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Lions Gate Entertainment Corp/CN – ‘10-Q’ for 9/30/08

On:  Monday, 11/10/08, at 4:15pm ET   ·   For:  9/30/08   ·   Accession #:  950134-8-20058   ·   File #:  1-14880

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

11/10/08  Lions Gate Entertainment Corp/CN  10-Q        9/30/08    4:1.1M                                   RR Donnelley

Quarterly Report   —   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    887K 
 2: EX-31.1     Certification per Sarbanes-Oxley Act (Section 302)  HTML     12K 
 3: EX-31.2     Certification per Sarbanes-Oxley Act (Section 302)  HTML     12K 
 4: EX-32.1     Certification per Sarbanes-Oxley Act (Section 906)  HTML      8K 


10-Q   —   Quarterly Report
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"Part I -- Financial Information
"Financial Statements
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Quantitative and Qualitative Disclosures About Market Risk
"Controls and Procedures
"Part Ii -- Other Information
"Legal Proceedings
"1A
"Risk Factors
"Unregistered Sales of Equity Securities and Use of Proceeds
"Defaults Upon Senior Securities
"Submission of Matters to a Vote of Security Holders
"Exhibits

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  e10vq  

Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
     
(Mark One)    
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended September 30, 2008
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission File No.: 1-14880
 
 
 
 
Lions Gate Entertainment Corp.
(Exact name of registrant as specified in its charter)
 
     
British Columbia, Canada
(State or other jurisdiction of
incorporation or organization)
  N/A
(I.R.S. Employer
Identification No.)
 
 
 
 
1055 West Hastings Street, Suite 2200
Vancouver, British Columbia V6E 2E9
and
2700 Colorado Avenue, Suite 200
Santa Monica, California 90404
(Address of principal executive offices)
 
 
 
 
(877) 848-3866
(Registrant’s telephone number, including area code)
 
 
 
 
          
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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.
 
     
Title of Each Class
 
Outstanding at November 1, 2008
 
Common Shares, no par value per share
  115,738,568 shares
 



 

 
TABLE OF CONTENTS
 
                 
Item
      Page
 
 
1.
    Financial Statements     4  
 
2.
    Management’s Discussion and Analysis of Financial Condition and Results of Operations     35  
 
3.
    Quantitative and Qualitative Disclosures About Market Risk     58  
 
4.
    Controls and Procedures     59  
 
 
1.
    Legal Proceedings     60  
 
1A.
    Risk Factors     60  
 
2.
    Unregistered Sales of Equity Securities and Use of Proceeds     60  
 
3.
    Defaults Upon Senior Securities     60  
 
4.
    Submission of Matters to a Vote of Security Holders     61  
 
5.
    Other Information     61  
 
6.
    Exhibits     62  
 EX-31.1
 EX-31.2
 EX-32.1


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Table of Contents

FORWARD-LOOKING STATEMENTS
 
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terms such as “may,” “intend,” “will,” “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.


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Table of Contents

 
PART I — FINANCIAL INFORMATION
 
Item 1.   Financial Statements.
 
LIONS GATE ENTERTAINMENT CORP.
 
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
                 
    September 30,
    March 31,
 
    2008     2008  
    (Unaudited)     (Note 1)  
    (Amounts in thousands, except share amounts)  
 
ASSETS
Cash and cash equivalents
  $ 248,905     $ 371,589  
Restricted cash
    22,235       10,300  
Investments
    6,875       6,927  
Accounts receivable, net of reserve for video returns and allowances of $108,328 (March 31, 2008 — $95,515) and provision for doubtful accounts of $6,154 (March 31, 2008 — $5,978)
    201,370       260,284  
Investment in films and television programs
    745,258       608,942  
Property and equipment
    17,095       13,613  
Goodwill
    224,213       224,531  
Other assets
    83,322       41,572  
                 
    $ 1,549,273     $ 1,537,758  
                 
 
LIABILITIES
Accounts payable and accrued liabilities
  $ 244,637     $ 245,430  
Participation and residuals
    450,760       385,846  
Film and production obligations
    282,519       278,016  
Subordinated notes and other financing obligations
    328,718       328,718  
Deferred revenue
    134,693       111,510  
                 
      1,441,327       1,349,520  
                 
Commitments and contingencies
               
 
SHAREHOLDERS’ EQUITY
Common shares, no par value, 500,000,000 shares authorized, 122,670,458 and 121,081,311 shares issued at September 30, 2008 and March 31, 2008, respectively
    443,890       434,650  
Series B preferred shares (10 shares issued and outstanding)
           
Accumulated deficit
    (264,619 )     (223,619 )
Accumulated other comprehensive loss
    (4,328 )     (533 )
                 
      174,943       210,498  
Treasury shares, no par value, 6,960,774 and 2,410,499 shares at September 30, 2008 and March 31, 2008, respectively
    (66,997 )     (22,260 )
                 
      107,946       188,238  
                 
    $ 1,549,273     $ 1,537,758  
                 
 
See accompanying notes.


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Table of Contents

LIONS GATE ENTERTAINMENT CORP.
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
                                 
    Three Months Ended
    Three Months Ended
    Six Months Ended
    Six Months Ended
 
    September 30, 2008     September 30, 2007     September 30, 2008     September 30, 2007  
    (Amounts in thousands, except per share amounts)  
 
Revenues
  $ 380,718     $ 351,744     $ 679,177     $ 550,486  
Expenses:
                               
Direct operating
    199,861       184,335       347,869       271,393  
Distribution and marketing
    189,407       197,193       288,382       332,694  
General and administration
    30,600       26,371       68,908       53,211  
Depreciation
    1,180       1,038       2,242       1,946  
                                 
Total expenses
    421,048       408,937       707,401       659,244  
                                 
Operating loss
    (40,330 )     (57,193 )     (28,224 )     (108,758 )
                                 
Other expenses (income):
                               
Interest expense
    5,190       4,225       9,501       8,085  
Interest and other income
    (2,047 )     (2,635 )     (4,202 )     (6,438 )
Gain on sale of equity securities
          (2,785 )           (2,785 )
                                 
Total other expenses (income), net
    3,143       (1,195 )     5,299       (1,138 )
                                 
Loss before equity interests and income taxes
    (43,473 )     (55,998 )     (33,523 )     (107,620 )
Equity interests loss
    (1,960 )     (1,187 )     (4,146 )     (1,994 )
                                 
Loss before income taxes
    (45,433 )     (57,185 )     (37,669 )     (109,614 )
Income tax provision
    2,662       818       3,331       1,507  
                                 
Net loss
  $ (48,095 )   $ (58,003 )   $ (41,000 )   $ (111,121 )
                                 
Basic Net Loss Per Common Share
  $ (0.41 )   $ (0.49 )   $ (0.35 )   $ (0.94 )
                                 
Diluted Net Loss Per Common Share
  $ (0.41 )   $ (0.49 )   $ (0.35 )   $ (0.94 )
                                 
 
See accompanying notes.


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Table of Contents

 
LIONS GATE ENTERTAINMENT CORP.
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
                                                                                 
                                        Accumulated
                   
                Series B
          Comprehensive
    Other
                   
    Common Shares     Preferred Shares     Accumulated
    Income
    Comprehensive
    Treasury Shares        
    Number     Amount     Number     Amount     Deficit     (Loss)     Income (Loss)     Number     Amount     Total  
    (Amounts in thousands, except share amounts)  
 
Balance at March 31, 2008
    121,081,311     $ 434,650       10     $     $ (223,619 )           $ (533 )     (2,410,499 )   $ (22,260 )   $ 188,238  
Exercise of stock options, net of shares withholding tax obligations of $1,182
    875,168       1,712                                                               1,712  
Stock based compensation, net of share units withholding tax obligations of $1,759
    523,037       5,757                                                               5,757  
Issuance of common shares to directors for services
    21,063       205                                                               205  
Issuance of common shares related to the Mandate acquisition
    169,879       1,566                                                               1,566  
Repurchase of common shares, no par value
                                                            (4,550,275 )     (44,737 )     (44,737 )
Comprehensive loss
                                                                               
Net loss
                                    (41,000 )   $ (41,000 )                             (41,000 )
Foreign currency translation adjustments
                                            (3,880 )     (3,880 )                     (3,880 )
Net unrealized gain on foreign exchange contracts
                                            12       12                       12  
Unrealized gain on investments — available for sale
                                            73       73                       73  
                                                                                 
Comprehensive loss
                                          $ (44,795 )                                
                                                                                 
Balance at September 30, 2008
    122,670,458     $ 443,890       10     $     $ (264,619 )           $ (4,328 )     (6,960,774 )   $ (66,997 )   $ 107,946  
                                                                                 
 
See accompanying notes.


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Table of Contents

 
LIONS GATE ENTERTAINMENT CORP.
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                 
    Six Months
    Six Months
 
    Ended
    Ended
 
    September 30,
    September 30,
 
    2008     2007  
    (Amounts in thousands)  
 
Operating Activities:
               
Net loss
  $ (41,000 )   $ (111,121 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation of property and equipment
    2,242       1,946  
Amortization of deferred financing costs
    2,592       1,771  
Amortization of films and television programs
    186,743       176,894  
Amortization of intangible assets
    559       325  
Non-cash stock-based compensation
    7,516       6,677  
Gain on sale of equity securities
          (2,711 )
Equity interests loss
    4,146       1,994  
Changes in operating assets and liabilities:
               
Restricted cash
    (11,935 )     359  
Accounts receivable, net
    56,667       (86,069 )
Investment in films and television programs
    (325,176 )     (258,711 )
Other assets
    (9,438 )     (898 )
Accounts payable and accrued liabilities
    3,077       78,274  
Participation and residuals
    65,271       117,392  
Film obligations
    (4,325 )     (8,276 )
Deferred revenue
    23,337       24,324  
                 
Net Cash Flows Used In Operating Activities
    (39,724 )     (57,830 )
                 
Investing Activities:
               
Purchases of investments — auction rate securities
          (207,266 )
Proceeds from the sale of investments — auction rate securities
    125       414,641  
Purchases of investments — equity securities
          (4,672 )
Proceeds from the sale of investments — equity securities
          23,782  
Acquisition of Mandate Pictures, net of unrestricted cash acquired
          (40,850 )
Investment in equity method investees
    (11,099 )     (6,465 )
Increase in loan receivables
    (28,427 )     (3,059 )
Purchases of property and equipment
    (5,743 )     (2,742 )
                 
Net Cash Flows Provided By (Used In) Investing Activities
    (45,144 )     173,369  
                 
Financing Activities:
               
Exercise of stock options
    2,894       745  
Tax withholding requirements on equity awards
    (2,941 )      
Repurchases of common shares
    (44,737 )     (10,736 )
Borrowings under financing arrangements
          3,718  
Increase in production obligations
    113,320       59,442  
Payment of production obligations
    (104,216 )     (58,012 )
                 
Net Cash Flows Used In Financing Activities
    (35,680 )     (4,843 )
                 
Net Change In Cash And Cash Equivalents
    (120,548 )     110,696  
Foreign Exchange Effects on Cash
    (2,136 )     (1,593 )
Cash and Cash Equivalents — Beginning Of Period
    371,589       51,497  
                 
Cash and Cash Equivalents — End Of Period
  $ 248,905     $ 160,600  
                 
 
See accompanying notes.


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Table of Contents

LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1.   General
 
Nature of Operations
 
Lions Gate Entertainment Corp. (the “Company,” “Lionsgate,” “we,” “us” or “our”) is a filmed entertainment studio with a diversified presence in motion pictures, television programming, home entertainment, family entertainment, video-on-demand and digitally delivered content.
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements include the accounts of Lionsgate and all of its wholly owned and controlled subsidiaries.
 
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions 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 and six months ended September 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. FSP APB 14-1 provides that issuers of such instruments should separately account for the liability and equity components of those instruments by allocating the proceeds at the date of issuance of the instrument between the liability component and the embedded conversion option (the equity component) by first determining the carrying amount of the liability. To calculate this amount, the issuer must determine the fair value of the liability excluding the embedded conversion option and by giving effect to other substantive features, such as put and call


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Table of Contents

 
LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
options, and then allocating the excess of the initial proceeds to the embedded conversion option. The excess of the principal amount of the liability component over its carrying amount is recorded as a debt discount and is amortized as interest expense over the expected life of the instrument using the interest method. 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.
 
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 September 30, 2008 and March 31, 2008, the Company held $6.9 million and $7.0 million, respectively, of a triple A rated taxable Student Auction Rate Security (“ARS”), at par value, 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. During the three months ended September 30, 2008, the Company received $0.1 million as a partial redemption of the ARS. In October 2008, all of the remaining $6.9 million balance was sold back to the issuer at par value, resulting in no gain or loss. Accordingly, the fair value of these securities at September 30, 2008 was equal to the underlying cost (i.e., par value).
 
Investments classified as available-for-sale as of September 30, 2008 and March 31, 2008 are set forth below:
 
                         
    September 30, 2008  
          Unrealized
    Fair
 
    Cost     Gains (Losses)     Value  
    (Amounts in thousands)  
 
Auction rate — student loans
  $ 6,875     $     $ 6,875  
                         
 
                         
    March 31, 2008  
          Unrealized
    Fair
 
    Cost     Gains (Losses)     Value  
    (Amounts in thousands)  
 
Auction rate — student loans
  $ 7,000     $ (73 )   $ 6,927  
                         


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Table of Contents

 
LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Interest and dividend income earned on available-for-sale investments during the three and six months ended September 30, 2008 were $0.5 million and $1.3 million, respectively. Interest and dividend income earned on available-for-sale investments during the three and six months ended September 30, 2007 were $2.0 million and $4.6 million, respectively.
 
