e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 |
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For the quarterly period ended December 31, 2005 |
or |
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission File No. 1-14880
Lions Gate Entertainment Corp.
(Exact name of registrant as specified in its charter)
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|
British Columbia, Canada |
|
|
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer
Identification No.) |
2200-1055 West Hastings Street
Vancouver, British Columbia V7J 3S5
and
2700 Colorado Avenue, Suite 200
Santa Monica, California 90404
(Address of principal executive offices)
Registrants telephone number, including area code:
(604) 721-0719
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act.
Large accelerated
filer þ Accelerated
Filer o Non-accelerated
Filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
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|
|
|
|
Outstanding at February 1, 2006 |
|
|
|
(Common Stock, no par value per share) |
|
104,081,068 shares |
TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. In some cases you can identify forward-looking
statements by terms such as may, intend,
will, should, could,
would, expects, believe,
estimate, or the negative of these terms, and
similar expressions intended to identify forward-looking
statements.
These forward-looking statements reflect our current views with
respect to future events and are based on assumptions and are
subject to risks and uncertainties. Also, these forward-looking
statements present our estimates and assumptions only as of the
date of this report. Except for our ongoing obligation to
disclose material information as required by federal securities
laws, we do not intend to update you concerning any future
revisions to any forward-looking statements to reflect events or
circumstances occurring after the date of this report.
Factors that could cause actual results to differ materially
from those expressed or implied by the forward-looking
statements include, but are not limited to, those risk factors
found in our Current Report on
Form 8-K filed
with the Securities and Exchange Commission (SEC) on
June 29, 2005, which is incorporated herein by reference.
2
PART I
|
|
Item 1. |
Financial Statements. |
LIONS GATE ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
March 31, | |
|
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
(Note 2) | |
|
|
(Amounts in thousands, | |
|
|
except share amounts) | |
ASSETS |
Cash and cash equivalents
|
|
$ |
50,548 |
|
|
$ |
112,839 |
|
Restricted cash
|
|
|
796 |
|
|
|
2,913 |
|
Investments auction rate preferreds and municipal
bonds
|
|
|
80,900 |
|
|
|
|
|
Investments equity securities
|
|
|
11,185 |
|
|
|
|
|
Accounts receivable, net of reserve for video returns of $56,988
(March 31, 2005 $58,449) and provision for
doubtful accounts of $10,654 (March 31, 2005
$6,102)
|
|
|
134,522 |
|
|
|
150,019 |
|
Investment in films and television programs
|
|
|
416,963 |
|
|
|
367,376 |
|
Property and equipment
|
|
|
33,909 |
|
|
|
30,842 |
|
Goodwill
|
|
|
186,627 |
|
|
|
161,182 |
|
Other assets
|
|
|
30,730 |
|
|
|
29,458 |
|
|
|
|
|
|
|
|
|
|
$ |
946,180 |
|
|
$ |
854,629 |
|
|
|
|
|
|
|
|
LIABILITIES |
Bank loans
|
|
$ |
|
|
|
$ |
1,162 |
|
Accounts payable and accrued liabilities
|
|
|
185,453 |
|
|
|
134,200 |
|
Film obligations
|
|
|
211,844 |
|
|
|
130,770 |
|
Subordinated notes
|
|
|
385,000 |
|
|
|
390,000 |
|
Mortgages payable
|
|
|
16,769 |
|
|
|
18,640 |
|
Deferred revenue
|
|
|
41,601 |
|
|
|
62,459 |
|
Minority interests
|
|
|
|
|
|
|
259 |
|
|
|
|
|
|
|
|
|
|
|
840,667 |
|
|
|
737,490 |
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
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|
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|
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|
SHAREHOLDERS EQUITY |
Common shares, no par value, 500,000,000 shares authorized,
104,080,322 at December 31, 2005 and 101,843,708 at
March 31, 2005 shares issued and outstanding
|
|
|
326,907 |
|
|
|
305,662 |
|
Series B preferred shares (10 shares issued and
outstanding)
|
|
|
|
|
|
|
|
|
Restricted common share units
|
|
|
4,856 |
|
|
|
|
|
Unearned compensation
|
|
|
(4,128 |
) |
|
|
|
|
Accumulated deficit
|
|
|
(216,009 |
) |
|
|
(183,226 |
) |
Accumulated other comprehensive loss
|
|
|
(6,113 |
) |
|
|
(5,297 |
) |
|
|
|
|
|
|
|
|
|
|
105,513 |
|
|
|
117,139 |
|
|
|
|
|
|
|
|
|
|
$ |
946,180 |
|
|
$ |
854,629 |
|
|
|
|
|
|
|
|
See accompanying notes.
3
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
Three | |
|
Three | |
|
|
|
|
|
|
Months | |
|
Months | |
|
Nine Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Amounts in thousands, except per share amounts) | |
Revenues
|
|
$ |
230,964 |
|
|
$ |
190,398 |
|
|
$ |
637,781 |
|
|
$ |
610,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating
|
|
|
110,681 |
|
|
|
82,461 |
|
|
|
319,960 |
|
|
|
258,610 |
|
|
Distribution and marketing
|
|
|
99,486 |
|
|
|
80,263 |
|
|
|
290,655 |
|
|
|
282,546 |
|
|
General and administration
|
|
|
12,957 |
|
|
|
15,582 |
|
|
|
45,419 |
|
|
|
49,482 |
|
|
Depreciation
|
|
|
631 |
|
|
|
835 |
|
|
|
1,976 |
|
|
|
2,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
223,755 |
|
|
|
179,141 |
|
|
|
658,010 |
|
|
|
592,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
7,209 |
|
|
|
11,257 |
|
|
|
(20,229 |
) |
|
|
17,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expense (Income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
4,929 |
|
|
|
8,275 |
|
|
|
14,718 |
|
|
|
19,388 |
|
|
Interest rate swaps mark-to-market
|
|
|
(218 |
) |
|
|
(419 |
) |
|
|
(119 |
) |
|
|
(2,408 |
) |
|
Interest income
|
|
|
(1,046 |
) |
|
|
(74 |
) |
|
|
(2,962 |
) |
|
|
(111 |
) |
|
Minority interests
|
|
|
|
|
|
|
(19 |
) |
|
|
|
|
|
|
2 |
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
3,665 |
|
|
|
7,763 |
|
|
|
11,637 |
|
|
|
16,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Equity Interests and Income Taxes
|
|
|
3,544 |
|
|
|
3,494 |
|
|
|
(31,866 |
) |
|
|
1,278 |
|
Equity interests
|
|
|
(44 |
) |
|
|
|
|
|
|
(98 |
) |
|
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
3,500 |
|
|
|
3,494 |
|
|
|
(31,964 |
) |
|
|
1,078 |
|
Income tax provision
|
|
|
358 |
|
|
|
141 |
|
|
|
819 |
|
|
|
857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
3,142 |
|
|
$ |
3,353 |
|
|
$ |
(32,783 |
) |
|
$ |
221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Income (Loss) Income Per Common Share
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
(0.32 |
) |
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income (Loss) Per Common Share
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
(0.32 |
) |
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B |
|
Restricted | |
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
Common Shares | |
|
Preferred Shares |
|
Common | |
|
|
|
|
|
Comprehensive | |
|
Other | |
|
|
|
|
| |
|
|
|
Share | |
|
Unearned | |
|
Accumulated | |
|
Income | |
|
Comprehensive | |
|
|
|
|
Number | |
|
Amount | |
|
Number | |
|
Amount |
|
Units | |
|
Compensation | |
|
Deficit | |
|
(Loss) | |
|
Loss | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Amounts in thousands, except share amounts) | |
Balance at March 31, 2004
|
|
|
93,615,896 |
|
|
$ |
280,501 |
|
|
|
10 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(203,507 |
) |
|
|
|
|
|
$ |
(7,385 |
) |
|
$ |
69,609 |
|
Exercise of stock options
|
|
|
4,991,141 |
|
|
|
13,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,871 |
|
Exercise of warrants
|
|
|
3,220,867 |
|
|
|
10,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,842 |
|
Issuance to directors for services
|
|
|
15,804 |
|
|
|
137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137 |
|
Impact of previously modified stock options
|
|
|
|
|
|
|
311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311 |
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,281 |
|
|
$ |
20,281 |
|
|
|
|
|
|
|
20,281 |
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,374 |
|
|
|
2,374 |
|
|
|
2,374 |
|
|
Net unrealized loss on foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(286 |
) |
|
|
(286 |
) |
|
|
(286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2005
|
|
|
101,843,708 |
|
|
$ |
305,662 |
|
|
|
10 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(183,226 |
) |
|
|
|
|
|
$ |
(5,297 |
) |
|
$ |
117,139 |
|
Exercise of stock options
|
|
|
244,280 |
|
|
|
779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
779 |
|
Issuance to directors for services
|
|
|
20,408 |
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203 |
|
Impact of previously modified stock options
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
Issuance of common shares in connection with acquisition of film
assets
|
|
|
399,042 |
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000 |
|
Issuance of common shares in connection with acquisition of
common shares of Image Entertainment
|
|
|
885,258 |
|
|
|
9,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,251 |
|
Issuance of common shares in connection with acquisition of
Redbus
|
|
|
643,460 |
|
|
|
6,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,100 |
|
Issuance of restricted share units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,301 |
|
|
|
(5,301 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted share units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,173 |
|
Vesting of restricted share units
|
|
|
44,166 |
|
|
|
445 |
|
|
|
|
|
|
|
|
|
|
|
(445 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,783 |
) |
|
|
(32,783 |
) |
|
|
|
|
|
|
(32,783 |
) |
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,476 |
|
|
|
1,476 |
|
|
|
1,476 |
|
|
Net unrealized loss on foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(315 |
) |
|
|
(315 |
) |
|
|
(315 |
) |
|
Unrealized loss on investments available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,537 |
) |
|
|
(1,537 |
) |
|
|
(1,537 |
) |
|
Fair value adjustment of common shares to be acquired in
exchange agreement with Image Entertainment
|
|
|
|
|
|
|
440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(440 |
) |
|
|
(440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(33,599 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
104,080,322 |
|
|
$ |
326,907 |
|
|
|
10 |
|
|
$ |
|
|
|
$ |
4,856 |
|
|
$ |
(4,128 |
) |
|
$ |
(216,009 |
) |
|
|
|
|
|
$ |
(6,113 |
) |
|
$ |
105,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
Nine Months Ended | |
|
|
December 31, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
(Amounts in thousands) | |
Operating Activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(32,783 |
) |
|
$ |
221 |
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation of property and equipment
|
|
|
1,976 |
|
|
|
2,224 |
|
|
Amortization of deferred financing costs
|
|
|
2,814 |
|
|
|
5,998 |
|
|
Amortization of films and television programs
|
|
|
191,337 |
|
|
|
169,163 |
|
|
Amortization of intangible assets
|
|
|
1,760 |
|
|
|
1,644 |
|
|
Non-cash stock-based compensation
|
|
|
1,403 |
|
|
|
364 |
|
|
Interest rate swaps mark-to-market
|
|
|
(119 |
) |
|
|
(2,408 |
) |
|
Gain on disposition of assets
|
|
|
|
|
|
|
(666 |
) |
|
Minority interests
|
|
|
|
|
|
|
2 |
|
|
Equity interests
|
|
|
98 |
|
|
|
200 |
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted cash
|
|
|
2,117 |
|
|
|
(20,000 |
) |
|
Accounts receivable, net
|
|
|
12,878 |
|
|
|
17,137 |
|
|
Increase in investment in films and television programs
|
|
|
(215,192 |
) |
|
|
(125,387 |
) |
|
Other assets
|
|
|
(3,186 |
) |
|
|
(1,263 |
) |
|
Accounts payable and accrued liabilities
|
|
|
43,254 |
|
|
|
(16,157 |
) |
|
Film obligations
|
|
|
73,043 |
|
|
|
51,555 |
|
|
Deferred revenue
|
|
|
(20,467 |
) |
|
|
507 |
|
|
|
|
|
|
|
|
Net Cash Flows Provided By Operating Activities
|
|
|
58,933 |
|
|
|
83,134 |
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of investments auction rate preferreds and
municipal bonds
|
|
|
(163,400 |
) |
|
|
|
|
Purchases of investments equity securities
|
|
|
(3,470 |
) |
|
|
|
|
Sales of investments auction rate preferreds
|
|
|
82,500 |
|
|
|
|
|
Cash received from sale of investment
|
|
|
2,945 |
|
|
|
|
|
Cash received from disposition of assets, net
|
|
|
|
|
|
|
1,172 |
|
Acquisition of Redbus, net of cash acquired
|
|
|
(27,122 |
) |
|
|
|
|
Purchases of property and equipment
|
|
|
(4,059 |
) |
|
|
(1,952 |
) |
|
|
|
|
|
|
|
Net Cash Flows Used In Investing Activities
|
|
|
(112,606 |
) |
|
|
(780 |
) |
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Issuance of common shares
|
|
|
779 |
|
|
|
21,991 |
|
Financing fees
|
|
|
(240 |
) |
|
|
(1,077 |
) |
Increase in subordinated notes, net of issue costs
|
|
|
|
|
|
|
145,390 |
|
Repayment of subordinated notes
|
|
|
(5,000 |
) |
|
|
|
|
Decrease in bank loans
|
|
|
|
|
|
|
(251,212 |
) |
Repayment of mortgages payable
|
|
|
(2,523 |
) |
|
|
(1,585 |
) |
|
|
|
|
|
|
|
Net Cash Flows Used In Financing Activities
|
|
|
(6,984 |
) |
|
|
(86,493 |
) |
|
|
|
|
|
|
|
Net Change In Cash And Cash Equivalents
|
|
|
(60,657 |
) |
|
|
(4,139 |
) |
Foreign Exchange Effects On Cash
|
|
|
(1,634 |
) |
|
|
2,189 |
|
Cash and Cash Equivalents Beginning Of Period
|
|
|
112,839 |
|
|
|
7,089 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents End Of Period
|
|
$ |
50,548 |
|
|
$ |
5,139 |
|
|
|
|
|
|
|
|
See accompanying notes.
6
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Lions Gate Entertainment Corp. (the Company or
Lions Gate or we) is an 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 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) and on October 17, 2005, the Company
acquired the Redbus companies as described in note 8.
|
|
2. |
Basis of Presentation and Use of Estimates |
The accompanying unaudited condensed consolidated financial
statements include the accounts of Lions Gate and all of its
majority-owned and controlled subsidiaries and consolidated
variable interest entities, with a provision for minority
interests.
The unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with accounting
principles generally accepted in the United States
(U.S. GAAP) which conforms, in all material
respects, with the accounting principles generally accepted in
Canada (Canadian GAAP), except as described in
note 15.
The unaudited condensed consolidated financial statements have
been prepared in accordance with U.S. GAAP 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 U.S. or Canadian 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 unaudited condensed consolidated financial statements.
Operating results for the three and nine months ended
December 31, 2005 are not necessarily indicative of the
results that may be expected for the year ended March 31,
2006. The balance sheet at March 31, 2005 has been derived
from the audited financial statements at that date but does not
include all the information and footnotes required by generally
accepted accounting principles for complete financial
statements. The accompanying unaudited condensed consolidated
financial statements should be read together with the
consolidated financial statements and related notes included in
our Annual Report on
Form 10-K for the
year ended March 31, 2005.
Certain amounts presented for fiscal 2005 have been reclassified
to conform to the fiscal 2006 presentation.
The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. The
most significant estimates made by management in the preparation
of the financial statements relate to ultimate revenue and costs
for investment in films and television programs; estimates of
sales returns, provision for doubtful accounts, fair value of
assets and liabilities for allocation of the purchase price of
companies acquired, income taxes and accruals for contingent
liabilities; and impairment assessments for investment in films
and television programs, property and equipment, goodwill and
intangible assets. Actual results could differ from such
estimates.
Investments classified as available-for-sale are reported at
fair value based on quoted market prices, with unrealized gains
and losses excluded from earnings and reported as other
comprehensive income (see note 10). The cost of investments
sold is determined in accordance with the specific
identification method and
7
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
realized gains and losses are included in interest income. As of
December 31, 2005, the cost, unrealized losses and carrying
value of the Companys available-for-sale investments were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized | |
|
|
|
|
|
|
Holding | |
|
Carrying | |
|
|
Cost | |
|
Losses | |
|
Value | |
|
|
| |
|
| |
|
| |
|
|
(Amounts in thousands) | |
Auction Rate Preferreds
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate preferred stock
|
|
$ |
45,000 |
|
|
$ |
|
|
|
$ |
45,000 |
|
Auction rate notes
|
|
|
20,900 |
|
|
|
|
|
|
|
20,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,900 |
|
|
|
|
|
|
|
65,900 |
|
|
|
|
|
|
|
|
|
|
|
Municipal Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal obligations
|
|
|
15,000 |
|
|
|
|
|
|
|
15,000 |
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
12,722 |
|
|
|
(1,537 |
) |
|
|
11,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
93,622 |
|
|
$ |
(1,537 |
) |
|
$ |
92,085 |
|
|
|
|
|
|
|
|
|
|
|
During the six months ended December 31, 2005, the Company
began investing in auction rate preferred stock and auction rate
notes (collectively, the auction rate preferreds).
Auction rate preferred stock is preferred stock with a dividend
rate determined periodically, typically less than every
90 days, based on an auction mechanism. Auction rate notes
are debt instruments. The interest rate for the auction rate
notes will adjust to current market rates at each interest reset
date, typically every seven, 28 or 35 days. The interest
rates are impacted by various factors, including credit risk,
tax risk, general market interest rate risk and other factors.
Auction rate preferreds do not meet the definition of a cash
equivalent since they do not have scheduled maturities of less
than 90 days from investment. All of the Companys
$65.9 million investment in auction rate preferreds as of
December 31, 2005 are invested in securities rated as
AAA. Proceeds from sales of auction rate preferreds
during the nine months ended December 31, 2005 were
$82.5 million.
All of the Companys $15.0 million investment in
municipal obligations as of December 31, 2005 are invested
in securities rated at AAA. As of December 31,
2005, the Companys investment in municipal obligations
were comprised of taxable revenue bonds with a maturity date of
May 15, 2034.
