Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 760K
2: EX-10.51 Material Contract HTML 705K
3: EX-31.1 Certification per Sarbanes-Oxley Act (Section 302) HTML 11K
4: EX-31.2 Certification per Sarbanes-Oxley Act (Section 302) HTML 11K
5: EX-32.1 Certification per Sarbanes-Oxley Act (Section 906) HTML 8K
(Exact name of registrant as
specified in its charter)
British Columbia, Canada
N/A
(State or other jurisdiction
of
(I.R.S. Employer
incorporation or
organization)
Identification
No.)
1055 West
Hastings Street, Suite 2200
Vancouver, British Columbia V6E 2E9
and
2700 Colorado Avenue, Suite 200 Santa Monica, California90404 (Address
of principal executive offices)
Registrant’s telephone
number, including area code)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,”“accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated
filer o
Smaller reporting
company o
(Do
not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest
practicable date.
This report contains “forward-looking statements”
within the meaning of the Private Securities Litigation Reform
Act of 1995. In some cases, you can identify forward-looking
statements by terms such as “may,”“intend,”“will,”“could,”“would,”“expect,”“anticipate,”“potential,”“believe,”“estimate,” or the negative of these terms, and
similar expressions intended to identify forward-looking
statements.
These forward-looking statements reflect Lions Gate
Entertainment Corp.’s current views with respect to future
events and are based on assumptions and are subject to risks and
uncertainties. Also, these forward-looking statements present
our estimates and assumptions only as of the date of this
report. Except for our ongoing obligation to disclose material
information as required by federal securities laws, we do not
intend to update you concerning any future revisions to any
forward-looking statements to reflect events or circumstances
occurring after the date of this report.
Actual results in the future could differ materially and
adversely from those described in the forward-looking statements
as a result of various important factors, including the
substantial investment of capital required to produce and market
films and television series, increased costs for producing and
marketing feature films, budget overruns, limitations imposed by
our credit facilities, unpredictability of the commercial
success of our motion pictures and television programming, the
cost of defending our intellectual property, difficulties in
integrating acquired businesses, technological changes and other
trends affecting the entertainment industry, and the risk
factors found herein and under the heading “Risk
Factors” in our Annual Report on
Form 10-K
filed with the U.S. Securities and Exchange Commission (the
“SEC”) on May 30, 2008, which risk factors are
incorporated herein by reference.
Unless otherwise indicated, all references to the
“Company,”“Lionsgate,”“we,”“us,” and “our” include reference to our
subsidiaries as well.
Accounts receivable, net of reserve for video returns and
allowances of $98,024 (March 31, 2008 — $95,515)
and provision for doubtful accounts of $6,302 (March 31,2008 — $5,978)
198,440
260,284
Investment in films and television programs
740,480
608,942
Property and equipment
14,836
13,613
Goodwill
224,213
224,531
Other assets
55,429
41,572
$
1,486,747
$
1,537,758
LIABILITIES
Accounts payable and accrued liabilities
$
182,985
$
245,430
Participation and residuals
350,952
385,846
Film and production obligations
312,616
278,016
Subordinated notes and other financing obligations
328,718
328,718
Deferred revenue
129,063
111,510
1,304,334
1,349,520
Commitments and contingencies
SHAREHOLDERS’ EQUITY
Common shares, no par value, 500,000,000 shares authorized,
121,445,965 and 121,081,311 shares issued at June 30,2008 and March 31, 2008, respectively
437,990
434,650
Series B preferred shares (10 shares issued and
outstanding)
—
—
Accumulated deficit
(216,524
)
(223,619
)
Accumulated other comprehensive loss
(373
)
(533
)
221,093
210,498
Treasury shares, no par value, 4,072,499 and
2,410,499 shares at June 30, 2008 and March 31,2008, respectively
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
General
Nature
of Operations
Lions Gate Entertainment Corp. (the “Company,”“Lionsgate,”“we,”“us” or
“our”) is a filmed entertainment studio with a
diversified presence in motion pictures, television programming,
home entertainment, family entertainment,
video-on-demand
and digitally delivered content.
Basis
of Presentation
The accompanying unaudited condensed consolidated financial
statements include the accounts of Lionsgate and all of its
wholly owned and controlled subsidiaries.
The unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally
accepted in the United States (“U.S. GAAP”) for
interim financial information and the instructions to
Form 10-Q
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and Article 10 of
Regulation S-X
under the Exchange Act. Accordingly, they do not include all of
the information and footnotes required by U.S. GAAP for
complete financial statements. In the opinion of the
Company’s management, all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair
presentation have been reflected in these unaudited condensed
consolidated financial statements. Operating results for the
three months ended June 30, 2008 are not necessarily
indicative of the results that may be expected for the fiscal
year ended March 31, 2009. The balance sheet at
March 31, 2008 has been derived from the audited financial
statements at that date, but does not include all the
information and footnotes required by U.S. GAAP for
complete financial statements. The accompanying unaudited
condensed consolidated financial statements should be read
together with the consolidated financial statements and related
notes included in our Annual Report on
Form 10-K
for the fiscal year ended March 31, 2008.
Certain amounts presented for fiscal 2008 have been reclassified
to conform to the fiscal 2009 presentation.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. The
most significant estimates made by the Company’s management
in the preparation of the financial statements relate to:
ultimate revenue and costs for investment in films and
television programs; estimates of sales returns, provision for
doubtful accounts, fair value of assets and liabilities for
allocation of the purchase price of companies acquired, income
taxes and accruals for contingent liabilities; and impairment
assessments for investment in films and television programs,
property and equipment, goodwill and intangible assets. Actual
results could differ from such estimates.
Recent
Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board
(“FASB”) issued FASB Staff Position (“FSP”)
APB 14-1,
Accounting for Convertible Debt Instruments That May Be Settled
in Cash upon Conversion (Including Partial Cash Settlement)
(“FSP APB
14-1”).
FSP APB 14-1
clarifies that convertible debt instruments that may be settled
in cash upon either mandatory or optional conversion (including
partial cash settlement) are not addressed by paragraph 12
of APB Opinion No. 14, Accounting for Convertible Debt
and Debt issued with Stock Purchase Warrants. Additionally,
FSP APB 14-1
specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that
will reflect the entity’s nonconvertible debt borrowing
rate when interest cost is recognized in subsequent periods. FSP
APB 14-1 is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. We will adopt FSP APB
14-1
beginning in the first quarter of fiscal 2010, and this standard
must be applied on a retrospective basis. We are evaluating the
impact the adoption of FSP APB
14-1 will
have on our consolidated financial position and results of
operations.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In December 2007, the FASB issued Statement of Financial
Accounting Standards (“SFAS”) No. 141 (revised
2007), Business Combinations
(“SFAS No. 141(R)”).
SFAS No. 141(R) significantly changes the accounting
for business combinations in a number of areas including the
treatment of contingent consideration, preacquisition
contingencies, transaction costs, in-process research and
development and restructuring costs. In addition, under
SFAS No. 141(R), changes in an acquired entity’s
deferred tax assets and uncertain tax positions after the
measurement period will impact income tax expense.
SFAS No. 141(R) is effective for fiscal years
beginning after December 15, 2008. We will adopt
SFAS No. 141(R) beginning in the first quarter of
fiscal 2010, which will change our accounting treatment for
business combinations on a prospective basis.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
(“SFAS No. 160”). SFAS No. 160
changes the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and
classified as a component of equity. This new consolidation
method significantly changes the accounting for transactions
with minority interest holders. SFAS No. 160 is
effective for fiscal years beginning after December 15,2008. We will adopt SFAS No. 160 beginning in the
first quarter of fiscal 2010. We are evaluating the impact the
adoption of SFAS No. 160 will have on our consolidated
financial position and results of operations.
2.
Restricted
Cash and Investments
Available-For-Sale
Restricted cash represents amounts on deposit with financial
institutions that are contractually designated for certain
theatrical marketing obligations, collateral required under a
revolving credit facility and for certain production obligations.
At June 30, 2008 and March 31, 2008, the Company held
$7.0 million, par value, of a triple A rated taxable
Student Auction Rate Security (“ARS”) issued by the
Panhandle-Plains Higher Education Authority. The bonds backing
the issue provide funds to purchase student loans which are
substantially guaranteed under the Higher Education Act of 1965,
as amended. This investment is held as collateral for a
production obligation pursuant to an escrow agreement.
The par value on these securities is designed to be equal to the
securities fair value because the interest rates are reset each
month through an auction process. However, due to the recent
credit crisis, auctions for this security have not been
successful in resetting the applicable interest rates. As a
result, these securities do not have a readily determinable
market value and are not liquid. The Company has estimated the
fair value based on a discounted cash flow analysis using a
discount rate reflective of a premium associated with a triple A
rated investment, factoring in the change in the liquidity of
the investment and the period of time we expect to hold these
securities. Based on this analysis and the fact that the Company
has the ability to hold these securities until the market
recovers, we recorded a temporary impairment of
$0.1 million to accumulated other comprehensive loss on the
accompanying unaudited condensed consolidated balance sheet at
June 30, 2008 and March 31, 2008, respectively (see
Note 11).
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Interest and dividend income earned on available for sale
investments during the three months ended June 30, 2008 and
2007 were $0.8 million and $2.6 million, respectively.
Motion Picture Segment — Theatrical and
Non-Theatrical Films
Released, net of accumulated amortization
$
221,610
$
218,898
Acquired libraries, net of accumulated amortization
76,110
80,674
Completed and not released
36,207
13,187
In progress
250,159
188,108
In development
7,207
6,513
Product inventory
44,811
33,147
636,104
540,527
Television Segment —
Direct-to-Television
Programs
Released, net of accumulated amortization
57,241
55,196
In progress
44,367
12,608
In development
2,768
611
104,376
68,415
$
740,480
$
608,942
The following table sets forth acquired libraries that represent
titles released three years prior to the date of acquisition,
and amortized over their expected revenue stream from
acquisition date up to 20 years:
Unamortized
Unamortized
Total
Remaining
Costs
Costs
Acquired
Amortization
Amortization
June 30,
March 31,
Library
Acquisition Date
Period
Period
2008
2008
(In years)
(Amounts in thousands)
Trimark
October 2000
20.00
12.25
$
11,911
$
12,318
Artisan
December 2003
20.00
15.50
55,124
58,533
Modern
August 2005
20.00
17.00
3,530
3,953
Lionsgate UK
October 2005
20.00
17.25
1,546
1,827
Mandate
September 2007
3.00
2.25
3,999
4,043
Total Acquired Libraries
$
76,110
$
80,674
The Company expects approximately 44% of completed films and
television programs, net of accumulated amortization, will be
amortized during the one-year period ending June 30, 2009.
Additionally, the Company expects approximately 80% of completed
and released films and television programs, net of accumulated
amortization and excluding acquired libraries, will be amortized
during the three-year period ending June 30, 2011.
During the three months ended June 30, 2008, goodwill
decreased by $0.3 million due to changes in the estimated
fair value of the assets acquired and liabilities assumed from
the acquisition of Mandate Pictures, LLC.
Deferred financing costs, net of accumulated amortization
$
7,304
$
7,200
Prepaid expenses and other
7,455
5,239
Loan receivables
6,248
3,382
Intangible assets
1,965
2,317
Equity method investments
32,457
23,434
$
55,429
$
41,572
Deferred
Financing Costs
Deferred financing costs primarily include costs incurred in
connection with a credit facility (see Note 6) and the
issuance of the 2.9375% Notes (as hereafter defined) and
the 3.625% Notes (as hereafter defined) (see
Note 8) that are deferred and amortized to interest
expense.
Loan
Receivables
Loan receivables at June 30, 2008 and March 31, 2008
consist of note receivables, including accrued interest, of
$6.2 million and $3.4 million, respectively, from
NextPoint, Inc. (“Break.com”), an equity method
investee, as described below.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Intangible
Assets
Intangible assets consists primarily of trademarks and
distribution agreements. The composition of the Company’s
acquired intangible assets and the associated accumulated
amortization is as follows as of June 30, 2008 and
March 31, 2008:
The aggregate amount of amortization expense associated with the
Company’s intangible assets for the three month period
ending June 30, 2008 was approximately $0.3 million.
Estimated amortization expense for each of the years ending
March 31, 2009 through 2014 is approximately
$0.7 million, $0.5 million, $0.3 million,
$0.3 million, $0.1 million and nil, respectively.
