================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 1-14880 -------------------- LIONS GATE ENTERTAINMENT CORP. (Exact name of registrant as specified in its charter) BRITISH COLUMBIA, CANADA (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) -------------------- SUITE 3123, THREE BENTALL CENTRE 595 BURRARD STREET VANCOUVER, BRITISH COLUMBIA V7X 1J1 (Address of principal executive offices, zip code) Registrant's telephone number, including area code: (604) 609-6100 -------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of November 14, 2001, 43,121,156 shares of the registrant's no par value common stock were outstanding. ================================================================================ TABLE OF CONTENTS ITEM PAGE ---- ---- PART I 1. FINANCIAL STATEMENTS.................................................. 4 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.................................................. 15 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............ 24 PART II 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................... 26 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...... 27 2 Unless the context indicates otherwise, all references herein to "Lions Gate," "the Company," "we," "us," and "our" refer collectively to Lions Gate Entertainment Corp. and its subsidiaries. This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "could," or "continue" or the negative thereof or other variations thereon or comparable terminology. These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by us in those statements. The most important factors that could prevent us from achieving our stated goals include, but are not limited to, the following: o lack of public acceptance of films or television programs resulting in significant write-downs affecting our results of operations and financial condition; o dependence on third party financing, government incentive programs and German tax shelter arrangements that could be reduced, amended or eliminated; o the unpredictability of commercial success of films and television programs; o actual production costs exceeding budgets due to circumstances beyond our control; o operating results fluctuating materially from period-to-period; o interest rate changes; and o fluctuating currency rates. Because these statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward looking statements. We caution you not to place undue reliance on the statements, which speak only as of the date of this report. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - 'Risks and Uncertainties' and 'Currency Risk Management.'" CURRENCY AND EXCHANGE RATES All dollar amounts set forth in this report are in Canadian dollars, except where otherwise indicated. The following table sets forth (1) the rate of exchange for the U.S. dollar, expressed in Canadian dollars, in effect at the end of each period indicated; (2) the average exchange rate for such period, based on the rate in effect on the last day of each month during such period; and (3) the high and low exchange rates during such period, in each case based on the noon buying rate in New York City for cable transfers in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York. Fiscal Year Ending March 31 ------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Rate at end of period............... $1.5784 $1.4828 $1.5092 $1.4180 $1.3835 Average rate during period.......... 1.5041 1.4790 1.5086 1.4060 1.3634 High rate........................... 1.5784 1.5140 1.5770 1.4637 1.3835 Low rate............................ 1.4515 1.4470 1.4175 1.3705 1.3310 On November 9, 2001, the noon buying rate in New York City for cable transfer in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York was Canadian $1.6023 = US$1.00. 3 PART I ITEM 1. FINANCIAL STATEMENTS. LIONS GATE ENTERTAINMENT CORP. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT FOR THE THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000 (all amounts in thousands of Canadian dollars) For the three For the six FOR THE THREE months ended FOR THE SIX months ended MONTHS ENDED Sept. 30, 2000 MONTHS ENDED Sept. 30, 2000 SEPT. 30, 2001 (Restated) SEPT. 30, 2001 (Restated) ----------------------------------------------------------------------------------------------------------------- REVENUE Motion Pictures $ 48,750 $ 40,039 $ 95,311 $ 71,709 Television 25,830 19,792 39,305 33,768 Animation 15,759 4,850 22,409 12,356 Studio Facilities 1,627 1,434 3,273 2,942 CineGate 343 678 1,560 678 ----------------------------------------------------------------------------------------------------------------- 92,309 66,793 161,858 121,453 ----------------------------------------------------------------------------------------------------------------- DIRECT OPERATING EXPENSES Motion Pictures 17,230 14,559 36,884 31,457 Television 20,054 18,809 32,034 31,298 Animation 11,785 3,294 17,702 8,830 Studio Facilities 690 632 1,401 1,271 CineGate -- -- -- -- ----------------------------------------------------------------------------------------------------------------- 49,759 37,294 88,021 72,856 ----------------------------------------------------------------------------------------------------------------- GROSS PROFIT Motion Pictures 31,520 25,480 58,427 40,252 Television 5,776 983 7,271 2,470 Animation 3,974 1,556 4,707 3,526 Studio Facilities 937 802 1,872 1,671 CineGate 343 678 1,560 678 ----------------------------------------------------------------------------------------------------------------- 42,550 29,499 73,837 48,597 ----------------------------------------------------------------------------------------------------------------- OTHER EXPENSES Distribution and marketing costs 25,415 8,726 41,052 35,009 General and administration 13,005 6,762 24,109 13,536 Amortization 2,089 1,732 3,827 3,570 Interest 3,118 1,216 6,704 2,021 Loss on disposal 646 -- 646 -- Minority interest 923 159 649 330 ----------------------------------------------------------------------------------------------------------------- 45,196 18,595 76,987 54,466 ----------------------------------------------------------------------------------------------------------------- Gain on investment in subsidiary 3,375 -- 3,375 -- ----------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY INTERESTS 729 10,904 225 (5,869) Income taxes 204 3,959 (1,815) (2,865) ----------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE EQUITY INTERESTS 525 6,945 2,040 (3,004) Equity interest in Mandalay Pictures, LLC 195 (2,059) (1,195) (2,719) Equity interest in CinemaNow, Inc. (500) -- (1,142) -- ----------------------------------------------------------------------------------------------------------------- Net income (loss) 220 4,886 (297) (5,723) Dividends on preferred shares (640) (604) (1,258) (1,209) Accretion on Series A preferred shares (803) (784) (1,602) (1,556) Adjusted deficit, beginning of period (81,834) (95,002) (79,900) (83,016) ----------------------------------------------------------------------------------------------------------------- DEFICIT, END OF PERIOD $ (83,057) $ (91,504) $ (83,057) $ (91,504) ================================================================================================================= BASIC AND DILUTED OPERATING INCOME (LOSS) PER COMMON SHARE $ 0.01 $ (0.16) $ (0.01) $ (0.18) ================================================================================================================= BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ (0.03) $ 0.11 $ (0.07) $ (0.27) ================================================================================================================= BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE EXCLUDING MANDALAY AND CINEMANOW $ (0.02) $ 0.18 $ (0.02) $ (0.18) ================================================================================================================= See notes to condensed consolidated financial statements 4 LIONS GATE ENTERTAINMENT CORP. CONDENSED CONSOLIDATED BALANCE SHEETS AS AT SEPTEMBER 30, 2001 AND MARCH 31, 2001 (all amounts in thousands of Canadian dollars) UNAUDITED NOTE 2 ----------------------------------------- SEPTEMBER 30, 2001 March 31, 2001 ASSETS Cash and equivalents $ 10,920 $ 10,485 Accounts receivable 188,295 183,787 Investment in films and television programs 337,942 228,349 Long term investments 74,904 77,230 Capital assets 44,938 44,212 Goodwill, net of accumulated amortization 36,471 34,924 Other assets 17,646 15,233 Future income taxes 9 -- ----------------------------------------- $ 711,125 $ 594,220 ========================================= LIABILITIES Bank loans $ 228,579 $ 159,765 Accounts payable and accrued liabilities 128,552 123,370 Production and distribution loans 31,886 24,045 Long-term debt 65,595 65,987 Deferred revenue 50,577 22,283 Future income taxes -- 757 Minority interest 12,257 1,224 ----------------------------------------- 517,446 397,431 SHAREHOLDERS' EQUITY Capital stock 268,484 266,523 Accumulated deficit (83,057) (79,900) Cumulative translation adjustments 8,252 10,166 ----------------------------------------- 193,679 196,789 ----------------------------------------- $ 711,125 $ 594,220 ========================================= See notes to condensed consolidated financial statements 5 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000 (all amounts in thousands of Canadian dollars) For the six FOR THE SIX months ended MONTHS ENDED Sept. 30, 2000 SEPT. 30, 2001 (Restated) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (297) $ (5,723) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of capital assets 1,730 1,426 Amortization of goodwill -- 1,280 Write-off of projects in development 852 281 Amortization of pre-operating costs 481 481 Amortization of deferred financing costs 764 102 Amortization of films and television programs 86,620 71,585 Minority interest 649 330 Gain on dilution of investment in a subsidiary (3,375) -- Equity interest in CinemaNow, Inc. 1,142 -- Equity interest in Mandalay Pictures, LLC 1,195 2,719 --------------------------------------------------------------------------------------------------- 89,761 72,481 CHANGES IN OPERATING ASSETS AND LIABILITIES, EXCLUDING THE EFFECTS OF ACQUISITIONS: Accounts receivable (7,557) (13,782) Increase in investment in films and television programs (198,197) (67,737) Other assets (4,200) (9,806) Future income taxes (516) (3,132) Accounts payable and accrued liabilities 11,464 (3,095) Deferred revenue 27,809 (3,279) --------------------------------------------------------------------------------------------------- (81,436) (28,350) --------------------------------------------------------------------------------------------------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issue of capital stock 54 14 Dividends paid on Series A preferred shares (1,258) (1,209) Increase in bank loans 67,176 20,600 Increase (decrease) in production and distribution loans 7,822 (7,502) Increase (decrease) in long-term debt (434) 1,109 --------------------------------------------------------------------------------------------------- 73,360 13,012 --------------------------------------------------------------------------------------------------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Issuance of capital stock in subsidiary 14,000 -- Purchase of capital assets (2,554) (1,271) --------------------------------------------------------------------------------------------------- 11,446 (1,271) --------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS 3,370 (16,609) FOREIGN EXCHANGE EFFECT ON CASH (2,935) 1,342 CASH AND EQUIVALENTS - BEGINNING OF PERIOD 10,485 19,283 --------------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS - END OF PERIOD $ 10,920 $ 4,016 =================================================================================================== See notes to condensed consolidated financial statements 6 LIONS GATE ENTERTAINMENT CORP. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Lions Gate Entertainment Corp. ("the Company" or "Lions Gate") is a fully integrated entertainment company engaged in the development, production and theatrical, video, television, and international distribution of feature films, television series, television movies and mini-series, non-fiction programming and animated programming, as well as the management of Canadian-based studio facilities and management services provided to Canadian limited partnerships. As an independent distribution company, the Company also acquires distribution rights from a wide variety of studios, production companies and independent producers. 2. BASIS OF PRESENTATION The unaudited condensed consolidated financial statements include the accounts of Lions Gate and its subsidiary companies, with a provision for non-controlling interests, and the Company's proportionate share of assets, liabilities, revenues and expenses of jointly controlled companies. The Company controls its subsidiary companies through a combination of existing voting interests and an ability to exercise various rights under certain shareholder agreements and debentures to acquire common shares. These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada ("Canadian GAAP") which conforms, in all material respects, with the accounting principles generally accepted in the United States ("U.S."), except as described in note 11, for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by Canadian or U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these condensed consolidated financial statements. Operating results for the quarter are not necessarily indicative of the results that may be expected for the year ending March 31, 2002. Certain reclassifications have been made in the fiscal 2001 financial statements to conform to the fiscal 2002 presentation (see note 12). For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for the year ended March 31, 2001. The balance sheet at March 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 3. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS GOODWILL- On June 29, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 142, "Goodwill and Other Intangible Assets". Under SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise, for impairment. Goodwill is required to be tested for impairment between the annual tests if an event occurs or circumstances change that more-likely-than-not reduce the fair value of a reporting unit below its carrying value. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the amortization and impairment provisions of SFAS 142 are effective upon adoption of SFAS 142. The Company elected to adopt SFAS 142 on April 1, 2001. (See note 6) 7 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES- On April 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative Instruments and Hedging Activities", as amended in June 2000 by SFAS 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which requires companies to recognize all derivatives as either assets or liabilities in the balance sheet and measure such instruments at fair value. The adoption of these standards did not have a material impact on the Company's unaudited condensed consolidated financial statements. 4. INVESTMENT IN FILMS AND TELEVISION PROGRAMS SEPT. 30, March 31, 2001 2001 THEATRICAL FILMS Released, net of accumulated amortization $ 90,568 $ 58,378 Acquired library, net of accumulated amortization 63,662 77,827 In progress 62,375 30,690 In development 1,963 4,972 ------------------------------------------------------------------------------- 218,568 171,867 ------------------------------------------------------------------------------- NON-THEATRICAL FILMS AND DIRECT-TO-TELEVISION Released, net of accumulated amortization 29,001 24,343 In progress 85,016 27,221 In development 5,357 4,918 ------------------------------------------------------------------------------- 119,374 56,482 ------------------------------------------------------------------------------- $ 337,942 $ 228,349 =============================================================================== The company expects that 78% of released films and television programs net of amortization will be amortized over the three-year period ending September 30, 2004. 5. LONG-TERM INVESTMENTS Long-term investments is comprised of the Company's investments in Mandalay Pictures, LLC and CinemaNow, Inc. The Company's investment in Mandalay Pictures is comprised of a 45% common stock interest, and a 100% interest in preferred stock with a stated value of US$50.0 million. The Company records 100% of the operating results of Mandalay Pictures as equity interest in Mandalay Pictures, LLC. 8 Summarized financial information of Mandalay Pictures is as follows: SEPT. 30, 2001 March 31, 2001 ------------------------------- ASSETS Cash and equivalents $ 27,541 $ 25,399 Restricted cash 29,563 33,336 Accounts receivable 46,999 69,878 Investment in films 128,425 209,848 Other assets 8 127 -------------------------------------------------------------------------------- 232,536 338,588 -------------------------------------------------------------------------------- LIABILITIES Accounts payable and accrued liabilities 11,654 16,901 Production and bank loans 43,100 151,659 Contractual obligations 62,758 57,653 Deferred revenue 67,864 65,032 -------------------------------------------------------------------------------- 185,376 291,245 -------------------------------------------------------------------------------- NET ASSETS $ 47,160 $ 47,343 ================================================================================ Three months Six months THREE MONTHS ended Sept. 30, SIX MONTHS ended Sept. 30, ENDED SEPT. 30, 2000 ENDED SEPT. 30, 2000 2001 (Restated) 2001 (Restated) ----------------------------------------------------------------- Revenue $ 87,241 $ 13,979 $ 87,245 $ 32,863 Direct operating expenses 85,469 13,953 85,473 32,008 ---------------------------------------------------------------------------------------------------- Gross profit 1,772 26 1,772 855 Indirect operating expenses (1,313) (2,150) (2,465) (3,328) Interest income, net of interest expense 212 543 479 1,460 ---------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE PROVISION OF INCOME TAXES $ 671 $ (1,581) $ (214) $ 1,013 ==================================================================================================== Mandalay Pictures is a non-taxable entity. Accordingly, all tax effects attributable to the operations of Mandalay are included directly in the Company's tax provision. 