick-up was not considered
likely.
In Animation, CineGroupe's gross margin of 22.9% increased slightly
compared to the gross margin of 22.7% (as restated) in the prior year's third
quarter.
Studio Facilities gross margin of 61.6% was favourable compared to the
gross margin of 48.2% recognized in the prior quarter. The gross margin increase
is due to improved occupancy levels and the contribution of the eighth
soundstage that commenced operations in December.
Distribution and marketing costs (or "P&A") of $33.6 million increased
$22.9 million or 214.0% compared to $10.7 million in the prior year's third
quarter. Distribution and marketing costs were greater in the current period
primarily due to the advertising expenditures on the more significant theatrical
titles released in the current period. Theatrical P&A in the current quarter of
$19.2 million compares to $1.8 million in the prior period. Theatrical releases
in the current quarter included: The Wash; and Les Boys and limited releases of
Monster's Ball and Lantana compared to the prior period's most significant
release, What's Cooking. Video P&A in the current quarter of $13.4 million
compares to $7.7 million in
18
the prior period due to the more significant video titles released in the
current period and the prior period. Revenues earned on videos released through
our Universal output deal, which included spillover from the video release of
American Psycho in the second quarter in the prior period, are recorded net of
distribution and marketing expenses.
General and administration expenses of $14.6 million increased $4.3
million or 41.7% compared to $10.3 million in the prior year's third quarter.
General and administrative expenses increased primarily as a result of increased
headcount due to the growth in production and theatrical and video distribution
divisions, growth in Animation and corporate administration and support
functions.
Amortization in the current quarter of $2.4 million decreased $0.1
million or 4.0% from $2.5 million in the prior year's third quarter due to a
decrease in goodwill amortization of $0.9 million as a result of the adoption of
SFAS 142 partially offset by a $0.7 million increase in capital assets
amortization, primarily in Animation pertaining to the acquisition of animation
and technical services equipment through capital leases.
Interest expense in the current quarter of $3.1 million decreased $0.5
million or 13.9% compared to interest expense of $3.6 million in the prior
year's third quarter. The decrease is primarily due to a decrease in interest
rates.
The unusual loss of $1.3 million recorded in the current period relates
to a loss recorded on acquisition of the remaining 50% of Eaton Entertainment
LLC.
Mandalay Pictures reported a net loss of $0.6 million in the current
quarter (including amortization of previously capitalized pre-operating costs of
$0.5 million) compared to a loss of $1.7 million in the prior period (including
amortization of previously capitalized pre-operating costs of $0.5 million).
The $0.6 million equity interest in the loss of CinemaNow comprises 63%
of the operating losses of CinemaNow for the three months ended December 31,
2001 and is relatively unchanged from the prior year's third quarter equity
interest (as restated).
The income tax recovery of $4.2 million consists of a recovery for
income taxes to record the realization of future benefit of income tax loss
carryforwards in certain entities, partially offset by tax provisions against
taxable income recorded in other entities.
NINE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
2000
Revenue for the nine months ended December 31, 2001 of $272.9 million
increased $82.5 million or 43.3% compared to $190.4 million (as restated) in the
same period in the prior year. We achieved significant revenue growth in all
businesses - $28.8 million or 25.5% in Motion Pictures, $36.3 million or 70.5%
in Television, $16.3 million or 81.6% in Animation, $0.7 million or 16.7% in
Studios and $0.4 million or 23.3% in CineGate.
Motion Pictures revenue of $142.0 million increased from $113.2 million
(as restated) in the nine months ended December 31, 2000. Video revenue for the
first nine months of fiscal 2002 increased $23.4 million compared to the prior
period. Theatrical revenue increased $11.1 million. The most significant
theatrical releases year-to-date in the current year are "O" and The Wash with
revenue of $8.0 million and $4.8 million, respectively, compared to American
Psycho, the most significant release in the prior period with revenue of $8.1
million. International revenues decreased $6.8 million from $20.7 million in
the prior period and television revenue from Motion Pictures decreased
$4.7 million from
19
$13.3 million in the prior period.