Equity
Method Investments
The carrying amount of significant equity method investments at
June 30, 2008 and March 31, 2008 were as follows:
Equity interests in equity method investments in our unaudited
condensed consolidated statements of operations represent our
portion of the income or loss of our equity method investee
based on our percentage
Maple Pictures Corp. Represents the
Company’s interest in Maple Pictures Corp. (“Maple
Pictures”), a motion picture, television and home
entertainment distributor in Canada. Maple Pictures was formed
by a director of the Company, a former Lionsgate executive and a
third-party equity investor. Through July 17, 2007, the
Company owned 10% of the common shares of Maple Pictures and
accounted for its investment in Maple Pictures under the equity
method of accounting. Accordingly, during the three months ended
June 30, 2007, the Company recorded 10% of the loss
incurred by Maple Pictures. On July 18, 2007, Maple
Pictures repurchased all of the outstanding shares held by a
third party investor, which increased the Company’s
ownership of Maple Pictures requiring the Company to consolidate
Maple Pictures for financial reporting purposes beginning on
July 18, 2007. Accordingly, the results of operations of
Maple Pictures are reflected in the Company’s consolidated
results since July 18, 2007.
Horror Entertainment, LLC. Represents the
Company’s 33.33% interest in Horror Entertainment, LLC
(“FEARnet”), a multiplatform programming and content
service provider of horror genre films operating under the
branding of “FEARnet.”The Company entered into a
five-year license agreement with FEARnet for
U.S. territories and possessions whereby the Company will
license content to FEARnet for
video-on-demand
and broadband exhibition. The Company made capital contributions
to FEARnet of $5.0 million in October 2006,
$2.6 million in July 2007, and $2.5 million in April
2008. As of June 30, 2008, the Company has a remaining
commitment for additional capital contributions totaling
$3.2 million, which are expected to be fully funded over
the next two-year period. Under certain circumstances, if the
Company defaults on any of its funding obligations, the Company
could forfeit its equity interest in FEARnet and its license
agreement with FEARnet could be terminated. The Company is
recording its share of the FEARnet results on a one quarter lag
and, accordingly, during the three months ended June 30,2008, the Company recorded 33.33% of the loss incurred by
FEARnet during the three months ended March 31, 2008.
NextPoint, Inc. Represents the Company’s
42% equity interest or 21,000,000 shares of the
Series B Preferred Stock of NextPoint, Inc.
(“Break.com”), an online home entertainment service
provider operating under the branding of “Break.com.”
The interest was acquired on June 29, 2007 for an aggregate
purchase price of $21.4 million which included
$0.5 million of transaction costs, by issuing 1,890,189 of
the Company’s common shares. The value assigned to the
shares for purposes of recording the investment of
$20.9 million was based on the average price of the
Company’s common shares a few days prior and subsequent to
the date of the closing of the acquisition. The Company has a
call option which is exercisable at any time from June 29,2007 until the earlier of (i) 30 months after
June 29, 2007 or (ii) one year after a change of
control, as narrowly defined, to purchase all of the remaining
58% equity interests (excluding any subsequent dilutive events)
of Break.com, including
in-the-money
stock options, warrants and other rights of Break.com for
$58.0 million in cash or common stock, at the
Company’s option. The estimated initial cost of the call
option was $1.2 million and is included within the
investment balance. This call option is accounted for at cost
and is evaluated for other than temporary impairment each
reporting period. The Company is recording its share of the
Break.com results on a one quarter lag and, accordingly, during
the three
Roadside Attractions, LLC. Represents the
Company’s 43% equity interest acquired on July 26,2007 in Roadside Attractions, LLC (“Roadside”), an
independent theatrical releasing company. The Company has a call
option which is exercisable for a period of 90 days
commencing on the receipt of certain audited financial
statements for the three years ended July 26, 2010, to
purchase all of the remaining 57% equity interests of Roadside,
at a price representative of the then fair value of the
remaining interest. The estimated initial cost of the call
option was de minimus since the option price is designed to be
representative of the then fair value and is included within the
investment balance. The Company is recording its share of the
Roadside results on a one quarter lag and, accordingly, during
the three months ended June 30, 2008, the Company recorded
43% of the loss incurred by Roadside during the three months
ended March 31, 2008.
Elevation Sales Limited. Represents the
Company’s 50% equity interest in Elevation Sales Limited
(“Elevation”), a UK based home entertainment
distributor. At June 30, 2008, the Company was owed
$9.6 million in account receivables from Elevation
(March 31, 2008 $29.0 million). The amounts receivable
from Elevation represent amounts due our wholly-owned
subsidiary, Lionsgate UK Limited (“Lionsgate UK”),
located in the United Kingdom for accounts receivable arising
from the sale and rental of DVD products. The credit period
extended to Elevation is 60 days.
Premium Television Channel. In April 2008, the
Company formed a joint venture with Viacom Inc.
(“Viacom”), Paramount Pictures Unit (“Paramount
Pictures”) and
Metro-Goldwyn-Mayer
Studios Inc. (“MGM”) to create a premium television
channel and subscription
video-on-demand
service. The new venture will have access to the Company’s
titles released theatrically on or after January 1, 2009.
Viacom will provide operational support to the venture,
including marketing and affiliate services through its MTV
Networks division. Upon its expected launch in the fall of 2009,
the joint venture will provide the Company with an additional
platform to distribute its library of motion picture titles and
television episodes and programs. Currently, the Company has
invested $8.6 million as of June 30, 2008, which
represents 28.57% or its proportionate share of investment in
the joint venture. The Company has a mandatory commitment of
$31.4 million increasing to $42.9 million if certain
performance targets are achieved. The Company is recording its
share of the joint venture results on a one quarter lag,
beginning in the second quarter of the current fiscal year.
CinemaNow, Inc.The Company holds an 18.6%, on
a fully diluted basis, or 21.0%, on an undiluted basis, equity
interest in CinemaNow, Inc. (“CinemaNow”), an
internet-video-on-demand provider. The investment carrying
amount is nil as a result of the Company absorbing its share of
losses to the full extent of the investment in CinemaNow.
6.
Bank
Loans
At June 30, 2008, the Company had a $215 million
revolving line of credit, of which $10 million is available
for borrowing by Lionsgate UK, in either U.S. dollars or
British pounds sterling. At June 30, 2008, the Company had
no borrowings (March 31, 2008 — nil) under the
credit facility. The credit facility expires December 31,2008 and bears interest at 2.75% over the “Adjusted
LIBOR” or the “Canadian Bankers Acceptance” rate
(each as defined in the credit facility), or 1.75% over the
U.S. or Canadian prime rates. The availability of funds
under the credit facility is limited by the borrowing base.
Amounts available under the credit facility are also limited by
outstanding letters of credit, which amounted to
$22.7 million at June 30, 2008. At June 30, 2008,
there was $192.3 million available under the credit
facility. The Company is required to pay a monthly commitment
fee based upon 0.50% per annum on the total credit facility of
$215 million less the amount drawn. Right, title and
interest in and to all personal property of Lions Gate
Entertainment Corp. and Lions Gate Entertainment Inc., the
Company’s wholly owned U.S. subsidiary, is pledged as
security for the credit facility. The credit facility is senior
to the Company’s film obligations and subordinated notes,
and restricts the Company from paying cash dividends on its
Less film and production obligations expected to be paid within
one year
(169,655
)
(193,699
)
Film and production obligations expected to be paid after one
year
$
142,961
$
84,317
Participation and residuals
$
350,952
$
385,846
(1)
Film obligations include minimum guarantees, which represent
amounts payable for film rights that the Company has acquired
and theatrical marketing obligations, which represent amounts
that are contractually committed for theatrical marketing
expenditures associated with specific titles.
(2)
Production obligations represent amounts payable for the cost
incurred for the production of film and television programs that
the Company produces, which, in some cases, are financed over
periods exceeding one year. Production obligations have
contractual repayment dates either at or near the expected
completion date, with the exception of certain obligations
containing repayment dates on a longer term basis. Production
obligations of $199.5 million incur interest at rates
ranging from 3.96% to 5.18%; one production loan of
$1.7 million bears interest of 11.45%, and approximately
$83.7 million of production obligations are non-interest
bearing. Also included in production obligations is
$5.0 million in long term production obligations with an
interest rate of 2.5% that is part of a $66.0 million
funding agreement with the State of Pennsylvania, as more fully
described below.
On April 9, 2008, the Company entered into a loan agreement
with the Pennsylvania Regional Center, which provides for the
availability of production loans up to $66,000,000 on a five
year term for use in film and television productions in the
State of Pennsylvania. The amount that can be borrowed is
generally limited to approximately one half of the qualified
production costs incurred in the State of Pennsylvania through
the two year period ended April 2010, and is subject to certain
other limitations. Under the terms of the loan, for every dollar
borrowed, the Company’s production companies are required
(within a two year period) to either create a specified number
of jobs, or spend a specified amount in certain geographic
regions in the State of Pennsylvania. Amounts borrowed under the
agreement carry an interest rate of 2.5% which is payable
semi-annually and the principal amount is due on the five year
anniversary date of the first borrowing under the agreement
(April 2013). The loan is secured by a first priority security
interest in our film library pursuant to an intercreditor
agreement with our senior lender under our revolving credit
facility. Pursuant to the terms of our credit facility, the
Company is required to maintain a balance equal to the loans
outstanding plus 5% under this facility in a bank account with
our senior lender under our credit facility. Accordingly,
included in restricted cash is $5.3 million (on deposit
with our senior lenders), related to amounts received under the
Pennsylvania agreement.
The Company expects approximately 73% of accrued participations
and residuals will be paid during the
one-year
period ending June 30, 2009.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Theatrical
Slate Participation
On May 25, 2007, the Company closed a theatrical slate
participation arrangement, as amended on January 30, 2008.
Under this arrangement, Pride Pictures, LLC (“Pride”),
an unrelated entity, will participate in, generally, 50% of the
Company’s production, acquisition, marketing and
distribution costs of theatrical feature films up to an
aggregate of approximately $196 million, net of transaction
costs. The funds available from Pride were generated from the
issuance by Pride of $35 million of subordinated debt
instruments, $35 million of equity and $134 million
from a senior revolving credit facility, which is subject to a
borrowing base. The borrowing base calculation is generally
based on 90% of the estimated ultimate amounts due to Pride on
previously released films, as defined in the applicable
agreements. The Company is not a party to the Pride debt
obligations or their senior credit facility, and provides no
guarantee of repayment of these obligations. The percentage of
the contribution may vary on certain pictures. Pride will
participate in a pro rata portion of the pictures’ net
profits or losses similar to a co-production arrangement based
on the portion of costs funded. The Company continues to
distribute the pictures covered by the arrangement with a
portion of net profits after all costs and the Company’s
distribution fee being distributed to Pride based on their pro
rata contribution to the applicable costs similar to a back-end
participation on a film.
Amounts provided from Pride are reflected as a participation
liability. The difference between the ultimate participation
expected to be paid to Pride and the amount provided by Pride is
amortized as a charge to or a reduction of participation expense
under the individual film forecast method. At June 30,2008, $86.3 million (March 31, 2008,
$134.3 million) was payable to Pride and is included in the
participation liability in the unaudited condensed consolidated
balance sheet, and $93.2 million was available to be
provided by Pride under the terms of the arrangement.
Société
Générale de Financement du Québec Filmed
Entertainment Participation
On July 30, 2007, the Company entered into a four-year
filmed entertainment slate participation agreement with
Société Générale de Financement du
Québec (“SGF”), the Québec provincial
government’s investment arm. SGF will provide up to 35% of
production costs of television and feature film productions
produced in Québec for a four-year period for an aggregate
participation of up to $140 million, and the Company will
advance all amounts necessary to fund the remaining budgeted
costs. The maximum aggregate of budgeted costs over the
four-year period will be $400 million, including the
Company’s portion, but no more than $100 million per
year. In connection with this agreement, the Company and SGF
will proportionally share in the proceeds derived from the
productions after the Company deducts a distribution fee,
recoups all distribution expenses and releasing costs, and pays
all applicable third party participations and residuals.
Amounts provided from SGF are reflected as a participation
liability. The difference between the ultimate participation
expected to be paid to SGF and the amount provided by SGF is
amortized as a charge to or a reduction of participation expense
under the individual film forecast method. At June 30,2008, $9.3 million (March 31, 2008, $9.3 million)
was payable to SGF and is included in the participation
liability in the unaudited condensed consolidated balance sheet,
and $124.5 million was available to be provided by SGF
under the terms of the arrangement.