3.   Investment in Films and Television Programs
 
                 
    September 30,
    March 31,
 
    2008     2008  
    (Amounts in thousands)  
 
Motion Picture Segment — Theatrical and Non-Theatrical Films
               
Released, net of accumulated amortization
  $ 245,011     $ 218,898  
Acquired libraries, net of accumulated amortization
    73,668       80,674  
Completed and not released
    43,801       13,187  
In progress
    204,549       188,108  
In development
    8,418       6,513  
Product inventory
    44,474       33,147  
                 
      619,921       540,527  
                 
Television Segment — Direct-to-Television Programs
               
Released, net of accumulated amortization
    66,896       55,196  
In progress
    57,309       12,608  
In development
    1,132       611  
                 
      125,337       68,415  
                 
    $ 745,258     $ 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
 
    Acquisition
  Amortization
    Amortization
    September 30,
    March 31,
 
Acquired Library
  Date   Period     Period     2008     2008  
        (In years)     (Amounts in thousands)  
 
Trimark
  October 2000     20.00       12.00     $ 11,539     $ 12,318  
Artisan
  December 2003     20.00       15.25       53,510       58,533  
Modern
  August 2005     20.00       16.75       3,551       3,953  
Lionsgate UK
  October 2005     20.00       17.00       1,210       1,827  
Mandate
  September 2007     3.00       2.00       3,858       4,043  
                                     
Total Acquired Libraries
                      $ 73,668     $ 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 September 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 September 30, 2011.


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
4.   Goodwill
 
The changes in the carrying amount of goodwill by reporting segment were as follows in the six months ended September 30, 2008:
 
                         
    Motion
             
    Pictures     Television     Total  
    (Amounts in thousands)  
 
Balance as of March 31, 2008
  $ 210,570     $ 13,961     $ 224,531  
Mandate Pictures, LLC
    (318 )           (318 )
                         
Balance as of September 30, 2008
  $ 210,252     $ 13,961     $ 224,213  
                         
 
During the six months ended September 30, 2008, goodwill decreased by $0.3 million due to changes in the estimated fair value of the assets acquired and liabilities assumed from the acquisition of Mandate Pictures, LLC.
 
5.   Other Assets
 
                 
    September 30,
    March 31,
 
    2008     2008  
    (Amounts in thousands)  
 
Deferred financing costs, net of accumulated amortization
  $ 13,021     $ 7,200  
Prepaid expenses and other
    6,333       5,239  
Loan receivables
    31,934       3,382  
Intangible assets
    1,671       2,317  
Equity method investments
    30,363       23,434  
                 
    $ 83,322     $ 41,572  
                 
 
Deferred Financing Costs
 
Deferred financing costs primarily include costs incurred in connection with an amended credit facility (see Note 6) executed in July 2008 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 September 30, 2008 consist of a $25.0 million note receivable plus $0.3 million of accrued interest from a third party producer, and a $6.4 million note receivable and $0.2 million of accrued interest from NextPoint, Inc. (“Break.com”), an equity method investee, as described below. At March 31, 2008, loan receivables consisted of note receivables, including accrued interest, of $3.4 million from Break.com.


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Intangible Assets
 
Intangible assets consists primarily of trademarks and distribution agreements. The composition of the Company’s acquired intangible assets and the associated accumulated amortization is as follows as of September 30, 2008 and March 31, 2008:
 
                                                         
    Weighted
                                     
    Average
    September 30, 2008     March 31, 2008  
    Remaining
    Gross
          Net
    Gross
          Net
 
    Life in
    Carrying
    Accumulated
    Carrying
    Carrying
    Accumulated
    Carrying
 
    Years     Amount     Amortization     Amount     Amount     Amortization     Amount  
    (Amounts in thousands)  
 
Intangible assets:
                                                       
Trademarks
    4     $ 1,600     $ 370     $ 1,230     $ 1,625     $ 200     $ 1,425  
Distribution agreements
    2       1,141       700       441       1,273       454       819  
Music license
    0       1,304       1,304             1,304       1,231       73  
                                                         
Total intangible assets
          $ 4,045     $ 2,374     $ 1,671     $ 4,202     $ 1,885     $ 2,317  
                                                         
 
The aggregate amount of amortization expense associated with the Company’s intangible assets for the three and six-month periods ending September 30, 2008 was approximately $0.3 million and $0.6 million, respectively. Estimated amortization expense for each of the years ending March 31, 2009 through 2014 is approximately $0.4 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 September 30, 2008 and March 31, 2008 were as follows:
 
                 
    September 30,
    March 31,
 
    2008     2008  
    (Amounts in thousands)  
 
Horror Entertainment, LLC (“FEARnet”)
  $ 902     $ 789  
NextPoint, Inc. (“Break.com”)
    18,856       19,979  
Roadside Attractions, LLC
    1,823       2,201  
Elevation Sales Limited
    417       465  
Premium Television Channel
    8,365        
                 
    $ 30,363     $ 23,434  
                 


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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 ownership. Equity losses in equity method investments for the three and six months ended September 30, 2008 and 2007 were as follows:
 
                                 
    Three Months
    Three Months
    Six Months
    Six Months
 
    Ended
    Ended
    Ended
    Ended
 
    September 30,
    September 30,
    September 30,
    September 30,
 
    2008     2007     2008     2007  
    (Amounts in thousands)  
 
Maple Pictures Corp. 
  $     $ (152 )   $     $ (90 )
Horror Entertainment, LLC (“FEARnet”)
    (1,344 )     (1,030 )     (2,410 )     (1,899 )
NextPoint, Inc. (“Break.com”)
    (320 )     (5 )     (1,146 )     (5 )
Roadside Attractions, LLC
    (84 )           (378 )      
Premium Television Channel
    (212 )           (212 )      
                                 
    $ (1,960 )   $ (1,187 )   $ (4,146 )   $ (1,994 )
                                 
 
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 six months ended September 30, 2007, the Company recorded 10% of the loss incurred by Maple Pictures through July 17, 2007. 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 September 30, 2008, the Company has a remaining commitment for additional capital contributions totaling $3.2 million, of which $2.9 million was funded in October 2008 and the remaining $0.3 million is expected to be funded by March 31, 2009. 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 six months ended September 30, 2008, the Company recorded 33.33% of the loss incurred by FEARnet through June 30, 2008.
 
NextPoint, Inc.  Represents the Company’s 42% equity interest or 21,000,000 share ownership 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


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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 six months ended September 30, 2008, the Company recorded 42% of the loss incurred by Break.com through June 30, 2008.
 
Roadside Attractions, LLC.  Represents the Company’s 43% equity interest acquired on July 26, 2007 in Roadside Attractions, LLC (“Roadside”), an independent theatrical releasing company. The Company has a call option which is exercisable for a period of 90 days commencing on the receipt of certain audited financial statements for the three years ended July 26, 2010, to purchase all of the remaining 57% equity interests of Roadside, at a price representative of the then fair value of the remaining interest. The estimated initial cost of the call option is 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 six months ended September 30, 2008, the Company recorded 43% of the loss incurred by Roadside through June 30, 2008.
 
Elevation Sales Limited.  Represents the Company’s 50% equity interest in Elevation Sales Limited (“Elevation”), a UK based home entertainment distributor. At September 30, 2008, the Company was owed $6.5 million in account receivables from Elevation (March 31, 2008 — $29.0 million). The amounts receivable from Elevation represent amounts due to our wholly-owned subsidiary, Lions Gate 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”), its 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 September 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 and, accordingly, during the six months ended September 30, 2008, the Company recorded 28.57% of the loss incurred by the joint venture through June 30, 2008.
 
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
 
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. At September 30, 2008, the Company had no borrowings (March 31, 2008 — nil) under the credit facility. The availability of funds under the credit facility is limited by a borrowing base and also reduced by outstanding letters of credit, which amounted to $22.7 million at September 30, 2008. At September 30, 2008, there was $317.3 million available under the amended credit facility. The Company is required to pay a monthly commitment fee based upon 0.50% per annum on the total credit facility of $340 million less the amount drawn. This amended credit facility amends and restates the Company’s original $215 million credit facility. Obligations


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
under the credit facility are secured by collateral (as defined in the credit agreement) granted by the Company and certain subsidiaries of the Company, as well as a pledge of equity interests in certain of the Company’s subsidiaries. The amended credit facility contains a number of affirmative and 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.
 
7.   Film and Production Obligations and Participation and Residuals
 
                 
    September 30,
    March 31,
 
    2008     2008  
    (Amounts in thousands)  
 
Film obligations(1)
  $ 25,522     $ 29,905  
Production obligations(2)
    256,997       248,111  
                 
Total film and production obligations
    282,519       278,016  
Less film and production obligations expected to be paid within one year
    (120,803 )     (193,699 )
                 
Film and production obligations expected to be paid after one year
  $ 161,716     $ 84,317  
                 
Participation and residuals
  $ 450,760     $ 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 films.
 
(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 $165.4 million incur interest at rates ranging from 4.62% to 6.45%, and approximately $83.7 million of production obligations are non-interest bearing. Also included in production obligations is $7.9 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 (i.e., April 2013). The loan is secured by a first priority security interest in the Company’s film library pursuant to an intercreditor agreement with the Company’s senior lender under our revolving credit facility. Pursuant to the terms of the Company’s 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 the Company’s senior lender under the Company’s credit facility. Accordingly, included in restricted cash is $8.3 million (on deposit with our senior lenders), related to amounts received under the Pennsylvania agreement.


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
The Company expects approximately 72% of accrued participations and residuals will be paid during the one-year period ending September 30, 2009.
 
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 September 30, 2008, $145.0 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 $31.1 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 September 30, 2008, $9.2 million (March 31, 2008, $9.3 million) was payable to SGF and is included in the participation liability in the unaudited condensed consolidated balance sheet, and $124.5 million was available to be provided by SGF under the terms of the arrangement.


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
8.   Subordinated Notes and Other Financing Obligations
 
The following table sets forth the subordinated notes and other financing obligations outstanding at September 30, 2008 and March 31, 2008:
 
                 
    September 30,
    March 31,
 
    2008     2008  
    (Amounts in thousands)  
 
2.9375% Convertible Senior Subordinated Notes
  $ 150,000     $ 150,000  
3.625% Convertible Senior Subordinated Notes
    175,000       175,000  
Other Financing Obligations
    3,718       3,718  
                 
    $ 328,718     $ 328,718  
                 
 
Subordinated Notes
 
3.625% Notes.  In February 2005, Lions Gate Entertainment Inc. (“LGEI”), a wholly-owned subsidiary of the Company, 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 the 3.625% Notes. The Company also paid $0.6 million of offering expenses incurred in connection with the sale of the 3.625% Notes. Interest on the 3.625% Notes is payable semi-annually on March 15 and September 15, from September 15, 2005 until March 15, 2012. After March 15, 2012, interest will be 3.125% per annum on the principal amount of the 3.625% Notes, payable semi-annually on March 15 and September 15 of each year until maturity on March 15, 2025. LGEI may redeem all or a portion of the 3.625% Notes at its option on or after March 15, 2012 at 100% of their principal amount, together with accrued and unpaid interest through the date of redemption.
 
The holder may require LGEI to repurchase the 3.625% Notes on March 15, 2012, 2015 and 2020 or upon a change in control at a price equal to 100% of the principal amount, together with accrued and unpaid interest through the date of repurchase. Under certain circumstances, if the holder requires LGEI to repurchase all or a portion of their notes upon a change in control, they will be entitled to receive a make whole premium. The amount of the make whole premium, if any, will be based on the price of the Company’s common shares on the effective date of the change in control. No make whole premium will be paid if the price of the Company’s common shares at such time is less than $10.35 per share or exceeds $75.00 per share.
 
The 3.625% Notes are convertible, at the option of the holder, at any time before the close of business on or prior to the trading day immediately before the maturity date, if the notes have not been previously redeemed or repurchased, at a conversion rate equal to 70.0133 shares per $1,000 principal amount of the 3.625% Notes, subject to adjustment in certain circumstances, which is equal to a conversion price of approximately $14.28 per share. Upon conversion of the 3.625% Notes, the Company has the option to deliver, in lieu of common shares, cash or a combination of cash and common shares of the Company. The holder may convert the 3.625% Notes into the Company’s common shares prior to maturity if the notes have been called for redemption, a change in control occurs or certain other corporate transactions occur.
 
2.9375% Notes.  In October 2004, LGEI sold $150.0 million of 2.9375% Convertible Senior Subordinated Notes (the “2.9375% Notes”). The Company received $146.0 million of net proceeds after paying placement agents’ fees from the sale of $150.0 million of the 2.9375% Notes. The Company also paid $0.7 million of offering expenses incurred in connection with the sale of the 2.9375% Notes. Interest on the 2.9375% Notes is payable semi-annually on April 15 and October 15, which commenced on April 15, 2005, and the 2.9375% Notes mature on October 15, 2024. From October 15, 2009 to October 14, 2010, LGEI may redeem the 2.9375% Notes at 100.839%; from October 15, 2010 to October 14, 2011, LGEI may redeem the 2.9375% Notes at 100.420%; and thereafter, LGEI may redeem the notes at 100%.


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The holder may require LGEI to repurchase the 2.9375% Notes on October 15, 2011, 2014 and 2019 or upon a change in control at a price equal to 100% of the principal amount, together with accrued and unpaid interest through the date of repurchase. Under certain circumstances, if the holder requires LGEI to repurchase all or a portion of their notes upon a change in control, they will be entitled to receive a make whole premium. The amount of the make whole premium, if any, will be based on the price of the Company’s common shares on the effective date of the change in control. No make whole premium will be paid if the price of the Company’s common shares at such time is less than $8.79 per share or exceeds $50.00 per share.
 
The holder may convert the 2.9375% Notes into the Company’s common shares prior to maturity only if the price of the Company’s common shares issuable upon conversion of a note reaches a specified threshold over a specified period, the trading price of the notes falls below certain thresholds, the notes have been called for redemption, a change in control occurs or certain other corporate transactions occur. Upon conversion of the 2.9375% 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. 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 Pictures”). Mandate Pictures is a worldwide independent film producer and distributor. The Mandate Pictures acquisition brought the Company additional experienced management personnel working within the motion picture business segment. In addition, the Mandate Pictures acquisition added 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, another 169,879 which were issued during the quarter ended September 30, 2008 and the balance of 943,241 to be issued and delivered in 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 quarter ended June 30, 2008. In addition, immediately prior to the transaction, the Company loaned Mandate Pictures $2.9 million. The value assigned to the shares for purposes of recording the acquisition was $11.8 million and was based on the average price of the Company’s common shares a few days prior and subsequent to the date of the closing of the acquisition, which is when it was publicly announced.
 