Equity securities are comprised of the Companys investment
in the common shares of Image Entertainment, Inc.
(Image), a distributor of DVDs and entertainment
programming. During the three months ended September 30,
2005, the Company purchased 1,150,000 common shares of Image for
$3.5 million in cash, representing an average cost per
share of $3.02. Also during the three months ended
September 30, 2005 the Company completed a negotiated
exchange with certain shareholders of Image in which the Company
exchanged 885,258 of its common shares (at $10.45 per
share) in return for 2,312,567 common shares of Image (at
$4.00 per share). The cost on an exchanged basis of the
additional 2,312,567 common shares of Image is
$9.2 million. As at December 31, 2005, the Company
held 3,462,567 common shares of Image acquired at an average
cost per share of $3.67. The closing price of Images
common shares on December 31, 2005 was $3.23 per
common share. As a result, the Company had an unrealized loss of
$1.5 million on its investment in Image common shares as of
December 31, 2005. The Company has reported the
$1.5 million unrealized loss as other comprehensive loss in
the unaudited condensed consolidated statement of
shareholders equity as of December 31, 2005.
Additionally, during the three months ended September 30,
2005, the Company entered into exchange agreements with certain
holders of Image common shares in which the Company agreed to
exchange 218,746 of its common shares (at $10.45 per
share) in return for 571,429 common shares of Image (at
$4.00 per share) held by those holders. The exchange
agreements are subject to certain conditions precedent to the
Company and the holders of the Image common shares to be
exchanged. At December 31, 2005, the Company has recorded
an unrealized loss of $0.4 million
8
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
on the 571,429 shares to be exchanged based on the
difference between the negotiated price per common share of
$4.00 and the closing price of Images common shares on
December 31, 2005 of $3.23 per common share. The
Company has reported the $0.4 million unrealized loss as a
charge to other comprehensive loss and as an increase in
shareholders equity in the unaudited condensed
consolidated statement of shareholders equity as of
December 31, 2005. The exchange agreements will terminate
if the closing of the agreement does not occur on or prior to
March 31, 2006.
|
|
|
Recent Accounting Pronouncements |
Statement of Financial Accounting Standards
No. 123R. In December 2004, the FASB issued
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123(R)). SFAS 123(R) revises
SFAS No. 123 and eliminates the alternative to use the
intrinsic method of accounting under APB No. 25.
SFAS 123(R) requires all public companies accounting for
share-based payment transactions in which an enterprise receives
employee services in exchange for (a) equity instruments of
the enterprise or (b) liabilities that are based on the
fair value of the enterprises equity instruments or that
may be settled by the issuance of such equity instruments, to
account for these types of transactions using a fair-value-based
method. The Company currently accounts for share-based payments
to employees using the intrinsic value method as set forth in
APB No. 25 Accounting for Stock Issued to
Employees. As such, the Company generally recognizes no
compensation cost for employee stock options.
SFAS No. 123(R) eliminates the alternative to use APB
No. 25s intrinsic value method of accounting. The
impact of adoption of SFAS No. 123(R) cannot be
predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had we
adopted SFAS No. 123(R) in prior periods, the impact
would have approximated the impact of SFAS No. 123 as
described in the disclosure of pro forma net income (loss) and
basic and diluted income (loss) per share in note 12.
SFAS No. 123(R) permits companies to adopt its
requirements using either a modified prospective method or a
modified retrospective method. The Company has not yet
determined which method it will utilize. The adoption of
SFAS No. 123(R)s fair value method will have an
impact on our results of operations, although it will have no
material impact on our overall financial position. The
provisions of SFAS No. 123(R) are effective for
financial statements with the first interim or annual reporting
period beginning after June 15, 2005. However, the SEC
announced on April 14, 2005 that it would provide for a
phased-in implementation process for SFAS No. 123(R).
As a result, the Company will not be required to apply
SFAS No. 123(R) until the period beginning
April 1, 2006.
9
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
3. |
Investment in Films and Television Programs |
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
March 31, | |
|
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
|
(Amounts in thousands) | |
Theatrical and Non-Theatrical Films
|
|
|
|
|
|
|
|
|
Released, net of accumulated amortization
|
|
$ |
159,927 |
|
|
$ |
113,536 |
|
Acquired libraries, net of accumulated amortization
|
|
|
108,759 |
|
|
|
109,805 |
|
Completed and not released
|
|
|
28,110 |
|
|
|
12,083 |
|
In progress
|
|
|
35,785 |
|
|
|
42,581 |
|
In development
|
|
|
3,381 |
|
|
|
2,302 |
|
Product inventory
|
|
|
24,227 |
|
|
|
26,029 |
|
|
|
|
|
|
|
|
|
|
|
360,189 |
|
|
|
306,336 |
|
|
|
|
|
|
|
|
Made-for-Television Programs
|
|
|
|
|
|
|
|
|
Released, net of accumulated amortization
|
|
|
33,882 |
|
|
|
21,098 |
|
In progress
|
|
|
22,577 |
|
|
|
39,221 |
|
In development
|
|
|
315 |
|
|
|
721 |
|
|
|
|
|
|
|
|
|
|
|
56,774 |
|
|
|
61,040 |
|
|
|
|
|
|
|
|
|
|
$ |
416,963 |
|
|
$ |
367,376 |
|
|
|
|
|
|
|
|
Acquired libraries of $108.8 million at December 31,
2005 (March 31, 2005 $109.8 million)
include the Trimark library acquired October 2000, the Artisan
library acquired December 2003 (refer to note 8), the
Modern Entertainment, Ltd. (Modern) library acquired
in August 2005 and the Redbus library acquired in October 2005
(refer to note 8). On August 17, 2005, the Company
acquired certain of the film assets and accounts receivable of
Modern, a licensor of film rights to DVD distributors,
broadcasters and cable networks. Under the terms of the Modern
purchase agreement, total consideration issued was
$7.5 million, comprised of $3.5 million in cash and
399,042 shares of the Companys common shares valued
at $4.0 million. In addition, the Company recorded
$0.2 million in direct transaction costs comprised
primarily of legal costs incurred in connection with the
purchased assets resulting in a total purchase price of
$7.7 million for the Modern library. The allocation of the
Modern purchase price to the assets acquired was
$5.6 million to investment in films and television programs
and $2.1 million to accounts receivable. The Trimark
library is amortized over its expected revenue stream for a
period of 20 years from the acquisition date. The remaining
amortization period on the Trimark library at December 31,
2005 is 14.75 years on unamortized costs of
$20.2 million. The Artisan library includes titles released
at least three years prior to the date of acquisition and is
amortized over its expected revenue stream for a period of up to
20 years from the date of acquisition. The remaining
amortization period on the Artisan library at December 31,
2005 is 18.0 years on unamortized costs of
$80.8 million. The Modern library is amortized over its
expected revenue stream for a period of up to 20 years from
the acquisition date. The remaining amortization period on the
Modern library at December 31, 2005 is 19.5 years on
unamortized costs of $5.5 million. The Redbus library
includes titles released at least three years prior to the date
of acquisition and is amortized over its expected revenue stream
for a period of up to 20 years from the date of
acquisition. The remaining amortization period on the Redbus
library at December 31, 2005 is 19.75 years on
unamortized costs of $2.3 million.
The Company expects approximately 47% of completed films and
television programs, net of accumulated amortization, will be
amortized during the one-year period ending December 31,
2006. Additionally, the Company expects approximately 81% of
completed and released films and television programs, net of
10
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
accumulated amortization and excluding acquired libraries, will
be amortized during the three-year period ending
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
March 31, | |
|
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
|
(Amounts in thousands) | |
Deferred financing costs, net
|
|
$ |
16,596 |
|
|
$ |
18,882 |
|
Prepaid expenses and other
|
|
|
10,475 |
|
|
|
8,148 |
|
Other investments
|
|
|
1,937 |
|
|
|
250 |
|
Intangible assets, net
|
|
|
1,722 |
|
|
|
2,178 |
|
|
|
|
|
|
|
|
|
|
$ |
30,730 |
|
|
$ |
29,458 |
|
|
|
|
|
|
|
|
Deferred Financing Costs. Deferred financing costs
primarily include costs incurred in connection with the credit
facility (see note 5) and the issuance of the
4.875% Notes, the 2.9375% Notes and the
3.625% Notes (see note 7) that are deferred and
amortized to interest expense.
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. In June 2005, the Company acquired all of the
publishing assets of a music publishing company, for a total
purchase price of $1.2 million in cash. The publishing
rights are amortized over a three-year period from the date of
acquisition. Amortization expense of $0.5 million and
$1.7 million was recorded for the three and nine months
ended December 31, 2005 (2004 $0.5 million
and $1.6 million). Based on the current amount of
intangibles subject to amortization, the estimated amortization
expense for each of the succeeding years is $0.9 million,
$0.6 million and $0.2 million for the years ending
December 31, 2006, 2007 and 2008, respectively.
On April 8, 2005, Lions Gate entered into library and
output agreements with Maple Pictures Corp. (Maple
Pictures), a Canadian corporation, for the distribution of
Lions Gates motion picture, television and home video
product in Canada. As part of this transaction, Maple Pictures
purchased a majority of the Companys interest in Christal
Distribution, a number of production entities and other Lions
Gate distribution assets in Canada. Maple Pictures was formed by
two former Lions Gate executives and a third-party equity
investor. Lions Gate also acquired a minority interest in Maple
Pictures.
As a result of these transactions with Maple Pictures, Lions
Gate recorded an investment in Maple Pictures of
$2.0 million as of June 30, 2005 in other assets in
the unaudited condensed consolidated balance sheet. The Company
is accounting for the investment in Maple Pictures using the
equity method. For the three and nine months ended
December 31, 2005, a loss of $0.1 million is recorded
in equity interests in the unaudited condensed consolidated
statements of operations and the investment in Maple Pictures is
$1.9 million as of December 31, 2005.
The Company entered into a $350 million credit facility in
December 2003 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. By December 31, 2004, the Company had repaid the
term loan in full, thereby reducing the credit facility to
$215 million at March 31, 2005. Effective
11
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
March 31, 2005, the credit facility was amended to
eliminate the $15 million Canadian dollar-denominated
revolving credit facility and increase the
U.S. dollar-denominated revolving credit facility by the
same amount. At December 31, 2005, the Company had no
borrowings (March 31, 2005 nil) under the
credit facility. The credit facility expires December 31,
2008 and bears interest at 2.75% over the Adjusted LIBOR or
1.75% over the U.S. prime rate. The availability of funds
under the credit facility is limited by the borrowing base,
which is calculated on a monthly basis. Amounts available under
the credit facility are also limited by outstanding letters of
credit which amount to $7.2 million at December 31,
2005. The borrowing base assets at December 31, 2005
totaled $411.3 million (March 31, 2005
$405.1 million) and therefore $207.8 million is
available under the credit facility at December 31, 2005.
The Company is required to pay a monthly commitment fee of
0.50% per annum on the total credit facility of
$215 million less the amount drawn. Right, title and
interest in and to all personal property of the Company and
Lions Gate Entertainment Inc., the Companys wholly-owned
subsidiary, is being pledged as security for the credit
facility. The credit facility is senior to the Companys
film obligations, subordinated notes and mortgages payable. 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 ended September 2005. The
swap was in effect as long as three month LIBOR was less than
5.0%. Fair market value of the interest rate swap at the
maturity date of September 30, 2005 was nil (March 31,
2005 negative $0.1 million). Changes in the
fair value representing fair valuation losses on the interest
rate swap during the three and nine months ended
December 31, 2005 amount to nil and $0.1 million,
respectively (2004 gains of $0.5 million and
$2.2 million, respectively) and are included in the
unaudited condensed consolidated statements of operations. On
October 17, 2005, the Company amended the credit facility
in connection with its acquisition of Redbus Film Distribution
Limited and Redbus Pictures Limited (collectively,
Redbus) to provide for $10 million of the
credit facility available for borrowing by the new Redbus
subsidiaries in either U.S. dollars or British pounds
sterling.
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
March 31, | |
|
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
|
(Amounts in thousands) | |
Minimum guarantees
|
|
$ |
21,528 |
|
|
$ |
5,210 |
|
Minimum guarantees initially incurred for a term of more than
one year
|
|
|
16,083 |
|
|
|
18,081 |
|
Participation and residual costs
|
|
|
134,853 |
|
|
|
95,650 |
|
Theatrical marketing
|
|
|
1,757 |
|
|
|
1,665 |
|
Film productions
|
|
|
37,623 |
|
|
|
10,164 |
|
|
|
|
|
|
|
|
|
|
$ |
211,844 |
|
|
$ |
130,770 |
|
|
|
|
|
|
|
|
The Company expects approximately 62% of accrued
participants shares will be paid during the one-year
period ending December 31, 2006.
3.625% Notes. In February 2005, Lions Gate
Entertainment Inc. sold $150.0 million of
3.625% Convertible Senior Subordinated Notes. In connection
with this sale, Lions Gate Entertainment Inc. granted the
initial purchasers of the 3.625% Notes an option to
purchase up to an additional $25.0 million of the
3.625% Notes for 13 days. The fair value of this
option was not significant. The initial purchasers exercised
this option in February 2005 and purchased an additional
$25 million of the 3.625% Notes. The Company received
$170.2 million of net proceeds after paying placement
agents fees from the sale of $175.0 million of
12
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
the 3.625% Notes. The Company also paid $0.6 million
of offering expenses incurred in connection with the
3.625% Notes. Interest on the 3.625% Notes is payable
semi-annually on March 15 and September 15 commencing on
September 15, 2005. After March 15, 2012, interest
will be 3.125% per annum on the principal amount of the
3.625% Notes, payable semi-annually on March 15 and
September 15 of each year. The 3.625% Notes mature on
March 15, 2025. Lions Gate Entertainment Inc. may redeem
all or a portion of the 3.625% Notes at its option on or
after March 15, 2012 at 100% of their principal amount,
together with accrued and unpaid interest through the date of
redemption.
The holders may require Lions Gate Entertainment Inc. to
repurchase the 3.625% Notes on March 15, 2012, 2015
and 2020 or upon a change in control at a price equal to 100% of
the principal amount, together with accrued and unpaid interest
through the date of repurchase. Under certain circumstances, if
the holders require Lions Gate Entertainment Inc. to repurchase
all or a portion of their notes upon a change in control, they
will be entitled to receive a make whole premium. The amount of
the make whole premium, if any, will be based on the price of
the common shares of the Company on the effective date of the
change in control. No make whole premium will be paid if the
price of the common shares of the Company is less than
$10.35 per share or if the price of the common shares of
the Company exceeds $75.00 per share.
The 3.625% Notes are convertible, at the option of the
holder, at any time before the close of business on or prior to
the trading day immediately before the maturity date, if the
notes have not been previously redeemed or repurchased, at a
conversion rate of 70.0133 shares of the Company per $1,000
principal amount of the 3.625% Notes, subject to adjustment
in certain circumstances, which is equal to a conversion price
of approximately $14.28 per share. Upon conversion of the
3.625% Notes, the Company has the option to deliver, in
lieu of common shares, cash or a combination of cash and common
shares of the Company. The holder may convert the
3.625% Notes into common shares of the Company prior to
maturity if the notes have been called for redemption, a change
in control occurs or certain corporate transactions occur. In
addition, under certain circumstances, if the holder converts
their notes upon a change in control they will be entitled to
receive a make whole premium.
2.9375% Notes. In October 2004, Lions Gate
Entertainment Inc. sold $150.0 million of
2.9375% Convertible Senior Subordinated Notes. The Company
received $146.0 million of net proceeds after paying
placement agents fees from the sale of $150.0 million
of the 2.9375% Notes. The Company also paid
$0.7 million of offering expenses incurred in connection
with the 2.9375% Notes. Interest on the 2.9375% Notes
is payable semi-annually on April 15 and October 15 commencing
on April 15, 2005 and the 2.9375% Notes mature on
October 15, 2024. From October 15, 2009 to
October 14, 2010, Lions Gate Entertainment Inc. may redeem
the 2.9375% Notes at 100.839%; from October 15, 2010
to October 14, 2011, Lions Gate Entertainment Inc. may
redeem the 2.9375% Notes at 100.420%; and thereafter at
100%.
The holders may require Lions Gate Entertainment Inc. to
repurchase the 2.9375% Notes on October 15, 2011, 2014
and 2019 or upon a change in control at a price equal to 100% of
the principal amount, together with accrued and unpaid interest
through the date of repurchase. Under certain circumstances, if
the holders require Lions Gate Entertainment Inc. to repurchase
all or a portion of their notes upon a change in control, they
will be entitled to receive a make whole premium. The amount of
the make whole premium, if any, will be based on the price of
the common shares of the Company on the effective date of the
change in control. No make whole premium will be paid if the
price of the common shares of the Company is less than
$8.79 per share or if the price of the common shares of the
Company exceeds $50.00 per share.
The holder may convert the 2.9375% Notes into common shares
of the Company prior to maturity only if the price of the common
shares of the Company issuable upon conversion of a note reaches
a specified threshold over a specified period, the trading price
of the notes falls below certain thresholds, the notes have been
called for redemption, a change in control occurs or certain
corporate transactions occur. In addition, under certain
circumstances, if the holder converts their notes upon a change
in control they will be entitled to
13
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
receive a make whole premium. Before the close of business on or
prior to the trading day immediately before the maturity date if
the notes have not been previously redeemed or repurchased, the
holder may convert the notes into common shares of the Company
at a conversion rate of 86.9565 shares per $1,000 principal
amount of the 2.9375% Notes, subject to adjustment in
certain circumstances, which is equal to a conversion price of
approximately $11.50 per share.
