e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
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For the quarterly period ended
June 30, 2006
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or
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File No.: 1-14880
Lions Gate Entertainment
Corp.
(Exact name of registrant as
specified in its charter)
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|
British Columbia,
Canada
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N/A
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(State or other jurisdiction
of
incorporation or organization)
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|
(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)
(604) 721-0719
(Registrants 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, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer þ
Accelerated
Filer o Non-accelerated
Filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
|
|
|
Title of Each Class
|
|
Outstanding at August 1, 2006
|
|
Common Stock, no par value per
share
|
|
104,632,663 shares
|
TABLE OF
CONTENTS
FORWARD-LOOKING
STATEMENTS
This report contains forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. In some cases you can identify forward-looking
statements by terms such as may, intend,
will, could, would,
expects, believe, estimate,
or the negative of these terms, and similar expressions intended
to identify forward-looking statements.
These forward-looking statements reflect our current views with
respect to future events and are based on assumptions and are
subject to risks and uncertainties. Also, these forward-looking
statements present our estimates and assumptions only as of the
date of this report. Except for our ongoing obligation to
disclose material information as required by federal securities
laws, we do not intend to update you concerning any future
revisions to any forward-looking statements to reflect events or
circumstances occurring after the date of this report.
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 under the heading Risk Factors in our
Annual Report on
Form 10-K
filed with the Securities and Exchange Commission
(SEC) on June 14, 2006, which risk factors are
incorporated herein by reference.
2
PART I
FINANCIAL INFORMATION
|
|
Item 1.
|
Financial
Statements.
|
LIONS
GATE ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
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|
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June 30,
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March 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Note 2)
|
|
|
|
(Amounts in thousands, except share amounts)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
54,858
|
|
|
$
|
46,978
|
|
Restricted cash
|
|
|
736
|
|
|
|
820
|
|
Investments auction
rate securities
|
|
|
142,107
|
|
|
|
167,081
|
|
Investments equity
securities
|
|
|
14,556
|
|
|
|
14,921
|
|
Accounts receivable, net of
reserve for video returns and allowances of $72,740
(March 31, 2006 $73,366) and provision for
doubtful accounts of $8,692 (March 31, 2006
$10,934)
|
|
|
90,801
|
|
|
|
182,659
|
|
Investment in films and television
programs
|
|
|
445,888
|
|
|
|
417,750
|
|
Property and equipment
|
|
|
8,509
|
|
|
|
7,218
|
|
Goodwill
|
|
|
185,517
|
|
|
|
185,117
|
|
Other assets
|
|
|
25,534
|
|
|
|
30,705
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
968,506
|
|
|
$
|
1,053,249
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Accounts payable and accrued
liabilities
|
|
$
|
121,113
|
|
|
$
|
188,793
|
|
Unpresented bank drafts
|
|
|
|
|
|
|
14,772
|
|
Film obligations
|
|
|
275,405
|
|
|
|
284,987
|
|
Subordinated notes
|
|
|
385,000
|
|
|
|
385,000
|
|
Deferred revenue
|
|
|
38,789
|
|
|
|
30,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
820,307
|
|
|
|
903,979
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS
EQUITY
|
Common shares, no par value,
500,000,000 shares authorized, 104,632,164 at June 30,
2006 and 104,422,765 at March 31, 2006 shares issued
and outstanding
|
|
|
331,246
|
|
|
|
328,771
|
|
Series B preferred shares
(10 shares issued and outstanding)
|
|
|
|
|
|
|
|
|
Restricted share units
|
|
|
|
|
|
|
5,178
|
|
Unearned compensation
|
|
|
|
|
|
|
(4,032
|
)
|
Accumulated deficit
|
|
|
(180,734
|
)
|
|
|
(177,130
|
)
|
Accumulated other comprehensive
loss
|
|
|
(2,313
|
)
|
|
|
(3,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
148,199
|
|
|
|
149,270
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
968,506
|
|
|
$
|
1,053,249
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
3
LIONS
GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands, except per share amounts)
|
|
|
Revenues
|
|
$
|
172,456
|
|
|
$
|
194,229
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Direct operating
|
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|
68,545
|
|
|
|
100,264
|
|
Distribution and marketing
|
|
|
87,046
|
|
|
|
93,481
|
|
General and administration
|
|
|
19,233
|
|
|
|
17,329
|
|
Depreciation
|
|
|
544
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
175,368
|
|
|
|
211,822
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(2,912
|
)
|
|
|
(17,593
|
)
|
|
|
|
|
|
|
|
|
|
Other Expense
(Income):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
4,676
|
|
|
|
4,884
|
|
Interest rate swaps
mark-to-market
|
|
|
|
|
|
|
337
|
|
Interest income
|
|
|
(2,561
|
)
|
|
|
(1,065
|
)
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
2,115
|
|
|
|
4,156
|
|
|
|
|
|
|
|
|
|
|
Loss Before Equity Interests
and Income Taxes
|
|
|
(5,027
|
)
|
|
|
(21,749
|
)
|
Equity interests
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Income
Taxes
|
|
|
(4,969
|
)
|
|
|
(21,749
|
)
|
Income tax provision (benefit)
|
|
|
(1,365
|
)
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,604
|
)
|
|
$
|
(21,819
|
)
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Loss Per
Common Share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
LIONS
GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B
|
|
|
Restricted
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
Other
|
|
|
|
|
|
|
Common Shares
|
|
|
Preferred Shares
|
|
|
Share
|
|
|
Unearned
|
|
|
Accumulated
|
|
|
Income
|
|
|
Comprehensive
|
|
|
|
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Units
|
|
|
Compensation
|
|
|
Deficit
|
|
|
(Loss)
|
|
|
Loss
|
|
|
Total
|
|
|
|
(Amounts in thousands, except share amounts)
|
|
|
Balance at March 31, 2005
|
|
|
101,843,708
|
|
|
$
|
305,662
|
|
|
|
10
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(183,226
|
)
|
|
|
|
|
|
$
|
(5,297
|
)
|
|
$
|
117,139
|
|
Exercise of stock options
|
|
|
361,310
|
|
|
|
1,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,408
|
|
Issuance to directors for services
|
|
|
20,408
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203
|
|
Impact of previously modified stock
options
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Issuance of common shares in
connection with acquisition of film assets
|
|
|
399,042
|
|
|
|
3,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,775
|
|
Issuance of common shares in
connection with acquisition of common shares of Image
Entertainment
|
|
|
1,104,004
|
|
|
|
11,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,537
|
|
Issuance of common shares in
connection with acquisition of Redbus
|
|
|
643,460
|
|
|
|
5,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,643
|
|
Issuance of restricted share units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,694
|
|
|
|
(5,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted share
units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,662
|
|
Vesting of restricted share units
|
|
|
50,833
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
(516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,096
|
|
|
|
6,096
|
|
|
|
|
|
|
|
6,096
|
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,223
|
|
|
|
2,223
|
|
|
|
2,223
|
|
Net unrealized loss on foreign
exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(356
|
)
|
|
|
(356
|
)
|
|
|
(356
|
)
|
Unrealized loss on
investments available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87
|
)
|
|
|
(87
|
)
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006
|
|
|
104,422,765
|
|
|
$
|
328,771
|
|
|
|
10
|
|
|
$
|
|
|
|
$
|
5,178
|
|
|
$
|
(4,032
|
)
|
|
$
|
(177,130
|
)
|
|
|
|
|
|
$
|
(3,517
|
)
|
|
$
|
149,270
|
|
Reclassification of unearned
compensation and restricted share common units upon adoption of
SFAS No. 123(R)
|
|
|
|
|
|
|
1,146
|
|
|
|
|
|
|
|
|
|
|
|
(5,178
|
)
|
|
|
4,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
123,633
|
|
|
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
355
|
|
Vesting of restricted share units
|
|
|
85,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
974
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,604
|
)
|
|
|
(3,604
|
)
|
|
|
|
|
|
|
(3,604
|
)
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,550
|
|
|
|
1,550
|
|
|
|
1,550
|
|
Net unrealized gain on foreign
exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
17
|
|
|
|
17
|
|
Unrealized loss on
investments available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(363
|
)
|
|
|
(363
|
)
|
|
|
(363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006
|
|
|
104,632,164
|
|
|
$
|
331,246
|
|
|
|
10
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(180,734
|
)
|
|
|
|
|
|
$
|
(2,313
|
)
|
|
$
|
148,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
LIONS
GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,604
|
)
|
|
$
|
(21,819
|
)
|
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
Depreciation of property and
equipment
|
|
|
544
|
|
|
|
748
|
|
Amortization of deferred financing
costs
|
|
|
975
|
|
|
|
898
|
|
Amortization of films and
television programs
|
|
|
33,193
|
|
|
|
65,376
|
|
Amortization of intangible assets
|
|
|
244
|
|
|
|
548
|
|
Non-cash stock-based compensation
|
|
|
974
|
|
|
|
89
|
|
Interest rate swaps
mark-to-market
|
|
|
|
|
|
|
337
|
|
Equity interests
|
|
|
(58
|
)
|
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
84
|
|
|
|
1,945
|
|
Accounts receivable, net
|
|
|
93,013
|
|
|
|
40,774
|
|
Increase in investment in films
and television programs
|
|
|
(60,439
|
)
|
|
|
(69,195
|
)
|
Other assets
|
|
|
4,717
|
|
|
|
(140
|
)
|
Accounts payable and accrued
liabilities
|
|
|
(68,278
|
)
|
|
|
(588
|
)
|
Unpresented bank drafts
|
|
|
(14,772
|
)
|
|
|
9,702
|
|
Film obligations
|
|
|
(9,936
|
)
|
|
|
15,247
|
|
Deferred revenue
|
|
|
8,319
|
|
|
|
(13,755
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Flows Provided By
(Used In) Operating Activities
|
|
|
(15,024
|
)
|
|
|
30,167
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of
investments auction rate securities
|
|
|
(165,620
|
)
|
|
|
|
|
Sales of investments
auction rate securities
|
|
|
190,594
|
|
|
|
|
|
Cash received from sale of
investment
|
|
|
|
|
|
|
2,011
|
|
Purchases of property and equipment
|
|
|
(1,831
|
)
|
|
|
(629
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Flows Provided By
Investing Activities
|
|
|
23,143
|
|
|
|
1,382
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Issuance of common shares
|
|
|
353
|
|
|
|
61
|
|
Repayment of subordinated notes
|
|
|
|
|
|
|
(5,000
|
)
|
Repayment of mortgages payable
|
|
|
|
|
|
|
(285
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Flows Provided By
(Used In) Financing Activities
|
|
|
353
|
|
|
|
(5,224
|
)
|
|
|
|
|
|
|
|
|
|
Net Change In Cash And Cash
Equivalents
|
|
|
8,472
|
|
|
|
26,325
|
|
Foreign Exchange Effects on
Cash
|
|
|
(592
|
)
|
|
|
(892
|
)
|
Cash and Cash
Equivalents Beginning Of Period
|
|
|
46,978
|
|
|
|
112,839
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash
Equivalents End Of Period
|
|
$
|
54,858
|
|
|
$
|
138,272
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Lions Gate Entertainment Corp. (the Company,
Lionsgate, us or our) is a
diversified independent producer and distributor of motion
pictures, television programming, home entertainment,
video-on-demand
and music content. The Company also acquires distribution rights
from a wide variety of studios, production companies and
independent producers. On December 15, 2003, the Company
acquired Film Holdings Co., the parent company of Artisan
Entertainment Inc. (Artisan) and on October 17,
2005, the Company acquired the Redbus companies as described in
note 8.
|
|
2.
|
Basis of
Presentation and Use of Estimates
|
The accompanying unaudited condensed consolidated financial
statements include the accounts of Lionsgate and all of its
majority-owned and controlled subsidiaries and consolidated
variable interest entities, with a provision for minority
interests.
The unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with accounting
principles generally accepted in the United States
(U.S. GAAP).
The unaudited condensed consolidated financial statements have
been prepared in accordance with U.S. GAAP for interim
financial information and the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by U.S. GAAP for complete financial
statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been reflected in these
unaudited condensed consolidated financial statements. Operating
results for the three months ended June 30, 2006 are not
necessarily indicative of the results that may be expected for
the fiscal year ended March 31, 2007. The balance sheet at
March 31, 2006 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, 2006.
Certain amounts presented for fiscal 2006 have been reclassified
to conform to the fiscal 2007 presentation.
The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. The
most significant estimates made by management in the preparation
of the financial statements relate to ultimate revenue and costs
for investment in films and television programs; estimates of
sales returns, provision for doubtful accounts, fair value of
assets and liabilities for allocation of the purchase price of
companies acquired, income taxes and accruals for contingent
liabilities; and impairment assessments for investment in films
and television programs, property and equipment, goodwill and
intangible assets. Actual results could differ from such
estimates.
Investments
Investments classified as
available-for-sale
are reported at fair value based on quoted market prices, with
unrealized gains and losses excluded from earnings and reported
as other comprehensive income or loss (see note 10). The
cost of investments sold is determined in accordance with the
specific identification method and
7
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
realized gains and losses are included in interest income. As of
June 30, 2006, the cost, unrealized losses and carrying
value of the Companys
available-for-sale
investments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
Holding
|
|
|
Carrying
|
|
|
|
Cost
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Amounts in thousands)
|
|
|
Auction Rate
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate preferred stock
|
|
$
|
34,331
|
|
|
$
|
|
|
|
$
|
34,331
|
|
Auction rate notes
|
|
|
107,776
|
|
|
|
|
|
|
|
107,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,107
|
|
|
|
|
|
|
|
142,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
15,008
|
|
|
|
(452
|
)
|
|
|
14,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
157,115
|
|
|
$
|
(452
|
)
|
|
$
|
156,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended March 31, 2006, the Company began
investing in auction rate preferred stock and auction rate notes
(collectively, the auction rate preferreds). Auction
rate preferred stock is preferred stock with a dividend rate
determined periodically, typically less than every 90 days,
based on an auction mechanism. Auction rate notes are debt
instruments. The interest rate for the auction rate notes will
adjust to current market rates at each interest reset date,
typically every seven, 28 or 35 days. The interest rates
are impacted by various factors, including credit risk, tax
risk, general market interest rate risk and other factors.