9 6. GOODWILL The net carrying value of goodwill recorded through acquisitions is $34.9 million as at March 31, 2001. Effective April 1, 2001, the Company adopted SFAS 142. This asset will be assessed for impairment at least annually or upon an adverse change in operations. Prior to the adoption of SFAS 142 the assets were amortized using the straight-line method over periods ranging from five to twenty years. The Company completed an impairment test required under SFAS 142 at September 30, 2001 and determined that the recognition of an impairment loss was not necessary. The following is the proforma effect had the six months and quarter ended September 30, 2000 been subject to SFAS 142: THREE MONTHS Three months SIX MONTHS Six months ENDED ended ENDED ended SEPT. 30, 2001 Sept. 30, 2000 SEPT. 30, 2001 Sept. 30, 2000 -------------------------------------------------------------- Reported net income/(loss) $ 220 $ 4,886 $ (297) $ (5,723) Amortization -- 640 -- 1,280 ----------------------------------------------------------------------------------------------- Adjusted (proforma) net income/(loss) $ 220 5,526 $ (297) $ (4,443) =============================================================================================== Reported net income/(loss) per share $ (0.03) $ 0.11 $ (0.07) $ (0.27) Amortization per share 0.00 (0.02) 0.00 (0.04) ----------------------------------------------------------------------------------------------- Adjusted net income/(loss) per share $ (0.03) $ 0.13 $ (0.07) $ (0.23) =============================================================================================== 7. BANK LOANS The Company has credit facilities available of US$200.0 million (Cdn$315.7 million) and Cdn$2.0 million as at September 30, 2001 (March 31, 2001 - US$200.0 million (Cdn$315.3 million) and Cdn$2.0 million)), expiring September 25, 2005 and July 31, 2002 respectively. The availability of funds under the US$200.0 million credit facility is limited by the borrowing base, which is calculated on a monthly basis. The borrowing base assets at September 30, 2001 totaled US$145.1 million (Cdn$229.1 million). As at September 30, 2001, US$143.7 million (Cdn$226.9 million) and $1.5 million was drawn on the facilities. The Company is required to pay a monthly commitment fee of 0.375% on the US$200.0 million less the amount drawn. 8. GAIN ON DILUTION On July 10, 2001 a third party invested $14.0 million in the Company's animation partner to obtain a 35% interest. The gain on dilution of the Company's investment was $3.4 million (net of income taxes of $nil) and resulted in a decrease of $0.2 million in goodwill. 9. INCOME PER SHARE Basic income per share is calculated after adjusting net income for dividends and accretion on the preferred shares and using the weighted average number of common shares outstanding during the three and six months ended September 30, 2001 of 42,463,000 shares and 42,427,000 shares, respectively, (September 30, 2000 - 31,423,000 shares and 31,420,000 shares, respectively). The exercise of common share equivalents including employee stock options, share purchase 10 warrants, convertible promissory notes and Series A preferred shares could potentially dilute earnings per share in the future, but were not reflected in fully diluted income per share because to do so would be anti-dilutive. 10. SUPPLEMENTARY CASH FLOW STATEMENT INFORMATION Interest paid during the three and six months ended September 30, 2001 amounted to $5.0 million and $7.9 million, respectively, (September 30, 2000 - $1.9 million and $3.4 million, respectively). Income taxes paid during the three and six months ended September 30, 2001 amounted to $0.1 million and $0.8 million, respectively, (September 30, 2000 - $0.7 million and $1.1 million, respectively). 11. RECONCILIATION TO UNITED STATES GAAP The condensed consolidated financial statements of the Company have been prepared in accordance with Canadian GAAP. The material differences between the accounting policies used by the Company under Canadian GAAP and U.S. GAAP are disclosed below in accordance with the rules and regulations of the Securities and Exchange Commission. Under U.S. GAAP, the net income (loss) and income (loss) per share figures for the three and six months ended September 30, 2001 and 2000 and the shareholders' equity as at September 30, 2001 and March 31, 2001 was: 11 NET INCOME (LOSS) SHAREHOLDERS' EQUITY ------------------------------------------------------------------------------------------------------------------- THREE Three SIX Six MONTHS months MONTHS months ENDED ended ENDED ended SEPT. 30, Sept. 30, SEPT. 30, Sept. 30, SEPT. 30, March 31, 2001 2000 2001 2000 2001 2001 AS REPORTED UNDER CANADIAN GAAP $ 220 $ 4,886 $ (297) $ (5,723) $ 193,679 $ 196,789 Equity interest in income (loss) of Mandalay Pictures (a) 287 287 574 574 (3,995) (4,569) Adjustment for capitalized pre-operating costs (b) 145 145 290 290 (2,965) (3,255) Restructuring costs (c) -- -- -- -- (1,733) (1,733) Accounting for income taxes (d) -- -- -- -- 2,754 2,754 Reclassification of Series A preferred Shares outside shareholders' equity (e) -- -- -- -- (39,707) (38,986) ------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) BEFORE ACCOUNTING CHANGE/ SHAREHOLDERS' EQUITY UNDER U.S. GAAP 652 5,318 567 (4,859) 148,033 151,000 ------------------------------------------------------------------------------------------------------------------- Cumulative effect of accounting changes, net of income taxes (f) -- -- -- (58,942) -- -- ------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS)/ SHAREHOLDERS' EQUITY UNDER U.S. GAAP 652 5,318 567 (63,801) 148,033 151,000 Adjustment to cumulative translation adjustments account (g) 4,455 1,518 (1,914) 2,007 -- -- Other comprehensive loss (g) (195) -- (385) -- (385) -- ------------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS UNDER U.S. GAAP $ 4,912 $ 6,836 $ (1,732) $ (61,794) $ 147,648 $ 151,000 =================================================================================================================== BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE UNDER U.S. GAAP BEFORE ACCOUNTING CHANGES $ (0.01) $ 0.14 $ (0.04) $ (0.22) ======================================================================================= BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE UNDER U.S. GAAP $ (0.01) $ 0.14 $ (0.04) $ (2.10) ======================================================================================= 12 Reconciliation of movement in Shareholders' Equity under U.S. GAAP: SEPT. 30, 2001 March 31, 2001 -------------------------------- BALANCE AT BEGINNING OF THE PERIOD $ 151,000 $ 158,974 Increase in capital stock 587 37,573 Dividends paid on preferred shares (1,258) (2,497) Accretion on preferred shares (f) (949) (1,555) Net income (loss) under U.S. GAAP 567 (50,217) Adjustment to cumulative translation adjustments account Comprehensive loss (385) -- Other comprehensive loss (1,914) 8,722 -------------------------------------------------------------------------------- BALANCE AT END OF THE PERIOD $ 147,648 $ 151,000 ================================================================================ (a) EQUITY INTEREST IN LOSS OF MANDALAY PICTURES, LLC The Company accounts for Mandalay Pictures using the equity method. Under Canadian GAAP, pre-operating costs incurred by Mandalay Pictures were deferred and are being amortized to income. Under U.S. GAAP, all start-up costs are required to be expensed as incurred. The amounts are presented net of income taxes for the three and six months ended September 30, 2001 of $0.3 million and $0.6 million, respectively, (September 30, 2000 - $0.3 million and $0.6 million, respectively). (b) ACCOUNTING FOR CAPITALIZED PRE-OPERATING PERIOD COSTS In the year ended March 31, 1999, under Canadian GAAP, the Company deferred certain pre-operating costs related to the launch of the television one-hour series business amounting to $4.8 million. This amount is being amortized over five years commencing in the year ended March 31, 2000. Under U.S. GAAP, all start-up costs are expensed as incurred. The amounts are presented net of income taxes for the three and six months ended September 30, 2001 of $0.1 million and $0.6 million, respectively (September 30, 2000 - $0.1 million and $0.3 million, respectively). (c) ACCOUNTING FOR BUSINESS COMBINATIONS Under Canadian GAAP, costs related to activities or employees of an acquiring company are not considered in the purchase price allocation. The Company included $2.1 million of such costs in the purchase equation for Trimark. Under U.S. GAAP, costs related to the acquiring Company are expensed as incurred. The amount is presented net of income taxes of $0.4 million. (d) ACCOUNTING FOR INCOME TAXES Under Canadian GAAP, for the year ended March 31, 2001, the Company used the asset and liability method to recognize future income taxes which is consistent with the U.S. GAAP method required under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", ("SFAS 109") except that Canadian GAAP requires use of the substantively enacted tax rates and legislation, whereas U.S. GAAP only permits use of enacted tax rates and legislation. For the years ended March 31, 2000 and March 31, 1999, the Company used the deferral method for accounting for deferred income taxes, which differs from the requirements of SFAS 109. The use of substantively enacted tax rates under Canadian GAAP to measure future income tax assets and liabilities resulted in an increase in Canadian net future income tax assets (before valuation 13 allowances) by $2.3 million, with a corresponding increase in valuation allowances by $1.7 million. SFAS 109 requires deferred tax assets and liabilities be recognized for temporary differences, other than non-deductible goodwill, arising in a business combination. As a result of the acquisition of Lions Gate Studios in the year ended March 31, 2000, under U.S. GAAP, goodwill was increased to reflect the additional deferred tax liability resulting from temporary differences arising on the acquisition. Under Canadian GAAP, the company did not restate income taxes for years prior to March 31, 2001, accordingly, there