Television revenue of $87.8 million increased from $51.5 million in the
first nine months of fiscal 2001. Deliveries in the current period included 18
one-hour episodes of "Mysterious Ways," two one-hour episodes of "Dead Zone",
the mini-series "Superfire", and television movies "Pilot's Wife" and "Attack on
the Queen" and the Avalanche project "Cabin Pressure". In the prior period seven
one-hour episodes of "Higher Ground" and 18 one-hour episodes of "Mysterious
Ways" were delivered. In addition, producer fees of $1.9 million were recognized
in the prior period compared to $0.3 million in the current period. Termite Art
contributed revenue of $15.4 million compared to $9.5 million in the prior
period. In the current period Termite Art delivered 73.0 hours of programming,
compared to 49.0 hours delivered in the prior period. Trimark Television
contributed library revenue of $2.8 million in the current period compared to
$0.9 in the prior period.
In Animation, CineGroupe's revenue of $36.3 million increased from
$20.0 million in the nine months ended December 31, 2000. In the current period
a total of 76.5 half-hours were delivered compared to 55 half-hours in the prior
period. Other revenue of $3.9 million was earned in the current period compared
to $2.8 million in the prior period.
Studio Facilities revenue of $4.9 million increased from $4.2 million
in the nine months ended December 31, 2000 due to revenue from Eagle Creek
Studios, the inclusion of rental revenue on the newly completed eighth
soundstage in early December, and improved stage and office occupancy levels.
Gross profit for the nine months ended December 31, 2001 was $120.9
million with a 44.3% gross margin compared to gross profit of $78.2 million (as
restated) representing a gross margin of 41.1% (as restated) for the nine months
ended December 31, 2000.
The gross margin in Motion Pictures of 66.2% in the nine months ended
December 31, 2001 was favourable compared to the gross margin of 56.4% (as
restated) reported in the nine months ended December 31, 2000 due to the
inclusion of more significant proprietary productions and library sales.
The gross margin in Television of 16.2% in the nine months ended
December 31, 2001 was favourable compared to the gross margin of 10.4% (as
restated) recognized in the prior period due to more favourable gross margins
realized on deliveries in the current period. The increased gross margin in
Lions Gate Television was slightly offset by an unfavourable variance in Termite
Art's gross margin, which decreased to 11.0% in the current period compared to
the gross margin realized in the prior period of 21.4%. In the prior period
producer fees of $0.4 million on "Ripley's Believe It Or Not" and library sales
of $0.3 million increased the gross margin.
In Animation, the gross margin of 21.7% was unfavourable compared to
the gross margin of 26.3% (as restated) recognized in the nine months ended
December 31, 2000 due to the mix of programming delivered in each period - live
action programming is a more significant component of the current deliveries
which is at a lower gross margin, and a provision for investment in films of
$1.4 million recorded against multi-media projects in the current period.
Studio Facilities gross margin of 58.6% in the nine months ended
December 31, 2001 improved slightly compared to the gross margin of 54.2%
recognized in the nine months ended December 31, 2000 primarily due to improved
occupancy levels.
Distribution and marketing costs of $74.6 million increased $28.9
million or 63.2% compared to $45.7 million in the prior period due to the
advertising expenditures on the more significant theatrical
20
titles released in the current period and a substantial increase in marketing
and distribution costs associated with video business primarily attributable to
the acquisition of Trimark.
General and administration expenses of $38.7 million in the nine months
ended December 31, 2001 increased $14.8 million or 61.9% compared to $23.9
million in the prior period due to the Trimark operations being included in the
current period's results and for approximately one quarter in the comparative
period's results since the acquisition date of October 13, 2000, and growth in
production and theatrical and video distribution divisions, growth in Animation
and head office administration and support functions.
Amortization in the nine months ended December 31, 2001 of $6.2 million
increased $0.2 million or 3.3% from $6.0 million in the nine months ended
December 31, 2000 due to a $1.1 million increase in capital assets amortization,
and a $0.6 million increase in development costs amortization, partially offset
by decreased in goodwill amortization as a result of the adoption of SFAS 142.
Interest expense in the nine months ended December 31, 2001 of $9.8
million increased $4.1 million or 71.9% compared to interest expense of $5.7
million in the prior period due to the financing of the Trimark acquisition, the
assumption of Trimark's debt and the significant growth of the Company,
partially offset by decreased interest rates.
The unusual losses consist of a $1.3 million loss recorded in the
current quarter relating to a loss recorded on the acquisition of Eaton
Entertainment LLC and a $0.6 million loss on disposal recorded in the second
quarter related to the demolition of the existing structure to provide room to
build the new 20,500 square foot sound stage at Lions Gate Studios.