Auction rate preferreds do not meet the definition of a cash
equivalent since they do not have scheduled maturities of less
than 90 days from investment. The Companys investment
in auction rate preferreds as of June 30, 2006 are invested
in securities rated as AAA.
Equity securities are comprised of the Companys investment
in the common shares of Image Entertainment, Inc.
(Image), a distributor of DVDs and entertainment
programming. During the year ended March 31, 2006, the
Company purchased in the open market 1,150,000 common shares of
Image for $3.5 million in cash, representing an average
cost per share of $3.02. Also during the year ended
March 31, 2006 the Company completed a negotiated exchange
with certain shareholders of Image in which the Company
exchanged 1,104,004 of its common shares (at $10.45 per
share) in return for 2,883,996 common shares of Image (at
$4.00 per share). The cost on an exchanged basis of the
additional 2,883,996 common shares of Image is
$11.5 million. As of June 30, 2006 and March 31,
2006, the Company held 4,033,996 common shares of Image acquired
at an average cost per share of $3.72; the shares held by the
Company represent approximately 18.9% of Images
outstanding common shares as of July 31, 2006. The closing
price of Images common shares on June 30, 2006 was
$3.61 per common share (March 31,
2006 $3.70 per common share). As a result,
the Company had unrealized losses of $0.5 million and
$0.1 million on its investment in Image common shares as of
June 30, 2006 and March 31, 2006, respectively. The
Company has reported the unrealized losses $0.5 million and
$0.1 million as other comprehensive loss in the condensed
consolidated statement of shareholders equity as of
June 30, 2006 and March 31, 2006, respectively.
Recent
Accounting Pronouncements
Statement of Financial Accounting Standards
No. 123R. In December 2004, the FASB issued
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123(R)). SFAS 123(R) revises
SFAS No. 123 and eliminates the alternative to use the
intrinsic method of accounting under APB No. 25.
SFAS 123(R) requires all public companies accounting for
share-based payment transactions in which an enterprise receives
employee services in exchange for (a) equity instruments of
the enterprise or (b) liabilities that are based on the
fair value of the enterprises equity instruments or that
may be settled by the issuance of such equity instruments, to
account for these types of
8
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
transactions using a
fair-value-based
method. Effective April 1, 2006, the Company adopted the
fair value recognition provisions of FASB Statement
No. 123(R), Share-Based Payment,
(SFAS No. 123(R)) using the modified-prospective
transition method. Under such transition method, compensation
cost recognized in the three months ended June 30, 2006
includes: (a) compensation cost for all stock options
granted prior to, but not yet vested as of April 1, 2006,
based on the grant date fair value estimated in accordance with
the original provisions of SFAS No. 123, and
(b) compensation cost for all share-based payments granted
on or after April 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of
SFAS No. 123(R). See note 12 for further
discussion of the Companys stock-based compensation in
accordance with SFAS 123(R).
Statement of Financial Accounting Standards Staff Position
115-1. In March 2004, the FASB ratified the
measurement and recognition guidance and certain disclosure
requirements for impaired securities as described in EITF Issue
No. 03-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments. In
November 2005, the FASB issued FASB Staff Position
SFAS 115-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments
(the FSP). The FSP nullifies certain requirements of
EITF
Issue 03-1
and supersedes EITF Topic D-44, Recognition of
Other-Than-Temporary
Impairment upon the Planned Sale of a Security Whose Cost
Exceeds Fair Value. The FSP addresses the determination as
to when an investment is considered impaired, whether that
impairment is
other-than-temporary,
and the measurement of an impairment loss. The FSP also includes
accounting considerations subsequent to the recognition of an
other-than-temporary
impairment and requires certain disclosures about unrealized
losses that have not been recognized as other-than temporary
impairments. The FSP was effective for reporting periods
beginning after December 15, 2005. The adoption of the FSP
did not have a material effect on the Companys results of
operations, financial position or cash flows.
Statement of Financial Accounting Standards
No. 154. In May 2005, the FASB issued
SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of Accounting Principles Board
Opinion No. 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements (SFAS 154).
SFAS 154 changes the requirements for the accounting for,
and reporting of, a change in accounting principle (including
voluntary changes). Previously, changes in accounting principles
were generally required to be recognized by way of a cumulative
effect adjustment within net income during the period of the
change. SFAS 154 requires retrospective application to
prior periods financial statements, unless it is
impracticable to determine either the period-specific effects or
the cumulative effect of the change. SFAS 154 is effective
for accounting changes made in fiscal years beginning after
December 15, 2005; however, the statement does not change
the transition provisions of any existing accounting
pronouncements. The Company adopted this pronouncement beginning
in the quarterly period ended June 30, 2006. The adoption
of SFAS 154 did not have a material effect on the
Companys results of operations, financial position or cash
flows.
EITF Issue
No. 04-8. During
the year ended March 31, 2005, the Company adopted EITF
Issue
No. 04-8
The Effect of Contingently Convertible Debt on Diluted
Earnings Per Share, which applied to reporting periods
ending after the effective date of December 15, 2004. Under
EITF Issue
No. 04-8,
all instruments that have embedded conversion features that are
contingent on market conditions indexed to an issuers
share price are included in diluted earnings per share
computations (if dilutive) regardless of whether the market
conditions have been met. On October 4, 2004, Lions Gate
Entertainment Inc., a wholly owned subsidiary of the Company,
sold $150.0 million of 2.9375% Convertible Senior
Subordinated Notes (2.9375% Notes) with a
maturity date of October 15, 2024. 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 Lions Gate Entertainment
Corp., and therefore the 2.9375% Notes would be included in
diluted earnings per share computations for the three months
ended June 30, 2006 and 2005 (if dilutive).
Variable Interest Entities. In January 2003,
the FASB issued FIN 46, which is effective for financial
statements of public companies that have special purpose
entities for periods ending after December 15, 2003 and for
public companies without special purpose entities for periods
ending after March 15, 2004. The standard
9
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
establishes criteria to identify Variable Interest Entities
(VIEs) and the primary beneficiary of such entities.
An entity that qualifies as a VIE must be consolidated by its
primary beneficiary. As of June 30, 2006 and March 31,
2006, the Company did not have any such special purpose entities.
|
|
3.
|
Investment
in Films and Television Programs
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
|
(Amounts in thousands)
|
|
|
Theatrical and Non-Theatrical
Films
|
|
|
|
|
|
|
|
|
Released, net of accumulated
amortization
|
|
$
|
148,811
|
|
|
$
|
154,574
|
|
Acquired libraries, net of
accumulated amortization
|
|
|
102,906
|
|
|
|
105,144
|
|
Completed and not released
|
|
|
16,712
|
|
|
|
30,444
|
|
In progress
|
|
|
83,670
|
|
|
|
47,487
|
|
In development
|
|
|
3,070
|
|
|
|
3,104
|
|
Product inventory
|
|
|
26,791
|
|
|
|
28,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
381,960
|
|
|
|
368,932
|
|
|
|
|
|
|
|
|
|
|
Direct-to-Television
Programs
|
|
|
|
|
|
|
|
|
Released, net of accumulated
amortization
|
|
|
33,801
|
|
|
|
36,003
|
|
In progress
|
|
|
29,681
|
|
|
|
12,311
|
|
In development
|
|
|
446
|
|
|
|
504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,928
|
|
|
|
48,818
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
445,888
|
|
|
$
|
417,750
|
|
|
|
|
|
|
|
|
|
|
Acquired libraries of $102.9 million at June 30, 2006
(March 31, 2006 $105.1 million) include
the Trimark library acquired October 2000, the Artisan library
acquired December 2003 (refer to note 8), the Modern
Entertainment, Ltd. (Modern) library acquired in
August 2005 and the Redbus library acquired in October 2005
(refer to note 8). On August 17, 2005, the Company
acquired certain of the film assets and accounts receivable of
Modern, a licensor of film rights to DVD distributors,
broadcasters and cable networks for total consideration of
$7.3 million, comprised of $3.5 million in cash and
399,042 shares of the Companys common shares valued
at $3.8 million. In addition, the Company recorded
$0.2 million in direct transaction costs comprised
primarily of legal costs incurred in connection with the
purchased assets. The allocation of the Modern purchase price to
the assets acquired was $5.3 million to investment in films
and television programs and $2.2 million to accounts
receivable. The Trimark library is amortized over its expected
revenue stream for a period of 20 years from the
acquisition date. The remaining amortization period on the
Trimark library at June 30, 2006 is 14.25 years on
unamortized costs of $18.2 million. The Artisan library
includes titles released at least three years prior to the date
of acquisition and is amortized over its expected revenue stream
for a period of 20 years from the date of acquisition. The
remaining amortization period on the Artisan library at
June 30, 2006 is 17.5 years on unamortized costs of
$77.5 million. The Modern library is amortized over its
expected revenue stream for a period of 20 years from the
acquisition date. The remaining amortization period on the
Modern library at June 30, 2006 is 19.0 years on
unamortized costs of $5.1 million. The Redbus library
includes titles released at least three years prior to the date
of acquisition and is amortized over its expected revenue stream
for a period of 20 years from the date of acquisition. The
remaining amortization period on the Redbus library at
June 30, 2006 is 19.25 years on unamortized costs of
$2.2 million.
The Company expects approximately 43% of completed films and
television programs, net of accumulated amortization, will be
amortized during the one-year period ending June 30, 2007.
Additionally, the Company
10
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
expects approximately 80% of completed and released films and
television programs, net of accumulated amortization and
excluding acquired libraries, will be amortized during the
three-year period ending June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
|
(Amounts in thousands)
|
|
|
Deferred financing costs, net of
accumulated amortization
|
|
$
|
14,896
|
|
|
$
|
15,626
|
|
Prepaid expenses and other
|
|
|
9,404
|
|
|
|
13,037
|
|
Intangible assets, net
|
|
|
1,234
|
|
|
|
1,478
|
|
Deferred print costs
|
|
|
|
|
|
|
564
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,534
|
|
|
$
|
30,705
|
|
|
|
|
|
|
|
|
|
|
Deferred Financing Costs. Deferred financing
costs primarily include costs incurred in connection with the
credit facility (see note 5) and the issuance of the
4.875% Notes, the 2.9375% Notes and the
3.625% Notes (see note 7) that are deferred and
amortized to interest expense.
Intangible Assets. Intangible assets represent
distribution and personal service agreements amortized over a
period of two to four years from the date of acquisition and
publishing rights that are amortized over a three-year period
from the date of acquisition. Amortization expense of
$0.2 million was recorded for the three months ended
June 30, 2006 (2005 $0.5 million).
Other
Investments.
Maple: On April 8, 2005, Lionsgate
entered into library and output agreements with Maple Pictures,
a Canadian corporation, for the distribution of Lionsgates
motion picture, television and home video product in Canada. As
part of this transaction, Maple Pictures purchased a majority of
the Companys interest in Christal Distribution, a number
of production entities and other Lionsgate distribution assets
in Canada. Maple Pictures was formed by two former Lionsgate
executives and a third-party equity investor. Lionsgate also
acquired and currently owns a 10% minority interest in Maple
Pictures.
As a result of these transactions with Maple Pictures, Lionsgate
recorded an investment in Maple Pictures of $2.1 million in
other assets in the consolidated balance sheet. The Company is
accounting for the investment in Maple Pictures using the equity
method. For the three months ended June 30, 2006, a gain of
$0.1 million is recorded in equity interests in the
consolidated statements of operations and the investment in
Maple Pictures is $2.1 million as of June 30, 2006
(March 31, 2006 $2.0 million).
Christal: On April 13, 2005, Maple
Pictures Corp. purchased a majority of the Companys
interest in Christal Films Distribution Inc.
(Christal), a film distributor and sub-distributor
in Quebec, Canada. Also on April 13, 2005, Christal
repurchased the Companys remaining interest in Christal
and therefore beginning April 2005, Christal is no longer being
consolidated by the Company. The divestiture of the
Companys interest in Christal was not material to our
consolidated financial statements.
CinemaNow: At March 31, 2006, the Company
had a 30% equity interest on an undiluted basis in CinemaNow,
Inc. (CinemaNow). The investment in CinemaNow was
accounted for using the equity method. The investment in
CinemaNow was nil at March 31, 2006. In June 2006, the
Company purchased $1.0 million Series E Preferred
Stock as part of an $20.3 million round of financing
secured by CinemaNow. At June 30, 2006, the Companys
equity interest in CinemaNow is 18.8% on a fully diluted basis
and 21.1% on an undiluted basis.
11
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
At June 30, 2006, the Company had a $215 million
revolving line of credit, of which $10 million is available
for borrowing by the new Redbus subsidiaries in either
U.S. dollars or British pounds sterling. At June 30,
2006, the Company had no borrowings (March 31,
2006 nil) under the credit facility. The credit
facility expires December 31, 2008 and bears interest at
2.75% over the Adjusted LIBOR or the Canadian
Bankers Acceptance rate (as defined in the credit
facility), or 1.75% over the U.S. or Canadian prime rates.
The availability of funds under the credit facility is limited
by the borrowing base. Amounts available under the credit
facility are also limited by outstanding letters of credit,
which amounted to $0.3 million at June 30, 2006. At
June 30, 2006 there was $214.7 million available under
the credit facility. The Company is required to pay a monthly
commitment fee based upon 0.50% per annum on the total credit
facility of $215 million less the amount drawn. Right,
title and interest in and to all personal property of Lions Gate
Entertainment Corp. and Lions Gate Entertainment Inc. is pledged
as security for the credit facility. The credit facility is
senior to the Companys film obligations and subordinated
notes. The credit facility restricts the Company from paying
cash dividends on its common shares. The Company entered into a
$100 million interest rate swap at an interest rate of
3.08%, commencing January 2003 and ended September 2005. The
swap was in effect as long as three month LIBOR was less than
5.0%.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
|
(Amounts in thousands)
|
|
|
Minimum guarantees
|
|
$
|
14,622
|
|
|
$
|
22,865
|
|
Minimum guarantees and production
obligations initially incurred for a term of more than one year
|
|
|
90,698
|
|
|
|
76,821
|
|
Participation and residual costs
|
|
|
155,110
|
|
|
|
164,326
|
|
Theatrical marketing
|
|
|
1,729
|
|
|
|
1,770
|
|
Film productions
|
|
|
13,246
|
|
|
|
19,205
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
275,405
|
|
|
$
|
284,987
|
|
|
|
|
|
|
|
|
|
|
The Company expects approximately 59% of accrued
participants shares will be paid during the one-year
period ending June 30, 2007.