3.625% Notes. In February 2005, Lions
Gate Entertainment Inc. (“LGEI”) sold
$175.0 million of 3.625% Convertible Senior
Subordinated Notes (the “3.625% Notes”). The
Company received $170.2 million of net proceeds after
paying placement agents’ fees from the sale of
$175.0 million of the 3.625% Notes. The Company also
paid $0.6 million of offering expenses incurred in
connection with the sale of the 3.625% Notes. Interest on
the 3.625% Notes is payable semi-annually on March 15 and
September 15, from September 15, 2005 until
March 15, 2012. After March 15, 2012, interest will be
3.125% per annum on the principal amount of the
3.625% Notes, payable semi-annually on March 15 and
September 15 of each year until maturity on March 15, 2025.
LGEI may redeem all or a portion of the 3.625% Notes at its
option on or after March 15, 2012 at 100% of their
principal amount, together with accrued and unpaid interest
through the date of redemption.
The holder may require LGEI to repurchase the 3.625% Notes
on March 15, 2012, 2015 and 2020 or upon a change in
control at a price equal to 100% of the principal amount,
together with accrued and unpaid interest through the date of
repurchase. Under certain circumstances, if the holder requires
LGEI to repurchase all or a portion of their notes upon a change
in control, they will be entitled to receive a make whole
premium. The amount of the make whole premium, if any, will be
based on the price of the Company’s common shares on the
effective date of the change in control. No make whole premium
will be paid if the price of the Company’s common shares at
such time is less than $10.35 per share or exceeds $75.00 per
share.
The 3.625% Notes are convertible, at the option of the
holder, at any time before the close of business on or prior to
the trading day immediately before the maturity date, if the
notes have not been previously redeemed or repurchased, at a
conversion rate equal to 70.0133 shares per $1,000
principal amount of the 3.625% Notes, subject to adjustment
in certain circumstances, which is equal to a conversion price
of approximately $14.28 per share. Upon conversion of the
3.625% Notes, the Company has the option to deliver, in
lieu of common shares, cash or a combination of cash and common
shares of the Company. The holder may convert the
3.625% Notes into the Company’s common shares prior to
maturity if the notes have been called for redemption, a change
in control occurs or certain other corporate transactions occur.
2.9375% Notes. In October 2004, LGEI sold
$150.0 million of 2.9375% Convertible Senior
Subordinated Notes (the “2.9375% Notes”). The
Company received $146.0 million of net proceeds after
paying placement agents’ fees from the sale of
$150.0 million of the 2.9375% Notes. The Company also
paid $0.7 million of offering expenses incurred in
connection with the sale of the 2.9375% Notes. Interest on
the 2.9375% Notes is payable semi-annually on April 15 and
October 15, which commenced on April 15, 2005, and the
2.9375% Notes mature on October 15, 2024. From
October 15, 2009 to October 14, 2010, LGEI may redeem
the 2.9375% Notes at 100.839%; from October 15, 2010
to October 14, 2011, LGEI may redeem the 2.9375% Notes
at 100.420%; and thereafter, LGEI may redeem the notes at 100%.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The holder may require LGEI to repurchase the 2.9375% Notes
on October 15, 2011, 2014 and 2019 or upon a change in
control at a price equal to 100% of the principal amount,
together with accrued and unpaid interest through the date of
repurchase. Under certain circumstances, if the holder requires
LGEI to repurchase all or a portion of their notes upon a change
in control, they will be entitled to receive a make whole
premium. The amount of the make whole premium, if any, will be
based on the price of the Company’s common shares on the
effective date of the change in control. No make whole premium
will be paid if the price of the Company’s common shares at
such time is less than $8.79 per share or exceeds $50.00 per
share.
The holder may convert the 2.9375% Notes into the
Company’s common shares prior to maturity only if the price
of the Company’s common shares issuable upon conversion of
a note reaches a specified threshold over a specified period,
the trading price of the notes falls below certain thresholds,
the notes have been called for redemption, a change in control
occurs or certain other corporate transactions occur. In
addition, under certain circumstances, if the holder converts
their notes upon a change in control, they will be entitled to
receive a make whole premium. Before the close of business on or
prior to the trading day immediately before the maturity date,
if the notes have not been previously redeemed or repurchased,
the holder may convert the notes into the Company’s common
shares at a conversion rate equal to 86.9565 shares per
$1,000 principal amount of the 2.9375% Notes, subject to
adjustment in certain circumstances, which is equal to a
conversion price of approximately $11.50 per share.
Other
Financing Obligations
On June 1, 2007, the Company entered into a bank financing
agreement for $3.7 million to fund the acquisition of
certain capital assets. Interest is payable in monthly payments
totaling $0.3 million per year for five years at an
interest rate of 8.02%, with the entire principal due June 2012.
9.
Acquisitions
Acquisition
of Mandate Pictures, LLC
On September 10, 2007, the Company purchased all of the
membership interests in Mandate Pictures, LLC, a Delaware
limited liability company (“Mandate”). Mandate is a
worldwide independent film producer and distributor. The Mandate
acquisition brings to the Company additional experienced
management personnel working within the motion picture business
segment. In addition, the Mandate acquisition adds an
independent film and distribution business to the Company’s
motion picture business. The aggregate cost of the acquisition
was approximately $128.8 million including liabilities
assumed of $70.2 million with amounts paid or to be paid to
the selling shareholders of approximately $58.6 million,
comprised of $46.8 million in cash and 1,282,999 of the
Company’s common shares, 169,879 of which were issued
during the quarter ended March 31, 2008 and the balance of
1,113,120 to be issued and delivered in September 2008 and March
2009, pursuant to certain holdback provisions. Of the
$46.8 million cash portion of the purchase price,
$44.3 million was paid at closing, $0.9 million
represented estimated direct transaction costs (paid to lawyers,
accountants and other consultants), and $1.6 million
represented the remaining cash consideration paid during the
current quarter. In addition, immediately prior to the
transaction, the Company loaned Mandate $2.9 million. The
value assigned to the shares for purposes of recording the
acquisition was $11.8 million and was based on the average
price of the Company’s common shares a few days prior and
subsequent to the date of the closing of the acquisition, which
is when it was publicly announced.
In addition, the Company may be obligated to pay additional
amounts pursuant to the purchase agreement should certain films
or derivative works meet certain target performance thresholds.
Such amounts, to the extent they relate to films or derivative
works of films identified at the acquisition date will be
charged to goodwill if the target thresholds are achieved, and
such amounts, to the extent they relate to other qualifying
films produced in the
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
future, will be accounted for similar to other film
participation arrangements. The amount to be paid is the excess
of the sum of the following amounts over the performance
threshold (i.e. the “Hurdle Amount”):
•
80% of the earnings of certain films for the longer of
5 years from the closing or 5 years from the release
of the pictures, plus
•
20% of the earnings of certain pictures which commence principal
photography within 5 years from the closing date for a
period up to 10 years, plus
•
certain fees designated for derivative works which commence
principal photography within 7 years of the initial release
of the original picture.
The Hurdle Amount is the purchase price of approximately
$56 million plus an interest cost accruing until such
hurdle is reached, and certain other costs the Company agreed to
pay in connection with the acquisition. Accordingly, the
additional consideration is the total of the above in excess of
the Hurdle Amount. As of June 30, 2008, the total earnings
and fees from identified projects in process are not projected
to reach the Hurdle Amount. However, as additional projects are
identified in the future and the current projects are released
in the market place the total projected earnings and fees from
these projects could increase causing additional payments to the
sellers to become payable.
The acquisition was accounted for as a purchase, with the
results of operations of Mandate included in the Company’s
consolidated results from September 10, 2007. Goodwill of
$36.8 million represents the excess of purchase price over
the estimate of the fair value of the net identifiable tangible
and intangible assets acquired. Although the goodwill will not
be amortized for financial reporting purposes, it is anticipated
that substantially all of the goodwill will be deductible for
federal tax purposes over the statutory period of 15 years.
The allocation of the purchase price to the assets acquired and
liabilities assumed based on their estimated fair values was as
follows:
Allocation
(Amounts in
thousands)
Cash and cash equivalents
$
3,952
Restricted cash
5,157
Accounts receivable, net
17,031
Investment in films and television programs
61,580
Definite life intangible assets
1,400
Other assets acquired
2,626
Goodwill
36,784
Accounts payable and accrued liabilities
(11,039
)
Participation and residuals
(3,641
)
Film obligations
(50,565
)
Deferred revenue
(4,658
)
Total
$
58,627
The $36.8 million of goodwill was assigned to the motion
pictures reporting segment.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following pro forma unaudited condensed consolidated
statements of operations presented below illustrate the results
of operations of the Company as if the acquisition of Mandate as
described above occurred at April 1, 2007, based on the
purchase price allocation:
Weighted average number of common shares outstanding —
Basic
118,390
Weighted average number of common shares
outstanding — Diluted
118,390
Acquisition
of Debmar-Mercury LLC
On July 3, 2006, the Company acquired all of the capital
stock of Debmar-Mercury, LLC (“Debmar-Mercury”), a
leading syndicator of film and television packages.
Consideration for the Debmar-Mercury acquisition was
$27.0 million, comprised of a combination of
$24.5 million in cash paid on July 3, 2006 and
$2.5 million in common shares of the Company issued in
January 2008, and assumed liabilities of $10.5 million.
Goodwill of $8.7 million represents the excess of the
purchase price over the fair value of the net identifiable
tangible and intangible assets acquired.
Pursuant to the purchase agreement, if the aggregate earnings
before interest, taxes, depreciation and amortization adjusted
to add back 20% of the overhead expense of Debmar-Mercury
(“Adjusted EBITDA”) of Debmar-Mercury LLC
(“Debmar-Mercury”) for the five year period ending
after the closing date exceeds the target amount, then up to 40%
of the excess Adjusted EBITDA over the target amount is payable
as additional consideration. The percentage of the excess
Adjusted EBITDA over the target amount ranges from 20% of such
excess up to an excess of $3 million, 25% of such excess
over $3 million and less than $6 million, 30% of such
excess over $6 million and less than $10 million and
40% of such excess over $10 million. The target amount is
$32.2 million plus adjustments for interest on certain
funding provided by Lions Gate and adjustments for certain
overhead and other items. If the Adjusted EBITDA of
Debmar-Mercury is proportionately on track to exceed the target
amount after three years from the date of closing, Lions Gate
will pay a recoupable advance against the five year payment.
In addition, up to 40% (percentage is determined based on how
much the cumulative Adjusted EBITDA exceeds the target amount)
of Adjusted EBITDA of Debmar-Mercury generated subsequent to the
five year period from the assets existing as of the fifth
anniversary date of the close is also payable as additional
consideration on a quarterly basis (i.e., the Continuing Earnout
Payment) unless the substitute earn out option is exercised by
either the seller or the Company. The substitute earn out option
is only available if the aggregate Adjusted EBITDA for the five
year period ending after the closing date exceeds the target
amount. Under the substitute earn out option, the seller can
elect to receive an amount equal to $2.5 million in lieu of
the Continuing Earnout Payments and the Company can elect to pay
an amount equal to $15 million in lieu of the Continuing
Earnout Payments.
Amounts paid, if any, under the above additional consideration
provisions will be recorded as additional goodwill.
Other expenses primarily consist of the provision (benefit) for
doubtful accounts and foreign exchange gains and losses. The
provision (benefit) for doubtful accounts included in other
expenses for the three months ended June 30, 2008 and 2007
was $0.2 million and a benefit of ($0.5) million,
respectively. Foreign exchange losses (gains) included in other
expenses for the three months ended June 30, 2008 and 2007
were $0.3 million and ($0.5) million, respectively.
Add (Deduct): Net unrealized gain (loss) on foreign exchange
contracts
9
(12
)
Add (Deduct): Unrealized gain (loss) on investments —
available
for sale
(18
)
1,280
Comprehensive income (loss)
$
7,255
$
(49,416
)
12.
Income
(Loss) Per Share and Treasury Shares
The Company calculates income (loss) per share in accordance
with SFAS No. 128, “Earnings Per Share.”