4.875% Notes. In December 2003, Lions Gate
Entertainment Inc. sold $60.0 million of
4.875% Convertible Senior Subordinated Notes. The Company
received $57.0 million of net proceeds after paying
placement agents fees from the sale of $60.0 million
of the 4.875% Notes. The Company also paid
$0.7 million of offering expenses incurred in connection
with the 4.875% Notes. Interest on the 4.875% Notes is
due semi-annually on June 15 and December 15 commencing on
June 15, 2004 and the 4.875% Notes mature on
December 15, 2010. Lions Gate Entertainment Inc. may redeem
all or a portion of the 4.875% 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 4.875% Notes will
only be redeemable if the closing price of the Companys
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 4.875% Notes are convertible, at the option of the
holder, at any time before the close of business on or prior to
the trading day immediately before the maturity date if the
notes have not been previously redeemed or repurchased at a
conversion rate of 185.0944 shares of the Company per
$1,000 principal amount of the 4.875% Notes, subject to
adjustment in certain circumstances, which is equal to a
conversion price of approximately $5.40 per share. Upon
conversion of the 4.875% Notes, the Company has the option
to deliver, in lieu of common shares, cash or a combination of
cash and common shares of the Company. The holder may convert
the 4.875% Notes into common shares of the Company prior to
maturity if the notes have been called for redemption, a change
in control occurs or certain corporate transactions occur.
Promissory Note. On December 15, 2003, the Company
assumed, as part of the purchase of Artisan, a $5.0 million
subordinated promissory note to Vialta, Inc (Promissory
Note) issued by Artisan which bore interest at
7.5% per annum compounded quarterly. The Promissory Note
matured and was paid during April 2005.
On October 17, 2005, the Company acquired all outstanding
shares of Redbus, an independent United Kingdom film
distributor. Consideration for the Redbus acquisition was
$36.1 million comprised of a combination of
$28.0 million in cash, $7.0 million in Lions Gate
common shares and direct transaction costs of $1.1 million.
In addition, the Company assumed other obligations (including
accounts payable and accrued liabilities and film obligations)
of $24.1 million. At the closing of the transaction the
Company issued 643,460 common shares to Redbus Group Limited
(RGL) valued at approximately $6.1 million, or
$9.48 per share, and will issue up to an additional 94,937
common shares to RGL upon satisfaction of the terms of the
escrow agreement. At December 31, 2005, the additional
94,937 common shares are valued at approximately
$0.9 million. Direct transaction costs are considered
liabilities assumed in the acquisition, and as such, are
included in the purchase price. Direct transaction costs consist
primarily of legal and accounting fees. The Company now has the
ability to self-distribute its motion pictures in the UK. The
Company also acquired the Redbus library of approximately 130
films. Effective October 17, 2005, the credit facility was
amended in connection with the acquisition of Redbus, which made
a portion of the credit facility available for borrowing by
Redbus in either U.S. dollars or British pounds sterling.
The Redbus acquisition was accounted for as a purchase, with the
results of operations of Redbus consolidated from
October 17, 2005. Goodwill of $25.4 million represents
the excess of the purchase price over
14
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
the fair value of the net identifiable tangible and intangible
assets acquired. The allocation of the purchase price to the
tangible and intangible assets acquired and liabilities assumed
based on their fair values is preliminary and subject to
completion of final appraisals as follows:
|
|
|
|
|
|
|
|
(Amounts in | |
|
|
thousands) | |
Cash and cash equivalents
|
|
$ |
1,937 |
|
Accounts receivable, net
|
|
|
2,890 |
|
Investment in films and television programs
|
|
|
28,987 |
|
Other tangible assets acquired
|
|
|
863 |
|
Goodwill
|
|
|
25,446 |
|
Other liabilities assumed
|
|
|
(24,064 |
) |
|
|
|
|
|
Total
|
|
$ |
36,059 |
|
|
|
|
|
On December 15, 2003, the Company completed its acquisition
of Film Holdings Co., the parent company of Artisan, an
independent distributor and producer of film and entertainment
content, for a total purchase price of $168.9 million
consisting of $160.0 million in cash and direct transaction
costs of $8.9 million. In addition, the Company assumed
debt of $59.9 million and other obligations (including
accounts payable and accrued liabilities, film obligations and
other advances) of $144.0 million.
Severance and relocation costs incurred by Lions Gate,
associated with the acquisition of Artisan, are not included in
the purchase price and, as such, were recorded in the
consolidated statement of operations for the year ended
March 31, 2004. Severance and relocation costs of
$5.6 million included 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
December 31, 2005 and March 31, 2005, the remaining
liabilities under the severance plan are nil. At
December 31, 2005, the remaining liabilities for the
property lease abandonment are $1.4 million (March 31,
2005 $1.7 million) and are included in accounts
payable and accrued liabilities in the condensed consolidated
balance sheets.
|
|
9. |
Direct Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Three Months | |
|
Nine Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Amounts in thousands) | |
Amortization of films and television programs
|
|
$ |
56,928 |
|
|
$ |
44,793 |
|
|
$ |
191,337 |
|
|
$ |
169,163 |
|
Participation and residual expense
|
|
|
48,003 |
|
|
|
39,798 |
|
|
|
118,221 |
|
|
|
89,500 |
|
Amortization of acquired intangible assets
|
|
|
520 |
|
|
|
548 |
|
|
|
1,760 |
|
|
|
1,644 |
|
Other expenses
|
|
|
5,230 |
|
|
|
(2,678 |
) |
|
|
8,642 |
|
|
|
(1,697 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
110,681 |
|
|
$ |
82,461 |
|
|
$ |
319,960 |
|
|
$ |
258,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses include direct operating expenses related to the
studio facility and provision for doubtful accounts. The
negative other expenses for the three and nine months ended
December 31, 2004 is due to a reversal of the provision for
doubtful accounts of $4.6 million. The reversal is
primarily due to collection of accounts receivable during the
three and nine months ended December 31, 2004 that were
previously provided for.
15
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
10. |
Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Three Months | |
|
Nine Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Amounts in thousands) | |
Net income (loss)
|
|
$ |
3,142 |
|
|
$ |
3,353 |
|
|
$ |
(32,783 |
) |
|
$ |
221 |
|
Add (deduct): Foreign currency translation adjustments
|
|
|
228 |
|
|
|
1,979 |
|
|
|
1,476 |
|
|
|
3,497 |
|
Add (deduct): Net unrealized gain (loss) on foreign exchange
contracts
|
|
|
(286 |
) |
|
|
442 |
|
|
|
(315 |
) |
|
|
76 |
|
Add (deduct): Unrealized loss on investments
available for sale
|
|
|
(3,324 |
) |
|
|
|
|
|
|
(1,537 |
) |
|
|
|
|
Add (deduct): Fair value adjustment of common shares to be
acquired in exchange agreement with Image Entertainment
|
|
|
(440 |
) |
|
|
|
|
|
|
(440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$ |
(680 |
) |
|
$ |
5,774 |
|
|
$ |
(33,599 |
) |
|
$ |
3,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. |
Income (Loss) Per Share |
The Company calculates earnings per share in accordance with
SFAS No. 128, Earnings Per Share. Basic
income (loss) per share is calculated based on the weighted
average common shares outstanding for the period. Diluted
earnings per share includes the impact of the convertible senior
subordinated notes, share purchase warrants, stock options and
restricted share units, if dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Three Months | |
|
Nine Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Amounts in thousands, except per share amounts) | |
Basic income (loss) per common share is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
3,142 |
|
|
$ |
3,353 |
|
|
$ |
(32,783 |
) |
|
$ |
221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
103,936 |
|
|
|
98,119 |
|
|
|
102,724 |
|
|
|
96,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
(0.32 |
) |
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share is calculated using the
weighted average number of common shares outstanding during the
three and nine months ended December 31, 2005 of
103,936,000 shares and 102,724,000 shares,
respectively (2004 98,119,000 and
96,437,000 shares, respectively). The exercise of common
share equivalents including stock options, share purchase
warrants, the conversion features of the 4.875% Notes, the
2.9375% Notes, the 3.625% Notes and restricted share
units could potentially dilute income (loss) per share in the
future, but was not reflected in diluted loss per share during
the nine months ended December 31, 2005 because to do so
would be anti-dilutive. Basic and diluted loss per common share
were the
16
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
same for the nine months ended December 31, 2005. Diluted
income per common share for the three months ended
December 31, 2005 and for the three and nine months ended
December 31, 2004 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(Amounts in thousands, except per share amounts) | |
Diluted income per common share is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
3,142 |
|
|
$ |
3,353 |
|
|
$ |
221 |
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
103,936 |
|
|
|
98,119 |
|
|
|
96,437 |
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share purchase options
|
|
|
2,876 |
|
|
|
5,287 |
|
|
|
5,216 |
|
|
Share purchase warrants
|
|
|
|
|
|
|
1,548 |
|
|
|
1,206 |
|
|
Restricted share units
|
|
|
413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares outstanding
|
|
|
107,225 |
|
|
|
104,954 |
|
|
|
102,859 |
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
The dilutive effect, if any, of the share purchase options, the
share purchase warrants and the restricted share units are
included in diluted income per share under the treasury method.
The shares issuable on the potential conversion of the
4.875% Notes, the 2.9375% Notes and the
3.625% Notes are not included in diluted income per share
as they are anti-dilutive.
During the three months ended December 31, 2004, the
Company amended the outstanding warrants to allow the holders,
at their option, to exercise by cashless exercise. Each warrant
may be exchanged for common shares in the Company determined by
taking the difference in the market price of the Companys
shares (defined as the average closing trading price per common
share for the twenty consecutive trading days ending on the
third day before the exercise date) less the exercise price of
$5.00 and dividing this number by the market price. During
December 2004, 1,993,250 warrants were exercised by cashless
exercise resulting in the issuance of 1,052,517 common shares.
As of December 31, 2004, 1,088,000 warrants remained
outstanding. The warrants expired January 1, 2005.
|
|
12. |
Accounting for Stock-Based Compensation |
Fair Value of Stock Options. 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 the following
disclosures are provided about the costs of stock-based
compensation awards using the fair value method for companies
that elect to use the intrinsic value method. See Recent
Accounting Pronouncements for a discussion of SFAS 123(R).
The weighted average estimated fair value of each stock option
granted in the nine months ended December 31, 2005 was
$3.61 (2004 $3.31). The total stock-based
compensation expense for disclosure purposes for the three and
nine months ended December 30, 2005, based on the fair
value of the stock options granted, was $0.4 million and
$1.6 million, respectively (2004
$0.5 million and $1.6 million, respectively)
17
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
and the fair value of stock option modifications for the three
and nine months ended December 31, 2005 was nil and less
than and $0.1 million, respectively (2004 nil
and $0.2 million, respectively).
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 33% (2004 30%), risk-free interest
rate of 4.0% (2004 3.8%) and expected life of five
years (2004 five years).
The following pro forma basic and diluted income (loss) per
common share includes stock-based compensation expense for stock
options issued and modified, as described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Three Months | |
|
Nine Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Amounts in thousands, except per share amounts) | |
The resulting pro forma basic and diluted income (loss) per
common share is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
3,142 |
|
|
$ |
3,353 |
|
|
$ |
(32,783 |
) |
|
$ |
221 |
|
|
Add: stock-based compensation expense recorded
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
227 |
|
|
Less: stock-based compensation expense calculated using fair
value method
|
|
|
(419 |
) |
|
|
(529 |
) |
|
|
(1,553 |
) |
|
|
(1,618 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (loss)
|
|
$ |
2,723 |
|
|
$ |
2,824 |
|
|
$ |
(34,309 |
) |
|
$ |
(1,170 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding (thousands)
|
|
|
103,936 |
|
|
|
98,119 |
|
|
|
102,724 |
|
|
|
96,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding (thousands)
|
|
|
107,225 |
|
|
|
104,954 |
|
|
|
102,724 |
|
|
|
96,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted basic income (loss) per common share
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
(0.33 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted diluted income (loss) per common share
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
(0.33 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Appreciation Rights. 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 as stock appreciation rights
(SARs) which 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 SARs price of
$5.00 multiplied by the number of options exercised. Any
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 SARs. These SARs are not considered
part of the Employees and Directors Equity Incentive
Plan. The Company measures compensation expense as the amount by
which the market value of common shares exceeds the SARs
price. At December 31, 2005, the market price of common
shares was $7.68 (March 31, 2005 $11.05;
December 31, 2004 $10.62) and the SARs had all
vested. Due to the reduction in the market price of its common
shares, the Company recorded a
18
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
reduction in stock-based compensation expense in the amount of
$1.4 million and $2.5 million in general and
administration expenses in the unaudited condensed consolidated
statement of operations for the three and nine months ended
December 31, 2005 (December 31, 2004
expense of $1.5 million and $3.3 million,
respectively). The amount in the period is calculated by using
the market price of common shares on December 31, 2005 less
the SARs price, multiplied by the 750,000 SARs vested less
the amount previously recorded. At December 31, 2005, the
Company has a stock-based compensation accrual in the amount of
$2.0 million (March 31, 2005
$4.5 million) included in accounts payable and accrued
liabilities on the condensed consolidated balance sheets
relating to these SARs.
On February 2, 2004, an officer of the Company was granted
1,000,000 SARs, which entitle the officer to receive cash only,
and not common shares. The amount of cash received will be equal
to the amount by which the trading price of common shares on the
exercise notice date exceeds the SARs price of $5.20
multiplied by the number of SARs exercised. The SARs vest one
quarter immediately on the award date and one quarter on each of
the first, second and third anniversaries of the award date.
These SARs are not considered part of the Employees and
Directors Equity Incentive Plan. Applying FIN 28
Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans, the Company is
accruing compensation expense over the service period, which is
assumed to be the three year vesting period, using a graded
approach and measures compensation cost as the amount by which
the market value of common shares exceeds the SARs price
times the SARs assumed to have vested under the graded approach.
At December 31, 2005, the market price of common shares was
$7.68 (March 31, 2005 $11.05; December 31,
2004 $10.62). Due to the reduction in the market
price of its common shares, the Company recorded a reduction in
stock-based compensation expense in the amount of
$1.2 million and $1.6 million in general and
administration expenses in the unaudited condensed consolidated
statement of operations for the three and nine months ended
December 31, 2005 (2004 expense of
$1.8 million and $3.7 million, respectively). During
the year ended March 31, 2005 the officer exercised 150,000
of the vested SARs and the Company paid $0.9 million. The
amount in the period is calculated by using the market price of
common shares on December 31, 2005 less the SARs
price, multiplied by the remaining 897,929 SARs assumed to have
vested less the 150,000 SARs exercised less the amount
previously recorded. At December 31, 2005, the Company has
a stock-based compensation accrual in the amount of
$1.9 million (March 31, 2005
$3.5 million) included in accounts payable and accrued
liabilities on the condensed consolidated balance sheets
relating to these SARs.
Restricted Share Units. Effective June 27, 2005 the
Company, pursuant to its 2004 Performance Incentive Plan,
entered into restricted share unit agreements with certain
employees and directors. During the three and nine months ended
December 31, 2005, the Company awarded 158,125 and 518,000,
respectively, restricted common share units under these
agreements. Upon issuance of the restricted common share units,
an unamortized compensation expense equivalent to the market
value of the common shares on the date of grant was charged to
shareholders equity as unearned compensation. This
unearned compensation will be amortized over the three-year
vesting period. Compensation expense recorded for these
restricted common share units was $0.4 million and
$1.2 million during the three and nine months ended
December 31, 2005 and is included in general and
administration expenses in the unaudited condensed consolidated
statements of operations.
The Company becomes entitled to an income tax deduction in an
amount equal to the taxable income reported by the holders of
the restricted share units when the restrictions are released
and the shares are issued. Restricted shares are forfeited if
the employees or directors terminate prior to the lapsing of
restrictions. The Company records forfeitures of restricted
share units, if any, as treasury share repurchases and any
compensation costs previously recorded are reversed in the
period of forfeiture.
19
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
SFAS No. 131 Disclosures About Segments of an
Enterprise and Related Information requires the Company to
make certain disclosures about each reportable segment. The
Companys 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 three reportable business
segments: Motion Pictures, Television and Studio Facilities.
Motion Pictures consists of the development and production of
feature films; acquisition of North American and worldwide
distribution rights; North American theatrical, home
entertainment 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 equipment
and services 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.
Segmented information by business unit is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Three Months | |
|
Nine Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Amounts in thousands) | |
Segment revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Motion Pictures
|
|
$ |
203,314 |
|
|
$ |
175,141 |
|
|
$ |
518,579 |
|
|
$ |
536,983 |
|
|
Television
|
|
|
25,999 |
|
|
|
14,158 |
|
|
|
114,551 |
|
|
|
69,692 |
|
|
Studio Facilities
|
|
|
1,651 |
|
|
|
1,099 |
|
|
|
4,651 |
|
|
|
3,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
230,964 |
|
|
$ |
190,398 |
|
|
$ |
637,781 |
|
|
$ |
610,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Motion Pictures
|
|
$ |
11,139 |
|
|
$ |
19,070 |
|
|
$ |
(3,942 |
) |
|
$ |
39,118 |
|
|
Television
|
|
|
1,559 |
|
|
|
1,150 |
|
|
|
8,419 |
|
|
|
7,294 |
|
|
Studio Facilities
|
|
|
1,028 |
|
|
|
480 |
|
|
|
2,853 |
|
|
|
1,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,726 |
|
|
$ |
20,700 |
|
|
$ |
7,330 |
|
|
$ |
48,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Segment profit (loss) is defined as segment revenue less segment
direct operating, distribution and marketing and general and
administration expenses. The reconciliation of total segment
profit (loss) to the Companys income (loss) before income
taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Three Months | |
|
Nine Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Amounts in thousands) | |
Companys total segment profit (loss)
|
|
$ |
13,726 |
|
|
$ |
20,700 |
|
|
$ |
7,330 |
|
|
$ |
48,158 |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate general and administration
|
|
|
(5,886 |
) |
|
|
(8,608 |
) |
|
|
(25,583 |
) |
|
|
(28,610 |
) |
|
Depreciation
|
|
|
(631 |
) |
|
|
(835 |
) |
|
|
(1,976 |
) |
|
|
(2,224 |
) |
|
Interest expense
|
|
|
(4,929 |
) |
|
|
(8,275 |
) |
|
|
(14,718 |
) |
|
|
(19,388 |
) |
|
Interest rate swaps mark-to-market
|
|
|
218 |
|
|
|
419 |
|
|
|
119 |
|
|
|
2,408 |
|
|
Interest income
|
|
|
1,046 |
|
|
|
74 |
|
|
|
2,962 |
|
|
|
111 |
|
|
Minority interests
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
(2 |
) |
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
825 |
|
|
Equity interests
|
|
|
(44 |
) |
|
|
|
|
|
|
(98 |
) |
|
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
$ |
3,500 |
|
|
$ |
3,494 |
|
|
$ |
(31,964 |
) |
|
$ |
1,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14. |
Commitments and Contingencies |
The Company is from time to time involved in various claims,
legal proceedings and complaints arising in the ordinary course
of business. The Company does not believe that adverse decisions
in any such pending or threatened proceedings, or any amount
which the Company might be required to pay by reason thereof,
would have a material adverse effect on the financial condition
or future results of the Company. The Company has provided an
accrual for estimated losses under the above matters as of
December 31, 2005, in accordance with FAS 5
Accounting for Contingencies.
|
|
15. |
Reconciliation to Canadian GAAP |
The unaudited condensed 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 SEC and the
National Instrument adopted by certain securities authorities in
Canada.
