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________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2001
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-14880
_________________________
LIONS GATE ENTERTAINMENT CORP.
(Exact name of registrant as specified in its charter)
BRITISH COLUMBIA, CANADA
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
_________________________
Suite 3123, Three Bentall Centre
595 Burrard Street
Vancouver, British Columbia V7X 1J1
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (604) 609-6100
_________________________
Securities registered pursuant to Section 12(b) of the Act: None
Title of class Name of exchange on which registered
------------------------------- ------------------------------------
Common Stock, without par value Toronto Stock Exchange
American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
_________________________
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __X__
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of June 1, 2001 was
approximately $100 million.
As of June 1, 2001, 42,449,496 shares of the registrant's no
par value common stock were outstanding.
________________________________________________________________________
TABLE OF CONTENTS
ITEM PAGE
PART I
1. BUSINESS......................................................... 4
2. PROPERTIES....................................................... 22
3. LEGAL PROCEEDINGS................................................ 23
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 23
PART II
5. MARKET OF REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.......................................................... 24
6. SELECTED FINANCIAL DATA.......................................... 26
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION..................... 30
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 41
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 42
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................. 42
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 42
11. EXECUTIVE COMPENSATION........................................... 46
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 51
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 52
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K......................................................... 53
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UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES
HEREIN TO "LIONS GATE," "THE COMPANY," "WE," "US," AND "OUR"
REFER COLLECTIVELY TO LIONS GATE ENTERTAINMENT CORP. AND ITS
SUBSIDIARIES.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
THAT CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "ANTICIPATE,"
"ESTIMATE," OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER
VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. WE CAUTION YOU
THAT THE MATTERS SET FORTH UNDER "RISK FACTORS," CONSTITUTE
CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT
TO SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS.
CURRENCY AND EXCHANGE RATES
All dollar amounts set forth in this report are in Canadian
dollars, except where otherwise indicated. The following table
sets forth (1) the rate of exchange for the U.S. dollar,
expressed in Canadian dollars, in effect at the end of each
period indicated; (2) the average exchange rate for such period,
based on the rate in effect on the last day of each month during
such period; and (3) the high and low exchange rates during such
period, in each case based on the noon buying rate in New York
City for cable transfers in Canadian dollars as certified for
customs purposes by the Federal Reserve Bank of New York.
Fiscal Year Ending March 31
------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Rate at end of period $1.5784 $1.4828 $1.5092 $1.4180 $1.3835
Average rate during period 1.5041 1.4790 1.5086 1.4060 1.3634
High rate 1.5784 1.5140 1.5770 1.4637 1.3835
Low rate 1.4515 1.4470 1.4175 1.3705 1.3310
On June 1, 2001, the noon buying rate in New York City for
cable transfer in Canadian dollars as certified for customs
purposes by the Federal Reserve Bank of New York was Canadian
$1.5324 = US$1.00.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Lions Gate Entertainment Corp. is an integrated North
American entertainment company. We develop, produce and
distribute a broad range of motion picture, television and other
filmed entertainment content through our operating divisions
(Motion Pictures, Television, Animation, Studio Facilities and
CineGate) as well as our CinemaNow Inc. ("CinemaNow") digital
media platform. We have the following divisions and partners:
o Motion Pictures, which includes Production and Theatrical,
Video, Television and International Distribution;
o Television, which includes One-Hour Drama Series, Television
Movies, Non Fiction Programming and International Distribution;
o Animation, which includes an interest in CineGroupe
Corporation ("CineGroupe"), a producer and distributor of
animated feature films and television programming;
o Studio Facilities which includes Lions Gate Studios ("LG
Studios") and leased facilities at Eagle Creek Studios;
o a joint venture with CineGate Production Management Services
2001 Inc. ("CineGate"), a Canadian production services company;
o a 63% interest in CinemaNow, a video on demand distributor
of feature films over the Internet; and
o a 45% interest in Mandalay Pictures, LLC ("Mandalay"), a
U.S.-based producer of class-A motion pictures.