is a difference in the carrying amount of goodwill of $2.8 million as at March 31, 2000, (March 31, 1999 - $2.9 million) and amortization expense relating to goodwill was $0.1 million higher under U.S. GAAP. (e) ACCRETION ON PREFERRED SHARES Under Canadian GAAP, the Company's preferred shares have been included in shareholders' equity as the Company considers the likelihood of redemption by the holders to be remote. Under U.S. GAAP, the preferred shares would be presented outside of shareholders' equity as temporary equity. Under Canadian GAAP, the fair value of the basic preferred shares was determined using the residual value method after determining the fair value of the common share purchase warrants and the preferred share conversion feature. Under U.S. GAAP, the proceeds received would be allocated to the common share purchase warrants and the preferred shares based on the relative fair values of the two instruments. Under U.S. GAAP, the preferred shares would have been valued at $42.4 million and the warrants at $5.7 million. As the conversion feature of the preferred shares was beneficial, an amount of $2.4 million was allocated to the conversion feature based on the intrinsic value of the conversion feature resulting in a carrying value for the preferred shares of $40.0 million. Under Canadian GAAP, the difference between the carrying amount and the redemption value of $50.5 million is being accreted as a charge to retained earnings on a straight line basis over five years whereas, under U.S. GAAP, the difference is being accreted using the effective interest method over the five year period to the first available date that the preferred shares are redeemable. (f) ACCOUNTING CHANGES In the year ended March 31, 2001, the Company elected early adoption of Statement of Position 00-2 "Accounting by Producers or Distributors of Films" ("SoP 00-2"). Under Canadian GAAP, the one-time after-tax adjustment for the initial adoption of SoP 00-2 was made to opening retained earnings. Under SoP 00-2, the cumulative effect of changes in accounting principles caused by adopting the provisions of SoP 00-2 should be included in the determination of net earnings for GAAP purposes. The cumulative effect adjustment comprised $40.1 million net of income taxes of $15.5 million for the Company and its subsidiaries as well as $3.3 million, net of income taxes of $2.2 million for the Company's equity investee Mandalay Pictures. (g) COMPREHENSIVE LOSS Comprehensive loss consists of net income (loss) and other gains and losses affecting shareholders' equity that, under U.S. GAAP are excluded from net income. Adjustment to cumulative translation adjustments comprises foreign currency translation gains and losses. 14 Other comprehensive loss comprises unrealized losses on investments available for sale based on the market price of the shares at September 30, 2001 net of income taxes of $0.4 million. (h) ACCOUNTING FOR TAX CREDITS Under Canadian GAAP, tax credits earned are included in revenue. Accounting Principles Board Opinion No. 4, "Accounting for the Investment Credit" requires tax credits to be presented as reduction of income tax expense. The corresponding impact would be a reduction of revenue and credit to income tax expense of $7.7 million (September 30, 2000 - $9.0 million). 12. COMPARATIVE FIGURES The unaudited condensed Consolidated Financial Statements as at and for the three months and six months ended September 30, 2000 have been restated to take into account the interim effect of the adoption of SoP 00-2 and the reclassification of the Company's U.S. operations as self-sustaining both as of April 1, 2000. 13. SUBSEQUENT EVENT On October 22, 2001 648 Series A preferred shares were converted into 648,000 common shares of the Company at US$2,550 per preferred share. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. We develop, produce and distribute a targeted range of film and television content in North America and around the world. To reflect our core businesses, this discussion focuses on Motion Pictures - which includes production of feature films and theatrical, video, television and international distribution, Television - which includes one-hour drama series, television movies, non-fiction programming (primarily through Termite Art Productions), Animation - which includes animation production at Corporation CineGroupe, Studio Facilities - which includes Lions Gate Studios and leased facilities at Eagle Creek Studios, and CineGate - which provides management services to Canadian limited partnerships. The following discussion and analysis for the three and six months ended September 30, 2001 and 2000 should be read in conjunction with the unaudited condensed Consolidated Financial Statements included in this report. The unaudited condensed Consolidated Financial Statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The material differences between the accounting policies used by Lions Gate under Canadian GAAP and United States ("U.S.") GAAP are disclosed in note 11 to the unaudited condensed Consolidated Financial Statements. The functional currency of our business, defined as the economic environment in which we primarily generate and expend cash, is the Canadian dollar and the U.S. dollar for the Canadian and U.S.-based businesses respectively. In accordance with GAAP in both Canada and the U.S., the financial statements of U.S.-based subsidiaries are translated for consolidation purposes using current exchange rates, with translation adjustments accumulated in a separate component of shareholders' equity. On June 29, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 142, "Goodwill and Other Intangible Assets". Under SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise, for impairment. Goodwill is required to be tested for impairment between the annual tests if an event occurs or circumstances change that more-likely-than-not 15 reduce the fair value of a reporting unit below its carrying value. We adopted SFAS 142 as of April 1, 2001. In accordance with the adoption provisions of SFAS 142, within six months of adoption, goodwill is required to be tested for impairment as of the beginning of the year. It was determined that the fair value of each of the reporting units was in excess of its carrying value including goodwill and, therefore, no further work was required and an impairment loss was not required. Note 6 to the unaudited condensed Consolidated Financial Statements includes additional information relating to the net carrying value of goodwill and the proforma effect of the adoption of SFAS 142 on the prior year's unaudited condensed Consolidated Statement of Operations for the six months ended September 30, 2001. On July 1, 2001, we adopted SFAS 133 "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for the designation and effectiveness of hedging relationships. The cumulative effect of adopting SFAS 133 was not material to the financial statements. It should be noted that the unaudited condensed Consolidated Financial Statements as at and for the three and six months ended September 30, 2000 have been restated to take into account the adoption of SoP 00-2 and the reclassification of our U.S. operations as self-sustaining, both as of April 1, 2000. The impact on fiscal 2001 of the adoption of SoP 00-2 and the reclassification of the U.S. operations was recorded in the fourth quarter of fiscal 2001, and has been apportioned to each of the four quarters in fiscal 2001 for comparative purposes. In addition, distribution and marketing costs, which were previously disclosed as a component of direct operating expenses, are now separately disclosed as a component of other expenses under SoP 00-2. The following is a comparison of the line items in the unaudited condensed Consolidated Statements of Operations that have been restated: AS REPORTED AS RESTATED 3 Months 6 Months 3 Months 6 Months (ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, ended ended ended ended EXCEPT PER SHARE AMOUNTS) Sept. 30, 2000 Sept. 30, 2000 Sept. 30, 2000 Sept. 30, 2000 Revenues $ 66,529 $ 120,926 $ 66,793 $ 121,453 Direct operating expenses 54,826 98,697 37,294 72,856 ------------------------------------------------------------------ Gross profit $ 11,703 $ 22,229 $ 29,499 $ 48,597 ================================================================== Distribution and marketing costs $ -- $ -- $ 8,726 $ 35,009 ================================================================== General and administration expenses $ 6,397 $ 12,197 $ 6,762 $ 13,536 ================================================================== Gain on dilution of investment in a subsidiary $ 709 $ 709 $ -- $ -- ================================================================== Income taxes $ 331 $ 591 $ 3,959 $ (2,865) ================================================================== Income (loss) before equity interests $ 2,578 $ 4,230 $ 6,945 $ (3,004) ================================================================== Net income (loss) for the period $ 519 $ 1,511 $ 4,886 $ (5,723) ================================================================== BASIC AND DILUTED OPERATING INCOME (LOSS) PER SHARE $ 0.02 $ 0.05 $ 0.16 $ (0.18) ================================================================== BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ (0.03) $ (0.04) $ 0.11 $ (0.27) ================================================================== BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE EXCLUDING MANDALAY PICTURES $ 0.04 $ 0.05 $ 0.18 $ (0.18) ================================================================== 