Basic income (loss) per share is calculated based on the
weighted average common shares outstanding for the period. Basic
income (loss) per share for the three months ended June 30,2008 and 2007 is presented below:
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Diluted net income (loss) per common share reflects the
potential dilutive effect, if any, of the 2.9375% Notes and
the 3.625% Notes sold by the Company in October 2004 and
February 2005, respectively, under the “if converted”
method, the share purchase options and restricted share units
using the treasury stock method when dilutive, and any
contingently issuable shares. For the three month period ended
June 30, 2008, the 12,252,328 and 13,043,475 shares
issuable on the potential conversion of the 3.625% Notes
and the 2.9375% Notes, respectively, 3,424,340 equivalent
shares of stock options, and 15,000 restricted share units were
not included in the computation of diluted net income per common
share because their inclusion would have had an anti-dilutive
effect. For the three months ended June 30, 2007, the
12,252,328 and 13,043,475 shares issuable on the potential
conversion of the 3.625% Notes and the 2.9375% Notes,
respectively, 2,303,646 equivalent shares of stock options, and
668,924 restricted share units were excluded from diluted loss
per common share for the period because their inclusion would
have had an anti-dilutive effect. Diluted net income (loss) per
common share for the three months ended June 30, 2008 and
2007 is presented below:
Adjusted weighted average common shares outstanding
121,076
117,107
Diluted Net Income (Loss) Per Common Share
$
0.06
$
(0.45
)
The Company had 500,000,000 authorized common shares at
June 30, 2008 and March 31, 2008. The table below
outlines common shares reserved for future issuance:
Share purchase options and restricted share units available for
future issuance
6,749
6,859
Shares issuable upon conversion of 2.9375% Notes at
conversion price of $11.50 per share
13,043
13,043
Shares issuable upon conversion of 3.625% Notes at
conversion price of $14.28 per share
12,252
12,252
Shares reserved for future issuance
39,323
39,616
On May 31, 2007, the Company’s Board of Directors
authorized the repurchase of up to $50 million of the
Company’s common shares and, on May 29, 2008, an
additional $50 million repurchase was authorized by the
Company’s Board of Directors, with the timing, price,
quantity, and manner of the purchases to be made at the
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
discretion of management, depending upon market conditions.
During the period from the authorization date through
June 30, 2008, 3,860,635 shares have been repurchased
pursuant to the plan at a cost of approximately
$36.7 million, including commission costs. During the three
months ended June 30, 2008, 1,662,000 shares have been
repurchased pursuant to the plan at a cost of approximately
$16.4 million. The share repurchase program has no
expiration date. The shares repurchased under the stock
repurchase program are included in treasury shares in the
accompanying unaudited consolidated balance sheets and
statements of shareholders’ equity.
13.
Accounting
for Stock-Based Compensation
Share-Based
Compensation
The Company accounts for stock-based compensation in accordance
with the provisions of SFAS No. 123 (revised 2004),
“Share-Based Payment”
(“SFAS No. 123(R)”).
SFAS No. 123(R) requires the measurement of all
stock-based awards using a fair value method and the recognition
of the related stock-based compensation expense in the
consolidated financial statements over the requisite service
period. Further, as required under SFAS No. 123(R),
the Company estimates forfeitures for share-based awards that
are not expected to vest. As stock-based compensation expense
recognized in the Company’s consolidated financial
statements is based on awards ultimately expected to vest, it
has been reduced for estimated forfeitures.
The fair value of each option award is estimated on the date of
grant using a closed-form option valuation model (Black-Scholes)
based on the assumptions noted in the following table. Expected
volatilities are based on implied volatilities from traded
options on the Company’s stock, historical volatility of
the Company’s stock and other factors. The expected term of
options granted represents the period of time that options
granted are expected to be outstanding. The weighted-average
grant-date fair values for options granted during the three
months ended June 30, 2007 was $4.75. No options were
granted during the three months ended June 30, 2008. The
following table represents the assumptions used in the
Black-Scholes option-pricing model for stock options granted
during the three months ended June 30, 2007:
There was no income tax benefit recognized in the statements of
operations for share-based compensation arrangements during the
three months ended June 30, 2008 and 2007.
On September 10, 2007, in connection with the acquisition
of Mandate (see Note 9), two executives entered into
employment agreements with Lions Gate Films, Inc., a
wholly-owned subsidiary of the Company. Pursuant to the
employment agreements, the executives were granted an aggregate
of 600,000 stock options, which vest over a three- to five-year
period. The options were granted outside of our long-term
incentive plans.
The total intrinsic value of options exercised as of each
exercise date during the three months ended June 30, 2008
was approximately $0.5 million (2007 —
$0.3 million).
Restricted
Share Units
A summary of the status of the Company’s restricted share
units as of June 30, 2008, and changes during the three
months then ended is presented below:
On September 10, 2007, in connection with the acquisition
of Mandate (see Note 9), two executives entered into
employment agreements with Lions Gate Films, Inc. Pursuant to
the employment agreements, the executives were granted an
aggregate of 287,500 restricted share units, which vest over a
three- to five-year period. The restricted share units were
granted outside of our long-term incentive plans.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The fair values of restricted share units are determined based
on the market value of the shares on the date of grant.
The following table summarizes the total remaining unrecognized
compensation cost as of June 30, 2008 related to non-vested
stock options and restricted share units and the weighted
average remaining years over which the cost will be recognized:
Total
Weighted
Unrecognized
Average
Compensation
Remaining
Cost
Years
(Amounts in thousands)
Stock Options
$
8,036
2.6
Restricted Share Units
16,159
2.3
Total
$
24,195
Under the Company’s two stock option and long term
incentive plans, the Company withholds shares to satisfy minimum
statutory federal, state and local tax withholding obligations
arising from the vesting of restricted share units. During the
three months ended June 30, 2008, 112,156 shares were
withheld upon the vesting of restricted share units.
The Company becomes entitled to an income tax deduction in an
amount equal to the taxable income reported by the holders of
the stock options and restricted share units when vesting or
exercise occurs, the restrictions are released and the shares
are issued. Restricted share units are forfeited if the
employees terminate prior to vesting.
Stock
Appreciation Rights
On February 2, 2004, an officer of the Company was granted
1,000,000 SARs, which entitles the officer to receive cash only,
and not common shares. The amount of cash received will be equal
to the amount by which the trading price of common shares on the
exercise notice date exceeds the SARs’ price of $5.20
multiplied by the number of SARs exercised. The SARs vested one
quarter immediately on the award date and one quarter on each of
the first, second and third anniversaries of the award date.
These SARs are not considered part of the Company’s stock
option and long term incentive plans. The Company measures
compensation expense based on the fair value of the SARs which
is determined by using the Black-Scholes option-pricing model at
each reporting date. For the three months ended June 30,2008, the following assumptions were used in the Black-Scholes
option-pricing model: Volatility of 47.7%, Risk Free Rate of
2.09%, Expected Term of 0.6 years, and Dividend of 0%. At
June 30, 2008, the market price of the Company’s
common shares was $10.36, the weighted average fair value of the
SARs was $5.25, and all 1,000,000 of the SARs had vested. Due to
the increase in the market price of its common shares during the
quarter, the Company recorded a stock-based compensation expense
in the amount of $0.5 million in general and administration
expenses in the unaudited condensed consolidated statements of
operations for the three months ended June 30, 2008
(2007 — decrease of expense of $0.4 million). The
compensation expense amount in the period is calculated by using
the fair value of the SARs, multiplied by the remaining 850,000
SARs which have fully vested (150,000 SARs were previously
exercised and expensed). At June 30, 2008, the Company has
a stock-based compensation liability accrual in the amount of
$4.5 million (March 31, 2008 —
$4.0 million) included in accounts payable and accrued
liabilities on the unaudited condensed consolidated balance
sheets relating to these SARs.
14.
Segment
Information
SFAS No. 131, “Disclosures About Segments of an
Enterprise and Related Information,” requires the Company
to make certain disclosures about each reportable segment. The
Company’s reportable segments are determined based on the
distinct nature of their operations and each segment is a
strategic business unit that offers different products and
services and is managed separately. The Company evaluates
performance of each segment
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
using segment profit (loss) as defined below. The Company has
two reportable business segments: Motion Pictures and Television.
Motion Pictures consists of the development and production of
feature films, acquisition of North American and worldwide
distribution rights, North American theatrical, DVD and
television distribution of feature films produced and acquired,
and worldwide licensing of distribution rights to feature films
produced and acquired.
Television consists of the development, production and worldwide
distribution of television productions, including television
series, television movies and mini-series and non-fiction
programming.
Segmented information by business unit is as follows:
Acquisition of investment in films and television programs
Motion Pictures
$
146,187
$
56,073
Television
54,710
80,066
$
200,897
$
136,139
Purchases of property and equipment amounted to
$2.3 million and $2.0 million for the three months
ending June 30, 2008 and 2007, respectively, all primarily
pertaining to purchases for the Company’s corporate
headquarters.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Segment profit (loss) is defined as segment revenue less segment
direct operating, distribution and marketing, and general and
administration expenses. The reconciliation of total segment
profit (loss) to the Company’s income (loss) before income
taxes is as follows:
Other unallocated assets (primarily cash and available-for-sale
investments)
323,614
444,001
Total assets
$
1,486,747
$
1,537,758
15.
Contingencies
The Company is, from time to time, involved in various claims,
legal proceedings and complaints arising in the ordinary course
of business. The Company does not believe that adverse decisions
in any such pending or threatened proceedings, or any amount
which the Company might be required to pay by reason thereof,
would have a material adverse effect on the financial condition
or future results of the Company.
16.
Consolidating
Financial Information
In October 2004, the Company sold $150.0 million of the
2.9375% Notes through LGEI. The 2.9375% Notes, by
their terms, are fully and unconditionally guaranteed by the
Company.
In February 2005, the Company sold $175.0 million of the
3.625% Notes through LGEI. The 3.625% Notes, by their
terms, are fully and unconditionally guaranteed by the Company.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following tables present unaudited condensed consolidating
financial information as of June 30, 2008 and
March 31, 2008, and for the three months ended
June 30, 2008 and 2007 for (1) the Company, on a
stand-alone basis, (2) LGEI, on a stand-alone basis,
(3) the non-guarantor subsidiaries of the Company
(including the subsidiaries of LGEI), on a combined basis
(collectively, the “Other Subsidiaries”) and
(4) the Company, on a consolidated basis.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
17.
Subsequent
Event
Amended
Credit Facility
In July 2008, the Company entered into an amended credit
facility, which provides for a $340 million secured
revolving credit facility, of which $30 million may be
utilized by two of the Company’s wholly owned foreign
subsidiaries. The amended credit facility expires July 25,2013 and bears interest at 2.25% over the Adjusted LIBOR rate.
The availability of funds under the credit facility is limited
by a borrowing base, and also reduced by outstanding letters of
credit. This amended credit facility amends and restates the
Company’s original $215 million credit facility
described in Note 6. The proceeds of the credit facility
may be used (i) to finance the development, production,
distribution or acquisition of feature films, television, DVD
product and other product lines (ii) to operate physical
production facilities, (iii) to acquire and operate
television channels and internet distribution platforms and
(iv) for other general corporate purposes, including
acquisitions, permitted stock repurchases and dividends.
Obligations under the credit facility are secured by collateral
(as defined) granted by the Company and certain subsidiaries of
the Company, as well as pledge of equity interests in certain of
the Company’s subsidiaries. The amended credit facility
contains a number of affirmative covenants and a number of
negative covenants that, among other things, require the Company
to satisfy certain financial covenants and restrict the ability
of the Company, to incur additional debt, pay dividends and make
distributions, make certain investments and acquisitions,
repurchase its stock and prepay certain indebtedness, create
liens, enter into agreements with affiliates, modify the nature
of its business, enter into sale-leaseback transactions,
transfer and sell material assets and merge or consolidate.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Overview
Lions Gate Entertainment Corp. (“Lionsgate,” the
“Company,”“we,”“us” or
“our”) is a leading next generation filmed
entertainment studio with a diversified presence in motion
pictures, television programming, home entertainment, family
entertainment,
video-on-demand
and digitally delivered content. We release approximately 18 to
20 motion pictures theatrically per year, which include films we
develop and produce in-house, as well as films that we acquire
from third parties. We also have produced approximately
76 hours of television programming on average for the last
three years, primarily prime time television series for the
cable and broadcast networks. We currently distribute our
library of approximately 8,000 motion picture titles and
approximately 4,000 television episodes and programs directly to
retailers, DVD rental stores, and pay and free television
channels in the United States (the “U.S.”), Canada,
the United Kingdom (the “UK”) and Ireland, through
various digital media platforms, and indirectly to other
international markets through our subsidiaries and various third
parties.