Our registered office and principal executive offices are
located at Suite 3123, Three Bentall Centre, 595 Burrard Street,
P.O. Box 49139, Vancouver, British Columbia, V7X 1J1.
BACKGROUND OF THE COMPANY
On May 26, 1986, IMI Computer Corp. ("IMI"), a British
Columbia company, incorporated under the Company Act (British
Columbia). IMI underwent name changes in 1987 and 1994, and on
November 18, 1996, changed its name to Beringer Gold Corp.
On April 28, 1997, Lions Gate Entertainment Corp., ("Old
Lions Gate"), incorporated under the Canada Business Corporations
Act using the name 3369382 Canada Limited. Old Lions Gate
amended its articles on July 3, 1997, to change its name to Lions
Gate Entertainment Corp. and on September 24, 1997, continued
under the Company Act (British Columbia).
On November 13, 1997, Old Lions Gate and Beringer Gold
Corp., merged under the Company Act (British Columbia) to form
Lions Gate Entertainment Corp.
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On November 13, 1997 our shares began trading on The Toronto
Stock Exchange and on November 17, 1998 our shares began trading
on the American Stock Exchange under the symbol "LGF."
On November 12, 1998 we reverse split our Common Shares from
500 million Common Shares to 250 million Common Shares and
increased the authorized number of Common Shares, as
consolidated, to 500 million.
On December 21, 1999 we issued a total of 13,000 5.25%
convertible, non-voting, redeemable Series A preferred shares.
These preferred shares are entitled to cumulative dividends, as
and when declared by the Board of Directors at a rate of 5.25% of
the offering price per annum, payable semi-annually on the last
day of March and September of each year. At our option, the
dividend may be paid in cash or additional preferred shares. The
preferred shareholders, as a class, have rights related to the
election of between one and three directors, depending on the
number of preferred shares outstanding.
On October 13, 2000 we issued a total of 10 Series B
preferred shares. Holders of these shares have the right to
elect one member of the Board of Directors of the Company, which
can only be Mark Amin.
RECENT DEVELOPMENTS
Since our incorporation in April 1997, we have pursued a
strategy of acquiring and integrating existing companies in the
entertainment business. To this end, we have made several
important acquisitions and have raised equity capital to pursue
our acquisition and development strategies.
In September 2000 we entered into a joint venture with
Cinegate Holdings Inc. to provide services to CineGate, which
provides management services to Canadian limited partnerships
utilizing the Film or Video Production Services Tax Credit and
the Canadian Federal Tax Act to finance productions in Canada.
On September 27, 2000 we arranged a US$200 million revolving
credit facility with a syndicate of global financial
institutions. J.P. Morgan Securities and Dresdner Kleinwort
Wasserstein Securities LLC arranged the five-year financing
commitment. J.P. Morgan Securities is the Administrative Agent,
Dresdner Bank AG is the Syndication Agent, and National Bank of
Canada is the Canadian Facility Agent.
On October 13, 2000 we acquired Trimark Holdings, Inc
("Trimark") by the issuance of 10,229,836 common shares and the
payment of approximately US$22 million in cash and US$4 million
of acquisition costs. Trimark is a worldwide distributor of
entertainment software that primarily distributes feature films
in the domestic home video and theatrical markets and licenses
distribution rights to motion pictures for international markets.
On November 27, 2000 we acquired the 50% remaining interest
in Sterling Home Entertainment (referred to as "Studio Home
Entertainment"). The total consideration of US$2.8 million for
the acquisition consisted of cash consideration of US$2.0
million, forgiveness of an account receivable of US$0.7 million
and US$0.1 million of acquisition costs.
On December 5, 2000 CinemaNow received financing of
US$5.3 million from Microsoft Corp., Blockbuster, Inc., Kuwait
Investment Projects Co. ("Kipco") and others.
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On April 1, 2001 we acquired a 75% equity interest in
Christal Films Distribution Inc. ("Christal Films"), an
independent producer and distributor of French and English
language feature films, by providing working capital.