In addition, the Company may be obligated to pay additional amounts pursuant to the purchase agreement should certain films or derivative works meet certain target performance thresholds. Such amounts, to the extent they relate to films or derivative works of films identified at the acquisition date will be charged to goodwill if the target thresholds are achieved, and such amounts, to the extent they relate to other qualifying films produced in the


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
future, will be accounted for similar to other film participation arrangements. The amount to be paid is the excess of the sum of the following amounts over the performance threshold (i.e. the “Hurdle Amount”):
 
  •  80% of the earnings of certain films for the longer of 5 years from the closing or 5 years from the release of the pictures, plus
 
  •  20% of the earnings of certain pictures which commence principal photography within 5 years from the closing date for a period up to 10 years, plus
 
  •  certain fees designated for derivative works which commence principal photography within 7 years of the initial release of the original picture.
 
The Hurdle Amount is the purchase price of approximately $56 million plus an interest cost accruing until such hurdle is reached, and certain other costs the Company agreed to pay in connection with the acquisition. Accordingly, the additional consideration is the total of the above in excess of the Hurdle Amount. As of September 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 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 Pictures included in the Company’s consolidated results from September 10, 2007. Goodwill of $36.8 million resulted from 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.
 
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


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
$8.7 million resulted from 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 (“Adjusted EBITDA”) of 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 payable 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 the Company 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, the Company 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.
 
10.   Direct Operating Expenses
 
                                 
    Three Months
    Three Months
    Six Months
    Six Months
 
    Ended
    Ended
    Ended
    Ended
 
    September 30,
    September 30,
    September 30,
    September 30,
 
    2008     2007     2008     2007  
    (Amounts in thousands)  
 
Amortization of films and television programs
  $ 117,696     $ 127,032     $ 186,743     $ 176,894  
Participation and residual expense
    80,895       56,540       159,007       94,551  
Amortization of acquired intangible assets
    235       163       559       325  
Other expenses
    1,035       600       1,560       (377 )
                                 
    $ 199,861     $ 184,335     $ 347,869     $ 271,393  
                                 
 
Other expenses primarily consist of the provision for doubtful accounts and foreign exchange gains and losses. The provision for doubtful accounts included in other expenses was less than $0.1 million and $0.6 million for the three months ended September 30, 2008 and 2007, respectively. The provision for doubtful accounts included in other expenses for the six months ended September 30, 2008 and 2007 was $0.2 million and less than $0.1 million, respectively. Foreign exchange losses included in other expenses for the three months ended September 30, 2008 and 2007 were $1.0 million and less than $0.1 million, respectively. Foreign exchange losses (gains) included in other expenses for the six months ended September 30, 2008 and 2007 were a loss of $1.3 million and gains of $0.4 million, respectively.


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
11.   Comprehensive Loss
 
                                 
    Three Months
    Three Months
    Six Months
    Six Months
 
    Ended
    Ended
    Ended
    Ended
 
    September 30,
    September 30,
    September 30,
    September 30,
 
    2008     2007     2008     2007  
    (Amounts in thousands)  
 
Net loss
  $ (48,095 )   $ (58,003 )   $ (41,000 )   $ (111,121 )
Add (Deduct): Foreign currency translation adjustments
    (4,049 )     65       (3,880 )     2,499  
Add: Net unrealized gain on foreign exchange contracts
    3       181       12       169  
Add: Unrealized gain on investments — available for sale
    91       26       73       26  
Reclassification adjustment for unrealized gains realized in period
          (1,280 )            
                                 
Comprehensive loss
  $ (52,050 )   $ (59,011 )   $ (44,795 )   $ (108,427 )
                                 
 
12.   Loss Per Share and Treasury Shares
 
The Company calculates income (loss) per share in accordance with SFAS No. 128, “Earnings Per Share.” Basic and diluted income (loss) per share is calculated based on the weighted average common shares outstanding for the period. Basic and diluted loss per share for the three and six months ended September 30, 2008 and 2007 is presented below:
 
                                 
    Three Months
    Three Months
    Six Months
    Six Months
 
    Ended
    Ended
    Ended
    Ended
 
    September 30,
    September 30,
    September 30,
    September 30,
 
    2008     2007     2008     2007  
    (Amounts in thousands)  
 
Basic and Diluted Net Loss Per Common Share:
                               
Numerator:
                               
Net loss
  $ (48,095 )   $ (58,003 )   $ (41,000 )   $ (111,121 )
                                 
Denominator:
                               
Weighted average common shares outstanding
    116,861       119,155       117,647       118,136  
                                 
Basic and Diluted Net Loss Per Common Share
  $ (0.41 )   $ (0.49 )   $ (0.35 )   $ (0.94 )
                                 
 
The exercise of common share equivalents including stock options, the conversion features of the 2.9375% Notes and the 3.625% Notes, restricted share units, and any contingently issuable shares could potentially dilute income (loss) per share in the future, but were not reflected in diluted loss per share during the periods presented because their effect is anti-dilutive.


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company had 500,000,000 authorized common shares at September 30, 2008 and March 31, 2008. The table below outlines common shares reserved for future issuance:
 
                 
    September 30,
    March 31,
 
    2008     2008  
    (Amounts in thousands)  
 
Stock options outstanding
    4,012       5,137  
Restricted share units — unvested
    2,505       2,325  
Share purchase options and restricted share units available for future issuance
    6,406       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
    38,218       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 discretion of management, depending upon market conditions. During the period from the authorization date through September 30, 2008, 6,748,910 shares have been repurchased pursuant to the plan at a cost of approximately $65.0 million, including commission costs. During the three and six months ended September 30, 2008, 2,888,275 and 4,550,275 shares, respectively, have been repurchased pursuant to the plan at a cost of approximately $28.3 million and $44.7 million, respectively. 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 condensed 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 unaudited condensed consolidated financial statements is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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 six months ended September 30, 2008 and 2007 was $3.06 and $4.17, respectively. The following table represents the assumptions used in the Black-Scholes option-pricing model for stock options granted during the six months ended September 30, 2008 and 2007:
 
         
    Six Months Ended
  Six Months Ended
    September 30,
  September 30,
    2008   2007
 
Risk-free interest rate
  2.7%   4.1% - 4.8%
Expected option lives (in years)
  5.0 years   5.6 to 6.5 years
Expected volatility for options
  31%   31%
Expected dividend yield
  0%   0%
 
The Company recognized the following share-based compensation expense (benefit) during the three and six months ended September 30, 2008 and 2007:
 
                                 
    Three Months Ended
    Six Months Ended
 
    September 30,     September 30,  
    2008     2007     2008     2007  
    (Amounts in thousands)  
 
Compensation Expense (Benefit):
                               
Stock Options
  $ 802     $ 851     $ 1,599     $ 1,636  
Restricted Share Units
    3,295       2,980       5,917       5,041  
Stock Appreciation Rights
    (1,112 )     (629 )     (646 )     (1,009 )
                                 
Total
  $ 2,985     $ 3,202     $ 6,870     $ 5,668  
                                 
 
There was no income tax benefit recognized in the statements of operations for share-based compensation arrangements during the three and six months ended September 30, 2008 and 2007.


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Stock Options
 
A summary of option activity as of September 30, 2008 and changes during the six months then ended is presented below:
 
                                                 
                            Weighted
    Aggregate
 
                      Weighted-
    Average
    Intrinsic
 
                Total
    Average
    Remaining
    Value as of
 
    Number of
    Number of
    Number of
    Exercise
    Contractual
    September 30,
 
Options:
  Shares(1)     Shares(2)     Shares     Price     Term in Years     2008  
 
Outstanding at March 31, 2008
    4,537,363       600,000       5,137,363     $ 8.32                  
Granted
                                       
Exercised
    (123,416 )           (123,416 )     6.68                  
Forfeited or expired
    (20,334 )           (20,334 )     2.93                  
                                                 
Outstanding at June 30, 2008
    4,393,613       600,000       4,993,613     $ 8.39                  
                                                 
Granted
    5,000               5,000       9.53                  
Exercised
    (986,734 )             (986,734 )     3.25                  
Forfeited or expired
                                         
                                                 
Outstanding at September 30, 2008
    3,411,879       600,000       4,011,879     $ 9.65       6.78     $ 777,059  
                                                 
Outstanding as of September 30, 2008, vested or expected to vest in the future
    3,410,046       600,000       4,010,046     $ 9.65       6.78     $ 777,059  
                                                 
Exercisable at September 30, 2008
    1,989,795       100,000       2,089,795     $ 9.39       5.35     $ 777,059  
                                                 
 
 
(1) Issued under our long-term incentive plans
 
(2) On September 10, 2007, in connection with the acquisition of Mandate Pictures (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 and six months ended September 30, 2008 were approximately $6.6 million and $7.1 million, respectively (2007 — $11.6 million and $11.9 million, respectively).
 
During the three and six months ended September 30, 2008, 234,982 options were cancelled to fund withholding tax obligations upon exercise.


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Restricted Share Units
 
A summary of the status of the Company’s restricted share units as of September 30, 2008, and changes during the six months then ended is presented below:
 
                                 
                Total
    Weighted Average
 
    Number of
    Number of
    Number of
    Grant Date Fair
 
Restricted Share Units:
  Shares(1)     Shares(2)     Shares     Value  
 
Outstanding at March 31, 2008
    2,037,125       287,500       2,324,625     $ 10.09  
Granted
    294,875             294,875       9.89  
Vested
    (332,331 )           (332,331 )     10.80  
Forfeited
    (1,791 )           (1,791 )     10.67  
                                 
Outstanding at June 30, 2008
    1,997,878       287,500       2,285,378     $ 9.96  
                                 
Granted
    489,042       105,000       594,042       10.04  
Vested
    (360,622 )     (8,333 )     (368,955 )     9.70  
Forfeited
    (5,333 )           (5,333 )     9.66  
                                 
Outstanding at September 30, 2008
    2,120,965       384,167       2,505,132     $ 10.02  
                                 
 
 
(1) Issued under our long-term incentive plans
 
(2) On September 10, 2007, in connection with the acquisition of Mandate Pictures (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, based on continued employment and 262,500 restricted share units, which vest over a five-year period, subject to the satisfaction of certain annual performance targets. The restricted share units were granted outside of our long-term incentive plans.
 
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 September 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
  $ 7,249       2.4  
Restricted Share Units
    18,852       2.1  
                 
Total
  $ 26,101          
                 
 
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 six months ended September 30, 2008, 178,652 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.


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Stock Appreciation Rights
 
On February 2, 2004, an officer of the Company was granted 1,000,000 stock appreciation rights (“SARs”), which entitles the officer to receive cash 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. 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 and six months ended September 30, 2008, the following assumptions were used in the Black-Scholes option-pricing model: Volatility of 47.7%, Risk Free Rate of 1.60%, Expected Term of 0.3 years, and Dividend of 0%. At September 30, 2008, the market price of the Company’s common shares was $9.10, the weighted average fair value of the SARs was $3.94, and all 1,000,000 of the SARs had vested. Due to the decrease in the market price of its common shares during the quarter, the Company recorded a stock-based compensation benefit in the amount of $1.1 million and $0.6 million in general and administration expenses in the unaudited condensed consolidated statements of operations for the three and six months ended September 30, 2008, respectively (2007 — decrease of expense of $0.6 million and $1.0 million, respectively). 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 September 30, 2008, the Company has a stock-based compensation liability accrual in the amount of $3.4 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.
 
During the quarter, a non-employee was granted a total of 1,000,000 SARs with exercise prices ranging from $9.56 to $11.16. The SARs vest over a three- and four-year period. 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 six months ended September 30, 2008, the following assumptions were used in the Black-Scholes option-pricing model: Volatility of 31%, Risk Free Rate of 2.6% to 3.0%, Expected Term of 3.7 to 4.8 years, and Dividend of 0%. At September 30, 2008, the market price of the Company’s common shares was $9.10, the weighted average fair value of the SARs was from $1.78 to $2.73. In connection with these SARs, the Company recorded a stock-based compensation expense in the amount of $0.6 million included in direct operating expenses in the unaudited condensed consolidated statements of operations for the three and six months ended September 30, 2008.
 
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 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, home entertainment and television distribution of feature films produced and acquired, and worldwide licensing of distribution rights to feature films produced and acquired.
 
Television consists of the development, production and worldwide distribution of television productions, including television series, television movies and mini-series and non-fiction programming.


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Segmented information by business unit is as follows:
 
                                 
    Three Months
    Three Months
    Six Months
    Six Months
 
    Ended
    Ended
    Ended
    Ended
 
    September 30,
    September 30,
    September 30,
    September 30,
 
    2008     2007     2008     2007  
    (Amounts in thousands)  
 
Segment revenues
                               
Motion Pictures
  $ 312,162     $ 242,133     $ 569,530     $ 412,455  
Television
    68,556       109,611       109,647       138,031  
                                 
    $ 380,718     $ 351,744     $ 679,177     $ 550,486  
                                 
Direct operating expenses
                               
Motion Pictures
  $ 143,854     $ 86,096     $ 258,509     $ 145,726  
Television
    56,007       98,239       89,360       125,667  
                                 
    $ 199,861     $ 184,335     $ 347,869     $ 271,393  
                                 
Distribution and marketing
                               
Motion Pictures
  $ 183,051     $ 192,762     $ 276,896     $ 325,621  
Television
    6,356       4,431       11,486       7,073  
                                 
    $ 189,407     $ 197,193     $ 288,382     $ 332,694  
                                 
General and administration
                               
Motion Pictures
  $ 11,758     $ 9,050     $ 24,876     $ 16,677  
Television
    2,671       1,455       5,328       2,878  
                                 
    $ 14,429     $ 10,505     $ 30,204     $ 19,555  
                                 
Segment profit (loss)
                               
Motion Pictures
  $ (26,501 )   $ (45,775 )   $ 9,249     $ (75,569 )
Television
    3,522       5,486       3,473       2,413  
                                 
    $ (22,979 )   $ (40,289 )   $ 12,722     $ (73,156 )
                                 
Acquisition of investment in films and television programs
                               
Motion Pictures
  $ 55,651     $ 93,107     $ 201,760     $ 149,180  
Television
    68,628       29,464       123,416       109,531  
                                 
    $ 124,279     $ 122,571     $ 325,176     $ 258,711  
                                 
 
Purchases of property and equipment amounted to $3.4 million and $5.7 million for the three and six months ending September 30, 2008, respectively, and $0.7 million and $2.7 million for the three and six months ending September 30, 2007, respectively, all primarily pertaining to purchases for the Company’s corporate headquarters.