21
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Under Canadian GAAP, the net income (loss) and income (loss) per
share figures for the three and nine months ended
December 31, 2005 and 2004, and the shareholders
equity as at December 31, 2005 and March 31, 2005 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) | |
|
|
|
|
|
|
| |
|
|
|
|
Three Months | |
|
Three Months | |
|
Nine Months | |
|
Nine Months | |
|
Shareholders Equity | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
| |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
March 31, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
As reported under U.S. GAAP
|
|
$ |
3,142 |
|
|
$ |
3,353 |
|
|
$ |
(32,783 |
) |
|
$ |
221 |
|
|
$ |
105,513 |
|
|
$ |
117,139 |
|
Adjustment for interest rate swaps(a)
|
|
|
(158 |
) |
|
|
(158 |
) |
|
|
(474 |
) |
|
|
(474 |
) |
|
|
1,851 |
|
|
|
2,325 |
|
Accounting for business combinations(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,145 |
|
|
|
1,145 |
|
Accounting for income taxes(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,900 |
) |
|
|
(1,900 |
) |
Accounting for stock-based compensation(g)
|
|
|
(419 |
) |
|
|
(529 |
) |
|
|
(1,526 |
) |
|
|
(1,391 |
) |
|
|
|
|
|
|
|
|
Adjustment for accretion on subordinated notes(d)
|
|
|
(3,158 |
) |
|
|
(1,946 |
) |
|
|
(9,474 |
) |
|
|
(3,182 |
) |
|
|
(15,898 |
) |
|
|
(6,424 |
) |
Adjustment for amortization of subordinated notes issue costs(d)
|
|
|
298 |
|
|
|
47 |
|
|
|
823 |
|
|
|
122 |
|
|
|
1,305 |
|
|
|
482 |
|
Adjustment for amortization and write-off of deferred bank loan
financing costs(e)
|
|
|
|
|
|
|
(266 |
) |
|
|
|
|
|
|
(98 |
) |
|
|
|
|
|
|
|
|
Reclassification of conversion feature of subordinated notes
outside shareholders equity(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,854 |
|
|
|
74,854 |
|
Other comprehensive income (loss) (net of tax of nil)(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,988 |
|
|
|
(304 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)/ Shareholders Equity under Canadian
GAAP
|
|
$ |
(295 |
) |
|
$ |
501 |
|
|
$ |
(43,434 |
) |
|
$ |
(4,802 |
) |
|
$ |
168,858 |
|
|
$ |
187,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Income (Loss) per Common Share under Canadian GAAP
|
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
|
$ |
(0.42 |
) |
|
$ |
(0.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income (Loss) per Common Share under Canadian GAAP
|
|
$ |
(0.01 |
) |
|
$ |
0.00 |
|
|
$ |
(0.42 |
) |
|
$ |
(0.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of movement in Shareholders Equity under
Canadian GAAP:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
March 31, | |
|
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
|
(Amounts in thousands) | |
Balance at beginning of the year
|
|
$ |
187,317 |
|
|
$ |
86,827 |
|
Increase in common shares
|
|
|
20,805 |
|
|
|
24,850 |
|
Increase in contributed surplus(d)(g)
|
|
|
2,694 |
|
|
|
60,842 |
|
Net income (loss) under Canadian GAAP
|
|
|
(43,434 |
) |
|
|
12,424 |
|
Adjustment to cumulative translation adjustments account(f)
|
|
|
1,476 |
|
|
|
2,374 |
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
$ |
168,858 |
|
|
$ |
187,317 |
|
|
|
|
|
|
|
|
22
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
(a) |
Interest Rate Swaps
Mark-to-Market |
Under U.S. GAAP, the interest swaps do not meet the
criteria of effective hedges and therefore the fair valuation
losses of nil and $0.1 million for the three and nine
months ended December 31, 2005 (2004 gains of
$0.5 million and $2.2 million, respectively) on the
Companys interest rate swap and fair valuation gains of
$0.2 million for the three and nine months ended
December 31, 2005 (2004 loss of
$0.1 million and gain of $0.2 million, respectively)
on a subsidiary companys interest swap are recorded in the
unaudited condensed consolidated statement of operations.
Under Canadian GAAP, until April 1, 2004, the interest rate
swaps were determined to be effective hedges under Canadian
Institute of Chartered Accountants (CICA)
Section 3860, Financial Instruments
Disclosure and Presentation, and no fair valuation
adjustments were recorded. In December 2001, the CICA released
Accounting Guideline
(AcG-13),
Hedging Relationships, to be applied by companies
for periods beginning on or after July 1, 2003. The
standard establishes criteria to identify, designate, document
and determine the effectiveness of hedging relationships, for
the purpose of applying hedge accounting and provides guidance
on the discontinuance of hedge accounting. Under Canadian GAAP
the Company adopted
AcG-13 effective
April 1, 2004 and determined the interest rate swaps do not
meet the criteria of effective hedges and therefore the fair
valuation losses of nil and $0.1 million for the three and
nine months ended December 31, 2005 (2004 gains
of $0.5 million and $2.2 million, respectively) on the
Companys interest swap and fair valuation gains of
$0.2 million for the three and nine months ended
December 31, 2005 (2004 loss of
$0.1 million and gain of $0.2 million, respectively)
on a subsidiary companys interest swap are recorded in the
unaudited condensed consolidated statement of operations, which
is consistent with U.S. GAAP.
The transitional provisions of
AcG-13 provide that
when an entity terminates its designation of a hedging
relationship or a hedging relationship ceases to be effective,
hedge accounting is not applied to gains, losses, revenues or
expenses arising subsequently. However, the hedge accounting
applied to the hedging relationship in prior periods is not
reversed. Any gains, losses, revenues or expenses deferred
previously as a result of applying hedge accounting continue to
be carried forward for subsequent recognition in income in the
same period as the corresponding gains, losses, revenues or
expenses associated with the hedged item. Accordingly, under
Canadian GAAP at April 1, 2004 the Company recorded the
fair values of the interest rate swaps totaling
$3.0 million on the consolidated balance sheet and recorded
the off-setting entry to deferred assets which is being
amortized straight-line to interest expense over the terms of
the hedged items. This results in an additional interest expense
in the three and nine months ended December 31, 2005 of
$0.2 million and $0.5 million respectively
(2004 $0.2 million and $0.5 million).
|
|
(b) |
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.
|
|
(c) |
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
23
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
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
December 31, 2005 (March 31, 2005
$1.9 million).
|
|
(d) |
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
4.875% Notes, as explained in note 7, is not accounted
for separately. Under Canadian GAAP, the conversion feature of
the 4.875% 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. Under U.S. GAAP the
principal amount and the carrying amount of the
4.875% 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.
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.
Under U.S. GAAP, the conversion feature of the
2.9375% Notes, as explained in note 7, is not
accounted for separately. Under Canadian GAAP, the conversion
feature of the 2.9375% Notes is valued at
$25.7 million, net of placement agents fees and
offering expenses of $0.8 million and, accordingly,
shareholders equity is increased by $25.7 million.
Under U.S. GAAP the principal amount and the carrying
amount of 2.9375% Notes are the same and therefore no
accretion is required whereas, under Canadian GAAP, the
difference between the principal amount of $150.0 million
and the original net carrying amount of $123.5 million is
being accreted on a straight-line basis over five years, the
time to the first potential redemption date by the Company, as a
charge to interest. Under U.S. GAAP all of the placement
agents fees and offering expenses are capitalized and
amortized through the earliest redemption date of 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
through the scheduled maturity date of twenty years as a charge
to interest expense.
Under U.S. GAAP, the conversion feature of the
3.625% Notes, as explained in note 7, is not accounted
for separately. Under Canadian GAAP, the conversion feature of
the 3.625% Notes is valued at $32.9 million, net of
placement agents fees and offering expenses of
$1.0 million and, accordingly, shareholders equity is
increased by $32.9 million. Under U.S. GAAP the
principal amount and the carrying amount of 3.625% Notes
are the same and therefore no accretion is required whereas,
under Canadian GAAP, the difference between the principal amount
of $175.0 million and the original net carrying amount of
$141.1 million is being accreted on a straight-line basis
over seven years, the time to the first potential redemption
date by the Company, as a charge to interest. Under
U.S. GAAP all of the placement agents fees and
offering expenses are capitalized and amortized through the
earliest redemption date of 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 through the scheduled
maturity date of twenty years as a charge to interest expense.
|
|
(e) |
Accounting for Amortization and Write-Off of Deferred Bank
Loan Financing Costs |
Under U.S. GAAP, deferred financing costs in the amount of
$4.3 million allocated to the Companys term loan was
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 was being amortized on a
straight-line
24
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
basis over the term of the loan. On December 31, 2004, the
Company repaid its term loan and wrote off the deferred
financing costs related to the term loan.
|
|
(f) |
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 foreign exchange contracts and unrealized loss on
investments available for sale, net of income taxes
of nil. Under Canadian GAAP, cumulative translation adjustments
are included as a separate component of shareholders
equity and unrealized gains (losses) on foreign exchange
contracts and unrealized losses on investments
available for sale are not recorded.
|
|
(g) |
Accounting for Stock-Based Compensation |
In December 2003, CICA amended Section 3870 to require
companies to account for stock options using the fair value
based method for fiscal years beginning on or after
January 1, 2004. In accordance with the transitional
alternatives permitted under amended Section 3870, the
Company retroactively adopted the fair value based method of
accounting for stock options and accordingly, the years ended
March 31, 2004 and March 31, 2003 have been restated.
The impact of this change for the three and nine months ended
December 31, 2005 was to decrease net income and increase
net loss and increase contributed surplus by $0.4 million
and $1.5 million, respectively, (2004
$0.5 million and $1.4 million) and to decrease basic
income per share by $0.01 and $0.01, respectively
(2004 nil and $0.02).
In accordance with CICA Section 3870, the following
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
three and nine months ended December 31, 2005 was $3.61
(2004 $3.31 and $2.57). 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 during the three and
nine months ended December 31, 2005: a dividend yield of
0%, expected volatility of 33% (2004 30%), risk-free
interest rate of 4.0% (2004 3.8%) and expected life
of five years (2004 five years).
|
|
16. |
Consolidating Financial Information |
In December 2003, the Company sold $60.0 million of the
4.875% Notes, through its wholly owned U.S. subsidiary
Lions Gate Entertainment Inc. (the Issuer). The
4.875% 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 the 4.875% Notes and common shares
issuable on conversion of the 4.875% Notes. On
April 29, 2004, the registration statement was declared
effective by the SEC.
In October 2004, the Company sold $150.0 million of the
2.9375% Notes, through the Issuer. The 2.9375% Notes,
by their terms, are fully and unconditionally guaranteed by the
Company. On February 4, 2005, the Company filed a
registration statement on
Form S-3 to
register the resale of the 2.9375% Notes and common shares
issuable on conversion of the 2.9375% Notes. On
March 3, 2005, the registration statement was declared
effective by the SEC.
In February 2005, the Company sold $175.0 million of the
3.625% Notes, through the Issuer. The 3.625% Notes, by
their terms, are fully and unconditionally guaranteed by the
Company. On March 29, 2005, and as amended April 6,
2005, the Company filed a registration statement on
Form S-3 to
register the resale of the 3.625% Notes and common shares
issuable on conversion of the 3.625% Notes. On
April 13, 2005, the registration statement was declared
effective by the SEC.
25
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The following tables present condensed consolidating financial
information as of December 31, 2005 and March 31, 2005
and for the nine months ended December 31, 2005 and 2004
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 December 31, 2005 | |
|
|
| |
|
|
Lions Gate | |
|
Lions Gate | |
|
|
|
|
Entertainment | |
|
Entertainment | |
|
Other | |
|
Consolidating | |
|
Lions Gate | |
|
|
Corp. | |
|
Inc. | |
|
Subsidiaries | |
|
Adjustments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Amounts in thousands) | |
BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
927 |
|
|
$ |
(8,316 |
) |
|
$ |
57,937 |
|
|
$ |
|
|
|
$ |
50,548 |
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
796 |
|
|
|
|
|
|
|
796 |
|
Investments auction rate preferreds and municipal
bonds
|
|
|
|
|
|
|
80,900 |
|
|
|
|
|
|
|
|
|
|
|
80,900 |
|
Investments equity securities
|
|
|
|
|
|
|
11,185 |
|
|
|
|
|
|
|
|
|
|
|
11,185 |
|
Accounts receivable, net
|
|
|
97 |
|
|
|
1,204 |
|
|
|
133,221 |
|
|
|
|
|
|
|
134,522 |
|
Investment in films and television programs
|
|
|
|
|
|
|
5,531 |
|
|
|
411,432 |
|
|
|
|
|
|
|
416,963 |
|
Property and equipment
|
|
|
|
|
|
|
6,606 |
|
|
|
27,303 |
|
|
|
|
|
|
|
33,909 |
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
186,627 |
|
|
|
|
|
|
|
186,627 |
|
Other assets
|
|
|
30 |
|
|
|
17,849 |
|
|
|
12,851 |
|
|
|
|
|
|
|
30,730 |
|
Investment in subsidiaries
|
|
|
217,241 |
|
|
|
307,452 |
|
|
|
|
|
|
|
(524,693 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
218,295 |
|
|
$ |
422,411 |
|
|
$ |
830,167 |
|
|
$ |
(524,693 |
) |
|
$ |
946,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS
EQUITY (DEFICIENCY) |
Accounts payable and accrued liabilities
|
|
$ |
24 |
|
|
$ |
15,411 |
|
|
$ |
170,018 |
|
|
$ |
|
|
|
$ |
185,453 |
|
Film obligations
|
|
|
|
|
|
|
|
|
|
|
211,844 |
|
|
|
|
|
|
|
211,844 |
|
Subordinated notes
|
|
|
|
|
|
|
385,000 |
|
|
|
|
|
|
|
|
|
|
|
385,000 |
|
Mortgages payable
|
|
|
|
|
|
|
|
|
|
|
16,769 |
|
|
|
|
|
|
|
16,769 |
|
Deferred revenue
|
|
|
|
|
|
|
|
|
|
|
41,601 |
|
|
|
|
|
|
|
41,601 |
|
Intercompany payables (receivables)
|
|
|
(156,051 |
) |
|
|
75,444 |
|
|
|
80,387 |
|
|
|
220 |
|
|
|
|
|
Intercompany equity
|
|
|
268,809 |
|
|
|
102,476 |
|
|
|
350,835 |
|
|
|
(722,120 |
) |
|
|
|
|
Shareholders equity (deficiency)
|
|
|
105,513 |
|
|
|
(155,920 |
) |
|
|
(41,287 |
) |
|
|
197,207 |
|
|
|
105,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
218,295 |
|
|
$ |
422,411 |
|
|
$ |
830,167 |
|
|
$ |
(524,693 |
) |
|
$ |
946,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31, 2005 | |
|
|
|
|
|
|
| |
|
|
|
|
Lions Gate | |
|
Lions Gate | |
|
|
|
|
|
|
Entertainment | |
|
Entertainment | |
|
Other | |
|
Consolidating | |
|
Lions Gate | |
|
|
Corp. | |
|
Inc. | |
|
Subsidiaries | |
|
Adjustments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(Amounts in thousands) | |
|
|
STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
513 |
|
|
$ |
964 |
|
|
$ |
636,749 |
|
|
$ |
(445 |
) |
|
$ |
637,781 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating
|
|
|
|
|
|
|
|
|
|
|
319,960 |
|
|
|
|
|
|
|
319,960 |
|
|
Distribution and marketing
|
|
|
|
|
|
|
275 |
|
|
|
290,380 |
|
|
|
|
|
|
|
290,655 |
|
|
General and administration
|
|
|
1,407 |
|
|
|
24,180 |
|
|
|
20,277 |
|
|
|
(445 |
) |
|
|
45,419 |
|
|
Depreciation
|
|
|
|
|
|
|
71 |
|
|
|
1,905 |
|
|
|
|
|
|
|
1,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,407 |
|
|
|
24,526 |
|
|
|
632,522 |
|
|
|
(445 |