We continue to integrate our existing operations and to
seek out other acquisition opportunities to complement our
growing entertainment operations.
INDUSTRY BACKGROUND
THE FEATURE FILM INDUSTRY
The feature film industry encompasses the development,
production and exhibition of feature-length motion pictures
and their subsequent distribution in the home video, television
and other ancillary markets. The major studios dominate the
industry, some of which have divisions that are promoted as
"independent" distributors of motion pictures, including
Universal Pictures, Warner Bros. (including Turner Pictures,
New Line Cinema and Castle Rock Entertainment), Twentieth
Century Fox, Sony Pictures Entertainment (including Columbia
Pictures and Columbia Tristar Motion Picture Group), Paramount
Pictures, The Walt Disney Company (including Buena Vista Pictures,
Touchstone Pictures and Miramax Film Corp.) and Metro-Goldwyn-Mayer
Inc. (including MGM Pictures, United Artists Pictures Inc., Orion
Pictures Corporation and Goldwyn Entertainment Company). In
recent years, however, true "independent" motion picture
production and distribution companies have played an important
role in the production of motion pictures for the worldwide
feature film market.
INDEPENDENT FEATURE FILM PRODUCTION AND FINANCING.
Generally, independent production companies do not have access
to the extensive capital required to make big budget motion
pictures, such as the "blockbuster" product produced by the major
studios. They also do not have the capital necessary to maintain
the substantial overhead that is typical of such studios'
operations. Independent producers target their product at
specialized markets and usually produce motion pictures with
budgets of less than US$25 million. Generally, independent
producers do not maintain significant infrastructure. They
instead hire only creative and other production personnel and
retain the other elements required for development, pre-
production, principal photography and post-production activities
on a project-by-project basis. Also, independent production
companies typically finance their production activities from bank
loans, pre-sales, equity offerings, co-productions and joint
ventures rather than out of operating cash flow. They generally
complete financing of an independent motion picture prior to
commencement of principal photography to minimize risk of loss.
INDEPENDENT FEATURE FILM DISTRIBUTION. Motion picture
distribution encompasses the exploitation of motion pictures in
theatres and in markets, such as the home video, pay-per-view,
pay television, free television and ancillary markets, such as
hotels, airlines and streaming films on the Internet.
Independent producers do not typically have distribution
capabilities and rely instead on pre-sales to North American and
international distributors. Generally, the local distributor
will acquire distribution rights for a motion picture in one or
more of the aforementioned distribution channels from an
independent producer. The local distributor will agree to
advance the producer a non-refundable minimum guarantee. The
local distributor will then generally receive a distribution fee
of between 20% and 35% of receipts, while the producer will
receive a portion of gross receipts in excess of the distribution
fees, distribution expenses and monies retained by exhibitors.
The local distributor and theatrical exhibitor generally will
enter into an arrangement providing for the exhibitor's payment
to the distributor of a percentage (generally 40% to 50%) of the
box-office receipts for the exhibition period, depending upon the
success of the motion picture.
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THE TELEVISION INDUSTRY
The North American television industry serves the largest
broadcast market in the world, with a population of nearly 300
million people and more than 120 million homes. Historically,
the North American market has been the source of the major
portion of the revenues earned by television producers. However,
the broadcasting and cable television markets outside North
America have grown in the last decade through the privatization
of broadcasting systems, the proliferation of broadcast licenses
and the introduction of sophisticated delivery technology, such
as cable and satellite transmission systems. This growth has led
to a higher proportion of revenues from international markets.
Generally, a production company will license the right to
broadcast a program to a combination of United States, Canadian
and international broadcasters, including free television and
cable networks or individual television stations in the first run
syndication market. After the initial network, cable licensing
or first run syndication period, the production company will make
the program available for further commercial exploitation on
cable and/or in syndication.