We own interests in CinemaNow, Inc., an internet
video-on-demand
provider (“CinemaNow”), Horror Entertainment, LLC, a
multiplatform programming and content service provider
(“FEARnet”), NextPoint, Inc., an online home
entertainment service provider (“Break.com”), Roadside
Attractions, LLC, an independent theatrical distribution company
(“Roadside”), Elevation Sales Limited, a UK based home
entertainment distributor (“Elevation”), Maple
Pictures Corp., a Canadian film, television and home
entertainment distributor (“Maple Pictures”), and a
premium television channel (“Premium TV Channel”).
Our revenues are derived from the following business segments:
•
Motion Pictures, which includes “Theatrical,”“Home Entertainment,”“Television” and
“International Distribution.”
Theatrical revenues are derived from the theatrical release of
motion pictures in the U.S. and Canada which are
distributed to theatrical exhibitors on a picture by picture
basis. The financial terms that we negotiate with our theatrical
exhibitors generally provide that we receive a percentage of the
box office results and are negotiated on a picture by picture
basis.
Home Entertainment revenues are derived primarily from the sale
of DVD releases of our own productions and acquired films,
including theatrical releases and direct-to-video releases, to
retail stores and through digital media platforms. In addition,
we have revenue sharing arrangements with certain rental stores
which generally provide that in exchange for a nominal or no
upfront sales price we share in the rental revenues generated by
each such store on a title by title basis.
Television revenues are primarily derived from the licensing of
our productions and acquired films to the domestic cable, free
and pay television markets.
International revenues include revenues from our international
subsidiaries from the licensing and sale of our productions,
acquired films, our catalog product or libraries of acquired
titles and revenue from our direct distribution to international
markets on a
territory-by-territory
basis. Our revenues are derived from the U.S., Canada, UK,
Australia and many other foreign countries; none of the foreign
countries individually comprised greater than 10% of total
revenue.
•
Television Productions, which includes the licensing and
syndication to domestic and international markets of
one-hour and
half-hour
drama series, television movies and mini-series and non-fiction
programming and revenues from the sale of television production
movies or series in other media, including home entertainment
and through digital media platforms.
Our primary operating expenses include the following:
•
Direct Operating Expenses, which include amortization of
production or acquisition costs, participation and residual
expenses and provision for doubtful accounts. Participation
costs represent contingent consideration payable based on the
performance of the film to parties associated with the film,
including producers, writers, directors or actors, etc.
Residuals represent amounts payable to various unions or
“guilds” such as the Screen Actors Guild, Directors
Guild of America, and Writers Guild of America, based on the
performance of the film in certain ancillary markets or based on
the individual’s (i.e., actor, director, writer) salary
level in the television market.
•
Distribution and Marketing Expenses, which primarily include the
costs of theatrical “prints and advertising” and of
DVD duplication and marketing. Theatrical print and advertising
represent the costs of the theatrical prints delivered to
theatrical exhibitors and advertising includes the advertising
and marketing cost associated with the theatrical release of the
picture. DVD duplication represent the cost of the DVD product
and the manufacturing costs associated with creating the
physical products. DVD marketing costs represent the cost of
advertising the product at or near the time of its release or
special promotional advertising.
•
General and Administration Expenses, which include salaries and
other overhead.
Recent
Developments
Premium Television Channel. In April 2008, the
Company formed a joint venture with Viacom Inc.
(“Viacom”), Paramount Pictures Unit (“Paramount
Pictures”) and
Metro-Goldwyn-Mayer
Studios Inc. (“MGM”) to create a premium television
channel and subscription
video-on-demand
service. The new venture will have access to the Company’s
titles released theatrically on or after January 1, 2009.
Viacom will provide operational support to the venture,
including marketing and affiliate services through its MTV
Networks division. Upon its expected launch in the fall of 2009,
the joint venture will provide the Company with an additional
platform to distribute its library of motion picture titles and
television episodes and programs. Currently, the Company has
invested $8.6 million as of June 30, 2008, which
represents 28.57% or its proportionate share of investment in
the joint venture. The Company has a mandatory commitment of
$31.4 million increasing to $42.9 million if certain
performance targets are achieved. The Company is recording its
share of the joint venture results on a one quarter lag,
beginning in the second quarter of the current fiscal year.
Amended Credit Facility. In July 2008, the
Company entered into an amended credit facility, which provides
for a $340 million secured revolving credit facility, of
which $30 million may be utilized by two of the
Company’s wholly owned foreign subsidiaries. The amended
credit facility expires July 25, 2013 and bears interest at
2.25% over the Adjusted LIBOR rate. The availability of funds
under the credit facility is limited by a borrowing base, and
also reduced by outstanding letters of credit. This amended
credit facility amends and restates the Company’s original
$215 million credit facility described in Note 6. The
proceeds of the credit facility may be used (i) to finance
the development, production, distribution or acquisition of
feature films, television, DVD product and other product lines
(ii) to operate physical production facilities,
(iii) to acquire and operate television channels and
internet distribution platforms and (iv) for other general
corporate purposes, including acquisitions, permitted stock
repurchases and dividends. Obligations under the credit facility
are secured by collateral (as defined) granted by the Company
and certain subsidiaries of the Company, as well as pledge of
equity interests in certain of the Company’s subsidiaries.
The amended credit facility contains a number of affirmative
covenants and a number of negative covenants that, among other
things, require the Company to satisfy certain financial
covenants and restrict the ability of the Company, to incur
additional debt, pay dividends and make distributions, make
certain investments and acquisitions, repurchase its stock and
prepay certain indebtedness, create liens, enter into agreements
with affiliates, modify the nature of its business, enter into
sale-leaseback transactions, transfer and sell material assets
and merge or consolidate.
CRITICAL
ACCOUNTING POLICIES
The application of the following accounting policies, which are
important to our financial position and results of operations,
requires significant judgments and estimates on the part of
management. As described more fully below, these estimates bear
the risk of change due to the inherent uncertainty attached to
the estimate. For example, accounting for films and television
programs requires the Company to estimate future revenue and
expense amounts which, due to the inherent uncertainties
involved in making such estimates, are likely to differ to some
extent from actual results. For a summary of all of our
accounting policies, including the accounting policies discussed
below, see Note 2 to our March 31, 2008 audited
consolidated financial statements.
Generally Accepted Accounting Principles
(“GAAP”). Our consolidated financial
statements have been prepared in accordance with U.S. GAAP.
Accounting for Films and Television
Programs. We capitalize costs of production and
acquisition, including financing costs and production overhead,
to investment in films and television programs. These costs are
amortized to direct operating expenses in accordance with
Statement of Position
00-2
“Accounting by Producers or Distributors of Films”
(“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 year’s revenues bear to management’s
estimates of the ultimate revenue at the beginning of the year
expected to be recognized from exploitation, exhibition or sale
of such film or television program over a period not to exceed
ten years from the date of initial release. For previously
released film or television programs acquired as part of a
library, ultimate revenue includes estimates over a period not
to exceed 20 years from the date of acquisition.
The Company’s management regularly reviews and revises when
necessary its ultimate revenue and cost estimates, which may
result in a change in the rate of amortization of film costs and
participations and 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. The
Company’s management estimates the ultimate revenue based
on experience with similar titles or title genre, the general
public appeal of the cast, actual performance (when available)
at the box office or in markets currently being exploited, and
other factors such as the quality and acceptance of motion
pictures or programs that our competitors release into the
marketplace at or near the same time, critical reviews, general
economic conditions and other tangible and intangible factors,
many of which we do not control and which may change. In the
normal course of our business, some films and titles are more
successful than anticipated and some are less successful.
Accordingly, we update our estimates of ultimate revenue and
participation costs based upon the actual results achieved or
new information as to anticipated revenue performance such as
(for home entertainment revenues) initial orders and demand from
retail stores when it becomes available. An increase in the
ultimate revenue will generally result in a lower amortization
rate while a decrease in the ultimate revenue will generally
result in a higher amortization rate and periodically results in
an impairment requiring a write down of the film cost to the
title’s fair value. These write downs are included in
amortization expense within direct operating expenses in our
consolidated statements of operations.
Revenue Recognition. Revenue from the sale or
licensing of films and television programs is recognized upon
meeting all recognition requirements of SoP
00-2.
Revenue from the theatrical release of feature films is
recognized at the time of exhibition based on the Company’s
participation in box office receipts. Revenue from the sale of
DVDs in the retail market, net of an allowance for estimated
returns and other allowances, is recognized on the later of
receipt by the customer or “street date” (when it is
available for sale by the customer). Under revenue sharing
arrangements, rental revenue is recognized when the Company is
entitled to receipts and such receipts are determinable.
Revenues from television licensing are recognized when the
feature film or television program is available to the licensee
for telecast. For television licenses that include separate
availability “windows” during the license period,
revenue is allocated over the “windows.” Revenue from
sales to international territories are recognized when access to
the feature film or television program has been granted or
delivery has occurred, as required under the sales contract, and
the right to exploit the feature film or television program has
commenced. For multiple media rights contracts with a fee for a
single film or television program where the contract provides
for media holdbacks (defined as contractual media release
restrictions), the fee is allocated to the various media based
on management’s assessment of the relative fair value of
the rights to exploit each media and is recognized as each
holdback is released. For multiple-title contracts with a fee,
the fee is allocated on a
title-by-title
basis, based on management’s assessment of the relative
fair value of each title.
Cash payments received are recorded as deferred revenue until
all the conditions of revenue recognition have been met.
Long-term, non-interest bearing receivables are discounted to
present value.
Reserves. Revenues are recorded net of
estimated returns and other allowances. We estimate reserves for
DVD returns based on previous returns and our estimated expected
future returns related to current period sales on a
title-by-title
basis in each of the DVD businesses. Factors affecting actual
returns include limited retail shelf space at various times of
the year, success of advertising or other sales promotions, the
near term release of competing
titles, among other factors. We believe that our estimates have
been materially accurate in the past; however, due to the
judgment involved in establishing reserves, we may have
adjustments to our historical estimates in the future.
We estimate provisions for accounts receivable based on
historical experience and relevant facts and information
regarding the collectability of the accounts receivable. In
performing this evaluation, significant judgments and estimates
are involved, including an analysis of specific risks on a
customer-by-customer
basis for our larger customers and an analysis of the length of
time receivables have been past due. The financial condition of
a given customer and its ability to pay may change over time and
could result in an increase or decrease to our allowance for
doubtful accounts, which, when the impact of such change is
material, is disclosed in our discussion on direct operating
expenses elsewhere in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Income Taxes.The Company is subject to
federal and state income taxes in the U.S., and in several
foreign jurisdictions. We account for income taxes according to
SFAS No. 109, “Accounting for Income Taxes”
(“SFAS No. 109”). SFAS No. 109
requires the recognition of deferred tax assets, net of
applicable reserves, related to net operating loss carryforwards
and certain temporary differences. The standard requires
recognition of a future tax benefit to the extent that
realization of such benefit is more likely than not or a
valuation allowance is applied. Because of our historical
operating losses, we have provided a full valuation allowance
against our net deferred tax assets. When we have a history of
profitable operations sufficient to demonstrate that it is more
likely than not that our deferred tax assets will be realized,
the valuation allowance will be reversed. However, this
assessment of our planned use of our deferred tax assets is an
estimate which could change in the future depending upon the
generation of taxable income in amounts sufficient to realize
our deferred tax assets.
Goodwill. Goodwill is reviewed annually for
impairment within each fiscal year or between the annual tests
if an event occurs or circumstances change that indicate it is
more likely than not that the fair value of a reporting unit is
less than its carrying value. The Company performs its annual
impairment test as of December 31 in each fiscal year. The
Company performed its annual impairment test on its goodwill as
of December 31, 2007. No goodwill impairment was identified
in any of the Company’s reporting units. Determining the
fair value of reporting units requires various assumptions and
estimates. The estimates of fair value include consideration of
the future projected operating results and cash flows of the
reporting unit. Such projections could be different than actual
results. Should actual results be significantly less than
estimates, the value of our goodwill could be impaired in the
future.
Business Acquisitions.The Company accounts
for its business acquisitions as a purchase, whereby the
purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair value. The
excess of the purchase price over estimated fair value of the
net identifiable assets is allocated to goodwill. Determining
the fair value of assets and liabilities requires various
assumptions and estimates. These estimates and assumptions are
refined with adjustments recorded to goodwill as information is
gathered and final appraisals are completed over the allocation
period allowed under SFAS No. 141. The changes in
these estimates could impact the amount of assets, including
goodwill and liabilities, ultimately recorded in our balance
sheet and could impact our operating results subsequent to such
acquisition. We believe that our estimates have been materially
accurate in the past.