) |
|
|
658,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(894 |
) |
|
|
(23,562 |
) |
|
|
4,227 |
|
|
|
|
|
|
|
(20,229 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expenses (Income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1 |
|
|
|
13,861 |
|
|
|
856 |
|
|
|
|
|
|
|
14,718 |
|
|
Interest rate swaps mark-to-market
|
|
|
|
|
|
|
123 |
|
|
|
(242 |
) |
|
|
|
|
|
|
(119 |
) |
|
Interest income
|
|
|
|
|
|
|
(2,863 |
) |
|
|
(99 |
) |
|
|
|
|
|
|
(2,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
1 |
|
|
|
11,121 |
|
|
|
515 |
|
|
|
|
|
|
|
11,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Equity Interests and Income Taxes
|
|
|
(895 |
) |
|
|
(34,683 |
) |
|
|
3,712 |
|
|
|
|
|
|
|
(31,866 |
) |
Equity interests
|
|
|
31,863 |
|
|
|
11,584 |
|
|
|
98 |
|
|
|
(43,447 |
) |
|
|
(98 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
(32,758 |
) |
|
|
(46,267 |
) |
|
|
3,614 |
|
|
|
43,447 |
|
|
|
(31,964 |
) |
Income tax provision
|
|
|
25 |
|
|
|
310 |
|
|
|
484 |
|
|
|
|
|
|
|
819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
(32,783 |
) |
|
$ |
(46,577 |
) |
|
$ |
3,130 |
|
|
$ |
43,447 |
|
|
$ |
(32,783 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
Lions Gate | |
|
Lions Gate | |
|
|
|
|
|
|
Entertainment | |
|
Entertainment | |
|
Other | |
|
Consolidating |
|
Lions Gate | |
|
|
Corp. | |
|
Inc. | |
|
Subsidiaries | |
|
Adjustments |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
|
|
| |
|
|
|
|
(Amounts in thousands) |
|
|
STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) operating activities
|
|
$ |
2,250 |
|
|
$ |
(15,636 |
) |
|
$ |
72,319 |
|
|
$ |
|
|
|
$ |
58,933 |
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments auction rate preferreds and
municipal bonds
|
|
|
|
|
|
|
(148,400 |
) |
|
|
(15,000 |
) |
|
|
|
|
|
|
(163,400 |
) |
|
Purchases of investments equity securities
|
|
|
|
|
|
|
(3,470 |
) |
|
|
|
|
|
|
|
|
|
|
(3,470 |
) |
|
Sales of investments auction rate preferreds
|
|
|
|
|
|
|
82,500 |
|
|
|
|
|
|
|
|
|
|
|
82,500 |
|
|
Cash received from sale of investment
|
|
|
|
|
|
|
|
|
|
|
2,945 |
|
|
|
|
|
|
|
2,945 |
|
|
Acquisition of Redbus, net of cash acquired
|
|
|
|
|
|
|
(27,122 |
) |
|
|
|
|
|
|
|
|
|
|
(27,122 |
) |
|
Purchases of property and equipment
|
|
|
|
|
|
|
(4,133 |
) |
|
|
74 |
|
|
|
|
|
|
|
(4,059 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in investing activities
|
|
|
|
|
|
|
(100,625 |
) |
|
|
(11,981 |
) |
|
|
|
|
|
|
(112,606 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares
|
|
|
779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
779 |
|
|
Financing fees
|
|
|
|
|
|
|
(240 |
) |
|
|
|
|
|
|
|
|
|
|
(240 |
) |
|
Repayment of subordinated notes
|
|
|
|
|
|
|
|
|
|
|
(5,000 |
) |
|
|
|
|
|
|
(5,000 |
) |
|
Repayment of mortgages payable
|
|
|
|
|
|
|
|
|
|
|
(2,523 |
) |
|
|
|
|
|
|
(2,523 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) financing activities
|
|
|
779 |
|
|
|
(240 |
) |
|
|
(7,523 |
) |
|
|
|
|
|
|
(6,984 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
3,029 |
|
|
|
(116,501 |
) |
|
|
52,815 |
|
|
|
|
|
|
|
(60,657 |
) |
Foreign exchange effect on cash
|
|
|
(3,045 |
) |
|
|
1,829 |
|
|
|
(418 |
) |
|
|
|
|
|
|
(1,634 |
) |
Cash and cash equivalents beginning of period
|
|
|
943 |
|
|
|
106,356 |
|
|
|
5,540 |
|
|
|
|
|
|
|
112,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$ |
927 |
|
|
$ |
(8,316 |
) |
|
$ |
57,937 |
|
|
$ |
|
|
|
$ |
50,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31, 2005 | |
|
|
| |
|
|
Lions Gate | |
|
Lions Gate | |
|
|
|
|
Entertainment | |
|
Entertainment | |
|
Other | |
|
Consolidating | |
|
Lions Gate | |
|
|
Corp. | |
|
Inc. | |
|
Subsidiaries | |
|
Adjustments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(Amounts in thousands) | |
|
|
RECONCILIATION OF NET INCOME (LOSS) TO CANADIAN GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported under U.S. GAAP
|
|
$ |
(32,783 |
) |
|
$ |
(46,577 |
) |
|
$ |
3,130 |
|
|
$ |
43,447 |
|
|
$ |
(32,783 |
) |
Interest rate swaps mark-to-market
|
|
|
(474 |
) |
|
|
(246 |
) |
|
|
(228 |
) |
|
|
474 |
|
|
|
(474 |
) |
Accounting for stock-based compensation
|
|
|
(1,526 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,526 |
) |
Adjustment for accretion on subordinated notes
|
|
|
(9,474 |
) |
|
|
(9,474 |
) |
|
|
|
|
|
|
9,474 |
|
|
|
(9,474 |
) |
Adjustment for amortization of subordinated notes issue costs
|
|
|
823 |
|
|
|
823 |
|
|
|
|
|
|
|
(823 |
) |
|
|
823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) under Canadian GAAP
|
|
$ |
(43,434 |
) |
|
$ |
(55,474 |
) |
|
$ |
2,902 |
|
|
$ |
52,572 |
|
|
$ |
(43,434 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 | |
|
|
| |
|
|
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
|
|
|
105,513 |
|
|
|
(155,920 |
) |
|
|
(41,287 |
) |
|
|
197,207 |
|
|
|
105,513 |
|
Interest rate swaps mark-to-market
|
|
|
1,851 |
|
|
|
1,682 |
|
|
|
327 |
|
|
|
(2,009 |
) |
|
|
1,851 |
|
Accounting for business combinations
|
|
|
1,145 |
|
|
|
|
|
|
|
1,145 |
|
|
|
(1,145 |
) |
|
|
1,145 |
|
Accounting for income taxes
|
|
|
(1,900 |
) |
|
|
|
|
|
|
(1,900 |
) |
|
|
1,900 |
|
|
|
(1,900 |
) |
Adjustment for accretion on subordinated notes
|
|
|
(15,898 |
) |
|
|
(15,898 |
) |
|
|
|
|
|
|
15,898 |
|
|
|
(15,898 |
) |
Adjustment for amortization of subordinated notes issue costs
|
|
|
1,305 |
|
|
|
1,305 |
|
|
|
|
|
|
|
(1,305 |
) |
|
|
1,305 |
|
Reclassification of conversion feature of subordinated notes
outside shareholders equity
|
|
|
74,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,854 |
|
Other comprehensive income (loss)
|
|
|
1,988 |
|
|
|
1,988 |
|
|
|
1,988 |
|
|
|
(3,976 |
) |
|
|
1,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity (deficiency) under Canadian
GAAP
|
|
$ |
168,858 |
|
|
$ |
(166,843 |
) |
|
$ |
(39,727 |
) |
|
$ |
206,570 |
|
|
$ |
168,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2005 | |
|
|
| |
|
|
Lions Gate | |
|
Lions Gate | |
|
|
|
|
Entertainment | |
|
Entertainment | |
|
Other | |
|
Consolidating | |
|
Lions Gate | |
|
|
Corp. | |
|
Inc. | |
|
Subsidiaries | |
|
Adjustments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(Amounts in thousands) | |
|
|
|
|
BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
943 |
|
|
$ |
106,356 |
|
|
$ |
5,540 |
|
|
$ |
|
|
|
$ |
112,839 |
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
2,913 |
|
|
|
|
|
|
|
2,913 |
|
Accounts receivable, net
|
|
|
35 |
|
|
|
69 |
|
|
|
149,915 |
|
|
|
|
|
|
|
150,019 |
|
Investment in films and television programs
|
|
|
|
|
|
|
|
|
|
|
367,376 |
|
|
|
|
|
|
|
367,376 |
|
Property and equipment
|
|
|
|
|
|
|
2,544 |
|
|
|
28,298 |
|
|
|
|
|
|
|
30,842 |
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
161,182 |
|
|
|
|
|
|
|
161,182 |
|
Other assets
|
|
|
92 |
|
|
|
19,517 |
|
|
|
9,849 |
|
|
|
|
|
|
|
29,458 |
|
Investment in subsidiaries
|
|
|
250,701 |
|
|
|
291,206 |
|
|
|
|
|
|
|
(541,907 |
) |
|
|
|
|
Deferred income taxes
|
|
|
1,896 |
|
|
|
|
|
|
|
(1,896 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
253,667 |
|
|
$ |
419,692 |
|
|
$ |
723,177 |
|
|
$ |
(541,907 |
) |
|
$ |
854,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIENCY) |
Bank loans
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,162 |
|
|
$ |
|
|
|
$ |
1,162 |
|
Accounts payable and accrued liabilities
|
|
|
143 |
|
|
|
21,074 |
|
|
|
112,983 |
|
|
|
|
|
|
|
134,200 |
|
Film obligations
|
|
|
|
|
|
|
|
|
|
|
130,770 |
|
|
|
|
|
|
|
130,770 |
|
Subordinated notes
|
|
|
|
|
|
|
385,000 |
|
|
|
5,000 |
|
|
|
|
|
|
|
390,000 |
|
Mortgages payable
|
|
|
|
|
|
|
|
|
|
|
18,640 |
|
|
|
|
|
|
|
18,640 |
|
Deferred revenue
|
|
|
|
|
|
|
|
|
|
|
62,459 |
|
|
|
|
|
|
|
62,459 |
|
Minority interests
|
|
|
|
|
|
|
|
|
|
|
259 |
|
|
|
|
|
|
|
259 |
|
Intercompany payables (receivables)
|
|
|
(134,932 |
) |
|
|
19,623 |
|
|
|
130,887 |
|
|
|
(15,578 |
) |
|
|
|
|
Intercompany equity
|
|
|
262,269 |
|
|
|
93,217 |
|
|
|
306,515 |
|
|
|
(662,001 |
) |
|
|
|
|
Shareholders equity (deficiency)
|
|
|
126,187 |
|
|
|
(99,222 |
) |
|
|
(45,498 |
) |
|
|
135,672 |
|
|
|
117,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
253,667 |
|
|
$ |
419,692 |
|
|
$ |
723,177 |
|
|
$ |
(541,907 |
) |
|
$ |
854,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2005 | |
|
|
| |
|
|
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
|
|
$ |
126,187 |
|
|
$ |
(99,222 |
) |
|
$ |
(45,498 |
) |
|
$ |
135,672 |
|
|
$ |
117,139 |
|
Interest rate swaps mark-to-market
|
|
|
2,325 |
|
|
|
1,840 |
|
|
|
485 |
|
|
|
(2,325 |
) |
|
|
2,325 |
|
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
|
|
|
(6,424 |
) |
|
|
(6,424 |
) |
|
|
|
|
|
|
6,424 |
|
|
|
(6,424 |
) |
Adjustment for amortization of subordinated note issue costs
|
|
|
482 |
|
|
|
482 |
|
|
|
|
|
|
|
(482 |
) |
|
|
482 |
|
Reclassification of conversion feature of subordinated notes to
shareholders equity
|
|
|
74,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,854 |
|
Other comprehensive loss
|
|
|
(304 |
) |
|
|
(304 |
) |
|
|
(304 |
) |
|
|
608 |
|
|
|
(304 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity (deficiency) under Canadian
GAAP
|
|
$ |
196,365 |
|
|
$ |
(102,483 |
) |
|
$ |
(46,072 |
) |
|
$ |
139,507 |
|
|
$ |
187,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31, 2004 | |
|
|
| |
|
|
Lions Gate | |
|
Lions Gate | |
|
|
|
|
Entertainment | |
|
Entertainment | |
|
Other | |
|
Consolidating | |
|
Lions Gate | |
|
|
Corp. | |
|
Inc. | |
|
Subsidiaries | |
|
Adjustments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(Amounts in thousands) | |
|
|
|
|
STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
345 |
|
|
$ |
|
|
|
$ |
610,147 |
|
|
$ |
(306 |
) |
|
$ |
610,186 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating
|
|
|
|
|
|
|
|
|
|
|
258,610 |
|
|
|
|
|
|
|
258,610 |
|
|
Distribution and marketing
|
|
|
|
|
|
|
|
|
|
|
282,546 |
|
|
|
|
|
|
|
282,546 |
|
|
General and administration
|
|
|
818 |
|
|
|
28,081 |
|
|
|
20,889 |
|
|
|
(306 |
) |
|
|
49,482 |
|
|
Depreciation
|
|
|
34 |
|
|
|
96 |
|
|
|
2,094 |
|
|
|
|
|
|
|
2,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
852 |
|
|
|
28,177 |
|
|
|
564,139 |
|
|
|
(306 |
) |
|
|
592,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(507 |
) |
|
|
(28,177 |
) |
|
|
46,008 |
|
|
|
|
|
|
|
17,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expenses (Income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
59 |
|
|
|
17,755 |
|
|
|
1,574 |
|
|
|
|
|
|
|
19,388 |
|
|
Interest rate swaps mark-to-market
|
|
|
|
|
|
|
(2,200 |
) |
|
|
(208 |
) |
|
|
|
|
|
|
(2,408 |
) |
|
Interest income
|
|
|
|
|
|
|
(111 |
) |
|
|
|
|
|
|
|
|
|
|
(111 |
) |
|
Minority interests
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
(825 |
) |
|
|
|
|
|
|
(825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses (income)
|
|
|
59 |
|
|
|
15,444 |
|
|
|
543 |
|
|
|
|
|
|
|
16,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Equity Interests and Income Taxes
|
|
|
(566 |
) |
|
|
(43,621 |
) |
|
|
45,465 |
|
|
|
|
|
|
|
1,278 |
|
Equity interests
|
|
|
(793 |
) |
|
|
(38,546 |
) |
|
|
200 |
|
|
|
39,339 |
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
227 |
|
|
|
(5,075 |
) |
|
|
45,265 |
|
|
|
(39,339 |
) |
|
|
1,078 |
|
Income tax provision
|
|
|
(6 |
) |
|
|
|
|
|
|
(851 |
) |
|
|
|
|
|
|
(857 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
221 |
|
|
$ |
(5,075 |
) |
|
$ |
44,414 |
|
|
$ |
(39,339 |
) |
|
$ |
221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31, 2004 | |
|
|
| |
|
|
Lions Gate | |
|
Lions Gate | |
|
|
|
|
Entertainment | |
|
Entertainment | |
|
Other | |
|
Consolidating |
|
Lions Gate | |
|
|
Corp. | |
|
Inc. | |
|
Subsidiaries | |
|
Adjustments |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
|
|
| |
|
|
(Amounts in thousands) | |
STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) operating activities
|
|
$ |
(23,161 |
) |
|
$ |
108,133 |
|
|
$ |
(1,838 |
) |
|
$ |
|
|
|
$ |
83,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares
|
|
|
21,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,991 |
|
|
Financing fees paid
|
|
|
|
|
|
|
(1,077 |
) |
|
|
|
|
|
|
|
|
|
|
(1,077 |
) |
|
Increase (decrease) in bank loans
|
|
|
|
|
|
|
(251,300 |
) |
|
|
88 |
|
|
|
|
|
|
|
(251,212 |
) |
|
Increase in subordinated notes
|
|
|
|
|
|
|
145,390 |
|
|
|
|
|
|
|
|
|
|
|
145,390 |
|
|
Decrease in mortgages payable
|
|
|
|
|
|
|
|
|
|
|
(1,585 |
) |
|
|
|
|
|
|
(1,585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) financing activities
|
|
|
21,991 |
|
|
|
(106,987 |
) |
|
|
(1,497 |
) |
|
|
|
|
|
|
(86,493 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from disposition, net
|
|
|
|
|
|
|
|
|
|
|
1,172 |
|
|
|
|
|
|
|
1,172 |
|
|
Purchases of property and equipment
|
|
|
|
|
|
|
(1,424 |
) |
|
|
(528 |
) |
|
|
|
|
|
|
(1,952 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) investing activities
|
|
|
|
|
|
|
(1,424 |
) |
|
|
644 |
|
|
|
|
|
|
|
(780 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(1,170 |
) |
|
|
(278 |
) |
|
|
(2,691 |
) |
|
|
|
|
|
|
(4,139 |
) |
Foreign exchange effect on cash
|
|
|
3,099 |
|
|
|
614 |
|
|
|
(1,524 |
) |
|
|
|
|
|
|
2,189 |
|
Cash and cash equivalents beginning of period
|
|
|
1,005 |
|
|
|
(9 |
) |
|
|
6,093 |
|
|
|
|
|
|
|
7,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$ |
2,934 |
|
|
$ |
327 |
|
|
$ |
1,878 |
|
|
$ |
|
|
|
$ |
5,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31, 2004 | |
|
|
| |
|
|
Lions Gate | |
|
Lions Gate | |
|
|
|
|
Entertainment | |
|
Entertainment | |
|
Other | |
|
Consolidating | |
|
Lions Gate | |
|
|
Corp. | |
|
Inc. | |
|
Subsidiaries | |
|
Adjustments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Amounts in thousands) | |
RECONCILIATION OF NET INCOME (LOSS) TO CANADIAN GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported under U.S. GAAP
|
|
$ |
221 |
|
|
$ |
(5,075 |
) |
|
$ |
44,414 |
|
|
$ |
(39,339 |
) |
|
$ |
221 |
|
Adjustment for interest rate swaps
|
|
|
(474 |
) |
|
|
(368 |
) |
|
|
(106 |
) |
|
|
474 |
|
|
|
(474 |
) |
Adjustment for accretion on subordinated notes
|
|
|
(3,182 |
) |
|
|
(3,182 |
) |
|
|
|
|
|
|
3,182 |
|
|
|
(3,182 |
) |
Adjustment for amortization of subordinated notes issue costs
|
|
|
122 |
|
|
|
122 |
|
|
|
|
|
|
|
(122 |
) |
|
|
122 |
|
Stock-based compensation
|
|
|
(1,391 |
) |
|
|
(1,391 |
) |
|
|
|
|
|
|
1,391 |
|
|
|
(1,391 |
) |
Adjustment for amortization of debt financing costs
|
|
|
(98 |
) |
|
|
(98 |
) |
|
|
|
|
|
|
98 |
|
|
|
(98 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) under Canadian GAAP
|
|
$ |
(4,802 |
) |
|
$ |
(9,992 |
) |
|
$ |
44,308 |
|
|
$ |
(34,316 |
) |
|
$ |
(4,802 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lions Gate Studios. On January 23, 2006, the Company
entered into an amended agreement to sell its partnership
interests in its studios facilities located in Vancouver,
British Columbia. The transaction is expected to close on
March 15, 2006. The purchase price of $35.4 million
(net of commissions) is payable in cash. Studios facilities
comprise the Companys studios facilities reporting unit
(see note 13). At December 31, 2005, the carrying
value of studios property and equipment was $27.6 million
and is comprised primarily of land and buildings, with carrying
values of $12.5 million and $14.8 million,
respectively, and is included in property and equipment in the
condensed consolidated balance sheets. At December 31,
2005, the carrying value of the goodwill within the studios
reporting unit was $1.9 million. At December 31, 2005,
the carrying value of the studios mortgages payable was
$16.8 million and is included in mortgages payable in the
unaudited condensed consolidated balance sheets. The agreement
requires the partnership to pay off the remaining balances of
its mortgages payable at the close of the transaction. The
Company estimates a pretax gain on the sale of the studio
facilities of approximately $5.0 million for the three
months ended March 31, 2006. The Company expects additional
transaction costs and adjustments in connection with completion
of the transaction. The studios facilities reporting unit had
revenues of $1.7 million and $4.7 million for the
three and nine months ended December 31, 2005, respectively
(2004 $1.1 million and $3.5 million).