NORTH AMERICAN MARKETS. In North America, programming is
delivered to the end user through free television networks,
cable channels and networks, individual television stations and
satellite delivery services. The following table identifies some
of the specific delivery mediums available in the United States
and Canada:
Medium Channels in the Channels in Canada
United States
-------------- ---------------------- --------------------
Free NBC, CBS, ABC, Fox CBC, CTV and the
television and PBS Global Television
networks Network
Broadcast PAXTV, UPN and The WB
networks
Cable HBO, Showtime, USA TMN, Super Ecran,
Network, Lifetime, SuperChannel,
Fox Family Channel, Canal D and
TNT, F/X, Odyssey and Showcase
TBS
Independent commercial television stations often purchase
programming from syndicators, including major studios and
companies such as Pearson Television and King World Productions,
in exchange for advertising time. This practice is known as
barter syndication. Pay-per-view television allows cable
television subscribers to purchase individual programs, including
recently released motion pictures and live sporting, music or
other events, on a "per use" basis. The program distributor, the
pay-per-view operator and the cable system operator typically
divide the subscriber fees.
Each major free television network in the United States and
Canada currently schedules approximately 22 hours of programming
in prime time (from 8 p.m. to 11 p.m. Monday to Saturday, and 7
p.m. to 11 p.m. on Sunday) each week. United States and Canadian
network prime time programming generates the highest license fees
and generally consists of a mix of television movies, mini-
series, non-fiction/reality, half-hour comedy and hour-length
drama or action/adventure series. In recent years, the market
share of the free television networks in the United States has
fallen significantly due, in large part, to the expansion of
other networks, cable channels and the development of a first
run syndication market.
INTERNATIONAL MARKETS. The development of new television
broadcasting systems outside of North America has sparked the
growth of the worldwide television industry. These broadcasting
systems represent significant new sources of revenue for
television producers. European television is the most striking
example of this growth. Over the last 15 years, governments
in Europe have encouraged a major expansion of the public and
private broadcasting sector. For example, Germany and France
have each
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added six television services in the last 15 years, and the
United Kingdom has added four. This process is just beginning
in the former East Bloc countries and in Japan, Southeast Asia
and Australia. The East Bloc countries represent a potential
market of more than 300 million people, with Japan, Southeast
Asia and Australia representing an even greater combined market.
Other factors contributing to the growth of the worldwide
television industry include the introduction of direct broadcast
satellite services and pay television, increased cable penetration
and the growth of home video. Most foreign broadcasters seek out
both indigenous programming, to satisfy the local content
regulations of their broadcast licenses, and international
programming largely from North America to appeal to a wide
audience.
CANADA'S ROLE IN THE TELEVISION AND FEATURE FILM INDUSTRY
Over the past several years, the Canadian film and
television industry has grown and matured, and at present, it
represents approximately a $3 billion annual business. At the
same time as the Canadian domestic industry has matured, Canada
has become a leading location for internationally originated
productions. Over the past few years, U.S. studios, television
networks and cable services have increasingly produced in Canada,
attracted by the low Canadian dollar, first-class Canadian casts,
crews, locations and facilities and government support for the
industry. U.S. companies with a strong presence in Canada
include:
o major U.S. studios, such as Paramount, The Walt Disney
Company, Universal Pictures and Columbia Tri-Star;
o U.S. networks, such as ABC, NBC, CBS, Fox and PAXTV;
o cable services, such as Showtime, TNT, Disney Channel and
HBO; and
o film companies, such as The Hearst Corporation and Saban
Entertainment, Inc.
European and Asian film companies have also found Canada to
be an attractive location and have often been able to access
Canada's numerous international film and television co-production
treaties. Of Canada's ten provinces and three territories, the
provinces of British Columbia, Ontario and Quebec are most
actively involved in the television and motion picture production
industries, and many other provinces are actively soliciting this
business.
BUSINESS OF THE COMPANY
We produce, distribute and market feature-length films,
television series and mini-series, and television movies, from
initial creative development through principal photography, post-
production, distribution and ancillary sales.
MOTION PICTURES
We develop and produce theatrical motion picture projects
through three separate production entities-Lions Gate Films,
Christal Films and Mandalay. We operate these production units
independently with separate management teams, which provide
distinct creative talents and perspectives. Independent
operation results in greater diversity within our overall release
slate. We produce quality films in the low to mid-budget range
through Lions Gate Films and Christal Films and produce class-A
feature films in the US$15 million to US$75 million range through
Mandalay.