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Segment profit (loss) is defined as segment revenue less segment direct operating, distribution and marketing, and general and administration expenses. The reconciliation of total segment profit (loss) to the Company’s income (loss) before income taxes is as follows:
 
                                 
    Three Months
    Three Months
    Six Months
    Six Months
 
    Ended
    Ended
    Ended
    Ended
 
    September 30,
    September 30,
    September 30,
    September 30,
 
    2008     2007     2008     2007  
    (Amounts in thousands)  
 
Company’s total segment profit (loss)
  $ (22,979 )   $ (40,289 )   $ 12,722     $ (73,156 )
Less:
                               
Corporate general and administration
    (16,171 )     (15,866 )     (38,704 )     (33,656 )
Depreciation
    (1,180 )     (1,038 )     (2,242 )     (1,946 )
Interest expense
    (5,190 )     (4,225 )     (9,501 )     (8,085 )
Interest and other income
    2,047       2,635       4,202       6,438  
Gain on sale of equity securities
          2,785             2,785  
Equity interests loss
    (1,960 )     (1,187 )     (4,146 )     (1,994 )
                                 
Loss before income taxes
  $ (45,433 )   $ (57,185 )   $ (37,669 )   $ (109,614 )
                                 
 
The following table sets forth significant assets as broken down by segment and other unallocated assets as of September 30, 2008 and March 31, 2008:
 
                                                 
    September 30, 2008     March 31, 2008  
    Motion
                Motion
             
    Pictures     Television     Total     Pictures     Television     Total  
    (Amounts in thousands)  
 
Significant assets by segment
                                               
Accounts receivable
  $ 120,920     $ 80,450     $ 201,370     $ 193,810     $ 66,474     $ 260,284  
Investment in films and television programs
    619,921       125,337       745,258       540,527       68,415       608,942  
Goodwill
    210,252       13,961       224,213       210,570       13,961       224,531  
                                                 
    $ 951,093     $ 219,748     $ 1,170,841     $ 944,907     $ 148,850     $ 1,093,757  
                                                 
Other unallocated assets (primarily cash and available-for-sale investments)
                    378,432                       444,001  
                                                 
Total assets
                  $ 1,549,273                     $ 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.


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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.
 
The following tables present unaudited condensed consolidating financial information as of September 30, 2008 and March 31, 2008, and for the six months ended September 30, 2008 and 2007 for (1) the Company, on a stand-alone basis, (2) LGEI, on a stand-alone basis, (3) the non-guarantor subsidiaries of the Company (including the subsidiaries of LGEI), on a combined basis (collectively, the “Other Subsidiaries) and (4) the Company, on a consolidated basis.
 
                                         
    As of September 30, 2008  
    Lions Gate
    Lions Gate
                   
    Entertainment
    Entertainment
    Other
    Consolidating
    Lions Gate
 
    Corp.     Inc.     Subsidiaries     Adjustments     Consolidated  
    (Amounts in thousands)  
 
BALANCE SHEET
                                       
Assets
                                       
Cash and cash equivalents
  $ 5,832     $ 192,268     $ 50,805     $     $ 248,905  
Restricted cash
          22,235                   22,235  
Investments
          6,875                   6,875  
Accounts receivable, net
    123       722       200,525             201,370  
Investment in films and television programs
    288       6,117       738,911       (58 )     745,258  
Property and equipment
          16,033       1,062             17,095  
Goodwill
    10,173             214,040             224,213  
Other assets
    1,906       373,116       2,588       (294,288 )     83,322  
Investment in subsidiaries
    224,180       594,142             (818,322 )      
                                         
    $ 242,502     $ 1,211,508     $ 1,207,931     $ (1,112,668 )   $ 1,549,273  
                                         
Liabilities and Shareholders’ Equity (Deficiency)
                                       
Accounts payable and accrued liabilities
  $ 379     $ 20,853     $ 223,405     $     $ 244,637  
Participation and residuals
    180       1,067       449,513             450,760  
Film and production obligations
    75             282,444             282,519  
Subordinated notes and other financing obligations
          325,000       3,718             328,718  
Deferred revenue
    4       516       134,173             134,693  
Intercompany payables (receivables)
    (186,067 )     783,396       (398,882 )     (198,447 )      
Intercompany equity
    319,985       93,217       330,092       (743,294 )      
Shareholders’ equity (deficiency)
    107,946       (12,541 )     183,468       (170,927 )     107,946  
                                         
    $ 242,502     $ 1,211,508     $ 1,207,931     $ (1,112,668 )   $ 1,549,273  
                                         
 


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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                         
    Six Months Ended September 30, 2008  
    Lions Gate
    Lions Gate
                   
    Entertainment
    Entertainment
    Other
    Consolidating
    Lions Gate
 
    Corp.     Inc.     Subsidiaries     Adjustments     Consolidated  
    (Amounts in thousands)  
 
STATEMENT OF OPERATIONS
                                       
Revenues
  $ 513     $ 11,061     $ 684,217     $ (16,614 )   $ 679,177  
EXPENSES:
                                       
Direct operating
    513       123       348,811       (1,578 )     347,869  
Distribution and marketing
          85       288,287       10       288,382  
General and administration
    577       38,202       30,128       1       68,908  
Depreciation
          1,824       418             2,242  
                                         
Total expenses
    1,090       40,234       667,644       (1,567 )     707,401  
                                         
OPERATING INCOME (LOSS)
    (577 )     (29,173 )     16,573       (15,047 )     (28,224 )
                                         
Other expenses (income):
                                       
Interest expense
    16       8,787       698             9,501  
Interest and other income
    (105 )     (3,137 )     (960 )           (4,202 )
                                         
Total other expenses (income)
    (89 )     5,650       (262 )           5,299  
                                         
INCOME (LOSS) BEFORE EQUITY INTERESTS AND INCOME TAXES
    (488 )     (34,823 )     16,835       (15,047 )     (33,523 )
Equity interests income (loss)
    (40,501 )     (2,129 )     (2,410 )     40,894       (4,146 )
                                         
INCOME (LOSS) BEFORE INCOME TAXES
    (40,989 )     (36,952 )     14,425       25,847       (37,669 )
Income tax provision (benefit)
    11       680       2,642       (2 )     3,331  
                                         
NET INCOME (LOSS)
  $ (41,000 )   $ (37,632 )   $ 11,783     $ 25,849     $ (41,000 )
                                         
 

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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                         
    Six Months Ended September 30, 2008  
    Lions Gate
    Lions Gate
                   
    Entertainment
    Entertainment
    Other
    Consolidating
    Lions Gate
 
    Corp.     Inc.     Subsidiaries     Adjustments     Consolidated  
    (Amounts in thousands)  
 
STATEMENT OF CASH FLOWS
NET CASH FLOWS PROVIDED
BY (USED IN) OPERATING
ACTIVITIES
  $ 46,358     $ (149,460 )   $ 63,378     $     $ (39,724 )
                                         
INVESTING ACTIVITIES:
                                       
Proceeds from the sale of investments — auction rate securities
            125                       125  
Investment in equity method investees
                (11,099 )           (11,099 )
Increase in loan receivables
          (3,427 )     (25,000 )             (28,427 )
Purchases of property and equipment
          (5,551 )     (192 )           (5,743 )
                                         
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
          (8,853 )     (36,291 )           (45,144 )
                                         
FINANCING ACTIVITIES:
                                       
Exercise of stock options
    2,894                         2,894  
Amounts paid to satisfy tax withholding requirements on options exercised
    (2,941 )                       (2,941 )
Repurchases of common shares
    (44,737 )                       (44,737 )
Increase in production obligations
                113,320               113,320  
Payment of production obligations
                (104,216 )             (104,216 )
                                         
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
    (44,784 )           9,104             (35,680 )
                                         
NET CHANGE IN CASH AND CASH EQUIVALENTS
    1,574       (158,313 )     36,191             (120,548 )
                                         
FOREIGN EXCHANGE EFFECT ON CASH
    (216 )           (1,920 )           (2,136 )
CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD
    4,474       350,581       16,534             371,589  
                                         
CASH AND CASH EQUIVALENTS — END OF PERIOD
  $ 5,832     $ 192,268     $ 50,805     $     $ 248,905  
                                         
 

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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                         
    As of March 31, 2008  
    Lions Gate
    Lions Gate
                   
    Entertainment
    Entertainment
    Other
    Consolidating
    Lions Gate
 
    Corp.     Inc.     Subsidiaries     Adjustments     Consolidated  
    (Amounts in thousands)  
 
BALANCE SHEET
                                       
Assets
                                       
Cash and cash equivalents
  $ 4,474     $ 350,581     $ 16,534     $     $ 371,589  
Restricted cash
          10,300                   10,300  
Investments
          6,927                   6,927  
Accounts receivable, net
    344             260,635       (695 )     260,284  
Investment in films and television programs
    871       6,683       601,246       142       608,942  
Property and equipment
          12,428       1,185             13,613  
Goodwill
    10,173             214,358             224,531  
Other assets
    1,983       268,070       4,217       (232,698 )     41,572  
Investment in subsidiaries
    264,329       594,542             (858,871 )      
                                         
    $ 282,174     $ 1,249,531     $ 1,098,175     $ (1,092,122 )   $ 1,537,758  
                                         
Liabilities and Shareholders’ Equity (Deficiency)
                                       
Accounts payable and accrued liabilities
  $ 540     $ 31,913     $ 212,980     $ (3 )   $ 245,430  
Participation and residuals
    187       1,567       384,228       (136 )     385,846  
Film and production obligations
    78             277,938             278,016  
Subordinated notes and other financing obligations
          325,000       3,718             328,718  
Deferred revenue
          1,026       110,484             111,510  
Intercompany payables (receivables)
    (226,854 )     852,748       (218,788 )     (407,106 )      
Intercompany equity
    319,985       93,217       329,597       (742,799 )      
Shareholders’ equity (deficiency)
    188,238       (55,940 )     (1,982 )     57,922       188,238  
                                         
    $ 282,174     $ 1,249,531     $ 1,098,175     $ (1,092,122 )   $ 1,537,758  
                                         
 

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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                         
    Six Months Ended September 30, 2007  
    Lions Gate
    Lions Gate
                   
    Entertainment
    Entertainment
    Other
    Consolidating
    Lions Gate
 
    Corp.     Inc.     Subsidiaries     Adjustments     Consolidated  
    (Amounts in thousands)  
 
STATEMENT OF OPERATIONS
                                       
Revenues
  $ 137     $ 7,624     $ 545,078     $ (2,353 )   $ 550,486  
EXPENSES:
                                       
Direct operating
                271,393             271,393  
Distribution and marketing
          1,155       331,539             332,694  
General and administration
    776       30,765       21,670             53,211  
Depreciation
          1       1,945             1,946  
                                         
Total expenses
    776       31,921       626,547             659,244  
                                         
OPERATING LOSS
    (639 )     (24,297 )     (81,469 )     (2,353 )     (108,758 )
                                         
Other Expense (Income):
                                       
Interest expense
          7,842       243             8,085  
Interest income
    (35 )     (6,116 )     (287 )           (6,438 )
Gain on sale of equity securities
                (2,785 )           (2,785 )
                                         
Total other expenses (income)
    (35 )     1,726       (2,829 )           (1,138 )
                                         
INCOME (LOSS) BEFORE EQUITY INTERESTS AND INCOME TAXES
    (604 )     (26,023 )     (78,640 )     (2,353 )     (107,620 )
Equity interests income (loss)
    (110,616 )     (80,358 )     (1,898 )     190,878       (1,994 )
                                         
INCOME (LOSS) BEFORE INCOME TAXES
    (111,220 )     (106,381 )     (80,538 )     188,525       (109,614 )
Income tax provision (benefit)
    (99 )     155       1,451             1,507  
                                         
NET INCOME (LOSS)
  $ (111,121 )   $ (106,536 )   $ (81,989 )   $ 188,525     $ (111,121 )
                                         
 

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LIONS GATE ENTERTAINMENT CORP.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                         
    Six Months Ended September 30, 2007  
    Lions Gate
    Lions Gate
                   
    Entertainment
    Entertainment
    Other
    Consolidating
    Lions Gate
 
    Corp.     Inc.     Subsidiaries     Adjustments     Consolidated  
    (Amounts in thousands)  
 
STATEMENT OF CASH FLOWS
NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
  $ 9,697     $ (54,138 )   $ (13,389 )   $     $ (57,830 )
                                         
INVESTING ACTIVITIES:
                                       
Purchases of investments — auction rate securities
          (207,266 )                 (207,266 )
Proceeds from the sale of investments — auction rate securities
          414,641                   414,641  
Purchases of investments — equity securities
                (4,672 )           (4,672 )
Proceeds from the sale of investments — equity securities
          16,343       7,439             23,782  
Acquisition of Mandate, net of unrestricted cash acquired
          (44,802 )     3,952             (40,850 )
Investment in equity method investees
          (3,051 )     (3,414 )           (6,465 )
Loan to equity method investee
          (3,059 )                 (3,059 )
Purchases of property and equipment
          (1,935 )     (807 )           (2,742 )
                                         
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
          170,871       2,498             173,369  
                                         
FINANCING ACTIVITIES:
                                       
Exercise of stock options
    745                         745  
Repurchase of common shares
    (10,736 )                       (10,736 )
Borrowings under financing arrangements
                3,718             3,718  
Increase in production obligations
                59,442             59,442  
Payment of production obligations
                (58,012 )           (58,012 )
                                         
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
    (9,991 )           5,148             (4,843 )
                                         
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (294 )     116,733       (5,743 )           110,696  
                                         
FOREIGN EXCHANGE EFFECT ON CASH
    402       (498 )     (1,497 )           (1,593 )
CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD
    1,908       28,347       21,242             51,497  
                                         
CASH AND CASH EQUIVALENTS — END OF PERIOD
  $ 2,016     $ 144,582     $ 14,002     $     $ 160,600  
                                         

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Overview
 
Lions Gate Entertainment Corp. (“Lionsgate,” the “Company,” “we,” “us” or “our”) is a leading next generation filmed entertainment studio with a diversified presence in motion pictures, television programming, home entertainment, family entertainment, video-on-demand and digitally delivered content. We release approximately 18 to 20 motion pictures theatrically per year, which include films we develop and produce in-house, as well as films that we acquire from third parties. We also have produced approximately 76 hours of television programming on average for the last three years, primarily prime time television series for the cable and broadcast networks. We currently distribute our library of approximately 8,000 motion picture titles and approximately 4,000 television episodes and programs directly to retailers, DVD rental stores, and pay and free television channels in the United States (the “U.S.”), Canada, the United Kingdom (the “UK”) and Ireland, through various digital media platforms, and indirectly to other international markets through our subsidiaries and various third parties.
 