The gain on dilution of investment in subsidiary of $3.4 million
consists of the dilution gain to the Company on $14.0 million of equity
financing received on July 10, 2001 from a third party in exchange for shares
issued in Corporation CineGroupe.
The $1.8 million equity interest in the loss of Mandalay Pictures is
comprised of 100% of the operating results of Mandalay Pictures for the nine
months ended December 31, 2001 of $0.9 million, plus amortization of previously
capitalized pre-operating period costs of $1.4 million.
The $1.8 million equity interest in the loss of CinemaNow comprises 63%
of the non-cash operating losses of CinemaNow for the nine months ended December
31, 2001.
The income tax recovery of $6.1 million consists of a recovery for
income taxes to record the benefit of income tax loss carryforward recorded in
certain entities, partially offset by tax provisions against taxable income
recorded in other entities.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used in operating activities in the nine months ended
December 31, 2001 was $88.8 million compared to cash flows used in operating
activities of $32.1 million in the nine months ended December 31, 2000 primarily
due to the increased investment in films and television programs in progress
(increased to $78.9 million at December 31, 2001 from $57.9 million at March 31,
2001). It should be noted that under SoP 00-2 addition to film and television
costs is now disclosed as an operating activity in the Consolidated Statements
of Cash Flows. Cash flows provided by financing activities increased $63.8
million to $84.4 million from $20.6 million (as restated) in the nine months
ended December 31, 2000 as a significant component of the production activity in
the current quarter was financed through the US$200.0 million JP Morgan credit
facility. Cash flows provided by investing
21
activities of $8.1 million in the nine months ended December 31, 2001 consisted
of $14.0 million of equity financing from a third party for shares in
Corporation CineGroupe, partially offset by capital asset additions. The cash
flows used in investing activities in the nine months ended December 31, 2000
were not significant.
Our liquidity and capital resources were provided during the nine
months ended December 31, 2001 principally through cash generated from
operations and the US$200 million "borrowing base" revolving credit facility
with JP Morgan. At December 31, 2001, availability against the borrowing base
totaled US$148.2 million (Cdn$236.2 million) and we had drawn US$140.9 million
(Cdn$224.4 million). In addition, at December 31, 2001, we had cash and
equivalents of $10.8 million. We finalized our updated library valuation as at
September 30, 2001, which increased approximately US$10.0 million (approximately
Cdn$16.0 million) over the prior year's valuation, and we have amended our
facility to modify certain covenants in response to industry-wide changes in the
accounting principles relating to the timing of expensing distribution and
marketing costs. We expect that we will have sufficient borrowing capacity to
allow us to continue to operate our Company over the foreseeable future.
The nature of our business is such that significant initial
expenditures are required to produce and acquire films and television programs,
while revenues from these films and television programs are earned over an
extended period of time after their completion and acquisition. As our
operations grow, our financing requirements are expected to grow. We believe
that cash flow from operations, cash on hand, credit lines available,
single-purpose financing and tax shelter financing available will be adequate to
meet known operational cash requirements for the future, including the funding
of future film and television production, film rights acquisitions, and
theatrical and video release schedules. We monitor our cash flow, interest
coverage, liquidity, capital base and debt-to-total capital ratios with the
long-term goal of maintaining our creditworthiness.
Our new 20,500 square foot sound stage at Lions Gate Studios was
completed in December at a total cost of $2.4 million. The financing of the
sound stage was provided by cash from operations and by Bank of Montreal, the
holder of the other mortgages on our sound stages.
Our current financing strategy is to finance substantially with equity
at the corporate level and to leverage investment in film and television
programs through operating credit facilities and single-purpose production
financing. We usually obtain financing commitments, including, in some cases,
funds from government incentive programs and foreign distribution commitments to
cover, on average, at least 70% of the budgeted costs of a project before
commencing production.
Bank loans consist of a five-year revolving credit facility bearing
interest at prime plus 1% or LIBOR plus 250 basis points, which is structured as
two separate facilities - a US$25 million Canadian dollar facility and a US$175
million U.S. dollar credit facility, and demand loans bearing interest at rates
not exceeding Canadian prime plus 4.0%. Production loans consist of bank demand
loans bearing interest at various rates between Canadian prime and 9.25%.