16 OVERVIEW Net income for the three months ended September 30, 2001 was $0.2 million, representing a loss of $0.03 per share (after giving effect to the Series A preferred share dividends and accretion on the Series A preferred shares) on 42.4 million weighted average common shares outstanding compared to net income of $4.9 million (as restated) or $0.11 per share (as restated) (after giving effect to the Series A preferred share dividends and accretion on the Series A preferred shares) on 31.4 million weighted average common shares outstanding for the three months ended September 30, 2000. Net loss for the six months ended September 30, 2001 was $0.3 million, representing a loss of $0.07 per share (after giving effect to the Series A preferred share dividends and accretion on the Series A preferred shares) on 42.4 million weighted average common shares outstanding compared to net loss of $5.7 million (as restated) or a loss of $0.27 per share (as restated) (after giving effect to the Series A preferred share dividends and accretion on the Series A preferred shares) on 31.4 million weighted average common shares outstanding for the six months ended September 30, 2000. Excluding the non-cash equity interests in Mandalay Pictures and CinemaNow, income for the three months ended September 30, 2001 was $0.5 million, a decrease of $6.4 million compared to income of $6.9 million (as restated) in the same period in the prior year. These results are equivalent to a loss per share of $0.02 for the three months ended September 30, 2001 and income per share of $0.18 (as restated) for the three months ended September 30, 2000 (each after giving effect to the Series A preferred share dividends and accretion on the Series A preferred shares). It should be noted that in the current quarter Mandalay Pictures reported its first profitable quarter since inception. Excluding the non-cash equity interests in Mandalay Pictures and CinemaNow, income for the six months ended September 30, 2001 was $2.0 million, an increase of $5.0 million compared to a loss of $3.0 million (as restated) in the same period in the prior year. These results are equivalent to a loss per share of $0.02 for the six months ended September 30, 2001 and a loss per share of $0.18 (as restated) for the six months ended September 30, 2000 (each after giving effect to the Series A preferred share dividends and accretion on the Series A preferred shares). EBITDA (defined as earnings before interest, provision for income taxes, amortization, minority interest and equity interests in losses) of $4.1 million for the three months ended September 30, 2001 decreased $9.9 million compared to $14.0 million (as restated) for the three months ended September 30, 2000. EBITDA for the six months ended September 30, 2001 of $8.7 million increased $8.6 million compared to $0.1 million (as restated) for the six months ended September 30, 2000. Revenues, gross profit and gross margin for the three months and six months ended September 30, 2001 increased significantly from the corresponding periods in the prior year. EBITDA in the current year was adversely impacted by increased distribution and marketing costs in both the theatrical and video divisions of the Motion Pictures business. Distribution and marketing costs of $25.4 million and $41.1 million for the three and six months ended September 30, 2001, respectively, increased significantly from $8.7 million and $35.0 million in the respective corresponding periods in the prior year. EBITDA should be considered in addition to, but not as a substitute for, net income and other measures of financial performance reported in accordance with generally accepted accounting principles. 17 RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 Revenue for the three months ended September 30, 2001 of $92.3 million increased $25.5 million or 38.2% compared to $66.8 million (as restated) in the same period in the prior year. Revenue increased in all businesses quarter-over-quarter with the exception of CineGate where revenue decreased by $0.4 million to $0.3 million. Motion Pictures revenue of $48.8 million increased $8.8 million or 22.0% from $40.0 million (as restated). The majority of the increase is due to an $8.0 million increase in theatrical revenue. Significant theatrical releases in the current quarter included O with revenue of $8.0 million and Songcatcher with revenue of $1.3 million. Foreign revenue of $7.0 million increased by $3.3 million. Television revenue from motion pictures of $3.3 million was virtually unchanged. Video revenue of $26.1 million decreased $1.9 million. It should be noted that American Psycho, which was released on video in the prior period, accounted for revenue of $10.1 million. Significant current quarter video releases included South of Heaven West of Hell, Amores Perros, Faust and Turbulence 3. Television production revenue of $25.8 million increased $6.0 million or 30.3% from $19.8 million. Current quarter deliveries included nine one-hour episodes of "Mysterious Ways" to Pax TV and NBC in the U.S., CTV in Canada and Sony worldwide, the television movie "Pilot's Wife" to CBS and the Avalanche project "Cabin Pressure" to several international territories. In the prior period 11 one-hour episodes of "Mysterious Ways" were delivered. Termite Art contributed revenue of $3.3 million compared to $3.0 million in the prior period. In the current quarter Termite Art delivered 13 hours of programming, compared to 11 hours delivered in the prior period and producer fees earned in the prior period on four hours of "Ripley's Believe It Or Not". Current quarter deliveries included: 4.5 hours of each of "Amazing Animal Videos" to Animal Planet and "Incredible Vacation Videos" to Travel Channel and two hours of "Journal of the Unknown" to The Learning Channel. In Animation, CineGroupe's revenue of $15.8 million increased $10.9 million or 222.4% compared to $4.9 million in the prior period. In the current quarter a total of 35.5 half-hours were delivered, including 21.5 half-hours of "Sagwa" to PBS and TVO; 8 half-hours of "What's With Andy" to Fox Family and Teletoon and six half-hours of Kids From Room 402 to Fox Family and TQS. In the prior period, 17 half-hours were delivered, including 13 half-hours of "Wunchpunch" and four half-hours of "Kids From Room 402". Studio Facilities revenue of $1.6 million increased $0.2 million or 14.3% from $1.4 million in the prior period due to the inclusion of revenue earned at Eagle Creek Studios of $0.1 million and favorable stage and office occupancy levels. In the current quarter, stage and office occupancy levels averaged 99% and 96% respectively, compared to 99% and 87% respectively in the prior period. CineGate earned revenue of $0.3 million on approximately $63 million of production financing arranged in the current quarter through the CineGate joint venture. Gross profit for the three months ended September 30, 2001 was $42.6 million representing a 46.1% gross margin compared to gross profit of $29.5 million (as restated) representing a gross margin of 44.2% (as restated) in the prior period. The gross margin in Motion Pictures of 64.7% in the current quarter was slightly favorable compared to the gross margin of 63.6% (as restated) in the prior period. The current quarter's video gross margin was positively impacted by the inclusion of Trimark's video library. Trimark was acquired in 18 October 2000. This gross margin improvement was partially offset by reduced margins recorded on the theatrical distribution of O. The gross margin in Television of 22.4% in the current quarter was favorable compared to the gross margin of 5.0% (as restated) recognized in the prior period. The gross margin realized on deliveries of episodes of the second season of "Mysterious Ways" and the television movie "Pilot's Wife" in the current quarter compare favorably to the gross margins realized in the prior period on deliveries of season one episodes of "Mysterious Ways" and "Higher Ground". Slightly offsetting these favorable variances, Termite Art's gross margin of 17.3% in the current quarter declined from the 20.5% gross margin in the prior period due primarily to the producer fees recognized in the prior period on "Ripley's Believe It Or Not". Without these fees, the prior period's gross margin would have been 18.5%. In Animation, CineGroupe's gross margin of 25.2% decreased compared to the gross margin of 32.1% (as restated) in the prior period due to the mix of productions delivered in each quarter. In addition, other revenue of $2.1 million was recognized in the current quarter, the majority of which related to sales of multi-media products, which did not have favorable gross margins compared to the prior period where other revenue of $1.2 million was recognized, the majority of which was sales of library products, with favorable gross margins. Studio Facilities gross margin did not vary significantly quarter-over-quarter. CineGate revenues are at a 100% gross margin due to the nature of the services provided. Distribution and marketing costs (or "P&A") of $25.4 million increased $16.7 million or 192.0% compared to $8.7 million in the prior period. Distribution and marketing costs were greater than the prior period primarily due to the advertising expenditures on the more significant theatrical titles released in the current quarter. Theatrical P&A in the current quarter of $12.1 million compares to $4.2 million in the prior period. Theatrical releases in the current quarter included: O and Songcatcher compared to the prior