We own interests in CinemaNow, Inc., an 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,” “International Distribution” and “Mandate Pictures.”
 
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 consist of sale or rental of packaged media (i.e., DVD and Blue-Ray) and electronic media (“EST”) 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.
 
Mandate Pictures revenues include 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.
 
  •  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 home entertainment product (i.e., packaged media and EST) consisting of television production movies or series.


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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”), its 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. The Company has invested $8.6 million as of September 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 recorded its share of the joint venture results on a one quarter lag, in the current quarter.
 
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. At September 30, 2008, the Company had no borrowings (March 31, 2008 — nil) under the credit facility. The availability of funds under the credit facility is limited by a borrowing base and also reduced by outstanding letters of credit, which amounted to $22.7 million at September 30, 2008. At September 30, 2008, there was $317.3 million available under the amended credit facility. The Company is required to pay a monthly commitment fee based upon 0.50% per annum on the total credit facility of $340 million less the amount drawn. This amended credit facility amends and restates the Company’s original $215 million credit facility. Obligations under the credit facility are secured by collateral (as defined in the credit agreement) granted by the Company and certain subsidiaries of the Company, as well as a pledge of equity interests in certain of the Company’s subsidiaries. The amended credit facility contains a number of affirmative and 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,


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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 unaudited condensed 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.


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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. FSP APB 14-1 provides that issuers of such instruments should separately account for the liability and equity components of those instruments by allocating the proceeds at the date of issuance of the instrument between


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the liability component and the embedded conversion option (the equity component) by first determining the carrying amount of the liability. To calculate this amount, the issuer must determine the fair value of the liability excluding the embedded conversion option and by giving effect to other substantive features, such as put and call options, and then allocating the excess of the initial proceeds to the embedded conversion option. The excess of the principal amount of the liability component over its carrying amount is recorded as a debt discount and is amortized as interest expense over the expected life of the instrument using the interest method. 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.
 
Results of Operations
 
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
 
Consolidated revenues this quarter of $380.7 million increased $29.0 million, or 8.2%, compared to $351.7 million in the prior year’s quarter. Motion pictures revenue of $312.2 million this quarter increased $70.1 million, or 29.0%, compared to $242.1 million in the prior year’s quarter. Television revenues of $68.5 million this quarter decreased $41.1 million, or 37.5%, compared to $109.6 million in the prior year’s quarter.
 
Our largest component of revenue comes from home entertainment. The following table sets forth total home entertainment revenue for both the Motion Pictures and Television Production reporting segments for the three-month periods ended September 30, 2008 and 2007:
 
                                 
    Three Months
    Three Months
             
    Ended
    Ended
             
    September 30,
    September 30,
    Increase (Decrease)  
    2008     2007     Amount     Percent  
    (Amounts in millions)  
 
Home Entertainment Revenue
                               
Motion Picture
  $ 164.4     $ 126.8     $ 37.6       29.7 %
Television Production
    13.9       8.4       5.5       65.5 %
                                 
    $ 178.3     $ 135.2     $ 43.1       31.9 %
                                 


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Motion Pictures Revenue
 
The increase in motion pictures revenue this quarter was mainly attributable to increases in home entertainment, television, and Mandate Pictures revenue, offset by decreases in theatrical and international revenue. The following table sets forth the components of revenue for the motion pictures reporting segment for the three-month periods ended September 30, 2008 and 2007:
 
                                 
    Three Months
    Three Months
             
    Ended
    Ended
             
    September 30,
    September 30,
    Increase (Decrease)  
    2008     2007     Amount     Percent  
    (Amounts in millions)  
 
Motion Pictures
                               
Theatrical
  $ 34.0     $ 45.3     $ (11.3 )     (24.9 )%
Home Entertainment
    164.4       126.8       37.6       29.7 %
Television
    61.9       37.6       24.3       64.6 %
International
    28.5       31.0       (2.5 )     (8.1 )%
Mandate Pictures
    21.2       0.1       21.1       NM  
Other
    2.2       1.3       0.9       69.2 %
                                 
    $ 312.2     $ 242.1     $ 70.1       29.0 %
                                 
 
 
(NM) Percentage not meaningful.


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The following table sets forth the titles contributing significant motion pictures revenue for the three-month periods ended September 30, 2008 and 2007:
 
             
Three Months Ended September 30,
2008   2007
    Theatrical and DVD
      Theatrical and DVD
Title
 
Release Date
 
Title
 
Release Date
 
Theatrical:
      Theatrical:    
Bangkok Dangerous
Disaster Movie
My Best Friend’s Girl
The Family That Preys
  September 2008
August 2008
September 2008
September 2008
    3:10 to Yuma
  Bratz
  Good Luck Chuck
  War
  September 2007
August 2007
September 2007
August 2007
Home Entertainment:
      Home Entertainment:    
Meet The Browns
Rambo
The Bank Job
The Forbidden Kingdom
  July 2008
May 2008
July 2008
September 2008
    Bratz Kidz Sleepover
     Adventure
  Bug
  Delta Farce
  Doctor Strange
  Pride
  The Condemned
  July 2007

September 2007
September 2007
August 2007
June 2007
September 2007
 
     
Television:
3:10 to Yuma
Good Luck Chuck
Saw IV
War
Why Did I Get Married? — Feature

International:
3:10 to Yuma
Employee of the Month
My Best Friend’s Girl
Saw IV
War
 
Television:
Crank
Diary of a Mad Black Woman
Employee of the Month
Saw III

International:
Saw II
Saw III
The U.S. vs. John Lennon
War
     
Mandate Pictures:
30 Days of Night
Juno
Nick and Norah’s Infinite Playlist
   
 
Theatrical revenue of $34.0 million decreased $11.3 million, or 24.9%, 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 16% and 44% of total theatrical revenue and, in the aggregate, approximately 99%, or $33.6 million 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 8% and 42% of total theatrical revenue and, in the aggregate, approximately 92%, or $41.9 million of total theatrical revenue.
 
Home entertainment revenue from the motion picture reporting segment of $164.4 million increased $37.6 million, or 29.7%, in this quarter as compared to the prior year’s quarter. The increase is primarily due to an increase in the amount of home entertainment product sold. The amount of home entertainment product 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 home entertainment revenue in the current quarter represented individually between 4% to 16% of total home entertainment revenue and, in the aggregate, 49%, or $79.9 million of total home entertainment revenue for the quarter. In the prior year’s quarter, the titles listed above as contributing significant home entertainment revenue represented individually between 2% to 12% of total home entertainment revenue and, in the aggregate, 35%, or $44.7 million of total home entertainment revenue for the quarter. In the current quarter, $84.5 million, or 51%, of total home entertainment revenue was contributed by titles that


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individually make up less than 2% of total home entertainment revenue, and in the prior year’s quarter this amounted to $82.1 million, or 65%, of total home entertainment revenue.
 
Television revenue included in motion pictures revenue of $61.9 million in this quarter increased $24.3 million, or 64.6%, compared to the prior year’s quarter. In this quarter, the titles listed above as contributing significant television revenue represented individually between 9% to 18% of total television revenue and, in the aggregate, 74% or $45.8 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 11% to 32% of total television revenue and, in the aggregate, 83%, or $31.1 million of total television revenue for the quarter. In the current quarter, $16.1 million, or 26%, 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 $6.5 million, or 17%, of total television revenue for the quarter.
 
International revenue of $28.5 million decreased $2.5 million, or 8.1%, in this quarter as compared to the prior year’s quarter. Lionsgate UK contributed $11.6 million, or 40.7% of international revenue in the current quarter, which included revenues from Good Luck Chuck, The Bank Job, The Eye and The Forbidden Kingdom, compared to $6.9 million, or 22.3%, 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 4% to 8% of total international revenue and, in the aggregate, 28%, or $8.0 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 4% to 18% of total international revenue and, in the aggregate, 39%, or $11.9 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 Pictures titles is included in Mandate Pictures revenue in the table above. In the current quarter, the revenue from Mandate Pictures, acquired in September 2007, amounted to $21.2 million, as compared to $0.1 million 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 September 30, 2008 and 2007:
 
                                 
    Three Months
    Three Months
             
    Ended
    Ended
             
    September 30,
    September 30,
    Increase (Decrease)  
    2008     2007     Amount     Percent  
    (Amounts in millions)  
 
Television Production
                               
Domestic series licensing
  $ 49.2     $ 75.9     $ (26.7 )     (35.2 )%
Domestic television movies and miniseries
          15.8       (15.8 )     (100.0 )%
International
    5.0       9.3       (4.3 )     (46.2 )%
Home entertainment releases of television production
    13.9       8.4       5.5       65.5 %
Other
    0.4       0.2       0.2       100.0 %
                                 
    $ 68.5     $ 109.6     $ (41.1 )     (37.5 )%
                                 


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Revenues included in domestic series licensing from the Company’s television syndication subsidiary, Debmar-Mercury, LLC (“Debmar-Mercury”), decreased $5.4 million to $12.4 million from $17.8 million in the prior year’s quarter largely due to a decrease in revenue from House of Payne, due to the delivery of a lesser number of episodes, and from South Park, due to lower advertising revenues, offset by an increase in revenue from Family Feud, due to delivery of a greater number of episodes. In addition, the following table sets forth the number of television episodes and hours delivered in the three months ended September 30, 2008 and 2007, respectively, excluding television episodes delivered by Debmar-Mercury:
 
                                                     
          Three Months Ended
              Three Months Ended
 
          September 30,
              September 30,
 
          2008               2007  
          Episodes     Hours               Episodes     Hours  
 
Fear Itself
    1hr       8       8.0     The Dead Zone Season 5     1hr       10       10.0  
Mad Men Season 2
    1hr       8       8.0     Mad Men Season 1     1hr       11       11.0  
Weeds Season 4
    1/2hr       9       4.5     Wildfire Season 4     1hr       7       7.0  
                            Weeds Season 3     1/2hr       11       5.5  
                                                     
              25       20.5                   39       33.5  
                                                     
 
In the three months ended September 30, 2008, the television episodes listed in the table above represented individually between 7% to 33% of domestic series revenue and, in the aggregate, 70%, or $34.3 million of total television revenue for the quarter. In the three months ended September 30, 2007, the television episodes listed above represented individually between 10% to 27% of domestic series revenue and, in the aggregate, 73%, or $55.2 million of total television revenue for the quarter.
 
Domestic television movies and miniseries revenue decreased by $15.8 million in the current quarter primarily due to the delivery of eight episodes of the miniseries The Kill Point in the prior year’s quarter as compared to nil in the current quarter.
 
International revenue of $5.0 million decreased by $4.3 million in the current quarter compared to international revenue of $9.3 million in the prior year’s quarter. International revenue in the current quarter includes revenue from Weeds Season 3, Mad Men Season 1 and Wildfire Season 4, and international revenue in the prior year’s quarter includes revenue from The Dead Zone Season 1 and Season 5, The Lost Room miniseries, Wildfire Season 3, and The Dresden Files.
 
The increase of $5.5 million in revenue from home entertainment releases of television production is primarily driven by home entertainment revenue from Mad Men Season 1, House of Payne Volume 2, and Weeds Seasons 1, 2 and 3.


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Direct Operating Expenses
 
The following table sets forth direct operating expenses by segment for the three months ended September 30, 2008 and 2007:
 
                                                 
    Three Months Ended
    Three Months Ended
 
    September 30, 2008     September 30, 2007  
    Motion
                Motion
             
    Pictures     Television     Total     Pictures     Television     Total  
    (Amounts in millions)  
 
Direct operating expenses
                                               
Amortization of films and television programs
  $ 73.2     $ 44.5     $ 117.7     $ 45.4     $ 81.6     $ 127.0  
Participation and residual expense
    69.8       11.1       80.9       40.2       16.3       56.5  
Amortization of acquired intangible assets
    0.2             0.2       0.2             0.2  
Other expenses
    0.7       0.4       1.1       0.3       0.3       0.6  
                                                 
    $ 143.9     $ 56.0     $ 199.9     $ 86.1     $ 98.2     $ 184.3  
                                                 
Direct operating expenses as a percentage of segment revenues
    46.1 %     81.8 %     52.5 %     35.6 %     89.6 %     52.4 %
 
Direct operating expenses include amortization, participation and residual expenses and other expenses. Direct operating expenses of the motion pictures segment of $143.9 million for this quarter were 46.1% of motion pictures revenue, compared to $86.1 million, or 35.6% 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 primarily to the performance of the titles from the fiscal 2008 and 2009 theatrical releases in the current quarter as compared to the prior year’s quarter. Direct operating expenses of the motion pictures segment included charges for write-downs of investment in film costs of $1.6 million and $4.2 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. Included in the write-downs in the prior year’s quarter is a charge of approximately $2.0 million resulting from concerns over the collectability of amounts due pursuant to a distribution agreement.
 