3.625% Notes. In February 2005, Lions
Gate Entertainment Inc. sold $150.0 million of
3.625% Convertible Senior Subordinated Notes. In connection
with this sale, Lions Gate Entertainment Inc. granted the
initial purchasers of the 3.625% Notes an option to
purchase up to an additional $25.0 million of the
3.625% Notes for 13 days. The fair value of this
option was not significant. The initial purchasers exercised
this option in February 2005 and purchased an additional
$25.0 million of the 3.625% Notes. The Company
received $170.2 million of net proceeds after paying
placement agents fees from the sale of $175.0 million
of the 3.625% Notes. The Company also paid
$0.6 million of offering expenses incurred in connection
with the 3.625% Notes. Interest on the 3.625% Notes is
payable semi-annually on March 15 and September 15,
commencing on September 15, 2005. After March 15,
2012, interest will be 3.125% per annum on the principal
amount of the 3.625% Notes, payable semi-annually on March
15 and September 15 of each year. The 3.625% Notes mature
on March 15, 2025. Lions Gate Entertainment Inc. may redeem
all or a portion of the 3.625% Notes at its option on or
after March 15, 2012 at 100% of their principal amount,
together with accrued and unpaid interest through the date of
redemption.
12
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The holder may require Lions Gate Entertainment Inc. to
repurchase the 3.625% Notes on March 15, 2012, 2015
and 2020 or upon a change in control at a price equal to 100% of
the principal amount, together with accrued and unpaid interest
through the date of repurchase. Under certain circumstances, if
the holder requires Lions Gate Entertainment Inc. to repurchase
all or a portion of their notes upon a change in control, they
will be entitled to receive a make whole premium. The amount of
the make whole premium, if any, will be based on the price of
our common shares on the effective date of the change in
control. No make whole premium will be paid if the price of our
common shares is less than $10.35 per share or if the price
of the common shares of the Company exceeds $75.00 per
share.
The 3.625% Notes are convertible, at the option of the
holder, at any time before the close of business on or prior to
the trading day immediately before the maturity date, if the
notes have not been previously redeemed or repurchased, at a
conversion rate of 70.0133 shares 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 our
common shares. The holder may convert the 3.625% Notes into
our common shares prior to maturity if the notes have been
called for redemption, a change in control occurs or certain
corporate transactions occur.
2.9375% Notes. In October 2004, Lions
Gate Entertainment Inc. sold $150.0 million of
2.9375% Convertible Senior Subordinated Notes. The Company
received $146.0 million of net proceeds after paying
placement agents fees from the sale of $150.0 million
of the 2.9375% Notes. The Company also paid
$0.7 million of offering expenses incurred in connection
with the 2.9375% Notes. Interest on the 2.9375% Notes
is payable semi-annually on April 15 and October 15,
commencing on April 15, 2005, and the 2.9375% Notes
mature on October 15, 2024. From October 15, 2009 to
October 14, 2010, Lions Gate Entertainment Inc. may redeem
the 2.9375% Notes at 100.839%; from October 15, 2010
to October 14, 2011, Lions Gate Entertainment Inc. may
redeem the 2.9375% Notes at 100.420%; and thereafter at
100%.
The holder may require Lions Gate Entertainment Inc. to
repurchase the 2.9375% Notes on October 15, 2011, 2014
and 2019 or upon a change in control at a price equal to 100% of
the principal amount, together with accrued and unpaid interest
through the date of repurchase. Under certain circumstances, if
the holder requires Lions Gate Entertainment Inc. to repurchase
all or a portion of their notes upon a change in control, they
will be entitled to receive a make whole premium. The amount of
the make whole premium, if any, will be based on the price of
our common shares on the effective date of the change in
control. No make whole premium will be paid if the price of our
common shares is less than $8.79 per share or if the price
of our common shares exceeds $50.00 per share.
The holder may convert the 2.9375% Notes into our common
shares prior to maturity only if the price of our 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 corporate
transactions occur. In addition, under certain circumstances, if
the holder converts their notes upon a change in control, such
holder 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
our common shares at a conversion rate of 86.9565 shares
per $1,000 principal amount of the 2.9375% Notes, subject
to adjustment in certain circumstances, which is equal to a
conversion price of approximately $11.50 per share.
4.875% Notes. In December 2003, Lions
Gate Entertainment Inc. sold $60.0 million of
4.875% Convertible Senior Subordinated Notes. The Company
received $57.0 million of net proceeds after paying
placement agents fees from the sale of $60.0 million
of the 4.875% Notes. The Company also paid
$0.7 million of offering expenses incurred in connection
with the 4.875% Notes. Interest on the 4.875% Notes is
due semi-annually on June 15 and December 15, commencing on
June 15, 2004, and the 4.875% Notes mature on
December 15, 2010. Lions Gate Entertainment Inc. may redeem
all or a portion of the 4.875% Notes at its option on or
after December 15, 2006 at 100% of their principal amount,
together with accrued and unpaid interest through the date of
redemption; provided,
13
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
however, that the 4.875% Notes will only be redeemable if
the closing price of the Companys common shares equals or
exceeds $9.45 per share for at least 20 trading days within
a period of 30 consecutive trading days ending on the day before
the date of the notice of optional redemption.
The 4.875% Notes are convertible, at the option of the
holder, at any time before the close of business on or prior to
the trading day immediately before the maturity date if the
notes have not been previously redeemed or repurchased at a
conversion rate of 185.0944 shares per $1,000 principal
amount of the 4.875% Notes, subject to adjustment in
certain circumstances, which is equal to a conversion price of
approximately $5.40 per share. Upon conversion of the
4.875% Notes, the Company has the option to deliver, in
lieu of common shares, cash or a combination of cash and our
common shares. The holder may convert the 4.875% Notes into
our common shares prior to maturity if the notes have been
called for redemption, a change in control occurs or certain
corporate transactions occur.
Promissory Note. On December 15, 2003,
the Company assumed, as part of the purchase of Artisan, a
$5.0 million subordinated promissory note to Vialta, Inc
(Promissory Note) issued by Artisan which bears
interest at 7.5% per annum compounded quarterly. The
Promissory Note matured on April 1, 2005 and was paid
during April 2005.
|
|
8.
|
Acquisitions
and Divestitures
|
On March 15, 2006, the Company sold its studio facility
located in Vancouver, British Columbia. The purchase price of
$35.3 million (net of commissions) was paid in cash.
Studios facilities comprised the Companys studios
facilities reporting segment (see note 13). Certain assets,
including cash and accounts receivable balances were excluded
from the transaction. At March 15, 2006, the carrying value
of the studios property and equipment sold in the
agreement was $28.3 million and was comprised primarily of
land and buildings, with carrying values of $12.6 million
and $14.8 million, respectively. At March 15, 2006,
the carrying value of the goodwill within the studios reporting
unit was $1.9 million. The agreement also required the
Company to repay the remaining balances of its mortgages payable
at the close of the transaction. On March 15, 2006, the
Company paid the remaining mortgages balances of
$16.8 million. In connection with the repayment of the
remaining balances of its mortgages payable on its studio
facilities, the Company terminated its CDN$20 million
interest rate swap. The fair value of the interest rate swap at
June 30, 2005 was negative $0.7 million. Change in the
fair value representing a fair valuation loss on the interest
rate swap for the three months ended June 30, 2005 amounted
to $0.3 million and is included in the condensed
consolidated statements of operations. The close-out value of
the CDN$20 million interest rate swap was approximately
$0.1 million, which the Company paid on March 15,
2006. The studios facilities reporting unit had revenues of
$1.4 million for the three months ended June 30, 2005
and segment profit of $0.8 million for the three months
ended June 30, 2005.
On October 17, 2005, the Company acquired all outstanding
shares of Redbus, an independent United Kingdom film
distributor. Consideration for the Redbus acquisition was
$35.5 million, comprised of a combination of
$28.0 million in cash, $6.4 million in Lionsgate
common shares and direct transaction costs of $1.1 million.
In addition, the Company assumed other obligations (including
accounts payable and accrued liabilities and film obligations)
of $19.4 million. At the closing of the transaction the
Company issued 643,460 common shares to Redbus Group Limited
(RGL) valued at approximately $5.6 million, or
$8.77 per share, and will issue up to an additional 94,937
common shares to RGL upon satisfaction of the terms of the
escrow agreement. Direct transaction costs are considered
liabilities assumed in the acquisition, and as such, are
included in the purchase price. Direct transaction costs consist
primarily of legal and accounting fees. The Company now has the
ability to self-distribute its motion pictures in the UK and
Ireland. The Company also acquired the Redbus library of
approximately 130 films.
The Redbus acquisition was accounted for as a purchase, with the
results of operations of Redbus consolidated from
October 17, 2005. Goodwill of $27.1 million represents
the excess of the purchase price over the fair value of
14
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
the net identifiable tangible and intangible assets acquired.
The allocation of the purchase price to the tangible and
intangible assets acquired and liabilities assumed based on
their fair values is as follows:
|
|
|
|
|
|
|
(Amounts in
|
|
|
|
thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
1,962
|
|
Accounts receivable, net
|
|
|
3,024
|
|
Investment in films and television
programs
|
|
|
22,024
|
|
Other tangible assets acquired
|
|
|
835
|
|
Goodwill
|
|
|
27,073
|
|
Other liabilities assumed
|
|
|
(19,384
|
)
|
|
|
|
|
|
Total
|
|
$
|
35,534
|
|
|
|
|
|
|
On December 15, 2003, the Company completed its acquisition
of Film Holdings Co., the parent company of Artisan, an
independent distributor and producer of film and entertainment
content, for a total purchase price of $168.9 million
consisting of $160.0 million in cash and direct transaction
costs of $8.9 million. In addition, the Company assumed
debt of $59.9 million and other obligations (including
accounts payable and accrued liabilities, film obligations and
other advances) of $144.0 million.
Severance and relocation costs incurred by Lionsgate associated
with the acquisition of Artisan are not included in the purchase
price and, as such, were recorded in the consolidated statement
of operations for the year ended March 31, 2004. Severance
and relocation costs of $5.6 million included property
lease abandonment costs of $2.5 million, the write-off of
capital assets no longer in use of $2.1 million and
severance of $1.0 million. At June 30, 2006 and
March 31, 2006, the remaining liabilities under the
severance plan were nil. At June 30, 2006, the remaining
liabilities for the property lease abandonment are
$1.2 million (March 31, 2006
$1.3 million) and are included in accounts payable and
accrued liabilities in the condensed consolidated balance sheets.
|
|
9.
|
Direct
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Amortization of films and
television programs
|
|
$
|
33,193
|
|
|
$
|
65,376
|
|
Participation and residual expense
|
|
|
37,198
|
|
|
|
33,076
|
|
Amortization of acquired
intangible assets
|
|
|
244
|
|
|
|
548
|
|
Other expenses
|
|
|
(2,090
|
)
|
|
|
1,264
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
68,545
|
|
|
$
|
100,264
|
|
|
|
|
|
|
|
|
|
|
Other expenses include direct operating expenses related to the
provision for doubtful accounts. Other expenses for three months
ended June 30, 2005 also include direct operating expenses
related to the studio facility. The negative other expenses for
the three months ended June 30, 2006 are due to the
reversal of the provision for doubtful accounts associated with
the collection of a portion of accounts receivable previously
reserved.
15
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
Net loss
|
|
$
|
(3,604
|
)
|
|
$
|
(21,819
|
)
|
|
|
|
|
Add (deduct): Foreign currency
translation adjustments
|
|
|
1,550
|
|
|
|
(831
|
)
|
|
|
|
|
Add: Net unrealized gain on
foreign exchange contracts
|
|
|
17
|
|
|
|
234
|
|
|
|
|
|
Deduct: Unrealized loss on
investments available for sale
|
|
|
(363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(2,400
|
)
|
|
$
|
(22,416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company calculates loss per share in accordance with
SFAS No. 128, Earnings Per Share. Basic
loss per share is calculated based on the weighted average
common shares outstanding for the period. Diluted earnings per
share includes the impact of the convertible senior subordinated
notes, share purchase warrants, stock options and restricted
share units, if dilutive.
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Basic loss per common share is
calculated as follows:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,604
|
)
|
|
$
|
(21,819
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding
|
|
|
103,319
|
|
|
|
101,852
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common
share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
Basic loss per common share is calculated using the weighted
average number of common shares outstanding during the three
months ended June 30, 2006 and 2005 of
103,318,955 shares and 101,852,000 shares,
respectively. The exercise of common share equivalents including
stock options, the conversion features of the 4.875% Notes,
the 2.9375% Notes, the 3.625% Notes and restricted
share units could potentially dilute income (loss) per share in
the future, but were not reflected in diluted loss per share
during the periods presented because to do so would be
anti-dilutive.
|
|
12.
|
Accounting
for Stock-Based Compensation
|
Share-Based
Compensation
Adoption
of SFAS No. 123(R)
As of June 30, 2006, the Company had two stock option and
long term incentive plans which permit the grant of stock
options and other equity awards to certain employees, officers
and non-employee directors, which are described more fully
below. Prior to April 1, 2006, the Company accounted for
stock-based compensation under the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB
Opinion No. 25), and related Interpretations, as permitted
under Statement of Financial Accounting Standards (FASB)
No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123). The intrinsic value
method requires recognition of compensation expense over the
applicable vesting period for the
16
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
difference between the exercise price of the stock option and
the fair value of the underlying stock on the date of grant.
Since the exercise price of our stock options is equal to the
fair value of the underlying stock at the date of grant, the
Company has not historically recognized compensation costs
associated with share based awards, with the exception of stock
appreciation rights (SARs) and restricted share
units discussed below and to a very limited extent the
modification of awards previously issued.