Long-term debt consists primarily of mortgages on the Studio Facility at
interest rates ranging from 6.63% to 7.51%, convertible promissory notes bearing
interest at a rate of 6% and non-interest bearing sales guarantees with respect
to the German tax shelter financings.
Our 5.25% convertible, non-voting redeemable Series A preferred shares
are entitled to cumulative dividends, as and when declared by the Board of
Directors, payable semi-annually on the last day of March and September of each
year. The Company has the option of paying such dividends either in cash or
additional preferred shares. The Company has determined to pay the dividend due
March 2002 in additional preferred shares and will continue to do so until it
would be prudent to resume paying the dividend in cash. We do not pay and do not
intend to pay dividends on common shares, giving
22
consideration to our business strategy and investment opportunities. We believe
it to be in the best interest of shareholders to invest all available cash in
the expansion of our business.
RISKS AND UNCERTAINTIES
We capitalize costs of production to investment in films and television
programs. These costs are amortized to direct operating expenses in accordance
with SoP 00-2. Under SoP 00-2, costs incurred in connection with an individual
film or television program, including production and financing costs, are
capitalized to investment in film and television programs. These costs are
stated at the lower of unamortized film or television program costs and fair
value. These costs for an individual film or television program are amortized in
the proportion that current period actual revenue realized relates to
management's estimates of the total revenue expected to be received from such
film or television program over a period not to exceed ten years from the date
of delivery. As a result, if revenue estimates change with respect to a film or
television program, we may be required to write down all or a portion of the
unamortized costs of such film or television program. No assurance can be given
that unfavourable changes to revenue estimates will not occur, which may result
in material write-downs affecting our results of operations and financial
condition.
We accrue for video returns and allowances in the financial statements
based on previous returns and allowances history on a title-by-title basis in
each of the video businesses. There may be differences between actual returns
and allowances and our historical experience.
We currently finance a portion of our production budgets from third
parties, from Canadian government agencies and incentive programs as well as
international sources in the case of our co-productions, and from German tax
shelter arrangements. There can be no assurance that third party financing,
government incentive programs and German tax shelter arrangements will not be
reduced, amended or eliminated. Any change in these programs may have an adverse
impact on our financial condition.
Revenue is driven by audience acceptance of a film or television
program, which represents a response not only to artistic merits but also to
critics' reviews, marketing and the competitive market for entertainment,
general economic conditions, and other intangible factors, all of which can
change rapidly. Actual production costs may exceed budgets. Risk of labor
disputes, disability of a star performer, rapid changes in production
technology, shortage of necessary equipment and locations or adverse weather
conditions may cause cost overruns. We generally maintain insurance policies
("completion bonds" and "essential elements insurance" on key talent) mitigating
certain of these risks.
Further erosion of the VHS rental market by DVD and sell-through VHS
products, which are at lower gross margins, may adversely impact our results of
operation. There may be opportunities for increased volume, however, which would
mitigate this risk. As direct-to-consumer digital delivery systems mature and
grow this could be expected to replace VHS and DVD products. The Company is well
positioned in the digital delivery marketplace through CinemaNow. The Company
expects it would be able to maintain the majority of revenues by the elimination
of third-party distribution channels and duplication and replication costs.
Profitability depends on revenue and on the cost to acquire or produce
a film or television program and the amount spent on the prints and advertising
campaign used to promote it. Results of operations for any period are
significantly dependent on the timing and number of films or television programs
produced and released in that period. Our operating results may fluctuate
materially from period to period, and the results for any one period are not
necessarily indicative of results for future periods.
23
Our five-year revolving operating credit facilities are either
alternate base rate loans or Eurodollar loans as we may request. Significant
increases in the base interest rates could have an unfavourable impact on us,
and vice versa.
CURRENCY RISK MANAGEMENT
Additionally, as part of our overall risk management program, we
evaluate and manage our exposure to changes in interest rates and currency
exchange risks on an ongoing basis. Hedges and derivative financial instruments
may be used in the future, within guidelines to be approved by the Board of
Directors for counterparty exposure, limits and hedging practices, in order to
manage our interest rate and currency exposure.
Our principal currency exposure is between Canadian and U.S. dollars,
although this exposure is significantly mitigated through the structuring of the
US$200 million revolving credit facility as a US$25 million Canadian dollar
facility and a US$175 million U.S. dollar credit facility. Each facility is
borrowed and repaid in the respective country of origin, in local currency.