Direct operating expenses of the television segment of $56.0 million for this quarter were 81.8% of television revenue, compared to $98.2 million, or 89.6% of television revenue for the prior year’s quarter. The decrease in direct operating expense of the television segment in the quarter is due to lower 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, $0.8 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 nil in the prior year’s quarter.


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Distribution and Marketing Expenses
 
The following table sets forth distribution and marketing expenses by segment for the three months ended September 30, 2008 and 2007:
 
                                                 
    Three Months Ended
    Three Months Ended
 
    September 30, 2008     September 30, 2007  
    Motion
                Motion
             
    Pictures     Television     Total     Pictures     Television     Total  
    (Amounts in millions)  
 
Distribution and marketing expenses
                                               
Theatrical
  $ 109.7     $     $ 109.7     $ 128.2     $     $ 128.2  
Home Entertainment
    62.9       3.6       66.5       52.2       2.3       54.5  
Television
    1.6       1.9       3.5       0.8       0.8       1.6  
International
    8.5       0.7       9.2       11.6       1.3       12.9  
Other
    0.3       0.2       0.5                    
                                                 
    $ 183.0     $ 6.4     $ 189.4     $ 192.8     $ 4.4     $ 197.2  
                                                 
 
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 $109.7 million decreased $18.5 million, or 14.4%, compared to $128.2 million in the prior year’s quarter. The decrease in theatrical P&A from the motion pictures segment is primarily due to a change in the mix of titles released during the quarter. Domestic theatrical P&A from the motion pictures segment in this quarter included P&A incurred on the release of Bangkok Dangerous, Disaster Movie, My Best Friend’s Girl and The Family That Preys which individually represented between 16% and 24% of total theatrical P&A and, in the aggregate, accounted for 83% 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 3:10 to Yuma, Bratz: The Movie, Good Luck Chuck, and War, which individually represented between 15% and 28% of total theatrical P&A and, in the aggregate, accounted for 85% of the total theatrical P&A.
 
Home entertainment distribution and marketing costs on motion pictures and television product in this quarter of $66.5 million increased $12.0 million, or 22.0%, compared to $54.5 million in the prior year’s quarter. The increase in home entertainment distribution and marketing costs is mainly due to the increase in revenue in the current quarter compared to the prior year’s quarter. Home entertainment distribution and marketing costs as a percentage of home entertainment revenues was 37.3% and 40.3% in the current quarter and prior year’s quarter, respectively.
 
International distribution and marketing expenses in this quarter includes $7.6 million of distribution and marketing costs from Lionsgate UK, compared to $9.9 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 September 30, 2008 and 2007:
 
                                 
    Three Months
    Three Months
             
    Ended
    Ended
             
    September 30,
    September 30,
    Increase (Decrease)  
    2008     2007     Amount     Percent  
    (Amounts in millions)  
 
General and Administrative Expenses
                               
Motion Pictures
  $ 11.8     $ 9.1     $ 2.7       29.7 %
Television
    2.6       1.5       1.1       73.3 %
Corporate
    16.2       15.8       0.4       2.5 %
                                 
    $ 30.6     $ 26.4     $ 4.2       15.9 %
                                 


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The increase in general and administrative expenses of the motion pictures segment of $2.7 million, or 29.7%, is primarily due to an increase in general and administrative expenses associated with our recent acquisitions and increases in salaries and related expenses, other professional fees, and other general overhead offset by capitalized film production costs that are directly attributable to motion picture productions. The following table sets forth the change in general and administrative expenses for the motion picture reporting segment for the three months ended September 30, 2008 and 2007:
 
         
    Increase
 
    (Decrease)  
    (In millions)  
 
General and Administrative Expenses Motion Pictures
       
Mandate Pictures (acquired September 2007)
  $ 1.2  
Maple Pictures (consolidated July 2007)
    0.7  
Salaries and related expenses
    1.2  
Other professional fees
    0.4  
Other general overhead costs
    0.7  
Capitalized film production costs
    (1.5 )
         
    $ 2.7  
         
 
Capitalized film production costs, which increased $1.5 million in the current quarter compared to the prior year’s quarter, consisted of an increase of $0.8 million of film production costs associated with pictures produced by Mandate Pictures and the remaining $0.7 million was from the increase in other salaries and related expenses and other general overhead costs directly attributable to motion picture productions.
 
The increase in general and administrative expenses of the television segment of $1.1 million is due to general and administrative expense increases related to our Debmar-Mercury subsidiary of $0.5 million, additional costs associated with the start up of our Asian TV venture of $0.8 million, offset by a decrease in other general overhead costs. In the current quarter, $2.0 million of television production overhead was capitalized of which $0.9 million was associated with productions of our new reality TV venture compared to $1.0 million in the prior year’s quarter.
 
The increase in corporate general and administrative expenses of $0.4 million, or 2.5%, is primarily due to an increase in salaries and related expenses of approximately $1.2 million, a decrease in stock-based compensation of approximately $0.2 million, an increase in other general overhead costs of $1.0 million primarily related to rents and facility expenses, offset by a decrease in professional fees of approximately $1.6 million. The increase in salaries and related expenses of $1.2 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 September 30, 2008 and 2007:
 
                                 
    Three Months
    Three Months
             
    Ended
    Ended
             
    September 30,
    September 30,
    Increase (Decrease)  
    2008     2007     Amount     Percent  
    (Amounts in millions)  
 
Stock Based Compensation Expense (Benefit):
                               
Stock options
  $ 0.8     $ 0.9     $ (0.1 )     (11.1 )%
Restricted share units
    3.3       2.9       0.4       13.8 %
Stock appreciation rights
    (1.1 )     (0.6 )     (0.5 )     83.3 %
                                 
    $ 3.0     $ 3.2     $ (0.2 )     (6.3 )%
                                 
 
At September 30, 2008, as disclosed in Note 13 to the unaudited condensed consolidated financial statements, there were unrecognized compensation costs of approximately $26.1 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 September 30, 2008,


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507,084 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 507,084 shares whose future annual performance targets have not been set was $4.6 million, based on the market price of the Company’s common shares as of September 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 $1.2 million this quarter increased $0.2 million, or 20.0% from $1.0 million in the prior year’s quarter.
 
Interest expense of $5.2 million this quarter increased $1.0 million, or 23.8%, from the prior year’s quarter of $4.2 million.
 
Interest and other income was $2.0 million for the quarter ended September 30, 2008, compared to $2.6 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 September 30, 2008.
 
Gain on sale of equity securities was nil this quarter, compared to $2.8 million in the prior year’s quarter primarily from the sale of shares in Magna Pacific Holdings (“Magna”), an Australian film distributor.
 
The Company’s equity interests in this quarter included a $1.3 million loss from the Company’s 33.33% equity interest in FEARnet, a loss of $0.3 million from the Company’s 42% equity interest in Break.com, a $0.1 million loss from the Company’s 43% equity interest in Roadside, and a $0.2 million loss from the Company’s 28.57% equity interest in the Premium TV Channel. For the three months ended September 30, 2007, equity interests included a $1.0 million loss from the Company’s 33.33% equity interest in FEARnet, a $0.2 million loss from the Company’s 10% equity interest in Maple Pictures, and a less than $0.1 million loss from the Company’s 42% equity interest in Break.com.
 
The Company had an income tax expense of $2.7 million, or (5.9%) of loss before income taxes in the three months ended September 30, 2008, compared to an expense of $0.8 million, or (1.4%) of loss before income taxes in the three months ended September 30, 2007. The tax expense reflected in the current quarter is primarily attributable to U.S. 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 loss for the three months ended September 30, 2008 was $48.1 million, or basic and diluted net loss per common share of $0.41 on 116.9 million weighted average shares outstanding. This compares to net loss for the three months ended September 30, 2007 of $58.0 million or basic and diluted net loss per common share of $0.49 on 119.2 million weighted average common shares outstanding.
 
Six Months Ended September 30, 2008 Compared to Six Months Ended September 30, 2007
 
Consolidated revenues for the six months ended September 30, 2008 of $679.2 million increased $128.7 million, or 23.4%, compared to $550.5 million in the six months ended September 30, 2007. Motion pictures revenue of $569.5 million for the current six-month period increased $157.0 million, or 38.1%, compared to $412.5 million in the prior year’s period. Television revenues of $109.7 million this period decreased $28.3 million, or 20.5%, compared to $138.0 million in the prior year’s period.


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Our largest component of revenue comes from home entertainment. The following table sets forth total home entertainment revenue for both the Motion Pictures and Television Production reporting segments for the six-month periods ended September 30, 2008 and 2007:
 
                                 
    Six Months
    Six Months
             
    Ended
    Ended
             
    September 30,
    September 30,
    Increase (Decrease)  
    2008     2007     Amount     Percent  
    (Amounts in millions)  
 
Home Entertainment Revenue
                               
Motion Picture
  $ 316.5     $ 230.6     $ 85.9       37.3 %
Television Production
    22.1       10.6       11.5       108.5 %
                                 
    $ 338.6     $ 241.2     $ 97.4       40.4 %
                                 
 
Motion Pictures Revenue
 
The increase in motion pictures revenue this period was mainly attributable to increases in home entertainment, television, Mandate Pictures and international revenue. The following table sets forth the components of revenue for the motion pictures reporting segment for the six-month periods ended September 30, 2008 and 2007:
 
                                 
    Six Months
    Six Months
             
    Ended
    Ended
             
    September 30,
    September 30,
    Increase (Decrease)  
    2008     2007     Amount     Percent  
    (Amounts in millions)  
 
Motion Pictures
                               
Theatrical
  $ 64.6     $ 64.3     $ 0.3       0.5 %
Home Entertainment
    316.5       230.6       85.9       37.3 %
Television
    90.8       60.0       30.8       51.3 %
International
    62.8       53.7       9.1       16.9 %
Mandate Pictures
    29.6       0.1       29.5       NM  
Other
    5.2       3.8       1.4       36.8 %
                                 
    $ 569.5     $ 412.5     $ 157.0       38.1 %
                                 
 
 
(NM) Percentage not meaningful.
 
The following table sets forth the titles contributing significant motion pictures revenue for the six-month periods ended September 30, 2008 and 2007:
 
             
Six Months Ended September 30,
2008   2007
    Theatrical and DVD
      Theatrical and DVD
Title
 
Release Date
 
Title
 
Release Date
 
Theatrical:
      Theatrical:    
Bangkok Dangerous
Disaster Movie
Meet The Browns
My Best Friend’s Girl
The Family That Preys
The Forbidden Kingdom
  September 2008
August 2008
March 2008
September 2008
September 2008
April 2008
    3:10 to Yuma
  Bratz
  Delta Farce
  Good Luck Chuck
  Hostel II
  War
  September 2007
August 2007
May 2007
September 2007
June 2007
August 2007
Home Entertainment:
      Home Entertainment:    
Meet The Browns
Rambo
The Bank Job
The Eye
The Forbidden Kingdom
Witless Protection
  July 2008
May 2008
July 2008
June 2008
September 2008
June 2008
    Bug
  Daddy’s Little Girls
  Delta Farce
  Happily N’Ever After
  Pride
  The Condemned
  September 2007
June 2007
September 2007
May 2007
June 2007
September 2007


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Television:
3:10 to Yuma
Good Luck Chuck
Saw IV
War
Why Did I Get Married? — Feature

International:
My Best Friend’s Girl
Saw IV
The Eye
War

Mandate Pictures:
30 Days of Night
Harold & Kumar Escape from Guantanamo Bay
Juno
Nick and Norah’s Infinite Playlist
Passengers
 
Television:
Crank
Diary of a Mad Black Woman
Employee of the Month
Saw III
The Descent

International:
Saw II
Saw III
The Punisher
War
 
Theatrical revenue of $64.6 million increased $0.3 million, or 0.5%, in this period as compared to the prior year’s period due to the performance of the significant titles listed above. In the current six-month period, the titles listed in the above table as contributing significant theatrical revenue represented individually between 5% and 38% of total theatrical revenue and, in the aggregate, approximately 95%, or $61.3 million of total theatrical revenue. In the prior year’s period, the titles listed in the above table as contributing significant theatrical revenue represented individually between 5% and 30% of total theatrical revenue and, in the aggregate, approximately 82%, or $52.5 million of total theatrical revenue.
 
Home entertainment revenue of $316.5 million increased $85.9 million, or 37.3%, in this period as compared to the prior year’s period. The amount of home entertainment product 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 home entertainment revenue in the current period represented individually between 5% to 14% of total home entertainment revenue and, in the aggregate, 48%, or $151.3 million of total home entertainment revenue for the period. In the prior year’s period, the titles listed above as contributing significant home entertainment revenue represented individually between 3% to 9% of total home entertainment revenue and, in the aggregate, 36%, or $83.2 million of total home entertainment revenue for the period. In the current period, $165.2 million, or 52%, of total home entertainment revenue was contributed by titles that individually make up less than 2% of total home entertainment revenue, and in the prior year’s period this amounted to $147.4 million, or 64%, of total home entertainment revenue.
 