Recent
Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board
(“FASB”) issued FASB Staff Position (“FSP”)
APB 14-1,
Accounting for Convertible Debt Instruments That May Be Settled
in Cash upon Conversion (Including Partial Cash Settlement)
(“FSP APB
14-1”).
FSP APB 14-1
clarifies that convertible debt instruments that may be settled
in cash upon either mandatory or optional conversion (including
partial cash settlement) are not addressed by paragraph 12
of APB Opinion No. 14, Accounting for Convertible Debt
and Debt issued with Stock Purchase Warrants. Additionally,
FSP APB 14-1
specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that
will reflect the entity’s nonconvertible debt borrowing
rate when interest cost is recognized in subsequent periods. FSP
APB 14-1 is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. We will adopt FSP APB
14-1
beginning in the first quarter of fiscal 2010, and this standard
must be applied on a retrospective basis. We are
evaluating the impact the adoption of FSP APB
14-1 will
have on our consolidated financial position and results of
operations.
In December 2007, the FASB issued Statement of Financial
Accounting Standards (“SFAS”) No. 141 (revised
2007), Business Combinations
(“SFAS No. 141(R)”).
SFAS No. 141(R) significantly changes the accounting
for business combinations in a number of areas including the
treatment of contingent consideration, preacquisition
contingencies, transaction costs, in-process research and
development and restructuring costs. In addition, under
SFAS No. 141(R), changes in an acquired entity’s
deferred tax assets and uncertain tax positions after the
measurement period will impact income tax expense.
SFAS No. 141(R) is effective for fiscal years
beginning after December 15, 2008. We will adopt
SFAS No. 141(R) beginning in the first quarter of
fiscal 2010, which will change our accounting treatment for
business combinations on a prospective basis.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
(“SFAS No. 160”). SFAS No. 160
changes the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and
classified as a component of equity. This new consolidation
method significantly changes the accounting for transactions
with minority interest holders. SFAS No. 160 is
effective for fiscal years beginning after December 15,2008. We will adopt SFAS No. 160 beginning in the
first quarter of fiscal 2010. We are evaluating the impact the
adoption of SFAS No. 160 will have on our consolidated
financial position and results of operations.
Consolidated revenues this quarter of $298.5 million
increased $99.8 million, or 50.2%, compared to
$198.7 million in the prior year’s quarter. Motion
pictures revenue of $257.4 million this quarter increased
$87.1 million, or 51.1%, compared to $170.3 million in
the prior year’s quarter. Television revenues of
$41.1 million this quarter increased $12.7 million, or
44.7%, compared to $28.4 million in the prior year’s
quarter.
Motion
Pictures Revenue
The increase in motion pictures revenue this quarter was mainly
attributable to increases in DVD, theatrical, international,
Mandate Pictures and television revenue. The following table
sets forth the components of revenue for the motion pictures
reporting segment for the three-month periods ended
June 30, 2008 and 2007:
Theatrical revenue of $30.5 million increased
$11.5 million, or 60.5%, in this quarter as compared to the
prior year’s quarter due to the performance of the
significant titles listed above. In this quarter, the titles
listed in the above table as contributing significant theatrical
revenue represented individually between 7% and 79% of total
theatrical revenue and, in the aggregate, approximately 97% of
total theatrical revenue. In the prior year’s quarter, the
titles listed in the above table as contributing significant
theatrical revenue represented individually between 7% and 36%
of total theatrical revenue and, in the aggregate, approximately
90%, or $17.1 million of total theatrical revenue.
DVD revenue of $152.2 million increased $48.4 million,
or 46.6%, in this quarter as compared to the prior year’s
quarter. The increase is primarily due to an increase in the
amount of DVDs sold. The amount of DVDs sold increased due to
the performance of the titles listed in the above table and to a
lesser extent titles not listed above. The titles listed above
as contributing significant DVD revenue in the current quarter
represented individually between 2% to 25% of total DVD revenue
and, in the aggregate, 49% , or $73.9 million of total DVD
revenue for the quarter. In the prior year’s quarter, the
titles listed above as contributing significant DVD revenue
represented individually between 2% to 19% of total DVD revenue
and, in the aggregate, 44%, or $45.6 million of total DVD
revenue for the quarter. In the current quarter
$78.3 million, or 51% , of total DVD revenue was
contributed by titles that individually make up less than 2% of
total DVD revenue, and in the prior year’s quarter this
amounted to $58.3 million, or 56%, of total DVD revenue.
Television revenue included in motion pictures revenue of
$28.9 million in this quarter increased $6.5 million,
or 29.0%, compared to the prior year’s quarter. In this
quarter, the titles listed above as contributing significant
television revenue represented individually between 6% to 15% of
total television revenue and, in the aggregate, 55% or
$16.0 million of total television revenue for the quarter.
In the prior year’s quarter the titles listed above as
contributing significant television revenue represented
individually between 7% to 31% of total television revenue and,
in the aggregate, 59%, or $13.2 million of total television
revenue for the quarter. In the current quarter,
$12.9 million, or 45% , of total television revenue was
contributed by titles that individually make up less than 5% of
total television revenue, and in the prior year’s quarter,
this amounted to $9.2 million, or 41% , of total television
revenue for the year.
International revenue of $34.3 million increased
$11.6 million, or 51.1%, in this quarter as compared to the
prior year’s quarter. Lionsgate UK, established from the
acquisition of Redbus in fiscal 2006, contributed
$16.1 million, or 46.9% of international revenue in the
current quarter, which included revenues from 3:10 to Yuma,
The Bank Job, The Condemned, The Eye, Revolver, Saw IV, and
War, compared to $8.0 million, or 35.2% , of total
international revenue in the prior year’s quarter. In this
quarter, the titles listed in the table above as contributing
significant international revenue, excluding revenue generated
from these titles by Lionsgate UK, represented individually
between 10% to 14% of total international revenue and, in the
aggregate, 25%, or $8.4 million, of total international
revenue for the quarter. In the prior year’s quarter the
titles listed in the table above as contributing significant
revenue represented individually between 5% to 10% of total
international revenue and, in the aggregate, 27%, or
$6.0 million, of total international revenue for the
quarter.
Mandate Pictures revenue includes revenue from the sales and
licensing of domestic and worldwide rights of titles developed
or acquired by Mandate Pictures to third-party distributors as
well as various titles sold by Mandate International, LLC, one
of the Company’s international divisions, to international
sub-distributors. International revenue from Mandate titles is
included in the Mandate Picture revenue in the table above. In
the current quarter, Mandate Pictures revenue amounted to
$8.5 million, as compared to nil in the prior year’s
quarter.
Television
Revenue
The following table sets forth the components and the changes in
the components of revenue that make up television production
revenue for the three-month periods ended June 30, 2008 and
2007:
Three Months
Three Months
Ended
Ended
June 30,
June 30,
Increase (Decrease)
2008
2007
Amount
Percent
(Amounts in millions)
Television Production
Domestic series licensing
$
27.1
$
20.0
$
7.1
35.5
%
International
5.8
6.1
(0.3
)
(4.9
)%
DVD releases of television production
8.2
2.3
5.9
256.5
%
$
41.1
$
28.4
$
12.7
44.7
%
Revenues included in domestic series licensing from the
Company’s television syndication subsidiary,
Debmar-Mercury, LLC (“Debmar-Mercury”) increased
$5.0 million to $13.6 million from $8.6 million
in the prior year’s quarter due to increased revenue from
television series such as House of Payne and Family
Feud. In
addition, the following table sets forth the number of
television episodes and hours delivered in the three months
ended June 30, 2008 and 2007, respectively, excluding
television episodes delivered by Debmar-Mercury:
In the three months ended June 30, 2008, the television
episodes, not including pilot episodes, listed in the table
above represented individually between 9% to 23% of domestic
series revenue and, in the aggregate, 47% , or
$12.7 million of total television revenue for the quarter.
In the three months ended June 30, 2007, the television
episodes listed above represented individually between 7% to 21%
of domestic series revenue and, in the aggregate, 57% , or
$11.4 million of total television revenue for the year.
International revenue of $5.8 million decreased by
$0.3 million in the current quarter mainly due to
international revenue from Kill Point, Mad Men Season 1
and Wildfire Season 4, compared to international
revenue of $6.1 million in the prior year’s quarter
from Hidden Palms, Lovespring International, The Dresden
Files and The Dead Zone.
The increase in revenue from DVD releases of television
production is primarily driven by DVD revenue from Weeds
Seasons 2 and 3.
Direct
Operating Expenses
The following table sets forth direct operating expenses by
segment for the three months ended June 30, 2008 and 2007:
Direct operating expenses as a percentage of segment revenues
44.7
%
80.0
%
49.6
%
35.0
%
96.8
%
43.8
%
Direct operating expenses include amortization, participation
and residual expenses and other expenses. Direct operating
expenses of the motion pictures segment of $115.1 million
for this quarter were 44.7% of motion pictures revenue, compared
to $59.6 million, or 35.0% of motion pictures revenue for
the prior year’s quarter. The increase in direct operating
expense of the motion pictures segment in the current quarter as
a percent of revenue is due to the change in the mix of titles
primarily from the fiscal 2008 and 2009 theatrical releases
and certain older titles generating revenue in the current
quarter as compared to the prior year’s quarter. The
benefit in other expense in the prior year’s quarter
resulted primarily from foreign exchange gains of approximately
$0.5 million and adjustments to the provision for bad debts
due to collection of accounts previously reserved. Direct
operating
expenses of the motion pictures segment included charges for
write downs of investment in film costs of $4.7 million and
$2.4 million in the current quarter and prior year quarter,
respectively, due to the lower than anticipated actual
performance or previously expected performance of certain
titles. In the current quarter, approximately $4.2 million
of the write down related to the change in the release strategy
of one motion picture that was completed in the current quarter.
In the prior year’s quarter, approximately
$1.5 million of the write down related to the unanticipated
poor performance at the box office of one motion picture.
Direct operating expenses of the television segment of
$32.9 million for this quarter were 80.0% of television
revenue, compared to $27.5 million, or 96.8% of television
revenue for the prior year’s quarter. The increase in
direct operating expense of the television segment in the
quarter is due to higher television production revenue. The
decrease in direct operating expenses of the television segment
in the current quarter as a percent of revenue is due to a
greater portion of revenue attributed to more successful shows,
such as Weeds, House of Payne and Mad Men. In the
current quarter, $1.8 million of write downs of investment
in film costs was included in amortization of television
programs, compared to write downs of investment in film costs of
$2.4 million in the prior year’s quarter.
Distribution
and Marketing Expenses
The following table sets forth distribution and marketing
expenses by segment for the three months ended June 30,2008 and 2007:
The majority of distribution and marketing expenses relate to
the motion pictures segment. Theatrical prints and advertising
(“P&A”) in the motion pictures segment in the
current quarter of $20.2 million decreased
$63.1 million, or 75.8%, compared to $83.3 million in
the prior year’s quarter. The decrease in theatrical
P&A from the motion pictures segment is primarily due to a
decrease in the number of significant releases during the
quarter. In the current quarter, there was only one significant
theatrical release, as compared to five significant theatrical
releases in the prior year’s quarter. Domestic theatrical
P&A from the motion pictures segment in this quarter
included P&A incurred on the release of Forbidden
Kingdom, and P&A incurred in advance of the release of
titles such as My Best Friend’s Girl, Bangkok Dangerous,
and The Spirit, which individually represented
between 5% and 71% of total theatrical P&A and in the
aggregate accounted for 95% of the total theatrical P&A.
Domestic theatrical P&A from the motion pictures segment in
the prior year’s quarter included P&A incurred on the
release of titles such as Hostel 2, Bug, Delta Farce, The
Condemned, and Slow Burn, which individually
represented between 12% and 25% of total theatrical P&A and
in the aggregate accounted for 86% of the total theatrical
P&A. Slow Burn, released theatrically during the
three months ended June 30, 2007, individually contributed
less than 3% of total theatrical revenue in the prior
year’s quarter.
Home entertainment distribution and marketing costs on motion
pictures and television product in this quarter of
$63.4 million increased $19.7 million, or 45.1%,
compared to $43.7 million in the prior year’s quarter.