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FILM PRODUCTION
We produce and distribute English and French-language films
generally budgeted at US$20 million or less. In fiscal 2001, we
produced or co-produced and delivered two films, and in fiscal
2000, we produced or co-produced and delivered five films. We
are expanding our production and co-production of feature films.
Our current strategic plan calls for the production or co-
production of ten to twenty features annually. In fiscal 2002
we anticipate our theatrical releases to include the following:
o FRAILTY, Bill Paxton's directorial debut, which stars Bill
Paxton and Mathew McConaughey;
o THE CAT'S MEOW, from award-winning director Peter
Bogdanovich, which stars Kirsten Dunst, Jennifer Tilly,
Eddie Izzard, Edward Herrmann and Cary Elwes;
o THE WASH, starring Dr. Dre and Snoop Dogg and written and
directed by DJ Pooh, the creator of the number-one urban
box office film Friday; and
o MONSTERS BALL, starring Billy Bob Thornton, Heath Ledger
and Halle Berry.
DISTRIBUTION
We also actively distribute feature films for theatrical,
television and home video audiences worldwide. In addition to
distributing films that we produce or co-produce, we also acquire
distribution rights and licenses for feature films produced by
others.
THEATRICAL DISTRIBUTION. We distribute major motion
pictures theatrically in North America in English, French and
other languages and have been responsible for the release of such
prominent films as Dogma, American Psycho, The Red Violin, Shadow
of the Vampire, Big Kahuna, Gods and Monsters, Affliction, Amores
Perros and Elvis Gratton II-Miracle in Memphis. Our releases -
Les Boys and Les Boys II - are the highest grossing films in
Quebec history, and video sales of these films have also set
records.
HOME VIDEO DISTRIBUTION. Lions Gate Home Entertainment
has three U.S. video distribution labels - Trimark Home Video,
Avalanche Home Entertainment and Studio Home Entertainment.
In addition to exploiting our own films, we have been able to
acquire high quality, star-driven films that, while not on par
with a wide theatrical release, are exploitable from a video and
ancillary media perspective. These films include Million Dollar
Hotel with Mel Gibson, Dwight Yoakam's South of Heaven, West of
Hell, Legionnaire with Jean-Claude Van Damme, Storm of the
Century by Stephen King and the creature feature Komodo.
We have an agreement with Universal Studios Home Video
for the licensing of select Lions Gate theatrical releases for
distribution in the United States as well as pay-per-view and
non-theatrical rights.
We distribute to the rental market using direct distribution
and revenue share output arrangements with Blockbuster, Hollywood
Entertainment Corporation, Movie Gallery, Inc. and Rentrak
Corporation.
We distribute or sell directly to mass merchandisers, such
as Wal-Mart Stores Inc., Costco Wholesale Corporation, Target
Corporation, Best Buy Co. Inc., and others who buy large volumes
of our videos and DVDs to sell directly to the consumer.
In Canada, we release our titles to the home video market
through a distribution arrangement with Columbia TriStar Home
Video and through our own label, Avalanche Home Entertainment.
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PAY AND FREE TELEVISION DISTRIBUTION. We exploit a library
of more than 1,500 titles in the cable, free and pay television
markets. We have an output deal with HBO expiring December 31,
2001, for our theatrical releases. The deal grants the network
exclusive pay-television rights to our line-up.
INTERNATIONAL DISTRIBUTION. We license our own productions
and productions acquired from third parties to the international
marketplace on a territory-by-territory basis. We currently have
approximately 55 films in active international distribution.
CLASS-A FEATURE FILM PRODUCTION
MANDALAY. Mandalay is a co-venture with Tigerstripes, a
company controlled by Peter Guber. Mandalay develops and
produces A-level feature length motion pictures with budgets
ranging from US$15 to US$75 million. Mandalay is accounted for
by the equity method and not on a consolidated basis.