Television revenue included in motion pictures revenue of $90.8 million in this period increased $30.8 million, or 51.3%, compared to the prior year’s period. In the current six-month period, the titles listed above as contributing significant television revenue represented individually between 8% to 16% of total television revenue and, in the aggregate, 66% or $59.5 million of total television revenue for the period. In the prior year’s period, the titles listed above as contributing significant television revenue represented individually between 7% to 23% of total television revenue and, in the aggregate, 75%, or $44.7 million of total television revenue for the period. In the current period, $31.3 million, or 34%, 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 period, this amounted to $15.3 million, or 25%, of total television revenue for the period.
 
International revenue of $62.8 million increased $9.1 million, or 16.9%, in the current six-month period as compared to the prior year’s period. Lionsgate UK contributed $27.7 million, or 44.1% of international revenue in the current period, which included revenues from 3:10 to Yuma, The Bank Job, The Condemned, The Eye, and Saw IV, compared to $15.0 million, or 27.9%, of total international revenue in the prior year’s period. In this period, the titles listed in the table above as contributing significant international revenue, excluding revenue generated from these titles by Lionsgate UK, represented individually between 3% to 9% of total international revenue and, in the aggregate, 24%, or $14.8 million, of total international revenue for the period. In the prior year’s period, the


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titles listed in the table above as contributing significant revenue represented individually between 4% to 13% of total international revenue and, in the aggregate, 28%, or $14.9 million, of total international revenue for the period.
 
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 Pictures titles is included in the Mandate Pictures revenue in the table above. In the current six-month period, Mandate Pictures revenue amounted to $29.6 million, as compared to $0.1 million in the prior year’s period.
 
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 six-month periods ended September 30, 2008 and 2007:
 
                                 
    Six Months
    Six Months
             
    Ended
    Ended
             
    September 30,
    September 30,
    Increase (Decrease)  
    2008     2007     Amount     Percent  
    (Amounts in millions)  
 
Television Production
                               
Domestic series licensing
  $ 76.4     $ 95.9     $ (19.5 )     (20.3 )%
Domestic television movies and miniseries
          15.8       (15.8 )     (100.0 )%
International
    10.7       15.5       (4.8 )     (31.0 )%
Home entertainment releases of television production
    22.1       10.6       11.5       108.5 %
Other
    0.5       0.2       0.3       150.0 %
                                 
    $ 109.7     $ 138.0     $ (28.3 )     (20.5 )%
                                 
 
Revenues included in domestic series licensing from Debmar-Mercury decreased $0.3 million to $26.0 million from $26.3 million in the prior year’s period due to decreased revenue from television series such as House of Payne, due to the delivery of a lesser number of episodes, and South Park, due to lower advertising revenues, offset by an increase in revenue from Family Feud, due to delivery of a greater number of episodes. In addition, the following table sets forth the number of television episodes and hours delivered in the six months ended September 30, 2008 and 2007, respectively, excluding television episodes delivered by Debmar-Mercury:
 
                                                     
          Six Months Ended
              Six Months Ended
 
          September 30,
              September 30,
 
          2008               2007  
          Episodes     Hours               Episodes     Hours  
 
Fear Itself
    1hr       13       13.0     The Dead Zone Season 5     1hr       13       13.0  
Mad Men Season 2
    1hr       10       10.0     The Dresden Files     1hr       2       2.0  
Weeds Season 4
    1/2hr       13       6.5     Mad Men Season 1     1hr       11       11.0  
                            Wildfire Season 4     1hr       11       11.0  
                            Weeds Season 3     1/2hr       12       6.0  
                                                     
              36       29.5                   49       43.0  
                                                     
 
In the six months ended September 30, 2008, the television episodes listed in the table above represented individually between 8% to 27% of domestic series revenue and, in the aggregate, 62%, or $47.0 million of total television revenue for the period. In the six months ended September 30, 2007, the television episodes listed above represented individually between 2% to 21% of domestic series revenue and, in the aggregate, 69%, or $66.6 million of total television revenue for the period.
 
Domestic television movies and miniseries revenue decreased by $15.8 million in the current period primarily due to the delivery of eight episodes of the miniseries The Kill Point in the prior year’s period as compared to nil in the current period.


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International revenue of $10.7 million decreased by $4.8 million in the current period, compared to international revenue of $15.5 million in the prior year’s period. International revenue in the current period includes revenue from Kill Point, Mad Men Season 1, Weeds Season 3 and Wildfire Season 4, and international revenue in the prior year’s period includes revenue from Hidden Palms, Lovespring International, The Dresden Files and The Dead Zone Season 1 and Season 5.
 
The increase in revenue from home entertainment releases of television production is primarily driven by DVD revenue from Weeds Season 3 and Mad Men Season 1.
 
Direct Operating Expenses
 
The following table sets forth direct operating expenses by segment for the six months ended September 30, 2008 and 2007:
 
                                                 
    Six Months Ended
    Six Months Ended
 
    September 30, 2008     September 30, 2007  
    Motion
                Motion
             
    Pictures     Television     Total     Pictures     Television     Total  
    (Amounts in millions)  
 
Direct operating expenses
                                               
Amortization of films and television programs
  $ 120.2     $ 66.5     $ 186.7     $ 74.6     $ 102.3     $ 176.9  
Participation and residual expense
    136.6       22.4       159.0       71.5       23.1       94.6  
Amortization of acquired intangible assets
    0.6             0.6       0.3             0.3  
Other expenses
    1.1       0.5       1.6       (0.7 )     0.3       (0.4 )
                                                 
    $ 258.5     $ 89.4     $ 347.9     $ 145.7     $ 125.7     $ 271.4  
                                                 
Direct operating expenses as a percentage of segment revenues
    45.4 %     81.5 %     51.2 %     35.3 %     91.1 %     49.3 %
 
Direct operating expenses include amortization, participation and residual expenses and other expenses. Direct operating expenses of the motion pictures segment of $258.5 million for this period were 45.4% of motion pictures revenue, compared to $145.7 million, or 35.3% of motion pictures revenue for the prior year’s period. The increase in direct operating expense of the motion pictures segment in the current period as a percent of revenue is due primarily to the performance of the titles from the fiscal 2008 and 2009 theatrical releases in the current period as compared to the prior year’s period. The benefit in other expense in the prior year’s period resulted primarily from foreign exchange gains of approximately $0.4 million. Direct operating expenses of the motion pictures segment included charges for write-downs of investment in film costs of $6.3 million and $6.7 million in the current period and prior year period, respectively, due to the lower than anticipated actual performance or previously expected performance of certain titles. In the prior year’s period, approximately $1.5 million of the write-down related to the unanticipated poor performance at the box office of one motion picture and a $2.0 million charge resulted from concerns over the collectability of amounts due pursuant to a distribution agreement.
 
Direct operating expenses of the television segment of $89.4 million for the current period were 81.5% of television revenue, compared to $125.7 million, or 91.1% of television revenue for the prior year’s period. The decrease in direct operating expense of the television segment in the current period is due to lower television production revenue. The decrease in direct operating expenses of the television segment in the current period 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 period, $2.6 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 period. In the prior year’s period, approximately $1.2 million resulted from the write-off of film costs associated with a television pilot.


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Distribution and Marketing Expenses
 
The following table sets forth distribution and marketing expenses by segment for the six months ended September 30, 2008 and 2007:
 
                                                 
    Six Months Ended
    Six Months Ended
 
    September 30, 2008     September 30, 2007  
    Motion
                Motion
             
    Pictures     Television     Total     Pictures     Television     Total  
    (Amounts in millions)  
 
Distribution and marketing expenses
                                               
Theatrical
  $ 131.4     $     $ 131.4     $ 211.4     $     $ 211.4  
Home Entertainment
    123.6       6.7       130.3       94.7       3.6       98.3  
Television
    2.4       2.5       4.9       1.1       1.5       2.6  
International
    18.6       2.1       20.7       18.3       2.0       20.3  
Other
    0.9       0.2       1.1       0.1             0.1  
                                                 
    $ 276.9     $ 11.5     $ 288.4     $ 325.6     $ 7.1     $ 332.7  
                                                 
 
The majority of distribution and marketing expenses relate to the motion pictures segment. Theatrical P&A in the motion pictures segment in the current period of $131.4 million decreased $80.0 million, or 37.8%, compared to $211.4 million in the prior year’s period. The decrease in theatrical P&A from the motion pictures segment is primarily due to a change in the mix of titles released during the period. Domestic theatrical P&A from the motion pictures segment this period included P&A incurred on the release of Bangkok Dangerous, Disaster Movie, My Best Friend’s Girl, The Family That Preys and The Forbidden Kingdom, which individually represented between 10% and 22% of total theatrical P&A and in the aggregate accounted for 84% of the total theatrical P&A. Domestic theatrical P&A from the motion pictures segment in the prior year’s period included P&A incurred on the release of titles such as Bug, Delta Farce, The Condemned, 3:10 to Yuma, Bratz: The Movie, Hostel 2, Good Luck Chuck and War, which individually represented between 5% and 17% of total theatrical P&A and in the aggregate accounted for 83% of the total theatrical P&A. Bug and The Condemned, released theatrically during the six months ended September 30, 2007, individually contributed less than 5% of total theatrical revenue in the prior year’s period.
 
Home entertainment distribution and marketing costs on motion pictures and television product in this period of $130.3 million increased $32.0 million, or 32.6%, compared to $98.3 million in the prior year’s period. The increase in home entertainment distribution and marketing costs is mainly due to the increase in revenue in the current period compared to the prior year’s period.
 
Home entertainment distribution and marketing costs as a percentage of home entertainment revenues was 38.5% and 40.8% in the current period and prior year’s period, respectively.
 
International distribution and marketing expenses in this period includes $16.6 million of distribution and marketing costs from Lionsgate UK, compared to $14.8 million in the prior year’s period.


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General and Administrative Expenses
 
The following table sets forth general and administrative expenses by segment for the six months ended September 30, 2008 and 2007:
 
                                 
    Six Months
    Six Months
             
    Ended
    Ended
             
    September 30,
    September 30,
    Increase (Decrease)  
    2008     2007     Amount     Percent  
    (Amounts in millions)  
 
General and Administrative Expenses
                               
Motion Pictures
  $ 24.9     $ 16.7     $ 8.2       49.1 %
Television
    5.3       2.9       2.4       82.8 %
Corporate
    38.7       33.6       5.1       15.2 %
                                 
    $ 68.9     $ 53.2     $ 15.7       29.5 %
                                 
 
The increase in general and administrative expenses of the motion pictures segment of $8.2 million, or 49.1%, is primarily due to an increase in general and administrative expenses associated with our recent acquisitions and increases in salaries and related expenses, other professional fees, and other general overhead primarily related to rent and facility costs offset by capitalized film production costs that are directly attributable to motion picture productions. The following table sets forth the change in general and administrative expenses for the motion picture reporting segment for the six months ended September 30, 2008 and 2007:
 
         
    Increase
 
    (Decrease)  
    (In millions)  
 
General and Administrative Expenses Motion Pictures
       
Mandate Pictures (acquired September 2007)
  $ 2.5  
Maple Pictures (consolidated July 2007)
    1.9  
Lionsgate UK
    0.6  
Salaries and related expenses
    2.7  
Other professional fees
    1.0  
Other general overhead costs
    1.7  
Capitalized film production costs
    (2.2 )
         
    $ 8.2  
         
 
Capitalized film production costs, which increased $2.2 million in the current period compared to the prior year’s period, consisted of $1.4 million of film production costs associated with pictures produced by Mandate Pictures and the remaining $0.8 million was from other salaries and related expenses, and other general overhead cost increases directly attributable to motion picture productions.
 
The increase in general and administrative expenses of the television segment of $2.4 million, is due to other general and administrative expense increases related to our Debmar-Mercury subsidiary of $1.1 million , additional costs associated with the start up of our Asian TV venture of $0.8 million and an increase in other general overhead costs primarily related to rents and facility expenses. In the current period, $2.9 million of television production overhead was capitalized of which $0.9 million was associated with productions of our new reality TV venture compared to $2.0 million in the prior year’s period.
 
The increase in corporate general and administrative expenses of $5.1 million, or 15.2%, is primarily due to an increase in salaries and related expenses of approximately $5.3 million, an increase in stock-based compensation of approximately $1.1 million, an increase in other general overhead costs primarily related to rents and facility expenses of $1.6 million, offset by a decrease in transactional related professional fees of approximately $2.9 million. The increase in salaries and related expenses of $5.3 million was partly due to higher salaries and increases in the number of full-time employees.


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The following table sets forth stock based compensation expense (benefit) for the six months ended September 30, 2008 and 2007:
 
                                 
    Six Months
    Six Months
             
    Ended
    Ended
             
    September 30,
    September 30,
    Increase (Decrease)  
    2008     2007     Amount     Percent  
    (Amounts in millions)  
 
Stock Based Compensation Expense (Benefit):
                               
Stock options
  $ 1.6     $ 1.6     $       0.0 %
Restricted share units
    5.9       5.1       0.8       15.7 %
Stock appreciation rights
    (0.6 )     (1.0 )     0.4       (40.0 )%
                                 
    $ 6.9     $ 5.7     $ 1.2       21.1 %
                                 
 
At September 30, 2008, as disclosed in Note 13 to the unaudited condensed consolidated financial statements, there were unrecognized compensation costs of approximately $26.1 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 September 30, 2008, 507,084 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 507,084 shares whose future annual performance targets have not been set was $4.6 million, based on the market price of the Company’s common shares as of September 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 $2.2 million this period increased $0.3 million, or 15.8% from $1.9 million in the prior year’s period.
 
Interest expense of $9.5 million this period increased $1.4 million, or 17.3%, from the prior year’s period of $8.1 million.
 
Interest and other income was $4.2 million for the period ended September 30, 2008, compared to $6.4 million in the prior year’s period. Interest and other income this period was earned on the cash balance and available-for-sale investments held during the six months ended September 30, 2008.
 
Gain on sale of equity securities was nil for the current six-month period, compared to $2.8 million in the prior year’s period primarily from the sale of shares in Magna, an Australian film distributor.
 