Effective April 1, 2006, the Company adopted the fair value
recognition provisions of FASB Statement No. 123(R),
Share-Based Payment (SFAS No. 123 (R)),
using the modified-prospective transition method. Under such
transition method, compensation cost recognized in the three
months ended June 30, 2006 includes: (a) compensation
cost for all stock options granted prior to, but not yet vested
as of, April 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS No. 123, and (b) compensation cost for all
share-based payments granted on or after April 1, 2006,
based on the grant-date fair value estimated in accordance with
the provisions of SFAS No. 123(R). Results for prior
periods have not been restated. As a result of adopting
SFAS No. 123(R) on April 1, 2006, the
Companys loss from operations before income taxes and net
loss for the three months ended June 30, 2006 are both
$1.5 million lower than if the Company had continued to
account for share-based compensation under APB Opinion 25. The
$1.5 million charge consisted of the recognition of
compensation expense of $0.5 million associated with stock
options granted in previous years and $1.0 million
attributable to the valuation of stock appreciation rights at
fair value rather than intrinsic value as previously required.
The Companys earnings per share for the three months ended
June 30, 2006 would have been $0.01 higher if the Company
had not adopted SFAS No. 123(R).
SFAS No. 123(R) requires the cash flows resulting from
the tax benefits from tax deductions in excess of the
compensation cost recognized for those options (excess tax
benefits) to be classified as financing cash flows. There were
no tax benefits realized from the deduction of amounts related
to share based payments in the three months ended June 30,
2006 and 2005. Prior to the adoption of
SFAS No. 123(R) and upon issuance of the restricted
share units pursuant to the agreements, an unamortized
compensation expense equivalent to the market value of the
shares on the date of grant was charged to stockholders
equity as unearned compensation and amortized over the
applicable vested periods. As a result of adopting
SFAS No. 123(R) on April 1, 2006, the Company
transferred the remaining unearned compensation balance in its
stockholders equity to common share capital. Prior to the
adoption of SFAS No. 123(R), the Company recorded
forfeitures of restricted share units, if any, and any
compensation cost previously recognized for unvested restricted
share units was reversed in the period of forfeiture. Beginning
April 1, 2006, the Company records forfeitures in
accordance with SFAS No. 123(R) by estimating the
forfeiture rates for share-based awards upfront and recording a
true-up
adjustment for the actual forfeitures. In the three months ended
June 30, 2006, the calculation of forfeitures did not have
a material effect on the Companys results of operations,
financial position or cash flows.
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 our stock, historical volatility of Lionsgate stock
and other factors. The expected term of options granted
represents the period of time that options granted are expected
to be outstanding. There were no stock options granted during
the three months ended June 30, 2006. The following table
represents the assumptions used in the Black-Scholes
option-pricing model for options granted during the three months
ended June 30, 2005.
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
|
2005
|
|
|
Risk-free interest rate
|
|
|
4.0
|
%
|
Expected option lives (in years)
|
|
|
5
|
|
Expected volatility for options
|
|
|
33
|
%
|
Expected dividend yield
|
|
|
None
|
|
17
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The weighted-average grant-date fair values for options granted
during the three months ended June 30, 2005 was $3.61.
The following table illustrates the effect on net loss and loss
per common share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock
options issued and modified under the companys stock
option plans to the three months ended June 30, 2005. For
purposes of this pro forma disclosure, the value of the options
is estimated using a Black-Scholes option pricing model and
amortized to expense over the options vesting periods.
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
|
2005
|
|
|
|
(Amounts in
|
|
|
|
thousands
|
|
|
|
except per
|
|
|
|
share data)
|
|
|
Numerator:
|
|
|
|
|
Net loss, as reported
|
|
$
|
(21,819
|
)
|
Add: stock-based compensation
expense calculated using intrinsic value method and included in
reported net loss
|
|
|
27
|
|
Deduct: stock-based compensation
expense calculated using fair value method
|
|
|
(602
|
)
|
|
|
|
|
|
Net loss, pro forma
|
|
$
|
(22,394
|
)
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Weighted average common shares
outstanding
|
|
|
101,852
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basic and diluted as
reported
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
Basic and diluted pro
forma
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
The compensation cost under our various stock option and
long-term incentive plans during the three months ended
June 30, 2006 and 2005 resulted in a net reduction in
compensation expense of $0.4 million and $0.8 million,
respectively. The reduction of compensation expense was due to a
benefit of $1.4 million and $0.8 million for the three
months ended June 30, 2006 and 2005, respectively, from the
revaluation of SARs as discussed below. The benefit recognized
from the SARs was offset by $1.0 million of compensation
expense related to restricted share units and stock options for
the three months ended June 30, 2006. There was no income
tax benefit recognized in the income statement for share-based
compensation arrangements for the three months ended
June 30, 2006 and 2005.
Stock
Option and Long Term Incentive Plans
The Company has two stock option and long term incentive plans
which permit the grant of stock options and other equity awards
to certain employees, officers and non-employee directors for up
to 11.0 million shares of common stock.
The shareholders approved an Employees and Directors
Equity Incentive Plan (the Plan) that provides for
the issue of up to 8.0 million common shares of the Company
to eligible employees, directors and service providers of the
Company and its affiliates. On July 25, 2003, the Board of
Directors increased the number of shares authorized for stock
options from 8.0 million to 9.0 million. Of the
9.0 million common shares allocated for issuance, up to a
maximum of 250,000 common shares may be issued as discretionary
bonuses in accordance with the terms of a share bonus plan. At
June 30, 2006, 64,431 common shares were available for
grant under the Plan.
18
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
On June 28, 2004, the Board of Directors adopted the 2004
Performance Incentive Plan (the 2004 Plan). The
shareholders approved the 2004 Plan at the 2004 Annual General
Meeting of Shareholders held on September 14, 2004. With
the approval of the 2004 Plan, no new awards were granted under
the Plan subsequent to the 2004 Annual General Meeting of
Shareholders. Any remaining shares available for additional
grant purposes under the Plan may be issued under the 2004 Plan.
The 2004 Plan provides for the issue of up to an additional
2.0 million common shares of the Company to eligible
employees, directors, officers and other eligible persons
through the grant of awards and incentives for high levels of
individual performance and improved financial performance of the
Company. The 2004 Plan authorizes stock options, share
appreciation rights, restricted shares, share bonuses and other
forms of awards granted or denominated in the Companys
common shares. The per share exercise price of an option granted
under the 2004 Plan generally may not be less than the fair
market value of a common share of the Company on the date of
grant. The maximum term of an option granted under the 2004 Plan
is ten years from the date of grant. At June 30, 2006,
66,930 common shares were available for grant under the 2004
Plan.
A summary of option activity under the various plans as of
June 30, 2006, and changes during the three months then
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Options
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Outstanding at April 1, 2006
|
|
|
5,170,104
|
|
|
$
|
4.19
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(123,633
|
)
|
|
|
2.87
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(16,841
|
)
|
|
|
8.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006
|
|
|
5,029,630
|
|
|
$
|
4.21
|
|
|
|
1.76
|
|
|
$
|
22,550,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to Vest at June 30,
2006
|
|
|
4,778,149
|
|
|
$
|
4.19
|
|
|
|
1.76
|
|
|
$
|
21,423,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006
|
|
|
4,331,840
|
|
|
$
|
3.56
|
|
|
|
1.54
|
|
|
$
|
21,835,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the three
months ended June 30, 2006 and 2005 were $0.8 million
and $1.0 million, respectively.
Restricted Share Units. Effective
June 27, 2005 the Company, pursuant to the 2004 Plan,
entered into restricted share unit agreements with certain
employees and directors. During the three months ended
June 30, 2006 and 2005, the Company awarded 352,875 and
198,000 restricted share units, respectively, under these
agreements.
A summary of the status of the Companys restricted share
units as of June 30, 2006, and changes during the three
months ended June 30, 2006, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant Date Fair
|
|
|
|
Number of Shares
|
|
|
Value
|
|
|
Outstanding at April 1, 2006
|
|
|
508,667
|
|
|
|
10.18
|
|
Granted
|
|
|
352,875
|
|
|
|
8.96
|
|
Vested
|
|
|
(85,766
|
)
|
|
|
10.60
|
|
Forfeited
|
|
|
(4,625
|
)
|
|
|
10.44
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006
|
|
|
771,151
|
|
|
$
|
9.57
|
|
|
|
|
|
|
|
|
|
|
The fair values of restricted share units are determined based
on the market value of the shares on the date of grant. The
weighted-average grant-date fair values of restricted share
units granted during the three months ended June 30, 2006
and 2005 were $8.96 and $10.60, respectively. The total fair
value of shares vested during the three
19
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
months ended June 30, 2006 was $0.8 million. No share
units vested during the three months ended June 30, 2005.
Compensation expense recorded for these restricted share units
was $0.5 million and nil during the three months ended
June 30, 2006 and 2005, respectively. As of June 30,
2006, the total remaining unrecognized compensation cost related
to nonvested stock options and restricted share units was
$1.6 million and $6.6 million, respectively, which is
expected to be recognized over a weighted-average period of
0.6 years and 2.3 years, respectively.
Under the Companys 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.
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
occurs, the restrictions are released and the shares are issued.
Restricted share units are forfeited if the employees terminate
prior to vesting.
Stock Appreciation Rights. On
November 13, 2001, the Board of Directors of the Company
resolved that 750,000 options, granted to certain officers of
the Company to purchase common shares of the Company, be revised
as stock appreciation rights (SARs) which entitle
the holders to receive cash only and not common shares. The
amount of cash received will be equal to the amount by which the
trading price of common shares on the exercise notice date
exceeds the SARs price of $5.00 multiplied by the number
of options exercised. Any twenty-day average trading price of
common shares prior to the exercise notice date has to be $6.00
or above in order for the officers to exercise their SARs. These
SARs are not considered part of the Employees and
Directors Equity Incentive Plan. Through March 31,
2006, the Company measured compensation expense as the amount by
which the market value of common shares exceeded the SARs
price. Effective April 1, 2006, upon the adoption of
SFAS No. 123R, the Company measures compensation
expense based on the fair value of the SARs determined by using
the Black-Scholes option pricing model. For the three months
ended June 30, 2006, the following assumptions were used in
the Black-Scholes option pricing model: Volatility of 41.8%,
Risk Free Rate of 5.0%-5.2%, Expected Term of
0.17-1.25 years, and Dividend of 0%. At June 30, 2006,
the market price of our common shares was $8.55 and the weighted
average fair value of the SARs was $3.79 and the SARs had all
vested. Due to the reduction in the market price of its common
shares, the Company recorded a reduction in stock-based
compensation expense in the amount of $1.0 million in
general and administration expenses in the unaudited condensed
consolidated statement of operations for the three months ended
June 30, 2006 (2005 reduction in expense of
$0.6 million). The compensation expense amount in the
period is calculated by using the fair value of the SAR
multiplied by the 750,000 SARs vested less the amount previously
recorded. At June 30, 2006, the Company has a stock-based
compensation accrual in the amount of $2.8 million
(March 31, 2006 $3.8 million) included in
accounts payable and accrued liabilities on the condensed
consolidated balance sheets relating to these SARs.
On February 2, 2004, an officer of the Company was granted
1,000,000 SARs, which entitle the officer to receive cash only,
and not common shares. The amount of cash received will be equal
to the amount by which the trading price of common shares on the
exercise notice date exceeds the SARs price of $5.20
multiplied by the number of SARs exercised. The SARs vest one
quarter immediately on the award date and one quarter on each of
the first, second and third anniversaries of the award date.
These SARs are not considered part of the Employees and
Directors Equity Incentive Plan. Applying FIN 28
Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans, the Company is
accruing compensation expense over the service period, which is
assumed to be the three year vesting period, using a graded
approach. Through March 31, 2006, the Company measured
compensation expense as the amount by which the market value of
common shares exceeded the SARs price. Effective
April 1, 2006, upon the adoption of
SFAS No. 123R, the Company measures compensation
expense based on the fair value of the SARs which is determined
by using the Black-Scholes option pricing model. For the three
months ended June 30, 2006, the following assumptions were
used in the Black-Scholes option pricing model: Volatility of
41.8%, Risk Free Rate of 5.1%, Expected Term of 2.6 years,
and Dividend of 0%. At June 30, 2006, the market price of
our common shares was $8.55 and the weighted average fair value
of the SAR was $4.36 and 950,502 of the SARs had vested. Due to
the reduction in the market price of its
20
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
common shares, the Company recorded a reduction in stock-based
compensation expense in the amount of $0.4 million in
general and administration expenses in the unaudited condensed
consolidated statement of operations for the three months ended
June 30, 2006 (2005 reduction in expense of
$0.2 million). During the year ended March 31, 2005
the officer exercised 150,000 of the vested SARs and the Company
paid $0.9 million. The compensation expense amount in the
period is calculated by using the fair value of the SAR,
multiplied by the remaining 950,502 SARs assumed to have vested
under the graded methodology less the 150,000 SARs exercised
less the amount previously recorded. At June 30, 2006, the
Company has a stock-based compensation accrual in the amount of
$3.5 million (March 31, 2006
$3.9 million) included in accounts payable and accrued
liabilities on the condensed consolidated balance sheets
relating to these SARs.
SFAS No. 131 Disclosures About Segments of an
Enterprise and Related Information requires the Company to
make certain disclosures about each reportable segment. The
Companys reportable segments are determined based on the
distinct nature of their operations and each segment is a
strategic business unit that offers different products and
services and is managed separately. The Company evaluates
performance of each segment using segment profit (loss) as
defined below. The Company has three reportable business
segments: Motion Pictures; Television; and Studio Facilities.
Motion Pictures consists of the development and production of
feature films, acquisition of North American and worldwide
distribution rights, North American theatrical, video and
television distribution of feature films produced and acquired
and worldwide licensing of distribution rights to feature films
produced and acquired.
Television consists of the development, production and worldwide
distribution of television productions, including television
series, television movies and mini-series and non-fiction
programming.
Studio Facilities consists of ownership and management of an
eight-soundstage studio facility in Vancouver, Canada. Rental
revenue is earned from soundstages, office and other services
such as furniture, telephones and lighting equipment to tenants
that produce or support the production of feature films,
television series, movies and commercials. As discussed in
note 8, the Company sold its studio facility in March 2006,
therefore, the Company is not reporting this segment in
fiscal 2007.