period's releases But I'm a Cheerleader, Jesus' Son and Eyes of Tammy Faye. Video P&A in the current quarter of $12.0 million compares to $6.6 million in the prior period due to the mix of the titles released in the current period and the prior period. It should be noted that revenues earned on videos released through our Universal output deal, which included the American Psycho video release in the prior period, are recorded net of distribution and marketing expenses. General and administration expenses of $13.0 million increased $6.2 million or 91.2% compared to $6.8 million in the prior period. General and administrative expenses increased primarily as a result of increased headcount stemming from the Trimark acquisition and the growth in production and theatrical and video distribution divisions, increased head count and the creation of an international sales department in Animation. Amortization in the current quarter of $2.1 million increased $0.4 million or 23.5% from $1.7 million in the prior period due to a $0.5 million increase in write-off of development costs and an increase of $0.2 million in capital assets amortization, partially offset by a decrease in goodwill amortization of $0.6 million as a result of the adoption of SFAS 142. Interest expense in the current quarter of $3.1 million increased $1.9 million or 158.3% compared to interest expense of $1.2 million in the prior period. The increase was primarily due to the financing of the Trimark acquisition, the assumption of Trimark's debt and the significant growth of the Company. In the current quarter a $0.6 million loss on disposal was recorded related to the demolition of the existing structure to provide room to build a new 20,500 square foot sound stage at Lions Gate Studios. 19 The gain on investment in subsidiary of $3.4 million consists of the dilution gain to the Company on $14.0 million of equity financing received from a third party in exchange for shares issued in Corporation CineGroupe. Mandalay Pictures reported its first profitable quarter since inception with net income of $0.2 million in the current quarter (net of amortization of previously capitalized pre-operating costs of $0.5 million) compared to a loss of $2.1 million in the prior period (net of amortization of previously capitalized pre-operating costs of $0.5 million). The $0.5 million non-cash equity interest in the loss of CinemaNow comprises 63% of the non-cash operating losses of CinemaNow for the three months ended September 30, 2001. CinemaNow has decreased its operating losses compared to the first quarter in the current year by over 22%. The income tax expense of $0.2 million consists of tax provisions against taxable income recorded in certain entities, partially offset by a recovery for income taxes to record the realization of future benefit of income tax loss carryforward recorded in other entities. SIX MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30, 2000 Revenue for the six months ended September 30, 2001 of $161.9 million increased $40.4 million or 33.3% compared to $121.5 million (as restated) in the same period in the prior year. We achieved significant revenue growth in all businesses - $23.6 million or 32.9% in Motion Pictures, $5.5 million or 16.3% in Television, $10.0 million or 80.6% in Animation, $0.4 million or 13.8% in Studios and $0.9 million or 128.6% in CineGate. Motion Pictures revenue of $95.3 million increased $23.6 million or 32.9% from $71.7 million (as restated) in the six months ended September 30, 2000. The increase is due primarily to the contribution from Trimark. Video revenue for the first six months of fiscal 2002 increased $16.8 million compared to the prior period. Theatrical revenue increased $2.5 million. The most significant theatrical releases year-to-date in the current year are O and Songcatcher with revenue of $8.0 million and $1.3 million, respectively, compared to American Psycho, the most significant release in the prior period with revenue of $8.1 million. Motion Pictures revenues in other media did not vary significantly. Television revenue of $39.3 million increased $5.5 million or 16.3% from $33.8 million in first six months of fiscal 2000. Deliveries in the current period included 11 one-hour episodes of "Mysterious Ways," one hour of the two one-hour pilots "Dead Zone", the television movie "Pilot's Wife" and the Avalanche project "Cabin Pressure". In the prior period seven one-hour episodes of "Higher Ground" and 11 one-hour episodes of "Mysterious Ways" were delivered. In addition, producer fees of $1.9 million were recognized in the prior period. Termite Art contributed revenue of $10.0 million compared to $5.5 million in the prior period. In the current period Termite Art delivered 39.5 hours of programming, compared to 19 hours delivered in the prior period. Trimark television contributed revenue of $2.2 million in the current period. In Animation, CineGroupe's revenue of $22.4 million increased $10.0 million or 44.6% from $12.4 million in the six months ended September 30, 2000. In the current period a total of 63.5 half-hours were delivered compared to 23 half-hours in the prior period. Studio Facilities revenue of $3.3 million increased $0.4 million or 13.8% from $2.9 million in the six months ended September 30, 2000 due to the inclusion of revenue from Eagle Creek Studios, and improved stage and office occupancy levels. 20 CineGate earned revenue of $1.6 million on approximately $268 million of production financing arranged in the current period through the CineGate joint venture. CineGate commenced operations in the second quarter of the prior year. Gross profit for the six months ended September 30, 2001 was $73.8 million with a 45.6% gross margin compared to gross profit of $48.6 million (as restated) representing a gross margin of 40.0% (as restated) for the six months ended September 30, 2000. The gross margin in Motion Pictures of 61.3% in the six months ended September 30, 2001 was favorable compared to the gross margin of 56.1% (as restated) reported in the six months ended September 30, 2000. The current period's video gross margin was positively impacted by the inclusion of Trimark's video library. The gross margin in Television of 18.5% in the six months ended September 30, 2001 was favorable compared to the gross margin of 7.3% (as restated) recognized in the prior period due to more favorable gross margins realized on deliveries in the current period. The increased gross margin in Lions Gate Television was slightly offset by an unfavorable variance in Termite Art's gross margin, which decreased to 13.9% in the current period compared to the gross margin realized in the prior period of 21.4%. In the prior period producer fees of $0.2 million on "Ripley's Believe It Or Not" increased the gross margin. In Animation, the gross margin of 21.0% was unfavorable compared to the gross margin of 28.5% (as restated) recognized in the six months ended September 30, 2000 due to the mix of programming delivered in each period, a provision for investment in films of $1.4 million recorded against multi-media projects in the current period and unfavorable gross margins realized on sales of multi-media projects in the current period. Studio Facilities gross margin did not vary significantly compared to the prior period. CineGate revenues are at a 100% gross margin due to the nature of the services provided. Distribution and marketing costs of $41.1 million increased $6.1 million or 17.4% compared to $35.0 million in the prior period due to the advertising expenditures on the more significant theatrical titles released in the current period and a substantial increase in marketing and distribution costs associated with video business attributable the acquisition of Trimark. General and administration expenses of $24.1 million increased $10.6 million or 78.5% compared to $13.5 million in the prior period due to the Trimark operations included in the current period's results and not in the comparative period's results, the growth in production and theatrical and video distribution divisions and increased head count and the creation of an international sales department in Animation. Amortization in the six months ended September 30, 2001 of $3.8 million increased $0.2 million or 5.6% from $3.6 million in the six months ended September 30, 2000 due to a $0.6 million increase in write-off of development costs and a $0.2 million increase in capital asset amortization partially offset by the cessation of goodwill amortization as a result of the adoption of SFAS 142. Interest expense in the six months ended September 30, 2001 of $6.7 million increased $4.7 million or 235.0% compared to interest expense of $2.0 million in the prior period due to the financing of the Trimark acquisition, the assumption of Trimark's debt and the significant growth of the Company. 