From time to time the Company may experience currency exposure on
distribution and production revenues and expenses from foreign countries. From
time to time the Company may enter into financial derivative contracts to hedge
such exposure. The Company has no intention of entering into derivative
contracts other than to hedge a specific financial risk.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risks relating to our operations result primarily from changes
in interest rates and changes in foreign currency exchange rates. Our exposure
to interest rate risk results from the financial debt instruments that arise
from transactions entered into during the normal course of business.
Debt. We are exposed to cash flow risk due to changes in market
interest rates related to our outstanding debt. For example, our credit
facilities and some of our long-term debt bears interest on borrowings
outstanding at various time intervals and at market rates based on either the
Canadian prime rate or the U.S. prime rate, plus a margin ranging from 1.2% to
4.0%. Our principal risk with respect to our long-term debt is changes in these
market rates.
The table below presents principal cash flows and related weighted
average interest rates for our credit facilities and long-term debt obligations
at December 31, 2001 by expected maturity date.
Expected Maturity Date
------------------------------------------------------------
Year ending March 31, 2002 2003 2004 2005 2006
---- ---- ---- ---- ----
(Amounts in thousands of Canadian dollars)
CREDIT FACILITIES:
Variable (1) $ 38,538 -- -- -- --
Variable (2) $187,288 -- -- -- --
LONG-TERM DEBT:
Fixed (3) $ 36,702 $ 1,260 $ 32,349 $ 243 $ 2,234
Fixed (4) $ 31,600 -- 31,600 -- --
Fixed (5) $ 7,159 $ 1,949 $ 1,396 -- --
Variable (6) $ 77,013 $ 1,125 $ 3 $ 921 --
---------------
(1) Variable interest rate equal to Canadian Prime minus 1.65%.
(2) Variable interest rate equal to U.S. Prime plus 0.03%. US$117.6 million.
(3) Fixed interest rate equal to 6.36%.
(4) Non interest-bearing. US$19.8 million.
(5) Fixed interest rate equal to 11.0%.
(6) Variable interest rate equal to Canadian Prime plus 1.21%.
Foreign Currency. We incur certain operating and production costs in
foreign currencies and are subject to market risks resulting from fluctuations
in foreign currency exchange rates. In certain instances, we enter into foreign
currency exchange contracts in order to reduce exposure to changes in foreign
currency exchange rates that affect the value of our firm commitments and
certain anticipated foreign currency cash flows. We currently intend to continue
to enter into such contracts to hedge against future material foreign currency
exchange rate risks.
25
PART II
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits filed for Lions Gate through the filing of this Form 10-Q.
Exhibit
Number Description of Documents
----------- -----------------------------------------------------------------
3.1* Articles of Incorporation........................................
3.2** Amendment to Articles of Incorporation to Provide Terms of the
Series A Preferred Shares dated as of December 20, 1999..........
3.3*** Amendment to Articles of Incorporation to Provide Terms of the
Series B Preferred Shares dated as of September 26, 2000.........
3.4*** Amendment to Articles of Incorporation to change the size of the
Board of Directors dated as of September 26, 2000................
3.5**** Amendment to Articles of Incorporation to change the size of the
Board of Directors dated as of September 12, 2001................
4.1* Trust Indenture between the Company and CIBC Mellon Trust Company
dated as of April 15, 1998.......................................
4.2** Warrant Indenture between the Company and CIBC Mellon Trust
Company dated as of December 30, 1999............................
10.20 Credit, Security, Guaranty and Pledge Agreement by and among
Lions Gate Entertainment Corp., Lions Gate Entertainment Inc.,
the Guarantors referred to therein, the Lenders referred to
therein, The Chase Manhattan Bank, National Bank of Canada, and
Dresdner Bank AG, New York and Grand Cayman Branches dated as of
September 25, 2000...............................................
10.21 First Amendment dated as of April 4, 2001 to the Credit,
Security, Guaranty and Pledge Agreement by and among Lions Gate
Entertainment Corp., Lions Gate Entertainment Inc., the
Guarantors referred to therein, the Lenders referred to therein,
The Chase Manhattan Bank, National Bank of Canada, and Dresdner
Bank AG, New York and Grand Cayman Branches dated as of September
25, 2000.........................................................