Segmented information by business unit is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Segment revenues
|
|
|
|
|
|
|
|
|
Motion Pictures
|
|
$
|
165,186
|
|
|
$
|
146,982
|
|
Television
|
|
|
7,270
|
|
|
|
45,858
|
|
Studio Facilities
|
|
|
|
|
|
|
1,389
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
172,456
|
|
|
$
|
194,229
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
|
|
|
|
|
|
|
Motion Pictures
|
|
$
|
11,158
|
|
|
$
|
(9,220
|
)
|
Television
|
|
|
(1,257
|
)
|
|
|
2,377
|
|
Studio Facilities
|
|
|
|
|
|
|
811
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,901
|
|
|
$
|
(6,032
|
)
|
|
|
|
|
|
|
|
|
|
21
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Segment profit (loss) is defined as segment revenue less segment
direct operating, distribution and marketing, and general and
administration expenses. The reconciliation of total segment
profit (loss) to the Companys income (loss) before income
taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Companys total segment
profit (loss)
|
|
$
|
9,901
|
|
|
$
|
(6,032
|
)
|
Less:
|
|
|
|
|
|
|
|
|
Corporate general and
administration
|
|
|
(12,269
|
)
|
|
|
(10,813
|
)
|
Depreciation
|
|
|
(544
|
)
|
|
|
(748
|
)
|
Interest expense
|
|
|
(4,676
|
)
|
|
|
(4,884
|
)
|
Interest rate swaps
mark-to-market
|
|
|
|
|
|
|
(337
|
)
|
Interest income
|
|
|
2,561
|
|
|
|
1,065
|
|
Equity interests
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
$
|
(4,969
|
)
|
|
$
|
(21,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
Commitments
and Contingencies
|
The Company is from time to time involved in various claims,
legal proceedings and complaints arising in the ordinary course
of business. The Company does not believe that adverse decisions
in any such pending or threatened proceedings, or any amount
which the Company might be required to pay by reason thereof,
would have a material adverse effect on the financial condition
or future results of the Company. The Company has provided an
accrual for estimated losses under the above matters as of
June 30, 2006, in accordance with FAS 5
Accounting for Contingencies.
|
|
15.
|
Consolidating
Financial Information
|
In December 2003, the Company sold $60.0 million of the
4.875% Notes, through its wholly owned U.S. subsidiary
Lions Gate Entertainment Inc. (the Issuer). The
4.875% Notes, by their terms, are fully and unconditionally
guaranteed by the Company. On April 2, 2004, the Company
filed a registration statement on
Form S-3
to register the resale of the 4.875% Notes and common
shares issuable on conversion of the 4.875% Notes. On
April 29, 2004, the registration statement was declared
effective by the SEC.
In October 2004, the Company sold $150.0 million of the
2.9375% Notes, through the Issuer. The 2.9375% Notes,
by their terms, are fully and unconditionally guaranteed by the
Company. On February 4, 2005, the Company filed a
registration statement on
Form S-3
to register the resale of the 2.9375% Notes and common
shares issuable on conversion of the 2.9375% Notes. On
March 3, 2005, the registration statement was declared
effective by the SEC.
In February 2005, the Company sold $175.0 million of the
3.625% Notes, through the Issuer. The 3.625% Notes, by
their terms, are fully and unconditionally guaranteed by the
Company. On March 29, 2005, and as amended April 6,
2005, the Company filed a registration statement on
Form S-3
to register the resale of the 3.625% Notes and common
shares issuable on conversion of the 3.625% Notes. On
April 13, 2005, the registration statement was declared
effective by the SEC.
22
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The following tables present condensed consolidating financial
information as of June 30, 2006 and March 31, 2006 and
for the three months ended June 30, 2006 and 2005 for
(1) the Company, on a stand-alone basis, (2) the
Issuer, on a stand-alone basis, (3) the non-guarantor
subsidiaries of the Company (including the subsidiaries of the
Issuer) on a combined basis (collectively, the Other
Subsidiaries) and (4) the Company on a consolidated
basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2006
|
|
|
|
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
|
|
$
|
5,204
|
|
|
$
|
|
|
|
$
|
49,654
|
|
|
$
|
|
|
|
$
|
54,858
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
736
|
|
|
|
|
|
|
|
736
|
|
Investments auction
rate securities
|
|
|
|
|
|
|
142,107
|
|
|
|
|
|
|
|
|
|
|
|
142,107
|
|
Investments equity
securities
|
|
|
|
|
|
|
14,556
|
|
|
|
|
|
|
|
|
|
|
|
14,556
|
|
Accounts receivable, net
|
|
|
298
|
|
|
|
785
|
|
|
|
89,718
|
|
|
|
|
|
|
|
90,801
|
|
Investment in films and television
programs
|
|
|
|
|
|
|
6,632
|
|
|
|
439,256
|
|
|
|
|
|
|
|
445,888
|
|
Property and equipment
|
|
|
|
|
|
|
8,404
|
|
|
|
105
|
|
|
|
|
|
|
|
8,509
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
185,517
|
|
|
|
|
|
|
|
185,517
|
|
Other assets
|
|
|
28
|
|
|
|
24,982
|
|
|
|
524
|
|
|
|
|
|
|
|
25,534
|
|
Investment in subsidiaries
|
|
|
249,444
|
|
|
|
252,555
|
|
|
|
(265,150
|
)
|
|
|
(236,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
254,974
|
|
|
$
|
450,021
|
|
|
$
|
500,360
|
|
|
$
|
(236,849
|
)
|
|
$
|
968,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Shareholders Equity (Deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
808
|
|
|
$
|
19,458
|
|
|
$
|
100,847
|
|
|
$
|
|
|
|
$
|
121,113
|
|
Film obligations
|
|
|
|
|
|
|
|
|
|
|
275,405
|
|
|
|
|
|
|
|
275,405
|
|
Subordinated notes
|
|
|
|
|
|
|
385,000
|
|
|
|
|
|
|
|
|
|
|
|
385,000
|
|
Deferred revenue
|
|
|
|
|
|
|
|
|
|
|
38,789
|
|
|
|
|
|
|
|
38,789
|
|
Intercompany payables (receivables)
|
|
|
(156,303
|
)
|
|
|
113,212
|
|
|
|
(6,057
|
)
|
|
|
49,148
|
|
|
|
|
|
Intercompany equity
|
|
|
262,270
|
|
|
|
93,217
|
|
|
|
76,420
|
|
|
|
(431,907
|
)
|
|
|
|
|
Shareholders equity
(deficiency)
|
|
|
148,199
|
|
|
|
(160,866
|
)
|
|
|
14,956
|
|
|
|
145,910
|
|
|
|
148,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
254,974
|
|
|
$
|
450,021
|
|
|
$
|
500,360
|
|
|
$
|
(236,849
|
)
|
|
$
|
968,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2006
|
|
|
|
Lions Gate
|
|
|
Lions Gate
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment
|
|
|
Entertainment
|
|
|
Other
|
|
|
Consolidating
|
|
|
Lions Gate
|
|
|
|
Corp.
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
|
(Amounts in thousands)
|
|
|
STATEMENT OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
3,618
|
|
|
$
|
168,838
|
|
|
$
|
|
|
|
$
|
172,456
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Operating
|
|
|
|
|
|
|
|
|
|
|
68,545
|
|
|
|
|
|
|
|
68,545
|
|
Distribution and marketing
|
|
|
|
|
|
|
346
|
|
|
|
86,700
|
|
|
|
|
|
|
|
87,046
|
|
General and administration
|
|
|
391
|
|
|
|
11,860
|
|
|
|
6,982
|
|
|
|
|
|
|
|
19,233
|
|
Depreciation
|
|
|
|
|
|
|
13
|
|
|
|
531
|
|
|
|
|
|
|
|
544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
391
|
|
|
|
12,219
|
|
|
|
162,758
|
|
|
|
|
|
|
|
175,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(391
|
)
|
|
|
(8,601
|
)
|
|
|
6,080
|
|
|
|
|
|
|
|
(2,912
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expense (Income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
100
|
|
|
|
4,497
|
|
|
|
278
|
|
|
|
(199
|
)
|
|
|
4,676
|
|
Interest income
|
|
|
(27
|
)
|
|
|
(2,497
|
)
|
|
|
(236
|
)
|
|
|
199
|
|
|
|
(2,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
73
|
|
|
|
2,000
|
|
|
|
42
|
|
|
|
|
|
|
|
2,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EQUITY
INTERESTS AND INCOME TAXES
|
|
|
(464
|
)
|
|
|
(10,601
|
)
|
|
|
6,038
|
|
|
|
|
|
|
|
(5,027
|
)
|
Equity interests
|
|
|
(3,419
|
)
|
|
|
6,728
|
|
|
|
58
|
|
|
|
(3,309
|
)
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(3,883
|
)
|
|
|
(3,873
|
)
|
|
|
6,096
|
|
|
|
(3,309
|
)
|
|
|
(4,969
|
)
|
Income tax provision (benefit)
|
|
|
(279
|
)
|
|
|
399
|
|
|
|
(1,485
|
)
|
|
|
|
|
|
|
(1,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(3,604
|
)
|
|
$
|
(4,272
|
)
|
|
$
|
7,581
|
|
|
$
|
(3,309
|
)
|
|
$
|
(3,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2006
|
|
|
|
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
|
|
$
|
3,591
|
|
|
$
|
(24,882
|
)
|
|
$
|
6,267
|
|
|
$
|
|
|
|
$
|
(15,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of
investments auction rate securities
|
|
|
|
|
|
|
(165,620
|
)
|
|
|
|
|
|
|
|
|
|
|
(165,620
|
)
|
Sales of investments
auction rate securities
|
|
|
|
|
|
|
190,594
|
|
|
|
|
|
|
|
|
|
|
|
190,594
|
|
Purchases of property and equipment
|
|
|
|
|
|
|
(153
|
)
|
|
|
(1,678
|
)
|
|
|
|
|
|
|
(1,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH FLOWS PROVIDED BY (USED
IN) INVESTING ACTIVITIES
|
|
|
|
|
|
|
24,821
|
|
|
|
(1,678
|
)
|
|
|
|
|
|
|
23,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH FLOWS PROVIDED BY (USED
IN) FINANCING ACTIVITIES
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH
EQUIVALENTS
|
|
|
3,944
|
|
|
|
(61
|
)
|
|
|
4,589
|
|
|
|
|
|
|
|
8,472
|
|
FOREIGN EXCHANGE EFFECTS ON CASH
|
|
|
(5,748
|
)
|
|
|
72
|
|
|
|
5,084
|
|
|
|
|
|
|
|
(592
|
)
|
CASH AND CASH
EQUIVALENTS BEGINNING OF PERIOD
|
|
|
6,541
|
|
|
|
|
|
|
|
40,437
|
|
|
|
|
|
|
|
46,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS END OF PERIOD
|
|
$
|
4,737
|
|
|
$
|
11
|
|
|
$
|
50,110
|
|
|
$
|
|
|
|
$
|
54,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006
|
|
|
|
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
|
|
$
|
6,541
|
|
|
$
|
|
|
|
$
|
40,437
|
|
|
$
|
|
|
|
$
|
46,978
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
820
|
|
|
|
|
|
|
|
820
|
|
Investments auction
rate preferreds and municipal bonds
|
|
|
|
|
|
|
167,081
|
|
|
|
|
|
|
|
|
|
|
|
167,081
|
|
Investments equity
securities
|
|
|
|
|
|
|
14,921
|
|
|
|
|
|
|
|
|
|
|
|
14,921
|
|
Accounts receivable, net
|
|
|
299
|
|
|
|
829
|
|
|
|
181,531
|
|
|
|
|
|
|
|
182,659
|
|
Investment in films and television
programs
|
|
|
|
|
|
|
5,245
|
|
|
|
412,505
|
|
|
|
|
|
|
|
417,750
|
|
Property and equipment
|
|
|
|
|
|
|
7,131
|
|
|
|
87
|
|
|
|
|
|
|
|
7,218
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
185,117
|
|
|
|
|
|
|
|
185,117
|
|
Other assets
|
|
|
27
|
|
|
|
16,377
|
|
|
|
14,301
|
|
|
|
|
|
|
|
30,705
|
|
Investment in subsidiaries
|
|
|
228,573
|
|
|
|
312,011
|
|
|
|
|
|
|
|
(540,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
235,440
|
|
|
$
|
523,595
|
|
|
$
|
834,798
|
|
|
$
|
(540,584
|
)
|
|
$
|
1,053,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Shareholders Equity (Deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
742
|
|
|
$
|
4,087
|
|
|
$
|
183,964
|
|
|
$
|
|
|
|
$
|
188,793
|
|
Unpresented bank drafts
|
|
|
|
|
|
|
14,772
|
|
|
|
|
|
|
|
|
|
|
|
14,772
|
|
Film obligations
|
|
|
|
|
|
|
|
|
|
|
284,987
|
|
|
|
|
|
|
|
284,987
|
|
Subordinated notes
|
|
|
|
|
|
|
385,000
|
|
|
|
|
|
|
|
|
|
|
|
385,000
|
|
Deferred revenue
|
|
|
|
|
|
|
|
|
|
|
30,427
|
|
|
|
|
|
|
|
30,427
|
|
Intercompany payables (receivables)
|
|
|
(168,726
|
)
|
|
|
188,859
|
|
|
|
(5,927
|
)
|
|
|
(14,206
|
)
|
|
|
|
|
Intercompany equity
|
|
|
254,154
|
|
|
|
93,217
|
|
|
|
329,948
|
|
|
|
(677,319
|
)
|
|
|
|
|
Shareholders equity
(deficiency)
|
|
|
149,270
|
|
|
|
(162,340
|
)
|
|
|
11,399
|
|
|
|
150,941
|
|
|
|
149,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
235,440
|
|
|
$
|
523,595
|
|
|
$
|
834,798
|
|
|
$
|
(540,584
|
)
|
|
$
|
1,053,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2005
|
|
|
|
Lions Gate
|
|
|
Lions Gate
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment
|
|
|
Entertainment
|
|
|
Other
|
|
|
Consolidating
|
|
|
Lions Gate
|
|
|
|
Corp.