The Company’s equity interests in this period included a $2.4 million loss from the Company’s 33.33% equity interest in FEARnet, a loss of $1.1 million from the Company’s 42% equity interest in Break.com, a $0.4 million loss from the Company’s 43% equity interest in Roadside, and a $0.2 million loss from the Company’s 28.57% equity interest in the Premium TV Channel. For the six months ended September 30, 2007, equity interests included a $1.9 million loss from the Company’s 33.33% equity interest in FEARnet, a $0.1 million loss from the Company’s 10% equity interest in Maple Pictures, and a loss of less than $0.1 million from the Company’s 42% equity interest in Break.com.
 
The Company had an income tax expense of $3.3 million, or (8.8%) of loss before income taxes in the six months ended September 30, 2008, compared to an expense of $1.5 million, or (1.4%) of loss before income taxes in the six months ended September 30, 2007. The tax expense reflected in the current period 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, subject to certain limitations that may prevent the Company from fully utilizing them, amount to approximately $87.5 million for U.S. federal income tax purposes available to


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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 loss for the six months ended September 30, 2008 was $41.0 million, or basic and diluted net loss per common share of $0.35 on 117.6 million weighted average shares outstanding. This compares to net loss for the six months ended September 30, 2007 of $111.1 million or basic and diluted net loss per common share of $0.94 on 118.1 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. At September 30, 2008, the Company had no borrowings (March 31, 2008 — nil) under the credit facility. The availability of funds under the credit facility is limited by a borrowing base and also reduced by outstanding letters of credit, which amounted to $22.7 million at September 30, 2008. At September 30, 2008, there was $317.3 million available under the amended credit facility. The Company is required to pay a monthly commitment fee based upon 0.50% per annum on the total credit facility of $340 million less the amount drawn. This amended credit facility amends and restates the Company’s original $215 million credit facility. Obligations under the credit facility are secured by collateral (as defined) granted by the Company and certain subsidiaries of the Company, as well as a pledge of equity interests in certain of the Company’s subsidiaries. The amended credit facility contains a number of affirmative and 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


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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. At September 30, 2008, $124.5 million was available to be provided by SGF under the terms of the arrangement.
 
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 September 30, 2008 and March 31, 2008 is $456.5 million and $437.4 million, respectively.
 
Cash Flows Used in Operating Activities.  Cash flows used in operating activities for the six months ended September 30, 2008 were $39.7 million compared to cash flows used in operating activities in the six months ended September 30, 2007 of $57.8 million. The increase in cash used in operating activities was primarily due to decreases in accounts receivable and a lower net loss generated in the six months ended September 30, 2008, offset by increases in investment in film, decreases in accounts payable and accrued liabilities, participation and residuals.
 
Cash Flows Provided by/Used in Investing Activities.  Cash flows used in investing activities of $45.1 million for the six months ended September 30, 2008 consisted of $5.7 million for purchases of property and equipment, $11.1 million for the investment in equity method investees and $28.4 million for increases in loans made to Break.com and a third party producer. Cash flows provided by investing activities of $173.4 million in the six months ended September 30, 2007 included net proceeds from the sale of $226.5 million of investments available-for-sale, offset by $2.7 million for purchases of property and equipment, $6.5 million for the investment in equity method investees, $3.1 million for a loan to Break.com, and $40.9 million for the acquisition of Mandate Pictures, net of cash acquired.
 
Cash Flows Used in Financing Activities.  Cash flows used in financing activities of $35.7 million for the six months ended September 30, 2008 resulted from increased production obligations of $113.3 million and the exercise of stock options of $2.9 million, offset by $104.2 million payment of production obligations, $44.7 million paid for the repurchase of the Company’s common shares and $2.9 million paid for tax withholding requirements associated with the vesting of shares. Cash flows used in financing activities of $4.8 million in the six months ended September 30, 2007 consisted of cash received from borrowings of $63.2 million and the exercise of stock options of $0.7 million, offset by $58.0 million repayment of production obligations and $10.7 million paid for the repurchase of the Company’s common shares.
 
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.


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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.
 
Future commitments under contractual obligations as of September 30, 2008 are as follows:
 
                                                         
    Year Ended March 31,  
    2009     2010     2011     2012     2013     Thereafter     Total  
    (Amounts in thousands)  
 
Future annual repayment of debt and other financing obligations as of September 30, 2008
                                                       
Production obligations(1)
  $ 95,281     $ 80,852     $ 42,942     $ 29,988     $     $ 7,934     $ 256,997  
Interest payments on subordinated notes and other financing obligations
    5,523       11,046       11,046       11,046       10,776       124,594       174,031  
Subordinated notes and other financing obligations
                            3,718       325,000       328,718  
                                                         
    $ 100,804     $ 91,898     $ 53,988     $ 41,034     $ 14,494     $ 457,528     $ 759,746  
Contractual commitments by expected repayment date
                                                       
Film obligations(1)
  $ 25,522     $     $     $     $     $     $ 25,522  
Distribution and marketing commitments(2)
    62,629       28,659       200                         91,488  
Minimum guarantee commitments(3)
    102,407       97,964       45,874       7,800       1,000             255,045  
Production obligation commitments(3)
    10,479       24,058       4,859                         39,396  
Operating lease commitments
    4,564       8,873       8,257       4,364       2,672       1,689       30,419  
Other contractual obligations
    28,122       257       221       185                   28,785  
Employment and consulting contracts
    17,503       24,531       13,515       2,968       376             58,893  
                                                         
    $ 251,226     $ 184,342     $ 72,926     $ 15,317     $ 4,048     $ 1,689     $ 529,548  
                                                         
Total future commitments under contractual obligations
  $ 352,030     $ 276,240     $ 126,914     $ 56,351     $ 18,542     $ 459,217     $ 1,289,294  
                                                         
 
 
(1) Film and production obligations include minimum guarantees, theatrical marketing obligations and production obligations as disclosed in Note 7 of our unaudited condensed consolidated financial statements. Repayment dates are based on anticipated delivery or release date of the related film or contractual due dates of the obligation.
 
(2) Distribution and marketing commitments represent contractual commitments for future expenditures associated with distribution and marketing of films which the Company will distribute. The payment dates of these amounts are primarily based on the anticipated release date of the film.
 
(3) Minimum guarantee commitments represent contractual commitments related to the purchase of film rights for future delivery. Production obligation commitments represent amounts committed for future film production and development to be funded through production financing and recorded as a production obligation liability. Future payments under these obligations are based on anticipated delivery or release dates of the related film or contractual due dates of the obligation. The amounts include future interest payments associated with the obligations.
 
Off-Balance Sheet Arrangements
 
We do not have any transactions, arrangements and other relationships with unconsolidated entities that will affect our liquidity or capital resources. We have no special purpose entities that provided off-balance sheet financing, liquidity or market or credit risk support, nor do we engage in leasing, hedging or research and development services, that could expose us to liability that is not reflected in our financial statements.


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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 September 30, 2008, the Company had outstanding contracts 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 both the three and six months ended September 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 and six months ended September 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 gains (losses) resulting from the completed contracts were less than $0.1 million and $(0.2) million, respectively. 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 September 30, 2008. Other financing obligations subject to variable interest rates include $165.4 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 September 30, 2008.
 
                                                         
    Year Ended March 31,  
    2009     2010     2011     2012     2013     Thereafter     Total  
    (Amounts in thousands)  
 
Revolving Credit Facility:
                                                       
Variable(1)
  $     $     $     $     $     $     $  
Production Obligations:
                                                       
Variable(2)
    88,532       70,910       5,930                         165,372  
Fixed(3)
                                  7,934       7,934  
Subordinated Notes and Other Financing Obligations:
                                                       
Fixed(4)
                                  150,000       150,000  
Fixed(5)
                                  175,000       175,000  
Fixed(6)
                            3,718             3,718  
                                                         
    $ 88,532     $ 70,910     $ 5,930     $     $ 3,718     $ 332,934     $ 502,024  
                                                         
 
 
(1) Revolving credit facility, which expires July 25, 2013 and bears interest at 2.25% over the Adjusted LIBOR rate. At September 30, 2008, the Company had no borrowings under this facility.
 
(2) Amounts owed to film production entities on anticipated delivery date or release date of the titles or the contractual due dates of the obligation. Production obligations of $165.4 million incur interest at rates ranging


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from approximately 4.62% to 6.45%. 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 $7.9 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 September 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 September 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.


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PART II — OTHER INFORMATION
 
Item 1.   Legal Proceedings.
 
None
 
Item 1A.   Risk Factors.
 
There were no material changes to the risk factors previously reported in our Annual Report on Form 10-K for the fiscal year ended March 31, 2008.
 
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.
 
The following table sets forth information with respect to shares of our common stock purchased by us during the three months ended September 30, 2008:
 
                                 
    Issuer Purchases of Equity Securities(1)  
                      (d) Approximate
 
                (c) Total Number of
    Dollar Value of
 
                Shares Purchased as
    Shares that May Yet
 
                Part of Publicly
    be Purchased Under
 
    (a) Total Number of
    (b) Average Price
    Announced Plans
    the Plans or
 
Period
  Shares Purchased     Paid per Share     or Programs     Programs  
 
                    $ 63,700,000  
    1,470,475     $ 9.99       1,470,475     $ 49,000,000  
    1,417,800     $ 9.57       1,417,800     $ 35,300,000  
Total
    2,888,275     $ 9.78       2,888,275     $ 35,300,000  
 
 
(1) On May 31, 2007, our Board of Directors authorized the repurchase of up to $50 million of our common shares. On May 29, 2008, as part of its regularly scheduled year-end meeting, our Board of Directors authorized the repurchase of up to an additional $50 million of our common shares, subject to market conditions. The common shares may be purchased, from time to time, at the Company’s discretion, including the quantity, timing and price thereof. Such purchases will be structured as permitted by securities laws and other legal requirements. During the period from the authorization date through September 30, 2008, 6,748,910 shares have been repurchased at a cost of approximately $65.0 million (including commission costs). The share repurchase program has no expiration date.
 
Item 3.   Defaults Upon Senior Securities.
 
None


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Item 4.   Submission of Matters to a Vote of Security Holders.
 
On September 9, 2008, the Company held its Annual General Meeting of Shareholders (the “Annual Meeting”). Below is a summary of the matters voted on at the meeting:
 
1. At the Annual Meeting, the Company’s stockholders voted to elect eleven (11) directors to the Board of Directors of the Company to serve for a term of one year. The votes for the director nominees were as follows:
 
                 
Nominees
  For     Abstain  
 
Norman Bacal
    106,518,632       1,461,969  
Michael Burns
    107,050,485       930,116  
Arthur Evrensel
    103,498,952       4,481,649  
Jon Feltheimer
    107,063,543       917,058  
Morley Koffman
    107,751,611       228,990  
Harald Ludwig
    107,752,064       228,537  
Laurie May
    107,070,898       909,703  
G. Scott Paterson
    65,566,199       42,414,402  
Daryl Simm
    104,231,965       3,748,636  
Hardwick Simmons
    107,747,748       232,853  
Brian V. Tobin
    107,754,821       225,780  
 
Additionally, the Company’s Series B preferred stockholder, Mark Amin, elected himself as a director.
 
2. Ernst & Young LLP was re-appointed as the Company’s independent registered public accounting firm for the fiscal year ending March 31, 2009 and authorizing the Audit Committee of the Board of Directors was authorized to determine the remuneration to be paid to Ernst & Young LLP. The vote was as follows:
 
                 
For
            107,454,139  
Abstain
            388,264  
Not Voted
            138,197  
 
Under applicable law, the proposals before the Company’s stockholders — for the election of each of the nominated directors (Proposal 1) and the re-appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm (Proposal 2) — each required the affirmative vote of a majority of the common shares present or represented by proxy. Abstentions and broker non-votes were not counted in determining the number of shares necessary for approval.
 
Item 5.   Other Information.
 
None


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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 .52   Amendment of Employment Agreement between the Company and Jon Feltheimer dated September 18, 2008 (Incorporated by reference to exhibit 10.52 to the Company’s Current Report on Form 8-K filed on September 23, 2008).
  10 .53   Amendment of Employment Agreement between the Company and Michael Burns dated September 22, 2008 (Incorporated by reference to exhibit 10.53 to the Company’s current report on Form 8-K filed on September 23, 2008).
  31 .1   Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31 .2   Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32 .1   Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
(1) Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2005 as filed on June 29, 2005.
 
(2) Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007 as filed on May 30, 2007.


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
LIONS GATE ENTERTAINMENT CORP.
 
  By: 
/s/  James Keegan
Name:     James Keegan
  Title:  Duly Authorized Officer and
Chief Financial Officer
 
Date: November 10, 2008


63


Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
3/15/25
10/15/24
3/15/20
10/15/19
3/15/15
10/15/14
7/25/134
3/15/12
10/15/11
10/14/114,  424B3,  8-K,  SC 13D/A
9/30/1110-Q
10/15/10
10/14/10
7/26/10DFAN14A,  SC 13D/A,  SC TO-T/A
10/15/09
9/30/0910-Q,  8-K
3/31/0910-K,  4
1/1/09
12/15/08
Filed on:11/10/088-K
11/1/08
For Period End:9/30/084
9/23/088-K
9/22/084,  SC 13G/A
9/18/084,  8-K
9/9/084,  DEF 14A
9/1/084
8/31/08
8/1/08
7/31/088-K
7/1/08
6/30/0810-Q
5/30/0810-K,  4,  4/A,  8-K
5/29/088-K
4/9/08
3/31/0810-K,  4,  5
1/30/088-K
12/31/0710-Q
9/30/0710-Q
9/10/073,  4,  424B7,  8-K
7/30/078-K
7/26/07DEF 14A
7/18/07
7/17/07
6/29/07S-3ASR
6/1/078-K
5/31/078-K
5/30/0710-K,  4,  8-K
5/25/078-K
3/31/0710-K
7/3/06
9/15/05
6/29/0510-K,  4,  8-K
4/15/05
3/31/0510-K,  4,  NT 10-K
2/2/043,  4
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