In November 1999, Mandalay released its first feature film
production - Sleepy Hollow starring Johnny Depp and Christina
Ricci. The film was nominated for three Academy Awards and
received an Oscar for Art Direction from the Academy of Motion
Picture Arts and Sciences. It grossed in excess of US$100
million in each of the North American and international markets.
ENEMY AT THE GATES starring Jude Law, Joseph Fiennes, Ed
Harris and Rachel Weiss was released in North America on March
16, 2001. As of June 1, 2001, it has grossed in excess of US$75
million worldwide. Mandalay has scheduled The Score, an action
suspense thriller starring Robert DeNiro, Marlon Brando, Ed
Norton and Angela Bassett, for release in July 2001. Servicing
Sarah, a romantic drama starring Mathew Perry and Elizabeth
Hurley, is currently in post-production with an anticipated
release in early 2002. Other projects currently in development
include Beyond Borders, Kung Fu Theatre and End Game.
FINANCING, PRODUCTION AND DISTRIBUTION AGREEMENT WITH
PARAMOUNT. Mandalay entered into a long-term, multi-picture
financing, production and distribution agreement with Paramount,
pursuant to which Paramount will market and distribute Mandalay's
feature films worldwide, except in the United Kingdom, Italy,
Germany, France, Japan, Spain, Australia and Greece. In these
territories, companies with which Mandalay's executives have had
a previous relationship will handle distribution. These foreign
distributors include Constantin Film Gmbh & Co. Verleigh KG,
Nippon Herald Films Inc., Tri-Pictures S.A., Medusa Film SPA,
Village Roadshow Netherlands B.V., Le Studio Canal Plus and
Pathe. Together with Paramount, they contribute approximately
85% to 90% of the cost of each film produced by Mandalay and
make significant contributions to overhead costs. The Paramount
agreement also provides Mandalay with rights to "put" film
projects to Paramount in certain circumstances. In addition,
it gives Paramount a limited reciprocal put, with Mandalay
obligated to distribute the resulting films in its territories.
Other features of the Paramount agreement include a sharing
between Paramount and Mandalay of worldwide merchandising
rights and a provision providing Mandalay with office space
on the Paramount studio lot to use as executive and motion
picture production offices.
Although significant financial risks relating to the
production, completion and release of Mandalay's film projects
remain, we expect that Mandalay's distribution arrangements with
Paramount and the foreign distributors will lower our economic
risk profile for these film projects and result in a more
consistent and varied flow of motion pictures with decreased
capital requirements from Mandalay.
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TELEVISION
ONE-HOUR DRAMA SERIES. We are currently in production of
the second season on twenty-two episodes of Mysterious Ways,
which is broadcast on PAXTV in the United States and CTV in
Canada. NBC has broadcast thirteen episodes of the first season
and has ordered eight additional episodes from season two. In
July 2001, we anticipate starting production on the first
thirteen episodes of No Boundaries, an adventure reality show for
The WB and CanWest Global. We have presold twenty-two episodes
of Tracker, a sci-fi fugitive drama, to the competitive first run
syndication market in the United States and to Telemunchen in
Germany and anticipate starting production in July 2001. In
February 2001 we completed a one hour pilot and a subsequent one
hour show of Dead Zone, a series based on Stephen King's novels.
It has been announced as a mid-season replacement for UPN, and
we are currently negotiating the terms of the UPN sale with the
network and our partner Paramount International Television.
TELEVISION MOVIES. We are actively involved in the
development, acquisition, production and distribution of
television productions in the movie-of-the-week and mini-series
formats. We produced the Linda McCartney Story for CBS that
aired in May 2000. We have recently completed principal
photography on The Pilot's Wife, a two-hour television movie
for CBS starring Christine Lahti and Campbell Scott based on
the best-selling novel by Anita Shreve, and Attack on the Queen,
a two-hour suspense thriller for TBS starring Rob Estes and
Joe Lando. Superfire, a three-hour television movie about
smokejumpers battling an inferno in the Oregon backcountry for
ABC starring D.B. Sweeney, is currently in post-production. In
addition to the television movies already completed or nearing
completion, we have approximately eight projects, representing
an aggregate of 18 hours of television programming, in development
with U.S. broadcasters and cable companies.