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
|
(Amounts in thousands)
|
|
|
STATEMENT OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
172
|
|
|
$
|
|
|
|
$
|
194,201
|
|
|
$
|
(144
|
)
|
|
$
|
194,229
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Operating
|
|
|
|
|
|
|
|
|
|
|
100,264
|
|
|
|
|
|
|
|
100,264
|
|
Distribution and marketing
|
|
|
|
|
|
|
|
|
|
|
93,481
|
|
|
|
|
|
|
|
93,481
|
|
General and administration
|
|
|
351
|
|
|
|
10,432
|
|
|
|
6,690
|
|
|
|
(144
|
)
|
|
|
17,329
|
|
Depreciation
|
|
|
|
|
|
|
26
|
|
|
|
722
|
|
|
|
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
351
|
|
|
|
10,458
|
|
|
|
201,157
|
|
|
|
(144
|
)
|
|
|
211,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(179
|
)
|
|
|
(10,458
|
)
|
|
|
(6,956
|
)
|
|
|
|
|
|
|
(17,593
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expenses (Income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
17
|
|
|
|
4,564
|
|
|
|
303
|
|
|
|
|
|
|
|
4,884
|
|
Interest rate swaps mark-to market
|
|
|
|
|
|
|
19
|
|
|
|
318
|
|
|
|
|
|
|
|
337
|
|
Interest income
|
|
|
|
|
|
|
(1,065
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net
|
|
|
17
|
|
|
|
3,518
|
|
|
|
621
|
|
|
|
|
|
|
|
4,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EQUITY
INTERESTS AND INCOME TAXES
|
|
|
(196
|
)
|
|
|
(13,976
|
)
|
|
|
(7,577
|
)
|
|
|
|
|
|
|
(21,749
|
)
|
Equity interests
|
|
|
21,623
|
|
|
|
8,955
|
|
|
|
|
|
|
|
(30,578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
(21,819
|
)
|
|
|
(22,931
|
)
|
|
|
(7,577
|
)
|
|
|
30,578
|
|
|
|
(21,749
|
)
|
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(21,819
|
)
|
|
$
|
(22,931
|
)
|
|
$
|
(7,647
|
)
|
|
$
|
30,578
|
|
|
$
|
(21,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
LIONS
GATE ENTERTAINMENT CORP.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2005
|
|
|
|
Lions Gate
|
|
|
Lions Gate
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment
|
|
|
Entertainment
|
|
|
Other
|
|
|
Consolidating
|
|
|
Lions Gate
|
|
|
|
Corp.
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
|
(Amounts in thousands)
|
|
|
STATEMENT OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH FLOWS PROVIDED BY (USED
IN) OPERATING ACTIVITIES
|
|
$
|
3,916
|
|
|
$
|
(85,958
|
)
|
|
$
|
112,209
|
|
|
$
|
|
|
|
$
|
30,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from sale of
investment
|
|
|
|
|
|
|
|
|
|
|
2,011
|
|
|
|
|
|
|
|
2,011
|
|
Purchases of property and equipment
|
|
|
|
|
|
|
(758
|
)
|
|
|
129
|
|
|
|
|
|
|
|
(629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH FLOWS PROVIDED BY (USED
IN) INVESTING ACTIVITIES
|
|
|
|
|
|
|
(758
|
)
|
|
|
2,140
|
|
|
|
|
|
|
|
1,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
Repayment of subordinated notes
|
|
|
|
|
|
|
|
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
(5,000
|
)
|
Repayment of mortgages payable
|
|
|
|
|
|
|
|
|
|
|
(285
|
)
|
|
|
|
|
|
|
(285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH FLOWS PROVIDED BY (USED
IN) FINANCING ACTIVITIES
|
|
|
61
|
|
|
|
|
|
|
|
(5,285
|
)
|
|
|
|
|
|
|
(5,224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH
EQUIVALENTS
|
|
|
3,977
|
|
|
|
(86,716
|
)
|
|
|
109,064
|
|
|
|
|
|
|
|
26,325
|
|
FOREIGN EXCHANGE EFFECT ON CASH
|
|
|
(916
|
)
|
|
|
(37
|
)
|
|
|
61
|
|
|
|
|
|
|
|
(892
|
)
|
CASH AND CASH
EQUIVALENTS BEGINNING OF PERIOD
|
|
|
943
|
|
|
|
106,356
|
|
|
|
5,540
|
|
|
|
|
|
|
|
112,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS END OF PERIOD
|
|
$
|
4,004
|
|
|
$
|
19,603
|
|
|
$
|
114,665
|
|
|
$
|
|
|
|
$
|
138,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Debmar. On July 3, 2006, the Company
acquired all of the capital stock of Debmar-Mercury LLC
(Debmar), an independent distributor of film and
television packages. Consideration for the Debmar acquisition
was $27.5 million, comprised of a combination of
$24.5 million in cash paid on July 3, 2006 and up to
$3.0 million in common shares of the Company to be issued
on January 1, 2008. The number of shares to be issued will
be determined by dividing (i) the result of
$3.0 million minus any losses for which the Company is
indemnified, by (ii) the volume weighted average price of a
common share of the Company during the 10-trading day period
ending on December 31, 2007. The purchase price may be
adjusted for the payment of additional consideration contingent
on the financial performance of Debmar for the five-year period
ending June 30, 2011. The Debmar acquisition provides the
Company a new distribution channel giving it the capacity to
syndicate its own television programming and feature film
packages.
29
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Overview
Lions Gate Entertainment Corp. (Lionsgate, the
Company, we, us or
our) is a diversified independent producer and
distributor of motion pictures, television programming, home
entertainment, family entertainment,
video-on-demand
and music content. We release approximately 15 to 18 motion
pictures theatrically per year. Our theatrical releases include
films we produce in-house and films we acquire from third
parties. We also have produced approximately 97 hours of
television programming on average each of the last three years.
Our disciplined approach to production, acquisition and
distribution is designed to maximize our profit by balancing our
financial risks against the probability of commercial success of
each project. We currently distribute our library of
approximately 5,300 motion picture titles and 2,500
television episodes and programs directly to retailers, video
rental stores, and pay and free television channels in the US,
UK and Ireland and indirectly to other international markets
through third parties. We own a minority interest in CinemaNow,
Inc. (CinemaNow), an internet
video-on-demand
provider. We also own a minority interest in Maple Pictures
Corp. (Maple Pictures), a Canadian film and
television distributor based in Toronto, Canada. We have an
output arrangement with Maple Pictures through which we
distribute our library and titles in Canada. During fiscal 2006,
we purchased an aggregate of 4,033,996 shares of Image
Entertainment, Inc. (Image), representing
approximately 18.9% of Images outstanding common shares as
of July 31, 2006. Image is a home video and television
distribution company specializing in digital media distribution
of television programs, public domain and copyrighted feature
films and music concerts.
Our revenues are derived from the following business segments:
|
|
|
|
|
Motion Pictures, which includes Theatrical, Home Entertainment,
Television and International Distribution. Theatrical revenues
are derived from the domestic theatrical release of motion
pictures in North America. Home entertainment revenues are
derived from the sale of video and DVD releases of our own
productions and acquired films, including theatrical releases
and
direct-to-video
releases. Television revenues are primarily derived from the
licensing of our productions and acquired films to the domestic
cable, free and pay television markets. International revenues
are derived from the licensing of our productions and acquired
films to international markets on a
territory-by-territory
basis.
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Television, which includes the licensing to domestic and
international markets of
one-hour and
half-hour
drama series, television movies and mini-series and non-fiction
programming.
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Studio Facilities, which included Lions Gate Studios and the
leased facility Eagle Creek Studios and which derived revenue
from rental of sound stages, production offices, construction
mills, storage facilities and lighting equipment to film and
television producers. We sold our studios facilities located in
Vancouver, British Columbia on March 15, 2006. Studios
facilities comprised the Companys studios facilities
reporting segment (see note 13 of our accompanying
consolidated financial statements). Therefore, the Company is
not reporting this segment in fiscal 2007. We are considering
building a studio in New Mexico.
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Our primary operating expenses include the following:
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Direct Operating Expenses, which include amortization of
production or acquisition costs, participation and residual
expenses and provision for doubtful accounts.
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Distribution and Marketing Expenses, which primarily include the
costs of theatrical prints and advertising and of
video and DVD duplication and marketing.
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General and Administration Expenses, which include salaries and
other overhead.
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Recent
Developments
Debmar. On July 3, 2006, the Company
acquired all of the capital stock of Debmar-Mercury LLC
(Debmar), an independent distributor of film and
television packages. Consideration for the Debmar acquisition
was $27.5 million, comprised of a combination of
$24.5 million in cash paid on July 3, 2006 and up to
$3.0 million in common shares of the Company to be issued
on January 1, 2008. The number of shares to be issued will
be determined by dividing (i) the result of
$3.0 million minus any losses for which the Company is
indemnified, by
30
(ii) the volume weighted average price of a common share of
the Company during the 10-trading day period ending on
December 31, 2007. The purchase price may be adjusted for
the payment of additional consideration contingent on the
financial performance of Debmar for the five-year period ending
June 30, 2011. The Debmar acquisition provides the Company
a new distribution channel giving it the capacity to syndicate
its own television programming and feature film packages.
Image. During the year ended March 31,
2006, the Company purchased in the open market 1,150,000 common
shares of Image for $3.5 million in cash, representing an
average cost per share of $3.02. Also during the year ended
March 31, 2006, the Company completed a negotiated exchange
with certain shareholders of Image in which the Company
exchanged 1,104,004 of its common shares (at $10.45 per
share) in return for 2,883,996 common shares of Image (at
$4.00 per share). The cost on an exchanged basis of the
additional 2,883,996 common shares of Image is
$11.5 million. As of June 30, 2006 and March 31,
2006, the Company held 4,033,996 common shares of Image acquired
at an average cost per share of $3.72; the shares held by the
Company represent approximately 18.9% of Images
outstanding common shares as of July 31, 2006. The closing
price of Images common shares on June 30, 2006 was
$3.61 per common share (March 31, 2006
$3.70 per common share). As a result, the Company had
unrealized losses of $0.5 million and $0.1 million on
its investment in Image common shares as of June 30, 2006
and March 31, 2006, respectively. The Company has reported
the unrealized losses $0.5 million and $0.1 million as
other comprehensive loss in the condensed consolidated statement
of shareholders equity as of June 30, 2006 and
March 31, 2006, respectively.
CinemaNow. At March 31, 2006, the Company
had a 30% equity interest on an undiluted basis in CinemaNow,
Inc. (CinemaNow). The investment in CinemaNow was
accounted for using the equity method. The investment in
CinemaNow was nil at March 31, 2006. In June 2006, the
Company purchased $1.0 million Series E Preferred
Stock as part of a $20.3 million round of financing secured
by CinemaNow. At June 30, 2006, the Companys equity
interest in CinemaNow is 18.8% on a fully diluted basis and
21.1% on an undiluted basis.
Redbus. On October 17, 2005, the Company
acquired all outstanding shares of Redbus, an independent United
Kingdom film distributor. Consideration for the Redbus
acquisition was $35.5 million, comprised of a combination
of $28.0 million in cash, $6.4 million in Lionsgate
common shares and direct transaction costs of $1.1 million.
In addition, the Company assumed other obligations (including
accounts payable and accrued liabilities and film obligations)
of $19.4 million. At the closing of the transaction the
Company issued 643,460 common shares to Redbus Group Limited
(RGL) valued at approximately $5.6 million, or
$8.77 per share, and will issue up to an expected
additional 94,937 common shares to RGL upon satisfaction of the
terms of the escrow agreement to terminate on May 17, 2007.
Direct transaction costs are considered liabilities assumed in
the acquisition and, as such, are included in the purchase
price. Direct transaction costs consist primarily of legal and
accounting fees. The Company now has the ability to
self-distribute its motion pictures in the UK and Ireland. The
Company also acquired the Redbus library of approximately 130
films.
The Redbus acquisition was accounted for as a purchase, with the
results of operations of Redbus consolidated from
October 17, 2005. Goodwill of $27.1 million represents
the excess of purchase price over the fair value of the net
identifiable tangible and intangible assets acquired.
Lionsgate Studios. On March 15, 2006, the
Company sold its studios facilities located in Vancouver,
British Columbia.
CRITICAL
ACCOUNTING POLICIES
The application of the following accounting policies, which are
important to our financial position and results of operations,
requires significant judgments and estimates on the part of
management. For a summary of all of our accounting policies,
including the accounting policies discussed below, see
note 2 to our March 31, 2006 audited consolidated
financial statements.
31
Generally Accepted Accounting Principles. Our
consolidated financial statements have been prepared in
accordance with U.S. GAAP.
Accounting for Films and Television
Programs. In June 2000, the Accounting Standards
Executive Committee of the American Institute of Certified
Public Accountants issued Statement of Position 00-2
Accounting by Producers or Distributors of Films
(SoP 00-2). SoP 00-2 establishes accounting
standards for producers or distributors of films, including
changes in revenue recognition, capitalization and amortization
of costs of acquiring films and television programs and
accounting for exploitation costs, including advertising and
marketing expenses.
We capitalize costs of production and acquisition, including
financing costs and production overhead, to investment in films
and television programs. These costs are amortized to direct
operating expenses in accordance with SoP 00-2. These costs are
stated at the lower of unamortized films or television program
costs or estimated fair value. These costs for an individual
film or television program are amortized and participation and
residual costs are accrued in the proportion that current
years revenues bear to managements estimates of the
ultimate revenue at the beginning of the year expected to be
recognized from exploitation, exhibition or sale of such film or
television program over a period not to exceed ten years from
the date of initial release. For previously released film or
television programs acquired as part of a library, ultimate
revenue includes estimates over a period not to exceed twenty
years from the date of acquisition. Management regularly reviews
and revises when necessary its ultimate revenue and cost
estimates, which may result in a change in the rate of
amortization of film costs and participations and residuals
and/or
write-down of all or a portion of the unamortized costs of the
film or television program to its estimated fair value. No
assurance can be given that unfavorable changes to revenue and
cost estimates will not occur, which may result in significant
write-downs affecting our results of operations and financial
condition.
Revenue Recognition. Revenue from the sale or
licensing of films and television programs is recognized upon
meeting all recognition requirements of SoP 00-2. Revenue from
the theatrical release of feature films is recognized at the
time of exhibition based on the Companys participation in
box office receipts. Revenue from the sale of videocassettes and
DVDs in the retail market, net of an allowance for estimated
returns and other allowances, is recognized on the later of
receipt by the customer or street date (when it is
available for sale by the customer). Under revenue sharing
arrangements, rental revenue is recognized when the Company is
entitled to receipts and such receipts are determinable.