34
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Item 2. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations. |
Overview
We are a diversified independent producer and distributor of
motion pictures, television programming, home entertainment,
family entertainment and
video-on-demand
content. We release approximately 15 to 18 motion pictures
theatrically per year. Our theatrical releases include films we
produce in-house and films we acquire from third parties. We
also have produced approximately 122 hours of television
programming on average each of the last three fiscal years. Our
disciplined approach to production, acquisition, and
distribution is designed to maximize our profit by balancing our
financial risks against the probability of commercial success of
each project. We currently distribute our library of
approximately 6,500 motion picture titles and 1,800 television
episodes and programs directly to retailers, video rental
stores, and pay and free television channels and indirectly to
international markets through third parties. In November 2005,
our distribution rights to the Republic library expired and were
not renewed. We are currently in a six month non-exclusive
sell-off period with respect to the Republic titles. When this
sell-off period expires in May 2006, the Republic titles will no
longer be included in our library. During the sell-off period,
the Company is permitted to sell its remaining Republic
inventory. The Republic library includes approximately 3,000
titles and represented approximately 2% of our revenues during
the last fiscal year. We also own a minority interest in
CinemaNow, Inc. (CinemaNow), an internet
video-on-demand
provider, and own and operate a film and television production
studio in Vancouver, British Columbia. We also own a minority
interest in Maple Pictures, a Canadian film and television
distributor based in Toronto, Canada.
Our revenues are derived from the following business segments:
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Motion Pictures, which includes Theatrical, Home Entertainment,
Television and International Distribution. Theatrical revenues
are derived from the domestic theatrical release of motion
pictures in North America. Home entertainment revenues are
derived from the sale of video and DVD releases of our own
productions and acquired films, including theatrical releases
and direct-to-video
releases. Television revenues are primarily derived from the
licensing of our productions and acquired films to the domestic
cable, free and pay television markets. International revenues
are derived from the licensing of our productions and acquired
films to international markets on a territory-by-territory
basis, except in the United Kingdom where we now have the
ability on a select basis to distribute directly through Redbus. |
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Television, which includes the licensing to domestic and
international markets of one-hour and half-hour drama series,
television movies and mini-series and non-fiction programming. |
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Studio Facilities, which derive revenue from rental of sound
stages, production offices, construction mills, storage
facilities and lighting equipment to film and television
producers. |
Our primary operating expenses include the following:
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Direct Operating Expenses, which primarily include amortization
of production or acquisition costs, participation and residual
expenses. |
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Distribution and Marketing Expenses, which primarily include the
costs of theatrical prints and advertising and of
video and DVD duplication and marketing. |
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General and Administration Expenses, which include salaries and
other overhead. |
Recent Developments
Lions Gate Studios. On January 23, 2006, the Company
entered into an amended agreement to sell its partnership
interests in its studios facilities located in Vancouver,
British Columbia. The transaction is expected to close on
March 15, 2006. The purchase price of $35.4 million
(net of commissions) is payable in cash. Studios facilities
comprise the Companys studios facilities reporting unit
(see note 13). At December 31, 2005, the carrying
value of studios property and equipment was $27.6 million
and is comprised primarily of land and buildings, with carrying
values of $12.5 million and $14.8 million,
respectively, and is included in property and equipment in the
unaudited condensed consolidated balance sheets. At
December 31,
35
2005, the carrying value of the goodwill within the studios
reporting unit was $1.9 million. At December 31, 2005,
the carrying value of the studios mortgages payable was
$16.8 million and is included in mortgages payable in the
unaudited condensed consolidated balance sheets. The agreement
requires the partnership to pay off the remaining balances of
its mortgages payable at the close of the transaction. The
Company estimates a pretax gain on the sale of the studio
facilities of approximately $5.0 million for three months
ended March 31, 2006. The Company expects additional
transaction costs and adjustments in connection with completion
of the transaction. The studios facilities reporting unit had
revenues of $1.7 million and $4.7 million for the
three and nine months ended December 31, 2005, respectively
(2004 $1.1 million and $3.5 million).
Redbus. On October 17, 2005, the Company acquired
all outstanding shares of Redbus, an independent United Kingdom
film distributor. Consideration for the Redbus acquisition was
$36.1 million comprised of a combination of
$28.0 million in cash, $7.0 million in Lions Gate
common shares and direct transaction costs of $1.1 million.
In addition, the Company assumed other obligations (including
accounts payable and accrued liabilities and film obligations)
of $24.1 million. At the closing of the transaction the
Company issued 643,460 common shares to Redbus Group Limited
(RGL) valued at approximately $6.1 million, or
$9.48 per share, and will issue up to an additional 94,937
common shares to RGL valued at approximately $0.9 million
upon satisfaction of the terms of the escrow agreement. Direct
transaction costs are considered liabilities assumed in the
acquisition and, as such, are included in the purchase price.
Direct transaction costs consist primarily of legal and
accounting fees. The Company now has the ability to
self-distribute its motion pictures in the UK. The Company also
acquired the Redbus library of approximately 130 films.
Effective October 17, 2005, the credit facility was amended
in connection with the acquisition of Redbus, which made a
portion of the credit facility available for borrowing by Redbus
in either U.S. dollars or British pounds sterling.
The Redbus acquisition was accounted for as a purchase, with the
results of operations of Redbus consolidated from
October 17, 2005. Goodwill of $25.4 million represents
the excess of purchase price over the fair value of the net
identifiable tangible and intangible assets acquired. The
allocation of the purchase price to the tangible and intangible
assets acquired and liabilities assumed based on their fair
values is preliminary and subject to completion of final
appraisals.
Image. During the three months ended September 30,
2005, we purchased 1,150,000 common shares of Image for
$3.5 million in cash and completed a negotiated exchange
with certain shareholders of Image in which we exchanged 885,258
of our common shares (at $10.45 per share) for 2,312,567
common shares of Image (at $4.00 per share) at a cost on an
exchanged basis of $9.2 million. We also entered into
exchange agreements for an additional 571,429 common shares of
Image, which are required to be delivered by March 31, 2006
and were not delivered as of December 31, 2005. As a result
of these transactions we purchased, or will conclude the
purchase of, an aggregate of 4,033,996 shares, representing
18.94% of Images outstanding common shares. We acquired
the common shares of Image in connection with possibly pursuing
a negotiated strategic transaction with Image to acquire 100% of
Images outstanding common shares. On October 31,
2005, Lions Gate proposed to purchase all the outstanding common
shares of Image for cash of $4.00 per common share. This
proposal was rejected by the Special Committee of the Board of
Directors of Image on October 31, 2005. Lions Gate is
currently considering its alternatives. At December 31,
2005, the Company has recorded an unrealized loss of
$0.4 million on the 571,429 shares to be exchanged
based on the difference between the negotiated price per common
share of $4.00 and the closing price of Images common
shares on December 31, 2005 of $3.23 per common share.
The Company has reported the $0.4 million unrealized loss
as a charge to other comprehensive loss and as an increase in
shareholders equity in the unaudited condensed
consolidated statement of shareholders equity as of
December 31, 2005.
CRITICAL ACCOUNTING POLICIES
The application of the following accounting policies, which are
important to our financial position and results of operations,
requires significant judgments and estimates on the part of
management. For a summary of all of our accounting policies,
including the accounting policies discussed below, see
note 2 to our March 31, 2005 audited consolidated
financial statements.
36
Generally Accepted Accounting Principles. Our
consolidated financial statements have been prepared in
accordance with U.S. GAAP which conforms, in all material
respects, with Canadian GAAP, except as described in the notes
to the unaudited condensed consolidated financial statements.
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 Companys consolidated
financial statements were prepared under Canadian GAAP. Amounts
presented in prior years in the consolidated financial
statements 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 through
March 31, 2006.
Accounting for Films and Television Programs. In June
2000, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued
Statement of Position 00-2 Accounting by Producers or
Distributors of Films (SoP 00-2). SoP 00-2
establishes accounting standards for producers or distributors
of films, including changes in revenue recognition,
capitalization and amortization of costs of acquiring films and
television programs and accounting for exploitation costs,
including advertising and marketing expenses.
We capitalize costs of production and acquisition, including
financing costs and production overhead, to investment in films
and television programs. These costs are amortized to direct
operating expenses in accordance with SoP 00-2. These costs are
stated at the lower of unamortized films or television program
costs or estimated fair value. These costs for an individual
film or television program are amortized and participation and
residual costs are accrued in the proportion that current
years revenues bear to managements estimates of the
ultimate revenue at the beginning of the year expected to be
recognized from exploitation, exhibition or sale of such film or
television program over a period not to exceed ten years from
the date of initial release. For previously released film or
television programs acquired as part of a library, ultimate
revenue includes estimates over a period not to exceed twenty
years from the date of acquisition. Management regularly reviews
and revises when necessary, its ultimate revenue and cost
estimates, which may result in a change in the rate of
amortization of film costs and participations and residuals
and/or write-down of all or a portion of the unamortized costs
of the film or television program to its estimated fair value.
No assurance can be given that unfavorable changes to revenue
and cost estimates will not occur, which may result in
significant write-downs affecting our results of operations and
financial condition.
Revenue Recognition. 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 Companys participation in box
office receipts. Revenue from the sale of videocassettes and
DVDs in the retail market, net of an allowance for estimated
returns and other allowances, is recognized on the later of
receipt by the customer or street date (when it is
available for sale by the customer). Under revenue sharing
arrangements, rental revenue is recognized when the Company is
entitled to receipts and such receipts are determinable.
Revenues from television licensing are recognized when the
feature film or television program is available to the licensee
for telecast. For television licenses that include separate
availability windows during the license period,
revenue is allocated over the windows. Revenue from
sales to international territories are recognized when access to
the feature film or television program has been granted or
delivery has occurred, as required under the sales contract, and
the right to exploit the feature film or television program has
commenced. For multiple media rights contracts with a fee for a
single film or television program where the contract provides
for media holdbacks, the fee is allocated to the various media
based on managements 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
managements 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.
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.
37
Reserves. Revenues are recorded net of estimated returns
and other allowances. We estimate reserves for video returns in
the unaudited condensed consolidated financial statements based
on previous returns and our estimated expected future returns
related to current period sales on a title-by-title basis in
each of the video businesses. There may be differences between
actual returns and our historical experience. We estimate
provisions for accounts receivable based on historical
experience and relevant facts and information regarding the
collectability of the accounts receivable.
Income Taxes. The Company is subject to income taxes in
the United States, and in several states and foreign
jurisdictions in which we operate. We account for income taxes
according to Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes
(SFAS 109). SFAS 109 requires the
recognition of deferred tax assets, net of applicable reserves,
related to net operating loss carryforwards and certain
temporary differences. The standard requires recognition of a
future tax benefit to the extent that realization of such
benefit is more likely than not or a valuation allowance is
applied.
Goodwill. On April 1, 2001, the Company adopted
Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets.
Goodwill is reviewed annually for impairment within each fiscal
year or between the annual tests if an event occurs or
circumstances change that indicate it is more-likely-than-not
that the fair value of a reporting unit is less than its
carrying value. The Company performs its annual impairment test
as of December 31 in each fiscal year. The Company
performed its annual impairment test on its goodwill as of
December 31, 2004. No goodwill impairment was identified in
any of the Companys reporting units. Determining the fair
value of reporting units requires various assumptions and
estimates.
Business Acquisitions. The Company accounts for its
business acquisitions as a purchase, whereby the purchase price
is allocated to the assets acquired and liabilities assumed
based on their estimated fair value. The excess of the purchase
price over estimated fair value of the net identifiable assets
is allocated to goodwill. Determining the fair value of assets
and liabilities requires various assumptions and estimates.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards
No. 123R. In December 2004, the FASB issued
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123(R)). SFAS 123(R) revises
SFAS No. 123 and eliminates the alternative to use the
intrinsic method of accounting under APB No. 25.
SFAS 123(R) requires all public companies accounting for
share-based payment transactions in which an enterprise receives
employee services in exchange for (a) equity instruments of
the enterprise or (b) liabilities that are based on the
fair value of the enterprises equity instruments or that
may be settled by the issuance of such equity instruments, to
account for these types of transactions using a fair-value-based
method. The Company currently accounts for share-based payments
to employees using the intrinsic value method as set forth in
APB No. 25 Accounting for Stock Issued to
Employees. As such, the Company generally recognizes no
compensation cost for employee stock options.
SFAS No. 123(R) eliminates the alternative to use APB
No. 25s intrinsic value method of accounting. The
impact of adoption of SFAS No. 123(R) cannot be
predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had we
adopted SFAS No. 123(R) in prior periods, the impact
would have approximated the impact of SFAS No. 123 as
described in the disclosure of pro forma net income (loss) and
basic and diluted income (loss) per share in note 12 in the
notes to the unaudited condensed consolidated financial
statements. SFAS No. 123(R) permits companies to adopt
its requirements using either a modified prospective method or a
modified retrospective method. The adoption of
SFAS No. 123(R)s fair value method will have an
impact on our results of operations, although it will have no
material impact on our overall financial position. The Company
has not yet determined which method it will utilize. The
provisions of SFAS No. 123(R) are effective for
financial statements with the first interim or annual reporting
period beginning after June 15, 2005. However, the SEC
announced on April 14, 2005 that it would provide for a
phased-in implementation process for SFAS No. 123(R).
As a result, the Company will not be required to apply
SFAS No. 123(R) until the period beginning
April 1, 2006.
38
Results of Operations
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Three Months Ended December 31, 2005 Compared to
Three Months Ended December 31, 2004 |
Consolidated revenues this quarter of $231.0 million
increased $40.6 million, or 21.3%, compared to
$190.4 million in the prior years quarter.
Motion pictures revenue of $203.3 million this quarter
increased $28.2 million, or 16.1%, compared to
$175.1 million in the prior years quarter. Theatrical
revenue included in motion picture revenue of $49.9 million
this quarter increased $21.0 million, or 72.7%, compared to
$28.9 million in the prior years quarter. Significant
theatrical releases this quarter included Saw II, Waiting
and In The Mix. Significant theatrical releases in
the prior years quarter included Saw. Video revenue
included in motion picture revenue of $115.9 million this
quarter decreased $4.9 million, or 4.1%, compared to
$120.8 million in the prior years quarter.
Significant video releases this quarter included Devils
Reject and High Tension. Previously released titles
such as Crash, Saw and Barbie and the Magic of Pegasus
also continued to generate significant video revenues in the
quarter. Significant video releases in the prior year which
generated significant revenue in the prior years quarter
included Open Water, The Punisher, Barbie as the Princess and
the Pauper, Godsend and Care Bears: Journey to
Joke-A-Lot. International revenue included in motion picture
revenue of $14.5 million this quarter increased
$3.2 million, or 28.3%, compared to $11.3 million in
the prior years quarter. Significant international sales
this quarter included Happy Endings and Saw II.
Significant international sales in the prior years
quarter included Godsend and The Prince and Me.
Television revenue included in motion picture revenue of
$20.2 million this quarter increased $9.5 million, or
88.8%, compared to $10.7 million in the prior years
quarter. Significant television license fees this quarter were
generated from Diary of a Mad Black Woman. Significant
television license fees in the prior years quarter
included Van Wilder: Party Liaison and Girl With a
Pearl Earring.
Television production revenue of $26.0 million this quarter
increased by $11.8 million, or 83.1%, from
$14.2 million in the prior years quarter. This
quarter, 17 hours of one-hour drama series were delivered
contributing revenue of $18.0 million and international and
other revenue on one-hour drama series was $4.2 million.
This quarter, revenue contributed from television movies, video
releases of television product and non-fiction programming
totaled $3.8 million. In the prior years quarter,
19 hours of one-hour drama series were delivered for
revenue of $8.4 million, international and other revenue on
one-hour drama series was $1.9 million and revenue
contributed from television movies and video releases of
television product was $3.9 million. Domestic deliveries of
one-hour drama series this quarter included Wildfire, Missing
and The Dead Zone. Television movies included
Three Wise Guys. Domestic deliveries in the prior
years quarter included the one-hour drama
series Second Verdict and Missing and
television movies included Frankenstein.
Studio facilities revenue of $1.7 million this quarter
increased $0.6 million, or 54.6%, compared to
$1.1 million in the prior years quarter due to
increases in occupancy and rental rates.
Direct operating expenses primarily include amortization of film
and television production or acquisition costs, participation
and residual expenses. Direct operating expenses of
$110.7 million for the quarter were 47.9% of revenue,
compared to direct operating expenses of $82.5 million,
which were 43.3% of revenue in the prior years quarter.
Direct operating expenses as a percentage of revenue for the
motion pictures segment increased due to a provision for
doubtful accounts recorded this quarter primarily for a video
retail customer of $4.4 million and to a reversal of the
provision for doubtful accounts in the prior years
quarter. The reversal was primarily due to collection of
accounts receivable during the three months ended
December 31, 2004 that were previously provided for.
Distribution and marketing expenses of $99.5 million
increased $19.2 million, or 23.9%, compared to
$80.3 million in the prior years quarter. Theatrical
prints and advertising (P&A) this quarter of
$45.6 million increased $15.5 million, or 51.5%,
compared to $30.1 million in the prior years quarter.