10.22 Second Amendment dated as of May 30, 2001 to the Credit,
Security, Guaranty and Pledge Agreement by and among Lions Gate
Entertainment Corp., Lions Gate Entertainment Inc., the
Guarantors referred to therein, the Lenders referred to therein,
The Chase Manhattan Bank, National Bank of Canada, and Dresdner
Bank AG, New York and Grand Cayman Branches dated as of September
25, 2000.........................................................
10.23 Third Amendment dated as of July 31, 2001 to the Credit,
Security, Guaranty and Pledge Agreement by and among Lions Gate
Entertainment Corp., Lions Gate Entertainment Inc., the
Guarantors referred to therein, the Lenders referred to therein,
The Chase Manhattan Bank, National Bank of Canada, and Dresdner
Bank AG, New York and Grand Cayman Branches dated as of September
25, 2000.........................................................
26
---------------
* Incorporated by reference to the Company's Annual Report on Form 20-F
for the fiscal year ended March 31, 1998 (File No. 000-27730).
** Incorporated by reference to the Company's Annual Report on Form 20-F
for the fiscal year ended March 31, 2000 (File No. 000-27730).
*** Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 2001 (File No. 1-14880).
**** Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 2001 (File No. 1-14880).
(b) Reports on Form 8-K
None
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LIONS GATE ENTERTAINMENT CORP.
DATE: February 14, 2002 By: /s/Marni Wieshofer
------------------------------
Marni Wieshofer
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
28
INDEX TO EXHIBITS
Exhibit
Number Description of Documents
------------ ----------------------------------------------------------------
3.1* Articles of Incorporation.......................................
3.2** Amendment to Articles of Incorporation to Provide Terms of the
Series A Preferred Shares dated as of December 20, 1999.........
3.3*** Amendment to Articles of Incorporation to Provide Terms of the
Series B Preferred Shares dated as of September 26, 2000........
3.4*** Amendment to Articles of Incorporation to change the size of the
Board of Directors dated as of September 26, 2000...............
3.5**** Amendment to Articles of Incorporation to change the size of the
Board of Directors dated as of September 12, 2001...............
4.1* Trust Indenture between the Company and CIBC Mellon Trust
Company dated as of April 15, 1998..............................
4.2** Warrant Indenture between the Company and CIBC Mellon Trust
Company dated as of December 30, 1999...........................
10.20 Credit, Security, Guaranty and Pledge Agreement by and among
Lions Gate Entertainment Corp., Lions Gate Entertainment Inc.,
the Guarantors referred to therein, the Lenders referred to
therein, The Chase Manhattan Bank, National Bank of Canada, and
Dresdner Bank AG, New York and Grand Cayman Branches dated as of
September 25, 2000..............................................
10.21 First Amendment dated as of April 4, 2001 to the Credit,
Security, Guaranty and Pledge Agreement by and among Lions Gate
Entertainment Corp., Lions Gate Entertainment Inc., the
Guarantors referred to therein, the Lenders referred to therein,
The Chase Manhattan Bank, National Bank of Canada, and Dresdner
Bank AG, New York and Grand Cayman Branches dated as of
September 25, 2000..............................................
10.22 Second Amendment dated as of May 30, 2001 to the Credit,
Security, Guaranty and Pledge Agreement by and among Lions Gate
Entertainment Corp., Lions Gate Entertainment Inc., the
Guarantors referred to therein, the Lenders referred to therein,
The Chase Manhattan Bank, National Bank of Canada, and Dresdner
Bank AG, New York and Grand Cayman Branches dated as of
September 25, 2000..............................................
10.23 Third Amendment dated as of July 31, 2001 to the Credit,
Security, Guaranty and Pledge Agreement by and among Lions Gate
Entertainment Corp., Lions Gate Entertainment Inc., the
Guarantors referred to therein, the Lenders referred to therein,
The Chase Manhattan Bank, National Bank of Canada, and Dresdner
Bank AG, New York and Grand Cayman Branches dated as of
September 25, 2000..............................................
---------------
* Incorporated by reference to the Company's Annual Report on Form 20-F
for the fiscal year ended March 31, 1998 (File No. 000-27730).
29
** Incorporated by reference to the Company's Annual Report on Form 20-F
for the fiscal year ended March 31, 2000 (File No. 000-27730).
*** Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 2001 (File No. 1-14880).
**** Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 2001 (File No. 1-14880).
30