Revenues from television licensing are recognized when the
feature film or television program is available to the licensee
for telecast. For television licenses that include separate
availability windows during the license period,
revenue is allocated over the windows. Revenue from
sales to international territories are recognized when access to
the feature film or television program has been granted or
delivery has occurred, as required under the sales contract, and
the right to exploit the feature film or television program has
commenced. For multiple media rights contracts with a fee for a
single film or television program where the contract provides
for media holdbacks, the fee is allocated to the various media
based on managements assessment of the relative fair value
of the rights to exploit each media and is recognized as each
holdback is released. For multiple-title contracts with a fee,
the fee is allocated on a
title-by-title
basis, based on managements assessment of the relative
fair value of each title.
Rental revenue from short-term operating leases of studio
facilities is recognized over the term of the lease.
Cash payments received are recorded as deferred revenue until
all the conditions of revenue recognition have been met.
Long-term, non-interest bearing receivables are discounted to
present value.
Reserves. Revenues are recorded net of
estimated returns and other allowances. We estimate reserves for
video 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 video businesses. There may be differences
between actual returns and our historical experience. We
estimate provisions for accounts receivable based on historical
experience and relevant facts and information regarding the
collectability of the accounts receivable.
Income Taxes. The Company is subject to
federal and state income taxes in the United States, and in
several foreign jurisdictions in which we operate. We account
for income taxes according to the Statement of Financial
Accounting Standards No. 109, Accounting for Income
Taxes (SFAS 109). SFAS 109 requires
the recognition of deferred tax assets, net of applicable
reserves, related to net operating loss carryforwards and
certain temporary
32
differences. The standard requires recognition of a future tax
benefit to the extent that realization of such benefit is more
likely than not or a valuation allowance is applied.
Goodwill. On April 1, 2001, the Company
adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other
Intangible Assets. Goodwill is reviewed annually for
impairment within each fiscal year or between the annual tests
if an event occurs or circumstances change that indicate it is
more-likely-than-not that the fair value of a reporting unit is
less than its carrying value. The Company performs its annual
impairment test as of December 31 in each fiscal year. The
Company performed its annual impairment test on its goodwill as
of December 31, 2005. No goodwill impairment was identified
in any of the Companys reporting units. Determining the
fair value of reporting units requires various assumptions and
estimates.
Business Acquisitions. The Company accounts
for its business acquisitions as a purchase, whereby the
purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair value. The
excess of the purchase price over estimated fair value of the
net identifiable assets is allocated to goodwill. Determining
the fair value of assets and liabilities requires various
assumptions and estimates.
Recent
Accounting Pronouncements
Statement of Financial Accounting Standards
No. 123R. In December 2004, the FASB issued
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123(R)). SFAS 123(R) revises
SFAS No. 123 and eliminates the alternative to use the
intrinsic method of accounting under APB No. 25.
SFAS 123(R) requires all public companies accounting for
share-based payment transactions in which an enterprise receives
employee services in exchange for (a) equity instruments of
the enterprise or (b) liabilities that are based on the
fair value of the enterprises equity instruments or that
may be settled by the issuance of such equity instruments, to
account for these types of transactions using a
fair-value-based
method. Effective April 1, 2006, the Company adopted the
fair value recognition provisions of FASB Statement
No. 123(R), Share-Based Payment
(SFAS No. 123(R)), using the
modified-prospective
transition method. Under such transition method, compensation
cost recognized in the three months ended June 30, 2006
includes: (a) compensation cost for all stock options
granted prior to, but not yet vested as of April 1, 2006,
based on the grant date fair value estimated in accordance with
the original provisions of SFAS No. 123, and
(b) compensation cost for all share-based payments granted
on or after April 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of
SFAS No. 123(R). See note 12 for further
discussion of the Companys stock-based compensation in
accordance with SFAS 123(R).
Statement of Financial Accounting Standards Staff Position
115-1. In March 2004, the FASB ratified the
measurement and recognition guidance and certain disclosure
requirements for impaired securities as described in EITF Issue
No. 03-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments. In
November 2005, the FASB issued FASB Staff Position
SFAS 115-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments
(the FSP). The FSP nullifies certain requirements of
EITF
Issue 03-1
and supersedes EITF Topic D-44, Recognition of
Other-Than-Temporary
Impairment upon the Planned Sale of a Security Whose Cost
Exceeds Fair Value. The FSP addresses the determination as
to when an investment is considered impaired, whether that
impairment is
other-than-temporary,
and the measurement of an impairment loss. The FSP also includes
accounting considerations subsequent to the recognition of an
other-than-temporary
impairment and requires certain disclosures about unrealized
losses that have not been recognized as other-than temporary
impairments. The FSP was effective for reporting periods
beginning after December 15, 2005. The adoption of the FSP
did not have a material effect on the Companys results of
operations, financial position or cash flows.
Statement of Financial Accounting Standards
No. 154. In May 2005, the FASB issued
SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of Accounting Principles Board
Opinion No. 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements (SFAS 154).
SFAS 154 changes the requirements for the accounting for,
and reporting of, a change in accounting principle (including
voluntary changes). Previously, changes in accounting principles
were generally required to be recognized by way of a cumulative
effect adjustment within net income during the period of the
change. SFAS 154 requires retrospective application to
prior periods financial statements, unless it is
impracticable to determine either the period-specific effects or
the cumulative effect of the change. SFAS 154 is effective
for accounting
33
changes made in fiscal years beginning after December 15,
2005; however, the statement does not change the transition
provisions of any existing accounting pronouncements. The
Company adopted this pronouncement beginning in the quarterly
period ended June 30, 2006. The adoption of SFAS 154
did not have a material effect on the Companys results of
operations, financial position or cash flows.
EITF Issue
No. 04-8.
During the year ended March 31, 2005, the Company adopted
EITF Issue
No. 04-8
The Effect of Contingently Convertible Debt on Diluted
Earnings Per Share, which applied to reporting periods
ending after the effective date of December 15, 2004. Under
EITF Issue
No. 04-8,
all instruments that have embedded conversion features that are
contingent on market conditions indexed to an issuers
share price are included in diluted earnings per share
computations (if dilutive) regardless of whether the market
conditions have been met. On October 4, 2004, Lions Gate
Entertainment Inc., a wholly owned subsidiary of the Company
sold $150.0 million of 2.9375% Convertible Senior
Subordinated Notes (2.9375% Notes) with a
maturity date of October 15, 2024. 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 Lions Gate Entertainment
Corp., and therefore the 2.9375% Notes would be included in
diluted earnings per share computations for the three months
ended June 30, 2006 and 2005 (if dilutive).
Variable Interest Entities. In January 2003, the FASB
issued FIN 46, which is effective for financial statements
of public companies that have special purpose entities for
periods ending after December 15, 2003 and for public
companies without special purpose entities for periods ending
after March 15, 2004. The standard establishes criteria to
identify Variable Interest Entities (VIEs) and the
primary beneficiary of such entities. An entity that qualifies
as a VIE must be consolidated by its primary beneficiary. As of
June 30, 2006 and March 31, 2006, the Company did not
have any such special purpose entities.
Results
of Operations
Three
Months Ended June 30, 2006 Compared to Three Months Ended
June 30, 2005
Consolidated revenues this quarter of $172.5 million
decreased $21.7 million, or 11.2%, compared to
$194.2 million in the prior years quarter.
Motion pictures revenue of $165.2 million this quarter
increased $18.2 million, or 12.4%, compared to
$147.0 million in the prior years quarter due to the
theatrical and video performance of theatrical releases during
this quarter. Theatrical revenue included in motion picture
revenue of $18.5 million in this quarter decreased
$3.8 million, or 17.0%, compared to $22.3 million in
the prior years quarter. In this quarter, our top four
performing theatrical titles represented individually between 6%
to 39% of total theatrical revenue and in the aggregate 92% of
total theatrical revenue. In the prior years quarter, our
top four performing theatrical titles represented individually
between 3% to 84% of total theatrical revenue and in the
aggregate 98% of total theatrical revenue. Current and prior
theatrical releases contributing significant theatrical revenue
this quarter included Akeelah and the Bee, See No Evil, Larry
the Cable Guy, and La Mujer De Mi Hermano.
Significant theatrical releases in the prior years quarter
included Crash, High Tension, Rize and State
Property. Video revenue included in motion picture revenue
of $114.8 million in this quarter increased
$17.4 million, or 17.9%, compared to $97.4 million in
the prior years quarter. Current and prior video releases
contributing significant revenue in this quarter included
Madeas Family Reunion, Crash, Madea Goes to Jail, Why
Did I Get Married, Lord of War, Barbie Diaries, Waiting and
Saw II. Significant video releases in the prior
years quarter included Diary of a Mad Black Woman,
Alone In the Dark, Beyond the Sea and the Tyler Perry
Plays. Previously released titles such as Saw, Final
Cut and Open Water also continued to generate video
revenues in the prior years quarter. International revenue
included in motion picture revenue of $15.5 million in this
quarter increased $5.5 million, or 55.0%, compared to
$10.0 million in the prior years quarter. Significant
international revenues in this quarter included revenues from
Saw 2, Hard Candy and Fierce People.
Lionsgate UK, established from the acquisition of Redbus in
fiscal 2006, contributed $6.2 million of international
revenue, which included significant revenues from
Revolver, Goodnight and Good Luck, American
Haunting and Hard Candy. Significant international
sales in the prior years quarter included Hotel
Rwanda. Television revenue included in motion picture
revenue of $14.8 million in this quarter decreased
$1.5 million, or 9.2%, compared to $16.3 million in
the prior years quarter. Significant television revenues
in this quarter included
34
revenue generated by The Devils Rejects and Crash.
Significant television revenues in the prior years
quarter included Open Water.
Television production revenue of $7.3 million in this
quarter decreased by $38.6 million, or 84.1%, compared to
$45.9 million in the prior years quarter, in part due
to the majority of the current fiscal years Television
production being anticipated to air in subsequent periods. In
this quarter, 1 hour of
one-hour
series and 6
half-hours
of half hour drama series were delivered, contributing domestic
licensing revenue of $5.6 million and international and
other revenue on
one-hour
series was $0.2 million. Also in this quarter, television
movies contributed revenue of $0.2 million, video releases
of television product contributed revenue of $1.3 million.
In the prior years quarter, 25 hours of
one-hour
drama series and 7
half-hours
of drama series were delivered contributing revenue of
$42.9 million and international and other revenue on
one-hour
drama series was $1.7 million. Also in the prior
years quarter, revenue contributed from television movies,
video releases of television product and non-fiction programming
totaled $1.3 million. Domestic deliveries of
one-hour
drama series in this quarter included 1 hour of Wildfire
Season 2, 2
half-hours
of Weeds Season 2, and 4
half-hours
of the comedy series Lovespring. Television movies
in this quarter included Frankenstein, Bad As I Wanna Be,
and Final Run. In the prior years quarter,
domestic deliveries of
one-hour
drama series included The Cut, Wildfire, Missing and
The Dead Zone and of
half-hour
drama series included Weeds.
Studio facilities revenue decreased to nil in this quarter
compared to $1.4 million in the prior years quarter
due to the sale of Companys studios facilities on
March 15, 2006. Studios facilities comprised the
Companys studios facilities reporting segment.
Direct operating expenses include amortization, participation
and residual expenses and provision for doubtful accounts.
Direct operating expenses of $68.5 million for this quarter
were 39.7% of revenue, compared to direct operating expenses of
$100.3 million, which were 51.6% of revenue for the prior
years quarter. The decrease in direct operating expenses
and direct operating expense as a percent of revenue from the
prior year is primarily driven by the television segment which
experienced a significant decrease in revenue as compared to the
prior year. Direct operating expenses as a percentage of revenue
for the motion pictures segment decreased only slightly year
over year due to changes in the mix of titles released during
the periods. The television segment in particular generated
significant revenues during the prior period which is associated
with higher direct operating expenses as a percentage of
revenue. Direct operating expense in the three months ended
June 30, 2006 was favorably impacted by a $2.2 million
reversal of the provision for doubtful accounts associated with
the collection of a portion of accounts receivable previously
reserved.
Distribution and marketing expenses of $87.0 million in
this quarter decreased $6.5 million, or 7.0%, compared to
$93.5 million in the prior years quarter due to the
theatrical releases during this quarter. Theatrical P&A in
this quarter of $42.3 million decreased $7.7 million,
or 15.4%, compared to $50.0 million in the prior
years quarter. Theatrical P&A in this quarter included
significant costs incurred on the release of titles such as
Akeelah and the Bee, See No Evil, Hard Candy and
La Mujer De Mi Hermano domestically and Hard
Candy and American Haunting released in the UK by
Lionsgate UK. Theatrical P&A in the prior years
quarter included significant expenditures on the release of
titles such as Crash, High Tension and Rize. Video
distribution and marketing costs on motion picture and
television product in this quarter of $42.0 million
increased $1.7 million, or 4.2%, compared to
$40.3 million in the prior years quarter . Video
expenditures on marketing and duplication costs included costs
incurred on current and prior period releases including
Madeas Family Reunion, Crash, Barbie Diaries, Madea
Goes to Jail and Why Did I Get Married. Video
expenditure in the prior years quarter included
significant expenditure on the release of titles such as
Diary of a Mad Black Woman, Alone In the Dark, Beyond the Sea
and the Tyler Perry Plays.
General and administration expenses of $19.2 million in
this quarter increased $1.9 million, or 11.0%, compared to
$17.3 million in the prior years quarter, primarily
due to increases in compensation expense and the additional
costs associated with operating Redbus (now Lionsgate UK). The
increase in compensation expense was due to an increase in
personnel, contractual increases, and an increase in stock-based
compensation from the amortization of unearned compensation
expense on restricted share units granted and stock option
compensation expense. Compensation from our restricted share
units amounted to $0.5 million and nil for the three months
ended June 30, 2006 and 2005, respectively. In addition,
due to the adoption of SFAS No. 123R we recorded
additional
35
compensation expense related to our stock options amounting to
$0.5 million in the three months ended June 30, 2006
with no comparable expense in the prior quarter. These
additional costs were offset by a benefit of $1.4 million
recorded in the three months ended June 30, 2006 compared
to a benefit of $0.8 million recorded in the three months
ended June 30, 2005 related to stock appreciation rights
which are revalued each reporting period. In this quarter,
$1.4 million of production overhead was capitalized
compared to $1.1 million in the prior years quarter.