Theatrical P&A this quarter included significant
expenditures on the release of titles such as Saw II, In
The Mix and Waiting. Theatrical P&A in the prior
years quarter included significant expenditures on the
release of titles such as Saw and Beyond the Sea. In
The Mix released theatrically during the quarter is not
expected to be an ultimately profitable title. Video
distribution and marketing costs on motion picture and television
39
product this quarter of $48.3 million remain unchanged
compared to $48.3 million in the prior years quarter.
Video expenditure this quarter included significant expenditure
on the release of titles such as Devils Rejects and
Care Bears: Big Wish. Video expenditure in the prior
years quarter included significant expenditure on titles
such as Open Water, Care Bears: The King Funshine and
Barbie as the Princess and the Pauper.
General and administration expenses of $13.0 million this
quarter decreased $2.6 million, or 16.7%, compared to
$15.6 million in the prior years quarter. The
decrease was primarily due to decreased stock-based compensation
expense consisting of a decrease in stock appreciation rights
expense of $5.8 million (this quarter included a recovery
of SARs expense of $2.6 million and the prior
years quarter included an expense of $3.2 million),
offset by an increase in amortization of unearned compensation
expense on restricted share units granted in the current year of
$0.4 million. The prior years quarter included
general and administration expenses for Christal of
$0.4 million, a variable interest entity no longer
consolidated effective April 2005 due to the sale of our
interest in Christal. In the current quarter, $1.2 million
of production overhead was capitalized compared to
$0.6 million in the prior years quarter.
Depreciation and amortization of $0.6 million this quarter
decreased $0.2 million, or 25.0%, from $0.8 million in
the prior years quarter.
Interest expense of $4.9 million this quarter decreased
$3.4 million, or 41.0%, from $8.3 million in the prior
years quarter primarily due to a write-off of deferred
financing costs in the prior quarters amortization and a
decrease in interest and amortization of deferred financing fees
on the credit facility, offset by an increase in interest and
amortization of deferred financing fees on the subordinated
notes. The credit facility had a nil balance during the three
months ended December 31, 2005 resulting in a decrease in
interest on the credit facility. During the three months ended
December 31, 2004, deferred financing fees of
$3.4 million on the term loan portion of the credit
facility were written off to interest expense. The three months
ended December 31, 2005 includes interest and amortization
on the 4.875% Notes issued December 2003, the
2.9375% Notes issued October 2004 and the 3.625% Notes
issued February 2005, whereas the three months ended
December 31, 2004 includes interest and amortization on the
4.875% Notes and the 2.9375% Notes only.
Interest rate swaps do not meet the criteria of effective hedges
and therefore a fair valuation gain of $0.2 million was
recorded this quarter compared to a fair valuation gain of
$0.4 million recorded in the prior years quarter.
This quarter included interest income of $1.0 million,
compared to $0.1 million in the prior years quarter.
Interest income this quarter was earned on the cash balance and
available-for-sale investments held during the three months
ended December 31, 2005.
Equity interests of less than $0.1 million this quarter
includes the equity interest in the loss of Maple Pictures
consisting of 10% of the losses of Maple Pictures.
Net income for the three months ended December 31, 2005 was
$3.1 million, or basic income per common share of $0.03 on
103.9 million weighted average shares outstanding. This
compares to net income for the three months ended
December 31, 2004 of $3.4 million or basic income per
common share of $0.03 on 98.1 million weighted average
common shares outstanding. Diluted income per common share for
the three months ended December 31, 2005 was $0.03 on
107.2 million weighted average shares outstanding. This
compares to diluted income per common share for the three months
ended December 31, 2004 of $0.03 on 105.0 million
weighted average shares outstanding.
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Nine Months Ended December 31, 2005 Compared to Nine
Months Ended December 31, 2004 |
Consolidated revenues for the nine months ended
December 31, 2005 of $637.8 million increased
$27.6 million, or 4.5%, compared to $610.2 million for
the nine months ended December 31, 2004.
Motion pictures revenue of $518.6 million this period
decreased $18.4 million, or 3.4%, compared to
$537.0 million in the prior years period. Theatrical
revenue from motion pictures of $90.9 million this period
decreased $22.4 million, or 19.8%, compared to
$113.3 million in the prior years period. Significant
theatrical
40
releases this period included Saw II, Crash, Lord of
War, The Devils Rejects and Waiting.
Significant theatrical releases in the prior years period
included Fahrenheit 9/11, Saw, The Punisher, Open Water,
Godsend and The Cookout. Video revenue from motion
pictures of $333.1 million this period increased
$7.2 million, or 2.2%, compared to $325.9 million in
the prior years period. Significant video releases this
period included Diary of a Mad Black Woman, Crash,
Devils Rejects, Alone in the Dark, Beyond the Sea, Barbie
and the Magic of Pegasus and the Tyler Perry Plays.
Significant video releases in the prior years period
included The Punisher, Barbie in the Prince and the Pauper,
Godsend, Dirty Dancing: Havana Nights, Open Water, The Cooler
and Girl With A Pearl Earring. International revenue
from motion pictures of $34.4 million this period decreased
$32.7 million, or 48.7%, compared to $67.1 million in
the prior years period. Significant international sales
this period included Hotel Rwanda, Happy Endings, Dirty
Dancing: Havana Nights, Saw, Devils Rejects and
Saw II. Significant international sales in the prior
years period included The Punisher, Godsend, The Prince
and Me, Open Water and Final Cut. Television revenue
from motion pictures of $54.8 million this period increased
$27.9 million, or 103.7%, compared to $26.9 million in
the prior years period. Significant television license
fees this period included Saw, Diary of a Mad Black Woman,
Open Water, The Cookout and The Punisher. Significant
television license fees in the prior years period included
Van Wilder: Party Liaison, House of the Dead and Cabin
Fever.
Television production revenue of $114.6 million this period
increased by $44.9 million, or 64.4%, from
$69.7 million in the prior years period. This period,
68 hours of one-hour drama series and 10 half-hours of
half-hour drama series were delivered domestically contributing
revenue of $91.6 million and international and other
revenue on one-hour and half-hour drama series was
$14.7 million. This period, revenue contributed from
television movies, video releases of television and non-fiction
programming totaled $8.3 million. In the prior years
period, 46 hours of one-hour drama series were delivered
for revenue of $38.8 million, international and other
revenue on one-hour drama series was $15.0 million and
revenue contributed from television movies, video releases of
television product and non-fiction programming was
$15.9 million. Domestic deliveries of one-hour drama series
this period included The Cut, Wildfire, Missing and
The Dead Zone and of half-hour drama series included
Weeds. Television movies included Three Wise Guys.
Domestic deliveries of one-hour drama series in the prior
years period included The Dead Zone, Second Verdict,
Missing and 5 Days to Midnight. Television movies in
the prior years period included Frankenstein, Baby for
Sale, Infidelity and A Mothers Gift.
Studio facilities revenue of $4.7 million this period
increased $1.2 million, or 34.3%, compared to
$3.5 million in the prior years period due primarily
to increases in occupancy and rental rates period over period.
Direct operating expenses primarily include amortization of film
and television production or acquisition costs, participation
and residual expenses. Direct operating expenses of
$320.0 million for the period were 50.2% of revenue,
compared to direct operating expenses of $258.6 million,
which were 42.4% of revenue in the prior years period.
Direct operating expenses as a percentage of revenue for the
motion pictures and television segment increased period over
period due to lower margins on the mix of titles released during
the period. The television segment in particular generated
significant revenues during the period associated with higher
direct operating expenses as a percentage of revenue. Direct
operating expenses as a percentage of revenue for the motion
pictures segment also increased due to a provision for doubtful
accounts recorded this period, primarily for a video retail
customer of $4.4 million and to a reversal of the provision
for doubtful accounts in the prior years period. The
reversal was primarily due to collection of accounts receivable
during the nine months ended December 31, 2004 that were
previously provided for.
Distribution and marketing expenses of $290.7 million
increased $8.2 million, or 2.9%, compared to
$282.5 million in the prior years period. Theatrical
P&A this period of $146.1 million increased
$10.7 million, or 7.9%, compared to $135.4 million in
the prior years period. Theatrical P&A this period
included significant expenditure on the release of titles such
as Saw II, Crash, Lord of War, In the Mix, The Devils
Rejects, High Tension, Rize, Undiscovered and
Waiting. In The Mix, High Tension, Undiscovered, Rize
and Happy Endings released theatrically during the
period are not expected to be ultimately profitable titles.
Theatrical P&A in the prior years period included
significant expenditures on the release of titles such as
Open Water, Saw, Godsend, The Punisher, Fahrenheit 9/11
and The Cookout. Video distribution and marketing
costs on motion
41
picture and television product this period of
$134.0 million decreased $6.4 million, or 4.6%,
compared to $140.4 million in the prior years period.
Video distribution and marketing costs this period included
significant expenditure on the release of titles such as
Diary of a Mad Black Woman, Crash, Devils Rejects,
Barbie and the Magic of Pegasus, Alone in the Dark, Beyond the
Sea and the Tyler Perry Plays. Video distribution and
marketing costs in the prior years period included
significant expenditure on the release of titles such as The
Punisher, Barbie in the Prince and the Pauper, Dirty Dancing:
Havana Nights, Godsend, Care Bears: The King Funshine, The
Cooler and Girl With A Pearl Earring.
General and administration expenses of $45.4 million this
period decreased $4.1 million, or 8.3%, compared to
$49.5 million in the prior years period primarily due
to a decrease in stock-based compensation expense, offset by an
increase in professional fees. The decrease in stock-based
compensation expense consists of a decrease in share
appreciation rights expense of $11.1 million (this period
included a recovery of SARs expense of $4.1 million
and the prior years period included an expense of
$7.0 million), offset by an increase in amortization of
unearned compensation expense on restricted share units granted
during the current year period of $1.1 million.
Professional fees increased primarily due to fees associated
with the documentation, assessment and testing of our internal
controls as required by Section 404 of the Sarbanes Oxley
Act and due to the fees associated with our fiscal year end
audit services. The prior years period included general
and administration expenses for Christal of $1.7 million, a
variable interest entity no longer consolidated effective April
2005 due to the sale of our interest in Christal. In the current
period, $3.5 million of production overhead was capitalized
compared to $1.9 million in the prior years period.
Depreciation of $2.0 million this period decreased
$0.2 million, or 9.1%, compared to $2.2 million in the
prior years period.
Interest expense of $14.7 million this period decreased
$4.7 million, or 24.2%, compared to $19.4 million in
the prior years period primarily due to a write-off of
deferred financing costs in the prior years amortization
and a decrease in interest and amortization of deferred
financing fees on the credit facility, offset by an increase in
interest and amortization of deferred financing fees on the
subordinated notes. The credit facility had a nil balance during
the nine months ended December 31, 2005 resulting in a
decrease in interest on the credit facility. During the three
months ended December 31, 2004, deferred financing fees of
$3.4 million on the term loan portion of the credit
facility were written off to interest expense. The nine months
ended December 31, 2005 includes interest and amortization
on the 4.875% Notes issued December 2003, the
2.9375% Notes issued October 2004 and the 3.625% Notes
issued February 2005, whereas the nine months ended
December 31, 2004 includes interest and amortization on the
4.875% Notes and the 2.9375% Notes only. Interest
expense in the prior years period was partially offset by
interest capitalized to production costs of $0.7 million in
the prior years period.
Interest rate swaps do not meet the criteria of effective hedges
and therefore a fair valuation gain of $0.1 million was
recorded this period and a fair valuation gain of
$2.4 million was recorded in the prior years period.
This period included interest income of $3.0 million,
compared to $0.1 million in the prior years period.
Interest income this period was earned on the cash balance and
available-for-sale investments held during the nine months ended
December 31, 2005.
Other income in the prior years period includes
$0.7 million gain on the disposition of assets and
liabilities of Termite Art, a division of the television
segment, in exchange for cash. Other income in the prior
years period also includes $0.1 million reversal of a
provision for a promissory note previously provided for as
write-down of other assets, due to the collection of cash on the
promissory note in October 2004.
Equity interests of $0.1 million this period includes
$0.1 million equity interest in the loss of Maple Pictures
consisting of 10% of the losses of Maple Pictures. Equity
interests of $0.2 million in the prior years period
includes $0.2 million equity interest in the loss of
CinemaNow which consists of approximately 30% of the losses of
CinemaNow. The investment in CinemaNow made in July 2004 was
reduced to nil by September 30, 2004 and therefore we do
not record any additional losses, as we have no further funding
requirements.
42
Net loss for the nine months ended December 31, 2005 was
$32.8 million, or basic loss per common share of $0.32 on
102.7 million weighted average shares outstanding. This
compares to net income for the nine months ended
December 31, 2004 of $0.2 million or basic income per
common share of $0.00 on 96.4 million weighted average
common shares outstanding. Diluted income per common share for
the nine months ended December 31, 2004 was $0.00 on
102.9 million weighted average common shares outstanding.
EBITDA
EBITDA, defined as earnings before interest expense, interest
rate swaps
mark-to-market,
interest income, income tax provision, depreciation and minority
interests of $7.8 million for the three months ended
December 31, 2005 decreased $4.3 million, or 35.5%,
compared to EBITDA of $12.1 million for the three months
ended December 31, 2004. EBITDA of negative
$18.4 million for the nine months ended December 31,
2005 decreased $38.6 million compared to EBITDA of
$20.2 million for the nine months ended December 31,
2004.
EBITDA is a non-GAAP financial measure. Management believes
EBITDA to be a meaningful indicator of our performance that
provides useful information to investors regarding our financial
condition and results of operations. Presentation of EBITDA is
consistent with our past practice, and EBITDA is a non-GAAP
financial measure commonly used in the entertainment industry
and by financial analysts and others who follow the industry to
measure operating performance. While management considers EBITDA
to be an important measure of comparative operating performance,
it should be considered in addition to, but not as a substitute
for, net income and other measures of financial performance
reported in accordance with GAAP. EBITDA does not reflect cash
available to fund cash requirements. 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.
The following table reconciles EBITDA to net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Three Months | |
|
Nine Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Amounts in thousands) | |
EBITDA, as defined
|
|
$ |
7,796 |
|
|
$ |
12,092 |
|
|
$ |
(18,351 |
) |
|
$ |
20,173 |
|
Depreciation
|
|
|
(631 |
) |
|
|
(835 |
) |
|
|
(1,976 |
) |
|
|
(2,224 |
) |
Interest expense
|
|
|
(4,929 |
) |
|
|
(8,275 |
) |
|
|
(14,718 |
) |
|
|
(19,388 |
) |
Interest rate swaps mark-to-market
|
|
|
218 |
|
|
|
419 |
|
|
|
119 |
|
|
|
2,408 |
|
Interest income
|
|
|
1,046 |
|
|
|
74 |
|
|
|
2,962 |
|
|
|
111 |
|
Minority interests
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
(2 |
) |
Income tax provision
|
|
|
(358 |
) |
|
|
(141 |
) |
|
|
(819 |
) |
|
|
(857 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
3,142 |
|
|
$ |
3,353 |
|
|
$ |
(32,783 |
) |
|
$ |
221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to note 15 of the unaudited condensed consolidated
financial statements for reconciliation of net income (loss)
reported under U.S. GAAP to net income (loss) reported
under Canadian GAAP.
Liquidity and Capital Resources
Our liquidity and capital resources are provided principally
through cash generated from operations, issuance of subordinated
notes and our credit facility.
Convertible Senior Subordinated Notes. In December 2003,
Lions Gate Entertainment Inc. sold $60.0 million of
4.875% Notes that mature on December 15, 2010. We
received $57.0 million of net proceeds, after paying
placement agents fees. Offering expenses were
$0.7 million. The 4.875% 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 4.875% Notes, unless previously redeemed, into common
shares of the Company at a
43
conversion rate of 185.0944 shares per $1,000 principal
amount of the 4.875% Notes, which is equal to a conversion
price of approximately $5.40 per share. Lions Gate
Entertainment Inc. may redeem the 4.875% Notes at its
option on or after December 15, 2006 at 100% of their
principal amount plus accrued and unpaid interest if the closing
price of our common shares 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 trading day before the
date of notice of redemption.
In October 2004, Lions Gate Entertainment Inc. sold the
2.9375% Notes that mature on October 15, 2024. We
received $146.0 million of net proceeds after paying
placement agents fees. Offering expenses were
$0.7 million. The 2.9375% Notes are convertible at the
option of the holder, at any time prior to maturity, upon
satisfaction of certain conversion contingencies, into common
shares of the Company at a conversion rate of
86.9565 shares per $1,000 principal amount of the
2.9375% Notes, which is equal to a conversion price of
approximately $11.50 per share, subject to adjustment upon
certain events. From October 15, 2009 to October 14,
2010, Lions Gate Entertainment Inc. may redeem the
2.9375% Notes at 100.839%; from October 15, 2010 to
October 14, 2011, Lions Gate Entertainment Inc. may redeem
the 2.9375% Notes at 100.420%; and thereafter at 100%.
In February 2005, Lions Gate Entertainment Inc. sold the
3.625% Notes that mature on March 15, 2025. We
received $170.2 million of net proceeds after paying
placement agents fees. Offering expenses were
approximately $0.6 million. The 3.625% Notes are
convertible at the option of the holder, at any time prior to
maturity into common shares of the Company at a conversion rate
of 70.0133 shares per $1,000 principal amount of the
3.625% Notes, which is equal to a conversion price of
approximately $14.28 per share, subject to adjustment upon
certain events. Lions Gate Entertainment Inc. may redeem the
3.625% Notes at its option on or after March 15, 2012
at 100% of their principal amount plus accrued and unpaid
interest.