NON-FICTION PROGRAMMING. Termite Art Productions ("Termite
Art"), a Television division, created a number of documentary and
reality-based programs for such notable clients as the Discovery
Network, Travel Channel, MTV, The Learning Channel, PBS, A&E, The
History Channel, The Health Channel and Fox Prime Time. Termite
Art produced When Chefs Attack for UPN, the Amazing Animal Videos
series for Animal Planet, Incredible Vacation Videos for the
Travel Channel, Ripley's Believe It or Not for TBS, It's
Burlesque! for A&E and assorted other non-fiction programming.
In addition to distributing Termite Art programs to the domestic
and international markets, we acquire third party productions for
distribution.
ANIMATED MOTION PICTURE AND TELEVISION PRODUCTION
In addition to our live-action film and television
productions, we are also involved in animation and interactive
production through our partner CineGroupe located in Montreal.
CineGroupe develops and produces animated and live-action
television series and television movies and feature film product
using 2D and 3D computer generated imagery and traditional ink
and paint techniques. CineGroupe has produced more than 575 half-
hour animated episodes for television, including such series as
Sagwa, the Chinese Siamese Cat, Mega Babies, Wounchpounch and
Kids from Room 402, and a made-for-television movie, Lion of Oz.
During fiscal 2001, CineGroupe delivered 81.5 half-hours of
programming, including:
o 40 half-hours of Wounchpounch to Saban SINV and Radio-
Canada;
o 18 half-hours of Kids from Room 402 (Season 2) to Fox
Family and Teletoon;
o 7 half-hours of Mega Babies to Fox Family and Teletoon;
Page 11
o 13.5 half hours of Sagwa, the Chinese Siamese Cat to PBS
Kids and TV Ontario; and
o the made-for television movie Lion of Oz to Disney
Channel and Super Ecran.
Projects currently in production include:
o 26 half-hours of What's With Andy;
o 12 half-hours of Kids from Room 402 (Season 3) for Fox
Family and Teletoon;
o the live action feature film Wilderness Station, a co-
production with Credo Entertainment that Lions Gate will
distribute;
o 12 half-hours of Wounchpounch;
o 26 hours of Sagwa, the Chinese Siamese Cat; and
o complimentary web activities for both Sagwa, the Chinese
Siamese Cat and Mega Babies.
In the coming years, CineGroupe plans to expand production
volume and interactive production in response to heightened
international demand for animated product and plans to build its
library.
STUDIO OPERATIONS
Film and television production has increased dramatically
over the past five years in Canada. This increase can be
attributed to:
o close professional contacts between Canadian and U.S.
studios, independent producers, distributors and buyers,
resulting from Canada's geographic proximity to the
United States and shared North American values and
interests;
o lower production costs in Canada than in the United
States and other countries due, in part, to lower guild
and union minimums;
o the favourable exchange rate of the Canadian dollar;
o government tax incentives;
o the availability of location assistance to film and
television producers offered by many Canadian cities and
several provinces;
o a large number of highly trained and professional crews,
technicians and production personnel;
o intensive training for Canadian directors, writers and
producers provided by the Canadian Film Centre;
o flexible trade unions that insist upon less onerous
requirements than their U.S. counterparts; and
o Canada's wide ranging topography (3,400 miles from coast
to coast) and small population (approximately 27 million
people) that make Canada ideally suited for location
shooting.
Page 12
(Urban centers such as Toronto, Vancouver and
Montreal have been disguised as London, Paris, New
York and Chicago.)