Depreciation and amortization of $0.5 million this quarter
decreased $0.2 million, or 28.6%, from $0.7 million in
the prior years quarter.
Interest expense of $4.7 million this quarter decreased
$0.2 million, or 4.1%, from prior years quarter of
$4.9 million, primarily due to a reduction in interest
expense on the studios mortgage repaid March 15, 2006 in
connection with the sale of the studio facilities.
Interest rate swaps did not meet the criteria of effective
hedges and therefore a fair valuation loss of $0.3 million
was recorded in the quarter ended June 30, 2005. The
$100 million interest rate swap the Company had entered
into commencing January 2003 ended September 30, 2005. The
CDN$20 million interest rate swap a subsidiary of the
Company had entered into commencing September 2003 and ending
September 2008 was terminated on March 15, 2006 in
connection with the repayment of the remaining balances of the
mortgages payable on the studio facilities.
Interest and other income of $2.6 million for the quarter
ended June 30, 2006, compared to $1.1 million in the
prior years quarter. Interest and other income this
quarter was earned on the cash balance and
available-for-sale
investments held during the three months ended June 30,
2006.
Equity interests of less than $0.1 million this quarter
includes the equity interest in the gain of Maple Pictures
consisting of 10% of the gains of Maple Pictures.
The Company had an income tax benefit of $1.4 million or
27.5% of loss before income taxes in the three months ended
June 30, 2006, compared to a provision of $0.1 million
in the three months ended June 30, 2005. The tax benefit
reflected in the current quarter is primarily attributable to
foreign losses benefited to the extent of existing deferred tax
liabilities in the local jurisdiction and the receipt of refunds
of foreign taxes paid in previous years, offset by
U.S. federal and state taxes. The Companys 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, state and local income taxes and the utilization of
acquired net operating losses.
Net loss for the three months ended June 30, 2006 was
$3.6 million, or basic loss per common share of $0.03 on
103.3 million weighted average shares outstanding. This
compares to net loss for the three months ended June 30,
2005 of $21.8 million or basic loss per common share of
$0.21 on 101.9 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.
Convertible Senior Subordinated Notes. In
December 2003, Lions Gate Entertainment Inc. sold
$60.0 million of 4.875% Notes that mature on
December 15, 2010. We received $57.0 million of net
proceeds, after paying placement agents fees. Offering
expenses were $0.7 million. The 4.875% Notes are
convertible, at the option of the holder, at any time before the
close of business on the business day immediately preceding the
maturity date of the 4.875% Notes, unless previously
redeemed, into our common shares at a conversion rate of
185.0944 shares per $1,000 principal amount of the 4.875%
Notes, which is equal to a conversion price of approximately
$5.40 per share. Lions Gate Entertainment Inc. may redeem
the 4.875% Notes at its option on or after
December 15, 2006 at 100% of their principal amount plus
accrued and unpaid interest if the closing price of our common
shares exceeds 175% of the conversion price then in effect for
at least 20 trading days within a period of 30 consecutive
trading days ending on the trading day before the date of notice
of redemption.
In October 2004, Lions Gate Entertainment Inc. sold
$150.0 million of 2.9375% Notes that mature on
October 15, 2024. We received $146.0 million of net
proceeds after paying placement agents fees. Offering
36
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 our common shares at a conversion rate of
86.9565 shares per $1,000 principal amount of the
2.9375% Notes, which is equal to a conversion price of
approximately $11.50 per share, subject to adjustment upon
certain events. From October 15, 2009 to October 14,
2010, Lions Gate Entertainment Inc. may redeem the
2.9375% Notes at 100.839%; from October 15, 2010 to
October 14, 2011, Lions Gate Entertainment Inc. may redeem
the 2.9375% Notes at 100.420%; and thereafter at 100%.
In February 2005, Lions Gate Entertainment Inc. sold
$175.0 million 3.625% Notes that mature on March 15,
2025. We received $170.2 million of net proceeds after
paying placement agents fees. Offering expenses were
approximately $0.6 million. The 3.625% Notes are
convertible at the option of the holder, at any time prior to
maturity into our common shares at a conversion rate of
70.0133 shares per $1,000 principal amount of the
3.625% Notes, which is equal to a conversion price of
approximately $14.28 per share, subject to adjustment upon
certain events. Lions Gate Entertainment Inc. may redeem the
3.625% Notes at its option on or after March 15, 2012
at 100% of their principal amount plus accrued and unpaid
interest.
Credit Facility. At June 30, 2006, the
Company had a $215 million revolving line of credit, of
which $10 million is available for borrowing by the new
Redbus subsidiaries in either U.S. dollars or British
pounds sterling. At June 30, 2006, the Company had no
borrowings (March 31, 2006 nil) under the
credit facility. The credit facility expires December 31,
2008 and bears interest at 2.75% over the Adjusted
LIBOR or the Canadian Bankers Acceptance rate
(as defined in the credit facility), or 1.75% over the
U.S. or Canadian prime rates. The availability of funds
under the credit facility is limited by the borrowing base.
Amounts available under the credit facility are also limited by
outstanding letters of credit which amounted to
$0.3 million at June 30, 2006. At June 30, 2006
there was $214.7 million available under the credit
facility. The Company is required to pay a monthly commitment
fee of 0.50% per annum on the total credit facility of
$215 million less the amount drawn. Right, title and
interest in and to all personal property of Lions Gate
Entertainment Corp. and Lions Gate Entertainment Inc. is pledged
as security for the credit facility. The credit facility is
senior to the Companys film obligations and subordinated
notes. The credit facility restricts the Company from paying
cash dividends on its common shares. The Company entered into a
$100 million interest rate swap at an interest rate of
3.08%, commencing January 2003 and ended September 2005. The
swap was in effect as long as three month LIBOR was less than
5.0%.
Filmed Entertainment Backlog. Backlog
represents the amount of future revenue not yet recorded from
executed contracts for the licensing of films and television
product for television exhibition and in international markets.
Backlog at June 30, 2006 and March 31, 2006 is
$240.5 million and $143.9 million, respectively.
Cash Flows Provided by Operating
Activities. Cash flows used in operating
activities in the three months ended June 30, 2006 were
$15.0 million compared to cash flows provided by operating
activities in the three months ended June 30, 2005 of
$30.2 million. The decrease in cash flows used in operating
activities primarily resulted from a decrease in accounts
payable and decrease in Film Obligations, offset by a decrease
in accounts receivable in the current period.
Cash Flows Used in Investing Activities. Cash
flows provided from investing activities of $23.1 million
for the three months ended June 30, 2006 consisted of the
net proceeds of $24.9 million of investments
available-for-sale,
offset by $1.8 million for purchases of property and
equipment. Cash flows provided by investing activities of
$1.4 million in the three months ended June 30, 2005
included cash received from the sale of our investment in
Christal Distribution to Maple Pictures Corp. of
$2.0 million, less $0.6 million for purchases of
property and equipment.
Cash Flows Used in Financing Activities. Cash
flows provided by financing activities of $0.4 million in
the three months ended June 30, 2006 consisted of cash
received from the issuance of common shares. Cash flows used in
financing activities of $5.2 million in the three months
ended June 30, 2005 were primarily for repayment of a
promissory note.
37
Anticipated Cash Requirements. The nature of
our business is such that significant initial expenditures are
required to produce, acquire, distribute and market films and
television programs, while revenues from these films and
television programs are earned over an extended period of time
after their completion or acquisition. We believe that cash flow
from operations, cash on hand, investments
available-for-sale,
credit facility availability, tax shelter and production
financing available will be adequate to meet known operational
cash requirements for the foreseeable future, including the
funding of future film and television production, film rights
acquisitions and theatrical and video release schedules. We
monitor our cash flow liquidity, availability, fixed charge
coverage, capital base, film spending and leverage ratios with
the long-term goal of maintaining our credit worthiness.
Our current financing strategy is to fund operations and to
leverage investment in films and television programs through our
cash flow from operations, our credit facility, single-purpose
production financing, government incentive programs and
distribution commitments. In addition, we may acquire businesses
or assets, including individual films or libraries, that are
complementary to our business. Any such transaction could be
financed through our cash flow from operations, credit
facilities, equity or debt financing.
Future annual repayments on debt and other financing
obligations, initially incurred for a term of more than one
year, as of June 30, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
|
Bank loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Film obligations
Minimum guarantees and production obligations initially incurred
for a term of more than one year
|
|
|
2,672
|
|
|
|
45,066
|
|
|
|
12,985
|
|
|
|
|
|
|
|
29,975
|
|
|
|
|
|
|
|
90,698
|
|
Subordinated notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
325,000
|
|
|
|
385,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,672
|
|
|
$
|
45,066
|
|
|
$
|
12,985
|
|
|
$
|
|
|
|
$
|
89,975
|
|
|
$
|
325,000
|
|
|
$
|
475,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal debt and other financing obligation repayments due
during the nine months ending March 31, 2007 consist of
$2.7 million owed to film production entities on delivery
of titles. Principal repayments due are expected to be paid
through cash generated from operations or from the available
borrowing capacity from our revolving credit facility.
Future commitments under contractual obligations by expected
maturity date as of June 30, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
|
Operating leases
|
|
$
|
2,792
|
|
|
$
|
3,650
|
|
|
$
|
3,718
|
|
|
$
|
3,812
|
|
|
$
|
3,913
|
|
|
$
|
2,551
|
|
|
$
|
20,436
|
|
Employment and consulting contracts
|
|
|
11,922
|
|
|
|
8,458
|
|
|
|
1,858
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
22,261
|
|
Purchase obligations
|
|
|
38,515
|
|
|
|
19,128
|
|
|
|
3,000
|
|
|
|
2,900
|
|
|
|
2,900
|
|
|
|
|
|
|
|
66,443
|
|
Distribution and marketing
commitments
|
|
|
17,329
|
|
|
|
20,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
70,558
|
|
|
$
|
51,471
|
|
|
$
|
8,576
|
|
|
$
|
6,735
|
|
|
$
|
6,813
|
|
|
$
|
2,551
|
|
|
$
|
146,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations relate to the purchase of film rights for
future delivery, future film production and development
obligations. Amounts due during the nine months ending
March 31, 2007 of $70.6 million are expected to be
paid through cash generated from operations or from the
available borrowing capacity from our revolving credit facility.
38
|
|
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. We incur certain operating
and production costs in foreign currencies and are subject to
market risks resulting from fluctuations in foreign currency
exchange rates. Our principal currency exposure is between
Canadian and U.S. dollars. The Company enters into forward
foreign exchange contracts to hedge foreign currency exposures
on future production expenses denominated in Canadian dollars.
As of June 30, 2006, we had outstanding contracts to sell
US$12.0 million in exchange for CDN$13.4 million over
a period of five weeks at a weighted average exchange rate of
CDN$1.1179. Changes in the fair value representing an unrealized
fair value loss on foreign exchange contracts outstanding during
the three months ended June 30, 2006 amounted to less than
$0.1 million and are included in accumulated other
comprehensive income (loss), a separate component of
shareholders equity. During the three months ended
June 30, 2006, we completed foreign exchange contracts
denominated in Canadian dollars. The net gains resulting from
the completed contracts were $0.1 million. These contracts
are entered into with a major financial institution as
counterparty. We are exposed to credit loss in the event of
nonperformance by the counterparty, which is limited to the cost
of replacing the contracts, at current market rates. We do not
require collateral or other security to support these contracts.
Interest Rate Risk. Our principal risk with
respect to our debt is interest rate risk. We currently have
minimal exposure to cash flow risk due to changes in market
interest rates related to our outstanding debt and other
financing obligations. Our credit facility has a nil balance at
June 30, 2006. Other financing obligations subject to
variable interest rates include $46.6 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 other
obligations as of June 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
|
Bank Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Film Obligations
Film productions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable(2)
|
|
|
13,246
|
|
|
|
33,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,575
|
|
Subordinated notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
|
|
|
|
60,000
|
|
Fixed(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
150,000
|
|
Fixed(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,000
|
|
|
|
175,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,246
|
|
|
$
|
33,329
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
60,000
|
|
|
$
|
325,000
|
|
|
$
|
431,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Revolving credit facility, which expires December 31, 2008.
At June 30, 2006, the Company had no borrowings under this
facility. |
|
(2) |
|
Amounts owed to film production entities on delivery of titles.
The film production entities incurred average variable interest
rates at June 30, 2006 of U.S. prime minus 4.08%. |
|
(3) |
|
4.875% Notes with fixed interest rate equal to 4.875%. |
39
|
|
|
(4) |
|
2.9375% Notes with fixed interest rate equal to 2.9375%. |
|
(5) |
|
3.625% Notes with fixed interest rate equal to 3.625%. |
|
|
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 (the Exchange
Act). These rules refer to the controls and other
procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports
that it files under the Exchange Act is recorded, processed,
summarized and reported within required time periods.
As of June 30, 2006, the end of the period covered by this
report, the Company carried out an evaluation under the
supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer of the effectiveness of our
disclosure controls and procedures. Our Chief Executive Officer
and Chief Financial Officer have concluded that such controls
and procedures were effective as of June 30, 2006.
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 Companys management, including the
Chief Executive Officer and Chief Financial Officer, also
evaluated whether any changes occurred to the Companys
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.
40
PART II
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings.
|
None
None
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
None
|
|
Item 3.
|
Defaults
Upon Senior Securities.
|
None
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
None
|
|
Item 5.
|
Other
Information.
|
None
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Documents
|
|
|
3
|
.1(1)
|
|
Articles
|
|
3
|
.2(2)
|
|
Notice of Articles
|
|
3
|
.3(1)
|
|
Vertical Short Form Amalgamation
Application
|
|
3
|
.4(1)
|
|
Certificate of Amalgamation
|
|
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 Companys Annual Report on
Form 10-K
for the fiscal year ended March 31, 2005 as filed on
June 29, 2005 (File No. 1-14880). |
|
(2) |
|
Incorporated by reference to the Companys Annual Report on
Form 10-K
for the fiscal year ended March 31, 2006 as filed on
June 14, 2006 (File No. 1-14880). |
41
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.
Name: James Keegan
|
|
|
|
Title:
|
Chief Financial Officer
|
Date: August 9, 2006
42