The increase in home entertainment distribution and marketing
costs is mainly due to the increase in the volume and the size
of marketing campaigns in the current quarter compared to the
prior year’s quarter and an increase in distribution costs
associated with the increase in revenue. Home entertainment
distribution and marketing costs as a percentage of DVD revenues
was 39.5% and 41.2% in the current quarter and prior year’s
quarter, respectively.
International distribution and marketing expenses in this
quarter includes $9.0 million of distribution and marketing
costs from Lionsgate UK, compared to $4.9 million in the
prior year’s quarter.
General
and Administrative Expenses
The following table sets forth general and administrative
expenses by segment for the three months ended June 30,2008 and 2007:
The increase in general and administrative expenses of the
motion pictures segment of $5.5 million, or 72.4%, is
primarily due to general and administrative expenses of Mandate
Pictures which was acquired in September 2007, of approximately
$1.0 million, general and administrative expenses of Maple
Pictures of $1.2 million consolidated since July 18,2007, and increases in general and administrative expenses from
Lionsgate UK of approximately $0.5 million associated with
the growth in revenue in our UK operations. The remaining
increase in general and administrative expenses of the motion
pictures segment is due to an increase in salaries and related
expenses of $1.4 million, an increase in professional fees
of $0.3 million and an increase in other general overhead
costs of $1.1 million. In the current quarter,
$0.9 million of motion picture production overhead was
capitalized compared to $0.7 million in the prior
year’s quarter.
The increase in general and administrative expenses of the
television segment of $1.2 million, or 80.0%, is primarily
due to an increase in salaries and related expenses of
approximately $0.7 million and an increase in other general
overhead costs of approximately $0.5 million. In the
current quarter, $1.0 million of television production
overhead was capitalized compared to $1.1 million in the
prior year’s quarter.
The increase in corporate general and administrative expenses of
$4.8 million, or 27.1%, is primarily due to an increase in
salaries and related expenses of approximately
$4.1 million, an increase in stock-based compensation of
approximately $1.5 million, an increase in other general
overhead costs of $0.6 million, offset by a decrease in
professional fees of approximately $1.4 million. The
increase in salaries and related expenses of $4.1 million
was partly due to higher salaries and increases in the number of
full-time employees.
The following table sets forth stock based compensation expense
(benefit) for the three months ended June 30, 2008 and 2007:
At June 30, 2008, as disclosed in Note 13 to the
unaudited condensed consolidated financial statements, there
were unrecognized compensation costs of approximately
$24.2 million related to stock options and restricted stock
units previously granted, including the first annual installment
of share grants that were subject to performance targets, which
will be expensed over the remaining vesting periods. At
June 30, 2008, 748,542 shares of restricted
stock units have been awarded to four key executive officers,
the vesting of which will be subject to performance targets to
be set annually by the Compensation Committee of the Board of
Directors of the Company. These restricted stock units will vest
in three, four, and five annual installments assuming annual
performance targets to be set annually have been met. The fair
value of the 748,542 shares whose future annual performance
targets have not been set was $7.8 million, based on the
market price of the Company’s common shares as of
June 30, 2008. The market value will be remeasured when the
annual performance criteria are set and the value will be
expensed over the remaining vesting periods once it becomes
probable that the performance targets will be satisfied.
Depreciation
and Other Expenses (Income)
Depreciation of $1.1 million this quarter increased
$0.2 million, or 22.2% from $0.9 million in the prior
year’s quarter.
Interest expense of $4.3 million this quarter increased
$0.4 million, or 10.3%, from the prior year’s quarter
of $3.9 million.
Interest and other income was $2.2 million for the quarter
ended June 30, 2008, compared to $3.8 million in the
prior year’s quarter. Interest and other income this
quarter was earned on the cash balance and available-for-sale
investments held during the three months ended June 30,2008.
The Company’s equity interests in this quarter included a
$1.1 million loss from the Company’s 33.33% equity
interest in FEARnet, a loss of $0.8 million from the
Company’s 42% equity interest in Break.com, and a
$0.3 million loss from the Company’s 43% equity
interest in Roadside. For the three months ended June 30,2007, equity interests included a $0.9 million loss from
the Company’s 33.33% equity interest in FEARnet and a
$0.1 million gain from the Company’s 10% equity
interest in Maple Pictures.
The Company had an income tax expense of $0.7 million, or
8.6% of income before income taxes in the three months ended
June 30, 2008, compared to an expense of $0.7 million,
or (1.3%) of loss before income taxes in the three months ended
June 30, 2007. The tax expense reflected in the current
quarter is primarily attributable to U.S. and Canadian
income taxes and foreign withholding taxes. The Company’s
actual annual effective tax rate will differ from the statutory
federal rate as a result of several factors, including changes
in the valuation allowance against net deferred tax assets,
non-temporary differences, foreign income taxed at different
rates, and state and local income taxes. Income tax loss
carryforwards amount to approximately $87.5 million for
U.S. federal income tax purposes available to reduce income
taxes over twenty years, $73.3 million for U.S. state
income tax purposes available to reduce income taxes over future
years with varying expirations, $21.6 million for Canadian
income tax purposes available to reduce income taxes over
19 years with varying expirations, and $19.8 million
for UK income tax purposes available indefinitely to reduce
future income taxes.
Net income for the three months ended June 30, 2008 was
$7.1 million, or basic net income per common share of $0.06
on 118.4 million weighted average shares outstanding.
Diluted net income per common share for the three months ended
June 30, 2008 was $0.06 on 121.1 million weighted
average shares outstanding. This compares to net loss for the
three months ended June 30, 2007 of $53.1 million or
basic and diluted net loss per common share of $0.45 on
117.1 million weighted average common shares outstanding.
Liquidity
and Capital Resources
Our liquidity and capital resources are provided principally
through cash generated from operations, issuance of subordinated
notes and our credit facility.
In October 2004, LGEI sold $150.0 million of the
2.9375% Notes that mature on October 15, 2024. The
Company received $146.0 million of net proceeds after
paying placement agents’ fees from the sale of the
2.9375% Notes. Offering expenses were $0.7 million.
The 2.9375% Notes are convertible at the option of the
holder, at any time prior to maturity, upon satisfaction of
certain conversion contingencies, into common shares of the
Company at a conversion rate of 86.9565 shares per $1,000
principal amount of the 2.9375% Notes, which is equal to a
conversion price of approximately $11.50 per share, subject to
adjustment upon certain events. From October 15, 2009 to
October 14, 2010, LGEI may redeem the 2.9375% Notes at
100.839%; from October 15, 2010
to October 14, 2011, LGEI may redeem the 2.9375% Notes
at 100.420%; and thereafter, LGEI may redeem the notes at 100%.
In February 2005, LGEI sold $175.0 million of the
3.625% Notes that mature on March 15, 2025. The
Company received $170.2 million of net proceeds after
paying placement agents’ fees from the sale of the
3.625% Notes. Offering expenses were approximately
$0.6 million. The 3.625% Notes are convertible at the
option of the holder, at any time prior to maturity, into common
shares of the Company at a conversion rate of
70.0133 shares per $1,000 principal amount of the
3.625% Notes, which is equal to a conversion price of
approximately $14.28 per share, subject to adjustment upon
certain events. LGEI may redeem the 3.625% Notes at its
option on or after March 15, 2012 at 100% of their
principal amount plus accrued and unpaid interest.
Amended Credit Facility. In July 2008, the
Company entered into an amended credit facility, which provides
for a $340 million secured revolving credit facility, of
which $30 million may be utilized by two of the
Company’s wholly owned foreign subsidiaries. The amended
credit facility expires July 25, 2013 and bears interest at
2.25% over the Adjusted LIBOR rate. The availability of funds
under the credit facility is limited by a borrowing base, and
also reduced by outstanding letters of credit. This amended
credit facility amends and restates the Company’s original
$215 million credit facility described in Note 6. The
proceeds of the credit facility may be used (i) to finance
the development, production, distribution or acquisition of
feature films, television, DVD product and other product lines
(ii) to operate physical production facilities,
(iii) to acquire and operate television channels and
internet distribution platforms and (iv) for other general
corporate purposes, including acquisitions, permitted stock
repurchases and dividends. Obligations under the credit facility
are secured by collateral (as defined) granted by the Company
and certain subsidiaries of the Company, as well as pledge of
equity interests in certain of the Company’s subsidiaries.
The amended credit facility contains a number of affirmative
covenants and a number of negative covenants that, among other
things, require the Company to satisfy certain financial
covenants and restrict the ability of the Company, to incur
additional debt, pay dividends and make distributions, make
certain investments and acquisitions, repurchase its stock and
prepay certain indebtedness, create liens, enter into agreements
with affiliates, modify the nature of its business, enter into
sale-leaseback transactions, transfer and sell material assets
and merge or consolidate.
Theatrical Slate Participation. On
May 25, 2007, the Company closed a theatrical slate
participation arrangement, as amended on January 30, 2008.
Under this arrangement Pride, an unrelated entity, will
participate in, generally, 50% of the Company’s production,
acquisition, marketing and distribution costs of theatrical
feature films up to an aggregate of approximately
$196 million, net of transaction costs. The funds available
from Pride were generated from the issuance by Pride of
$35 million of subordinated debt instruments,
$35 million of equity and $134 million from a senior
credit facility, which is subject to a borrowing base. The
Company is not a party to the Pride debt obligations or their
senior credit facility, and provides no guarantee of repayment
of these obligations. The percentage of the contribution may
vary on certain pictures. Pride will participate in a pro rata
portion of the pictures net profits or losses similar to a
co-production arrangement based on the portion of costs funded.
The Company continues to distribute the pictures covered by the
arrangement with a portion of net profits after all costs and
the Company’s distribution fee being distributed to Pride
based on its pro rata contribution to the applicable costs
similar to a back-end participation on a film.
SGF. On July 30, 2007, the Company
entered into a four-year filmed entertainment slate
participation agreement with SGF, the Québec provincial
government’s investment arm. SGF will provide up to 35% of
production costs of television and feature film productions
produced in Québec for a four-year period for an aggregate
participation of up to $140 million, and the Company will
advance all amounts necessary to fund the remaining budgeted
costs. The maximum aggregate of budgeted costs over the
four-year period will be $400 million, including the
Company’s portion, but no more than $100 million per
year. In connection with this agreement, the Company and SGF
will proportionally share in the proceeds derived from the
productions after the Company deducts a distribution fee,
recoups all distribution expenses and releasing costs, and pays
all applicable third party participations and residuals.
Filmed Entertainment Backlog. Backlog
represents the amount of future revenue not yet recorded from
contracts for the licensing of films and television product for
television exhibition and in international markets. Backlog at
June 30, 2008 and March 31, 2008 is
$441.2 million and $437.4 million, respectively.
Cash Flows Used in Operating Activities. Cash
flows used in operating activities for the three months ended
June 30, 2008 were $149.8 million compared to cash
flows used in operating activities in the three months ended
June 30, 2007 of $55.6 million. The increase in cash
used in operating activities was primarily due to increases in
investment in film, decreases in accounts payable and accrued
liabilities, participation and residuals, offset by net income
generated in the three months ended June 30, 2008 and
decreases in accounts receivable.
Cash Flows Provided by/Used in Investing
Activities. Cash flows used in investing
activities of $16.5 million for the three months ended
June 30, 2008 consisted of $2.3 million for purchases
of property and equipment, $11.1 million for the investment
in equity method investees and $3.1 million for an increase
in a loan receivable from Break.com. Cash flows provided by
investing activities of $81.9 million in the three months
ended June 30, 2007 included net proceeds from the sale of
$83.9 million of investments available-for-sale, offset by
$2.0 million for purchases of property and equipment.
Cash Flows Provided by/Used in Financing
Activities. Cash flows provided by financing
activities of $25.3 million for the three months ended
June 30, 2008 resulted from increased production
obligations of $70.5 million and the exercise of stock
options of $0.8 million, offset by $28.5 million
payment of production obligations, $16.4 million paid for
the repurchase of the Company’s common shares and
$1.1 million paid for tax withholding requirements
associated with the vesting of shares. Cash flows used in
financing activities of $20.7 million in the three months
ended June 30, 2007 consisted of cash received from
borrowings of $26.6 million and the exercise of stock
options of $0.4 million, offset by $47.7 million
repayment of production obligations.