21 The gain on dilution of investment in subsidiary of $3.4 million consists of the dilution gain to the Company on $14.0 million of equity financing received on July 10, 2001 from a third party in exchange for shares issued in Corporation CineGroupe. The $1.2 million negative non-cash equity interest in Mandalay Pictures is comprised of 100% of the operating results of Mandalay Pictures for the six months ended September 30, 2001 of $0.2 million, plus amortization of previously capitalized pre-operating period costs of $1.0 million. The $1.1 million non-cash equity interest in the loss of CinemaNow comprises 63% of the non-cash operating losses of CinemaNow for the six months ended September 30, 2001. The income tax recovery of $1.8 million consists of a recovery for income taxes to record the benefit of income tax loss carryforward recorded in certain entities, partially offset by tax provisions against taxable income recorded in other entities. LIQUIDITY AND CAPITAL RESOURCES Cash flows used in operating activities increased $53.0 million to negative $81.4 million from cash flow used in operating activities of $28.4 million (as restated) in the six months ended September 30, 2000 primarily due to the increased investment in films and television programs in progress (increased to $147.4 million at September 30, 2001 from $57.9 million at March 31, 2001). It should be noted that under SoP 00-2 addition to film and television costs is now disclosed as an operating activity in the Consolidated Statements of Cash Flows. Cash flows provided by financing activities increased $60.4 million to $73.4 million from $13.0 million (as restated) in the six months ended September 30, 2000 as a significant component of the production activity in the current quarter was financed through the US$200.0 million JP Morgan credit facility. Cash flows provided by investing activities of $11.4 million in the six months ended September 30, 2001 consisted of $14.0 million of equity financing from a third party for shares in Corporation CineGroupe, partially offset by capital asset additions. The cash flows used in investing activities in the six months ended September 30, 2000 were not significant. Our liquidity and capital resources were provided during the six months ended September 30, 2001 principally through cash generated from operations and the US$200 million "borrowing base" revolving credit facility with JP Morgan. At September 30, 2001 availability against the borrowing base totaled US$145.1 million (Cdn$229.1 million) and we had drawn US$143.7 million (Cdn$226.9 million). In addition, at September 30, 2001, we had cash of approximately $10 million. We are currently in the process of finalizing our annual library valuation and we expect that the revised library valuation will provide us with sufficient additional borrowing capacity to allow us to continue to grow our Company over the next twelve months. The nature of our business is such that significant initial expenditures are required to produce and acquire films and television programs, while revenues from these films and television programs are earned over an extended period of time after their completion and acquisition. As our operations grow, our financing requirements are expected to grow. We believe that cash flow from operations, cash on hand, credit lines available, single-purpose financing and tax shelter financing available will be adequate to meet known operational cash requirements for the future, including the funding of future film and television production, film rights acquisitions, and theatrical and video release schedules. We monitor our cash flow, interest coverage, liquidity, capital base and debt-to-total capital ratios with the long-term goal of maintaining our creditworthiness. 22 A new 20,500 square foot sound stage at Lions Gate Studios is currently under construction, expected to cost approximately $2.4 million. The financing of the construction has been provided by cash from operations and by Bank of Montreal, the current holder of the mortgages on our existing sound stages. Our current financing strategy is to finance substantially with equity at the corporate level and to leverage investment in film and television programs through operating credit facilities and single-purpose production financing. We usually obtain financing commitments, including, in some cases, funds from government incentive programs and foreign distribution commitments to cover, on average, at least 70% of the budgeted costs of a project before commencing production. Bank loans consist of a five-year revolving credit facility and demand loans bearing interest at rates not exceeding Canadian prime plus 4.0%. Production loans consist of bank demand loans bearing interest at various rates between Canadian prime and 9.25%. Long-term debt consists primarily of mortgages on the Studio Facility at interest rates ranging from 6.63% to 7.51%, convertible promissory notes bearing interest at a rate of 6% and non-interest bearing sales guarantees with respect to the German tax shelter financings. Our 5.25% convertible, non-voting redeemable Series A preferred shares are entitled to cumulative dividends, as and when declared by the Board of Directors, payable semi-annually on the last day of March and September of each year. The Company has the option of paying such dividends either in cash or additional preferred shares. We do not pay and do not intend to pay dividends on common shares, giving consideration to our business strategy and investment opportunities. We believe it to be in the best interest of shareholders to invest all available cash in the expansion of our business. RISKS AND UNCERTAINTIES We capitalize costs of production to investment in films and television programs. These costs are amortized to direct operating expenses in accordance with SoP 00-2. Under SoP 00-2, costs incurred in connection with an individual film or television program, including production and financing costs, are capitalized to investment in film and television programs. These costs are stated at the lower of unamortized film or television program costs and fair value. These costs for an individual film or television program are amortized in the proportion that current period actual revenue realized relates to management's estimates of the total revenue expected to be received from such film or television program over a period not to exceed ten years from the date of delivery. As a result, if revenue estimates change with respect to a film or television program, we may be required to write down all or a portion of the unamortized costs of such film or television program. No assurance can be given that unfavorable changes to revenue estimates will not occur, resulting in significant write-downs affecting our results of operations and financial condition. We currently finance a portion of our production budgets from third parties, from Canadian government agencies and incentive programs as well as international sources in the case of our co-productions, and from German tax shelter arrangements. There can be no assurance that third party financing, government incentive programs and German tax shelter arrangements will not be reduced, amended or eliminated. Any change in these programs may have an adverse impact on our financial condition. Revenue is driven by audience acceptance of a film or television program, which represents a response not only to artistic merits but also to critics' reviews, marketing and the competitive market for entertainment, general economic conditions, and other intangible factors, all of which can change rapidly. Actual production costs may exceed budgets. Risk of labor disputes, disability of a star performer, rapid changes in production technology, shortage of necessary equipment and locations or adverse weather 23 conditions may cause cost overruns. We generally maintain insurance policies ("completion bonds" and "essential elements insurance" on key talent) mitigating certain of these risks. Profitability depends on revenue and on the cost to acquire or produce a film or television program and the amount spent on the prints and advertising campaign used to promote it. Results of operations for any period are significantly dependent on the timing and number of films or television programs produced and released in that period. Our operating results may fluctuate materially from period to period, and the results for any one period are not necessarily indicative of results for future periods. Our five-year revolving operating credit facilities are either alternate base rate loans or Eurodollar loans as we may request. Significant increases in the base interest rates could have an unfavorable impact on us, and vice versa. CURRENCY RISK MANAGEMENT Additionally, as part of our overall risk management program, we evaluate and manage our exposure to changes in interest rates and currency exchange risks on an ongoing basis. Hedges and derivative financial instruments may be used in the future, within guidelines to be approved by the Board of Directors for counterparty exposure, limits and hedging practices, in order to manage our interest rate and currency exposure. Our principal currency exposure is between Canadian and U.S. dollars, although this exposure is significantly mitigated through the structuring of the US$200 million revolving credit facility as two separate facilities - a US$25 million Canadian dollar facility and a US$175 million U.S. dollar credit facility. Each facility is borrowed and repaid in the respective country of origin, in local currency. From time to time the Company may experience currency exposure on distribution and production revenues and expenses from foreign countries. From time to time the Company may enter into financial derivative contracts to hedge such exposure. The Company has no intention of entering into derivative contracts other than to hedge a specific financial risk. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risks relating to our operations result primarily from changes in interest rates and changes in foreign currency exchange rates. Our exposure to interest rate risk results from the financial debt instruments that arise from transactions entered into during the normal course of business. Debt. We are exposed to cash flow risk due to changes in market interest rates related to our outstanding debt. For example, our credit facilities and some of our long-term debt bears interest on borrowings outstanding at various time intervals and at market rates based on either the Canadian prime rate or the U.S. prime rate, plus a margin ranging from 1.2% to 4.0%. Our principal risk with respect to our long-term debt is changes in these market rates. The table below presents principal cash flows and related weighted average interest rates for our credit facilities and long-term debt obligations at September 30, 2001 by expected maturity date. 24 Expected Maturity Date -------------------------------------------------------------------------------- 2001 2002 2003 2004 2005 2006 ---- ---- ---- ---- ---- ---- (Amounts in thousands of Canadian dollars) CREDIT FACILITIES: Variable (1) $ 39,579 -- -- -- -- -- Variable (2) $189,000 -- -- -- -- -- LONG-TERM DEBT: Fixed (3) $ 36,163 $ 551 $ 1,156 $ 32,249 $ 143 $ 2,064 Fixed (4) $ 25,791 -- -- $ 25,791 -- -- Variable (5) $ 35,526 $ 33,361 $ 21 $ 1,162 $ 983 -- (1) Variable interest rate equal to Canadian Prime plus 1.53%. (2) Variable interest rate equal to U.S. Prime plus 0.6%. US$119.7 million. (3) Fixed interest rate equal to 6.37%. (4) Non interest-bearing. US$16.2 million. (5) Variable interest rate equal to Canadian Prime plus 1.32%. Foreign Currency. We incur certain operating and production costs in foreign currencies and are subject to market risks resulting from fluctuations in foreign currency exchange rates. In certain instances, we enter into foreign currency exchange contracts in order to reduce exposure to changes in foreign currency exchange rates that affect the value of our firm commitments and certain anticipated foreign currency cash flows. We currently intend to continue to enter into such contracts to hedge against future material foreign currency exchange rate risks. 25 PART II ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS. On September 12, 2001, the Company held its annual meeting of shareholders. Below is a summary of the matters voted on at the meeting. An election of directors was held with the following persons being elected directors: ----------------------------------------------------------------------------- Name Votes For Votes Withheld ----------------------------------------------------------------------------- Michael Burns 28,528,865 234,664 ----------------------------------------------------------------------------- Drew Craig 28,528,865 234,664 ----------------------------------------------------------------------------- Arthur Evrensel 28,528,865 234,664 ----------------------------------------------------------------------------- Jon Feltheimer 28,528,865 234,664 ----------------------------------------------------------------------------- Frank Giustra 28,528,865 234,664 ----------------------------------------------------------------------------- Joe Houssian 28,528,865 234,664 ----------------------------------------------------------------------------- Gordon Keep 28,528,865 234,664 ----------------------------------------------------------------------------- Morley Koffman 28,528,865 234,664 ----------------------------------------------------------------------------- Patrick Lavelle 28,528,865 234,664 ----------------------------------------------------------------------------- Andre Link 28,528,865 234,664 ----------------------------------------------------------------------------- Harald Ludwig 28,528,865 234,664 ----------------------------------------------------------------------------- Laurie May 28,528,865 234,664 ----------------------------------------------------------------------------- G. Scott Paterson 28,528,865 234,664 ----------------------------------------------------------------------------- E. Duff Scott 28,528,865 234,664 ----------------------------------------------------------------------------- Other matters voted upon and approved at the meeting, and the number of votes cast with respect to each matter were as follows: ------------------------------------------------------------------------------------------------------------------ Matter Votes For Votes Against Abstaining ------------------------------------------------------------------------------------------------------------------ 1. To approve a resolution to amend the Company's 27,840,639 796,835 110,812 articles to change the size of the Board of Directors to up to eighteen directors. ------------------------------------------------------------------------------------------------------------------ 2. To approve a resolution to increase the number of 26,470,811 2,183,821 104,454 common shares reserved for issuance under the Company's Employees' and Directors' Equity Incentive Plan by 722,916 common shares. ------------------------------------------------------------------------------------------------------------------ 3. To approve a resolution to authorize the Company to 9,675,033 6,043,869 186,514 enter into one or more private placement transactions during the 12 month period following adoption of the resolution for the issuance of up to an additional 20,000,000 common shares or other securities convertible into a maximum of 20,000,000 common shares. ------------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------- ------------------ ----------------- Matter Votes For Abstaining --------------------------------------------------------------- ------------------ ----------------- 4. To approve the appointment of Ernst & Young LLP as 28,628,043 39,489 the Company's auditors for fiscal 2002. --------------------------------------------------------------- ------------------ ----------------- 26 The Company's Series A and Series B shareholders unanimously approved a resolution to amend the Company's articles to change the size of the Board of Directors to up to eighteen directors. The Series B preferred shareholder, Mark Amin, elected himself as a director. The Series A preferred shareholders unanimously elected Herbert Kloiber, Howard Knight and Harry Sloan as directors. ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Exhibits filed for Lions Gate through the filing of this Form 10-Q. Exhibit Number Description of Documents ---------- ------------------------------------------------------------------- 3.1* Articles of Incorporation.......................................... 3.2** Amendment to Articles of Incorporation to Provide Terms of the Series A Preferred Shares dated as of December 20, 1999............ 3.3*** Amendment to Articles of Incorporation to Provide Terms of the Series B Preferred Shares dated as of September 26, 2000........... 3.4*** Amendment to Articles of Incorporation to change the size of the Board of Directors dated as of September 26, 2000.................. 3.5 Amendment to Articles of Incorporation to change the size of the Board of Directors dated as of September 12, 2001.................. 4.1* Trust Indenture between the Company and CIBC Mellon Trust Company dated as of April 15, 1998......................................... 4.2** Warrant Indenture between the Company and CIBC Mellon Trust Company dated as of December 30, 1999...................................... ---------------------------- * Incorporated by reference to the Company's Annual Report on Form 20-F for the fiscal year ended March 31, 1998 (File No. 000-27730). ** Incorporated by reference to the Company's Annual Report on Form 20-F for the fiscal year ended March 31, 2000 (File No. 000-27730). *** Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2001 (File No. 1-14880). (b) Reports on Form 8-K (i) On August 3, 2001, the Company filed a report on Form 8-K regarding a change in its certifying accountant. (ii) On August 10, 2001, the Company filed a report on Form 8-K/A regarding a change in its certifying accountant. (iii) On September 4, 2001, the Company filed a report on Form 8-K/A regarding a change in its certifying accountant. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LIONS GATE ENTERTAINMENT CORP. DATE: November 14, 2001 By: /s/Marni Wieshofer ---------------------------------- Marni Wieshofer Chief Financial Officer 28 INDEX TO EXHIBITS Exhibit Number Description of Documents ---------- ------------------------------------------------------------------- 3.1* Articles of Incorporation.......................................... 3.2** Amendment to Articles of Incorporation to Provide Terms of the Series A Preferred Shares dated as of December 20, 1999............ 3.3*** Amendment to Articles of Incorporation to Provide Terms of the Series B Preferred Shares dated as of September 26, 2000........... 3.4*** Amendment to Articles of Incorporation to change the size of the Board of Directors dated as of September 26, 2000.................. 3.5 Amendment to Articles of Incorporation to change the size of the Board of Directors dated as of September 12, 2001.................. 4.1* Trust Indenture between the Company and CIBC Mellon Trust Company dated as of April 15, 1998......................................... 4.2** Warrant Indenture between the Company and CIBC Mellon Trust Company dated as of December 30, 1999...................................... * Incorporated by reference to the Company's Annual Report on Form 20-F for the fiscal year ended March 31, 1998 (File No. 000-27730). ** Incorporated by reference to the Company's Annual Report on Form 20-F for the fiscal year ended March 31, 2000 (File No. 000-27730). *** Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2001 (File No. 1-14880). 29