Credit Facility. The Company entered into a
$350 million credit facility in December 2003 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. By December 31,
2004, the Company had repaid the term loan in full, thereby
reducing the credit facility to $215 million. Effective
March 31, 2005, the credit facility was amended to
eliminate the $15 million Canadian dollar-denominated
revolving credit facility and increase the
U.S. dollar-denominated revolving credit facility by the
same amount. Effective October 17, 2005, the credit
facility was amended in connection with the acquisition of
Redbus, to provide a portion of the credit facility available
for borrowing by Redbus in either U.S. dollars or British
pounds sterling. At December 31, 2005, the Company had no
borrowings (March 31, 2005 nil) under the
credit facility. The credit facility expires December 31,
2008 and bears interest at 2.75% over the Adjusted LIBOR or
1.75% over the U.S. prime rates. The availability of funds
under the credit facility is limited by the borrowing base,
which is calculated on a monthly basis. Amounts available under
the credit facility are also limited by outstanding letters of
credit which amounted to $7.2 million at December 31,
2005. The borrowing base assets at December 31, 2005
totaled $411.3 million (March 31, 2005
$405.1 million) and therefore $207.8 million is
available under the credit facility at December 31, 2005.
The Company is required to pay a monthly commitment fee of
0.50% per annum on the total credit facility of
$215 million less the amount drawn. Right, title and
interest in and to all personal property of Lions Gate
Entertainment Corp. and Lions Gate Entertainment Inc. is being
pledged as security for the credit facility. The credit facility
is senior to the Companys film obligations, subordinated
notes and mortgages payable. 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 ended
September 30, 2005. The swap was in effect as long as three
month LIBOR was less than 5.0%. The value of the interest rate
swap at the maturity date of December 31, 2005 is nil
(March 31, 2005 $0.1 million). Changes in
the fair value representing a fair valuation loss on the
interest rate swap during the nine months ended
December 31, 2005 are $0.1 million (2004
gain of $2.2 million) and are included in the unaudited
condensed consolidated statements of operations.
Filmed Entertainment Backlog. Backlog represents the
amount of future revenue not yet recorded from executed
contracts for the licensing of films and television product for
television exhibition and in international markets. Backlog at
December 31, 2005 and March 31, 2005 is
$147.6 million and $100.3 million,
44
respectively. The increase in backlog is primarily due to
contracts entered into on titles such as Crash, Saw II,
In the Mix, Skinwalkers, Waiting, Wildfire and Lord of
War during the nine months ended December 31, 2005.
Cash Flows Provided by Operating Activities. Cash flows
provided by operating activities in the nine months ended
December 31, 2005 were $58.9 million compared to cash
flows provided by operating activities in the nine months ended
December 31, 2004 of $83.1 million. The decrease in
cash flows provided by operating activities primarily resulted
from an increase in net loss this period and an increase in
investment in films and television programs expenditure, offset
by an increase in accounts payable and accrued liabilities in
the current period.
Cash Flows Used in Investing Activities. Cash flows used
in investing activities of $112.6 million for the nine
months ended December 31, 2005 included the acquisition of
a net $84.4 million of investments available-for-sale,
$27.1 million for our acquisition of Redbus, net of cash
acquired, cash received from the sale of our investment in
Christal Distribution of $2.9 million, less
$4.1 million for purchases of property and equipment. Cash
flows used in investing activities of $0.8 million in the
nine months ended December 31, 2004 included
$2.0 million for purchases of property and equipment less
$1.2 million received on the disposition of the assets and
liabilities of Termite Art, as division of the television
segment.
Cash Flows Used in Financing Activities. Cash flows used
in financing activities of $7.0 million in the nine months
ended December 31, 2005 were primarily for repayment of a
promissory note and mortgages payable. Cash flows used in
financing activities of $86.5 million in the nine months
ended December 31, 2004 were primarily due to the repayment
of bank loans, offset by proceeds from the sale of the
2.9375% Notes and proceeds from the issuance of common
shares for the exercise of stock options and warrants.
Anticipated Cash Requirements. The nature of our business
is such that significant initial expenditures are required to
produce, acquire, distribute and market films and television
programs, while revenues from these films and television
programs are earned over an extended period of time after their
completion or acquisition. We believe that cash flow from
operations, cash on hand, investments available-for-sale, credit
facility availability, tax shelter and production financing
available will be adequate to meet known operational cash
requirements for the foreseeable future, including the funding
of future film and television production, film rights
acquisitions and theatrical and video release schedules. We
monitor our cash flow liquidity, availability, fixed charge
coverage, capital base, film spending and leverage ratios with
the long-term goal of maintaining our creditworthiness.
Our current financing strategy is to fund operations and to
leverage investment in films and television programs through our
cash flow from operations, our credit facility, single-purpose
production financing, government incentive programs and
distribution commitments. In addition, we may acquire businesses
or assets, including individual films or libraries, that are
complementary to our business. Any such transaction could be
financed through our cash flow from operations, credit
facilities, equity or debt financing.
Future annual repayments on debt and other financing
obligations, initially incurred for a term of more than one
year, as of December 31, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 |
|
Thereafter | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
|
(Amounts in thousands) | |
Bank loans
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Film obligations Minimum guarantees initially
incurred for a term of more than one year
|
|
|
202 |
|
|
|
3,444 |
|
|
|
12,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,083 |
|
Film obligations Film productions
|
|
|
5,923 |
|
|
|
12,632 |
|
|
|
|
|
|
|
4,080 |
|
|
|
|
|
|
|
14,988 |
|
|
|
37,623 |
|
Subordinated notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
385,000 |
|
|
|
385,000 |
|
Mortgages payable
|
|
|
275 |
|
|
|
1,153 |
|
|
|
2,101 |
|
|
|
13,240 |
|
|
|
|
|
|
|
|
|
|
|
16,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,400 |
|
|
$ |
17,229 |
|
|
$ |
14,538 |
|
|
$ |
17,320 |
|
|
$ |
|
|
|
$ |
399,988 |
|
|
$ |
455,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
Principal debt and other financing obligation repayments due
during the three months ending March 31, 2006 of
$6.4 million consists primarily of $5.9 million owed
to film production entities on delivery of titles. Principal
repayments due are expected to be paid through cash generated
from operations or from the available borrowing capacity from
our revolving credit facility.
Future commitments under contractual obligations by expected
maturity date as of December 31, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Amounts in thousands) | |
Operating leases
|
|
$ |
813 |
|
|
$ |
2,279 |
|
|
$ |
2,203 |
|
|
$ |
454 |
|
|
$ |
42 |
|
|
$ |
|
|
|
$ |
5,791 |
|
Employment and consulting contracts
|
|
|
4,739 |
|
|
|
12,613 |
|
|
|
5,758 |
|
|
|
914 |
|
|
|
|
|
|
|
|
|
|
|
24,024 |
|
Purchase obligations
|
|
|
19,077 |
|
|
|
29,962 |
|
|
|
14,314 |
|
|
|
3,000 |
|
|
|
2,900 |
|
|
|
900 |
|
|
|
70,153 |
|
Distribution and marketing commitments
|
|
|
3,108 |
|
|
|
35,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27,737 |
|
|
$ |
80,479 |
|
|
$ |
22,275 |
|
|
$ |
4,368 |
|
|
$ |
2,942 |
|
|
$ |
900 |
|
|
$ |
138,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations relate to the purchase of film rights for
future delivery, future film production and development
obligations. Amounts due during the three months ending
March 31, 2006 of $27.7 million are expected to be
paid through cash generated from operations or from the
available borrowing capacity from our revolving credit facility.
|
|
Item 3. |
Quantitative and Qualitative Disclosures About Market
Risk. |
Currency and Interest Rate Risk Management
Market risks relating to our operations result primarily from
changes in interest rates and changes in foreign currency
exchange rates. Our exposure to interest rate risk results from
the financial debt and obligation instruments that arise from
transactions entered into during the normal course of business.
As part of our overall risk management program, we evaluate and
manage our exposure to changes in interest rates and currency
exchange risks on an ongoing basis. Hedges and derivative
financial instruments will be used in the future in order to
manage our interest rate and currency exposure. We have no
intention of entering into financial derivative contracts, other
than to hedge a specific financial risk.
Currency Rate Risk. We incur certain operating and
production costs in foreign currencies and are subject to market
risks resulting from fluctuations in foreign currency exchange
rates. Our principal currency exposure is between Canadian and
U.S. dollars. The Company enters into forward foreign
exchange contracts to hedge foreign currency exposures on future
production expenses denominated in Canadian dollars. As of
December 31, 2005, we had outstanding contracts to sell
US$9.0 million in exchange for CDN$10.5 million over a
period of five weeks at a weighted average exchange rate of
CDN$1.1663. Net changes in the fair value representing an
unrealized fair value loss on foreign exchange contracts
outstanding during the three and nine months ended
December 31, 2005 amounted to $0.3 million and
$0.3 million, respectively, and are included in accumulated
other comprehensive income (loss), a separate component of
shareholders equity. During the three and nine months
ended December 31, 2005, we completed foreign exchange
contracts denominated in Canadian dollars. The net gains
resulting from the completed contracts were $0.3 million
and $1.0 million for the three months and nine months ended
December 31, 2005, respectively. These contracts are
entered into with a major financial institution as counterparty.
We are exposed to credit loss in the event of nonperformance by
the counterparty, which is limited to the cost of replacing the
contracts, at current market rates. We do not require collateral
or other security to support these contracts.
Interest Rate Risk. Our principal risk with respect to
our debt and other financing obligations is interest rate risk,
to the extent not mitigated by interest rate swaps. We currently
have minimal exposure to cash flow risk due to changes in market
interest rates related to our outstanding debt and other
financing obligations.
46
Our credit facility has a nil balance at December 31, 2005.
Other financing obligations subject to variable interest rates
include $37.6 million owed to film production entities on
delivery of titles.
The Company entered into a $100 million interest rate swap
at an interest rate of 3.08%, commencing January 2003 and ended
September 30, 2005. The swap was in effect as long as three
month LIBOR was less than 5.0%. The value of the interest rate
swap at the maturity date of September 30, 2005 was nil
(March 31, 2005 negative $0.1 million).
Changes in the fair value representing a fair valuation loss on
the interest rate swap during the nine months ended
December 31, 2005 are $0.1 million (2004
gain of $2.2 million) and are included in the unaudited
condensed consolidated statements of operations.
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 three and nine months ended
December 31, 2005, the subsidiary recorded interest expense
of $0.3 million and $0.8 million, respectively
(2004 $0.2 million and $0.7 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 December 31, 2005 is negative
$0.1 million (March 31, 2005 negative
$0.3 million). Change in the fair value representing a fair
valuation gain on the interest rate swap for the nine months
ended December 31, 2005 is $0.2 million
(2004 gain of $0.2 million) and is included in
the unaudited condensed 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.
The table below presents repayments and related weighted average
interest rates for our interest-bearing debt and other
obligations as of December 31, 2005.
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|
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|
|
|
|
|
|
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|
|
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|
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|
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|
|
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|
Year Ended March 31, | |
|
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| |
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 |
|
Thereafter | |
|
Total | |
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| |
|
| |
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| |
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| |
|
|
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| |
|
| |
|
|
(Amounts in thousands) | |
Film obligations Film productions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable(1)
|
|
$ |
5,923 |
|
|
$ |
12,632 |
|
|
$ |
|
|
|
$ |
4,080 |
|
|
$ |
|
|
|
$ |
14,988 |
|
|
$ |
37,623 |
|
Subordinated notes:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000 |
|
|
|
60,000 |
|
Fixed(3)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000 |
|
|
|
150,000 |
|
Fixed(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,000 |
|
|
|
175,000 |
|
Mortgages payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed(5)
|
|
|
275 |
|
|
|
1,153 |
|
|
|
2,101 |
|
|
|
13,240 |
|
|
|
|
|
|
|
|
|
|
|
16,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,198 |
|
|
$ |
13,785 |
|
|
$ |
2,101 |
|
|
$ |
17,320 |
|
|
$ |
|
|
|
$ |
399,988 |
|
|
$ |
439,392 |
|
|
|
|
|
|
|
|
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|
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|
|
|
(1) |
Amounts owed to film production entities on delivery of titles.
The film production entities incurred average variable interest
rates at December 31, 2005 of U.S. prime minus 4.0%. |
|
(2) |
4.875% Notes with fixed interest rate equal to 4.875%. |
|
(3) |
2.9375% Notes with fixed interest rate equal to 2.9375%. |
|
(4) |
3.625% Notes with fixed interest rate equal to 3.625%. |
|
(5) |
Mortgages payable on the studio facility. Fixed interest rate
equal to 5.62% to 7.51%. |
Item 4. Controls and
Procedures.
Evaluation of Disclosure Controls and Procedures
As previously disclosed in our Annual Report on
Form 10-K for
2005, our Quarterly Reports on
Form 10-Q for the
quarters ended June 30, 2005 and September 30, 2005,
management had identified
47
material weaknesses in internal controls over financial
reporting as a result of its annual assessment of its internal
controls over financial reporting for the year ended
March 31, 2005 related to the following areas:
|
|
|
|
|
Calculating participations expense and related liabilities for
financial reporting purposes; |
|
|
|
Calculating amortization of investment in film and television
programs; |
|
|
|
Monitoring certain charges billed to us by our outsourced home
entertainment distribution service provider; and |
|
|
|
Financial statement close process. |
Notwithstanding these material weaknesses, there were no
restatements of any previously issued financial statements of
the Company as a result of these identified control deficiencies.
The term disclosure controls and procedures is
defined in
Rules 13a-15(e)
and 15d-15(e) of the
Securities Exchange Act of 1934 (the Exchange Act).
These rules refer to the controls and other procedures of a
company that are designed to ensure that information required to
be disclosed by a company in the reports that it files under the
Exchange Act is recorded, processed, summarized and reported
within required time periods. As of December 31, 2005, the
end of the period covered by this report, the Company carried
out an evaluation under the supervision and with the
participation of our Chief Executive Officer and Chief Financial
Officer of the effectiveness of our disclosure controls and
procedures. Our Chief Executive Officer and Chief Financial
Officer have concluded that such controls and procedures were
not effective. Although we believe we have substantially
addressed the previously identified material weaknesses through
execution of our action plan to remediate these material
weaknesses, we will not be able to demonstrate that these
material weaknesses have been fully remediated or that our
controls are operating effectively until we and our independent
registered public accounting firm conduct the required testing
and assessment of our internal controls over financial reporting
in connection with our March 31, 2006 annual assessment
date.
Changes in Internal Control over Financial Reporting
The Company has implemented an action plan to remediate the
material weaknesses described above. We will not complete our
full assessment and testing until fiscal year end, and
accordingly, can not provide any assurance as to the complete
remediation of these issues. However, we believe that the
actions taken as disclosed in our 2005 Annual Report on
Form 10-K, our
quarterly report on
Form 10-Q for the
first and second quarters and below, have improved our internal
controls. We have made the following additional enhancements to
our internal controls:
|
|
|
|
|
The personnel hired in the previous quarters continue to have a
positive effect on our internal controls as they become more
experienced with our systems, processes and procedures and have
provided additional account analysis, implemented additional
control procedures and provided additional review of analysis
performed by others. In addition, the additional personnel have
allowed for greater allocation of duties within our financial
statement close process to specific personnel and provided an
opportunity for senior financial executives to monitor and
manage the process more effectively. |
|
|
|
The additional personnel in our participations royalty
department have helped to improve the timeliness of preparation
of our participation statements which assists our accounting
department in determining necessary accruals earlier and
allowing more time for review procedures. |
|
|
|
We implemented additional control procedures performed as part
of our participations accounting including a procedure to
accelerate the analysis of our participations liabilities as
compared to our participation statements and payments. We
continue to work on a system development project intended to
improve and simplify the reconciliation of the data to the
general ledger. |
|
|
|
Our new investment in film controller, hired in the prior
quarter, has positively impacted the controls over the
calculations of the film amortization by providing additional
review and analysis of the calculations. In addition, we
implemented a more extensive review process that included at
least two individuals performing review procedures and holding
meetings to review the analysis. |
48
|
|
|
|
|
We have continued to work closely with our outsourced home
entertainment distribution service provider to obtain more
visibility and allow for more analysis of the information
provided. |
|
|
|
We reorganized the duties within the accounts receivable group
in connection with filling certain open positions to better
address the needs of the department, enhance communications and
allow for more specific focus on billing and collections,
revenue recognition and cash application. |
|
|
|
We added a senior analyst in our financial planning and analysis
group to allow for additional analysis of preliminary results
and actual versus budget comparisons by the overall financial
planning and analysis group as well as allowing for more
financial modeling for business decisions. |
|
|
|
We added a vice president of taxation, replacing our former
director of tax, who brings additional experience and can
provide additional oversight and management to our corporate tax
group. |
|
|
|
We added a vice president of internal audit to coordinate and
oversee our internal audit group which performs internal audits
of our internal controls and procedures. |
We will continue to evaluate and align the accounting workload
with existing and new personnel as determined necessary.
Management intends to further implement its action plan to
remediate material weaknesses identified at the end of fiscal
2005 described above and improve our processes and control
procedures.
No other changes to internal control over financial reporting
have come to our managements attention during the three
months ended December 31, 2005 that have materially
affected, or are reasonably likely to materially affect the
Companys internal control over financial reporting.
49
PART II
|
|
Item 1. |
Legal Proceedings. |
None
|
|
Item 2. |
Unregistered Sales of Equity Securities and Use of
Proceeds. |
None
|
|
Item 3. |
Defaults Upon Senior Securities. |
None
|
|
Item 4. |
Submission of Matters to a Vote of Security
Holders. |
None
|
|
Item 5. |
Other Information. |
None
Exhibits filed for Lions Gate through the filing of this
Form 10-Q.
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description of Documents |
|
|
|
|
10 |
.1 |
|
Partnership Interest Purchase Agreement, dated
December 22, 2005, by and among Lions Gate Entertainment
Corp., Lions Gate Films Corp., Bosa Development Corp., and
0742102 B.C. LTD. |
|
10 |
.2 |
|
Amendment to Partnership Interest Purchase Agreement
Amendment and Removal of Conditions Precedent, January 23,
2006, by and among Lions Gate Entertainment Corp., Lions Gate
Films Corp., Bosa Development Corp., and 0742102 B.C. LTD. |
|
31 |
.1 |
|
Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
31 |
.2 |
|
Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
32 |
.1 |
|
Certification of CEO and CFO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
50
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. |
|
|
|
|
Title: |
Chief Financial Officer |
Date: February 9, 2006
51