Anticipated Cash Requirements. The nature of
our business is such that significant initial expenditures are
required to produce, acquire, distribute and market films and
television programs, while revenues from these films and
television programs are earned over an extended period of time
after their completion or acquisition. We believe that cash flow
from operations, cash on hand, investments available-for-sale,
credit facility availability, tax-efficient financing and
production financing available will be adequate to meet known
operational cash requirements for the foreseeable future,
including the funding of future film and television production,
film rights acquisitions and theatrical and DVD release
schedules. We monitor our cash flow liquidity, availability,
fixed charge coverage, capital base, film spending and leverage
ratios with the long-term goal of maintaining our credit
worthiness.
Our current financing strategy is to fund operations and to
leverage investment in films and television programs through our
cash flow from operations, our credit facility, single-purpose
production financing, government incentive programs, film funds,
and distribution commitments. In addition, we may acquire
businesses or assets, including individual films or libraries,
that are complementary to our business. Any such transaction
could be financed through our cash flow from operations, credit
facilities, equity or debt financing.
Total future commitments under contractual obligations
$
505,194
$
223,397
$
120,261
$
49,802
$
17,544
$
456,311
$
1,372,509
(1)
Film and production obligations include minimum guarantees,
theatrical marketing obligations and production obligations as
disclosed in Note 7 of our unaudited condensed consolidated
financial statements. Repayment dates are based on anticipated
delivery or release date of the related film or contractual due
dates of the obligation.
(2)
Distribution and marketing commitments represent contractual
commitments for future expenditures associated with distribution
and marketing of films which the Company will distribute. The
payment dates of these amounts are primarily based on the
anticipated release date of the film.
(3)
Minimum guarantee commitments represent contractual commitments
related to the purchase of film rights for future delivery.
Production obligation commitments represent amounts committed
for future film production and development to be funded through
production financing and recorded as a production obligation
liability. Future payments under these obligations are based on
anticipated delivery or release dates of the related film or
contractual due dates of the obligation. The amounts include
future interest payments associated with the obligations.
Off-Balance
Sheet Arrangements
We do not have any transactions, arrangements and other
relationships with unconsolidated entities that will affect our
liquidity or capital resources. We have no special purpose
entities that provided off-balance sheet financing, liquidity or
market or credit risk support, nor do we engage in leasing,
hedging or research and development services, that could expose
us to liability that is not reflected in our financial
statements.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk.
Currency
and Interest Rate Risk Management
Market risks relating to our operations result primarily from
changes in interest rates and changes in foreign currency
exchange rates. Our exposure to interest rate risk results from
the financial debt instruments that arise from transactions
entered into during the normal course of business. As part of
our overall risk management program, we evaluate and manage our
exposure to changes in interest rates and currency exchange
risks on an ongoing basis. Hedges and derivative financial
instruments will be used in the future in order to manage our
interest rate and currency exposure. We have no intention of
entering into financial derivative contracts, other than to
hedge a specific financial risk.
Currency Rate Risk.The Company enters into
forward foreign exchange contracts to hedge its foreign currency
exposures on future production expenses denominated in Canadian
dollars. As of June 30, 2008, the Company had outstanding
contracts to buy CDN$2.1 million in exchange for
US$2.1 million over a period of three weeks at a weighted
average exchange rate of CDN$1.02, and to sell
CDN$0.2 million in exchange for US$0.2 million over a
period of four weeks at a weighted average exchange rate of
CDN$1.02. Changes in the fair value representing a net
unrealized fair value gain on foreign exchange contracts that
qualified as effective hedge contracts outstanding during the
three months ended June 30, 2008 amounted to less than
$0.1 million and are included in accumulated other
comprehensive income (loss), a separate component of
shareholders’ equity. During the three months ended
June 30, 2008, the Company completed foreign exchange
contracts denominated in Canadian dollars, including a contract
that did not qualify as an effective hedge. The net losses
resulting from the completed contracts were $0.2 million.
These contracts are entered into with a major financial
institution as counterparty. The Company is exposed to credit
loss in the event of nonperformance by the counterparty, which
is limited to the cost of replacing the contracts, at current
market rates. The Company does not require collateral or other
security to support these contracts.
Interest Rate Risk. Our principal risk with
respect to our debt is interest rate risk. We currently have
minimal exposure to cash flow risk due to changes in market
interest rates related to our outstanding debt and other
financing obligations. Our credit facility has a nil balance at
June 30, 2008. Other financing obligations subject to
variable interest rates include $201.2 million owed to film
production entities on delivery of titles.
The table below presents repayments and related weighted average
interest rates for our interest-bearing debt and production
obligations and subordinate notes and other financing
obligations as of June 30, 2008.
Amounts owed to film production entities on anticipated delivery
date or release date of the titles or the contractual due dates
of the obligation. Production obligations of $199.5 million
incur interest at rates ranging
from approximately 3.96% to 5.18% and one production loan of
$1.7 million bears interest of approximately 11.45%. Not
included in the table above are approximately $83.7 million
of production obligations which are non-interest bearing.
(3)
Long term production obligations of $5.0 million with a
fixed interest rate equal to 2.50%.
(4)
2.9375% Notes with fixed interest rate equal to 2.9375%.
(5)
3.625% Notes with fixed interest rate equal to 3.625%.
(6)
Other financing obligation with fixed interest rate equal to
8.02%.
Item 4.
Controls
and Procedures.
Evaluation
of Disclosure Controls and Procedures
The term “disclosure controls and procedures” is
defined in
Rules 13a-15(e)
and
15d-15(e) of
the Securities Exchange Act of 1934 as amended (the
“Exchange Act”). These rules refer to the controls and
other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports
that it files under the Exchange Act is recorded, processed,
summarized and reported within required time periods specified
in the SEC’s rules and forms, and that such information is
accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure.
As of June 30, 2008, the end of the period covered by this
report, the Company carried out an evaluation under the
supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer of the effectiveness of our
disclosure controls and procedures. Our Chief Executive Officer
and Chief Financial Officer have concluded that such controls
and procedures were effective as of June 30, 2008.
Changes
in Internal Control over Financial Reporting
As required by
Rule 13a-15(d)
of the Exchange Act, the Company, under the supervision and with
the participation of the Company’s management, including
the Chief Executive Officer and Chief Financial Officer, also
evaluated whether any changes occurred to the Company’s
internal control over financial reporting during the period
covered by this report that have materially affected, or are
reasonably likely to materially affect, such control. Based on
that evaluation, there has been no such change during the period
covered by this report.
The following updates the risk factor entitled “We
face substantial capital requirements and financial risks
— Our credit facility contains certain
covenants and financial tests that limit the way we conduct
business” in the “Risk Factors” section of
our Annual Report on
Form 10-K
for the fiscal year ended March 31, 2008.
Our credit facility contains certain covenants and financial
tests that limit the way we conduct business. On
July 25, 2008, we entered into a Second Amended and
Restated Credit, Security, Guaranty and Pledge Agreement with
JPMorgan Chase Bank, N.A., for a $340 million five-year
secured credit facility. Our credit facility contains various
covenants limiting our ability to incur or guarantee additional
indebtedness, pay dividends and make other distributions,
pre-pay any subordinated indebtedness, make investments and
other restricted payments, make capital expenditures, make
acquisitions and sell assets. These covenants may prevent us
from raising additional financing, competing effectively or
taking advantage of new business opportunities. Under our credit
facility, we are also required to maintain specified financial
ratios and satisfy certain financial tests. If we cannot comply
with these covenants or meet these ratios and other tests, it
could result in a default under our credit facility, and unless
we are able to negotiate an amendment, forbearance or waiver, we
could be required to repay all amounts then outstanding, which
could have a material adverse effect on our business, results of
operations and financial condition, depending upon our
outstanding balance at the time.
Borrowings under our credit facility also are secured by liens
on substantially all of our assets and the assets of certain of
our subsidiaries. If we are in default under our credit
facility, the lenders could foreclose upon all or substantially
all of our assets and the assets of these subsidiaries. We
cannot assure you that we will generate sufficient cash flow to
repay our indebtedness, and we further cannot assure you that,
if the need arises, we will be able to obtain additional
financing or to refinance our indebtedness on terms acceptable
to us, if at all. Accordingly, any such failure could have a
material adverse effect on our business, results of operations
and financial condition.
The following updates the risk factor entitled “We
face substantial capital requirements and financial risks
— Substantial leverage could adversely
affect our financial condition” in the “Risk
Factors” section of our Annual Report on
Form 10-K
for the fiscal year ended March 31, 2008.
Substantial leverage could adversely affect our financial
condition. Historically, we have been highly
leveraged and may be highly leveraged in the future. We have
access to capital through our $340 million credit facility
with JPMorgan Chase Bank, N.A. and a balance under letters of
credit for $22.7 million. In addition, we have
$325 million Convertible Senior Subordinated Notes
outstanding, with $150 million maturing October 15,2024 and $175 million maturing March 15, 2025. At
March 31, 2008, we had approximately $371.6 million in
cash and cash equivalents. While we have not currently drawn
down on our credit facility, we could borrow some or all of the
permitted amount in the future. The amount we have available to
borrow under this facility depends upon our borrowing base,
which in turn depends on the value of our existing library of
films and television programs, as well as accounts receivable
and cash held in collateral accounts. If several of our larger
motion picture releases are commercial failures or our library
declines in value, our borrowing base could decrease. Such a
decrease could have a material adverse effect on our business,
results of operations and financial condition. For example, it
could:
•
require us to dedicate a substantial portion of our cash flow to
the repayment of our indebtedness, reducing the amount of cash
flow available to fund motion picture and television production,
distribution and other operating expenses;
•
limit our flexibility in planning for or reacting to downturns
in our business, our industry or the economy in general;
•
limit our ability to obtain additional financing, if necessary,
for operating expenses, or limit our ability to obtain such
financing on terms acceptable to us; and
•
limit our ability to pursue strategic acquisitions and other
business opportunities that may be in our best interests.
The following updates the risk factor entitled “Our
success depends on external factors in the motion picture and
television industry — We could be aversely
affected by strikes or other union job actions” in the
“Risk Factors” section of our Annual Report on
Form 10-K
for the fiscal year ended March 31, 2008.
We could be adversely affected by strikes or other union job
actions. We are directly or indirectly dependent
upon highly specialized union members who are essential to the
production of motion pictures and television programs. A strike
by, or a lockout of, one or more of the unions that provide
personnel essential to the production of motion pictures or
television programs could delay or halt our ongoing production
activities. In November 2007, the members of the Writer’s
Guild of America went on strike, and a new agreement was not
approved until February 2008. Additionally, the Directors Guild
of America and Screen Actors Guild collective bargaining
agreements expired in 2008, and while an agreement has been
reached with the Directors Guild, negotiations with the Screen
Actors Guild, which agreement expired on June 30, 2008, are
ongoing. Such a halt or delay, depending on the length of time,
could cause a delay or interruption in our release of new motion
pictures and television programs, which could have a material
adverse effect on our business, results of operations and
financial condition.
Other than the updates below, there were no other material
changes to the risk factors previously reported in our Annual
Report on
Form 10-K
for the fiscal year ended March 31, 2008.
On May 31, 2007, our Board of Directors authorized the
repurchase of up to $50 million of our common shares. On
May 29, 2008, as part of its regularly scheduled year-end
meeting, our Board of Directors authorized the repurchase of up
to an additional $50 million of our common shares, subject
to market conditions. The common shares may be purchased, from
time to time, at the Company’s discretion, including the
quantity, timing and price thereof. Such purchases will be
structured as permitted by securities laws and other legal
requirements. During the period from the authorization date
through June 30, 2008, 3,860,635 shares have been
repurchased at a cost of approximately $36.3 million
(including commission costs). The share repurchase program has
no expiration date.
Item 3.
Defaults
Upon Senior Securities.
None
Item 4.
Submission
of Matters to a Vote of Security Holders.
None
Item 5.
Other
Information.
None
Item 6.
Exhibits.
Exhibit
Number
Description of Documents
3
.1(1)
Articles
3
.2(2)
Notice of Articles
3
.3(2)
Vertical Short Form Amalgamation Application
3
.4(2)
Certificate of Amalgamation
10
.51*
Second Amended and Restated Credit, Security, Guaranty and
Pledge Agreement by and among Lions Gate Entertainment Inc.,
Lions Gate UK Limited, Lions Gate Australia Pty Limited, the
Guarantors referred to therein, the Lenders referred to therein,
JPMorgan Chase Bank, N.A. and Wachovia Bank, N.A., dated of July25, 2008.
31
.1
Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31
.2
Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32
.1
Certification of CEO and CFO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Confidential treatment has been requested for portions of this
exhibit. Portions of this document have been omitted and
submitted separately to the Securities and Exchange Commission.
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.