We have benefited from the high demand for sound stages and
production office space created by this increase in production
through our ownership in LG Studios and a lease on the Eagle
Creek Studios. Occupying nearly 14 acres in North Vancouver,
British Columbia, LG Studios is one of the largest film and
television studio complexes in Canada. Although the majority of
its revenues are generated from the rental of its sound stages,
production offices, construction mills and storage facilities to
independent film and television producers, LG Studios is host to
a number of long-term industry tenants, such as:
o William F. White Limited, Canada's largest supplier of
cinematic lighting, power and grip equipment;
o Pinewood Sound, a supplier of audio post-production
services;
o Sim Video Productions, Ltd., a supplier of cameras and
post-production editing equipment;
o the local union of one of the major film and
entertainment industry craft guilds; and
o production companies.
Studio capacity usage is consistently above 90%. Current
studio productions include Lions Gate's one hour drama series
Mysterious Ways, the James Cameron television series Dark Angel
and Universal Pictures feature film 24 Hours.
LG Studios' industry tenants complement each other in
providing a broad range of production and post-production
services to the independent producers who regularly make use
of LG Studios' facilities. These facilities consist of seven
state-of-the-art sound stages, ranging from 11,000 to 20,500
square feet in area, and over 130,000 square feet of production,
office and support space, including a state of the art mixing
theatre. We anticipate building our eighth stage, a second
20,500 square foot stage, at LG Studios this fiscal year.
LG Studios owns its own telephone system and rental
furniture and can therefore provide a fully operational
production office to independent producers in a timely manner.
LG Studios' office space has film set facade exteriors suitable
for filming, including commercial and residential districts, a
courthouse and a small-town main street. Producers can also
take advantage of a variety of filming locations situated in
close proximity to the studio complex, including mountain and
ocean settings, ethnic neighbourhoods and downtown cityscapes.
We expect to have continued high occupancy rates for both
our studios and offices for the next year. We have entered into
a five-year operating lease with Eagle Creek Studios in Burnaby,
British Columbia. Eagle Creek Studios has two 17,000 square foot
sound stages with accompanying office space. Its current tenant
is the Warner Bros. feature film Insomnia. The addition of Eagle
Creek Studios increases LG Studios' sound stage inventory to
nine. We have also entered into a revenue share equipment supply
contract with William F. White Limited for equipment on the
stages.
CINEGATE
Through a joint venture with CineGate, we provide services
to a production services company that facilitates the production
of feature length films and television programs in Canada.
CineGate
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provides management services to Canadian limited partnerships
utilizing the Film or Video Production Services Tax Credit and
the Canadian Federal Tax Act to fund productions in Canada.
CINEMANOW
We are involved in video-on-demand distribution over the
Internet through our majority ownership in CinemaNow. CinemaNow
is accounted for by the equity method, not on a consolidated
basis, because we do not have the ability to control the
strategic operating, investing and financing policies of CinemaNow
as a consequence of our inability to elect a majority of the
board of directors of CinemaNow.
CinemaNow distributes feature films on demand over the
Internet and is currently delivering over 2 million streams to
over 500,000 users per month via its website, www.cinemanow.com.
CinemaNow currently streams over 250 feature length films, using
the Windows Media Player as its viewing platform. CinemaNow's
fee based, on demand selections are securely streamed using
Microsoft's Digital Rights Management and iBeam Broadcasting's
proprietary platform. CinemaNow controls exclusive Internet
distribution rights to over 1,000 films from Lions Gate, Allied
Artists Entertainment Group, Inc., Tai Seng Video Marketing and
Salvation film libraries. CinemaNow makes select CinemaNow
movies available through syndication partners including
Hollywood.com and WindowsMedia.com. In December, CinemaNow
closed its series B round of financing led by Microsoft and
included Blockbuster and Kipco. After the series B financing
we own 63% of CinemaNow.
INTELLECTUAL PROPERTY
We are currently using the trademarks "TRIMARK HOME VIDEO"
in connection with our domestic home video distribution "LIONS
GATE FILMS" and "TRIMARK PICTURES" in connection with films
distributed domestically and licensed internationally and "LIONS
GATE TELEVISION" and "TRIMARK TELEVISION" in connection with
licenses to free, pay and cable television. The trademarks
"LIONS GATE ENTERTAINMENT," "LIONS GATE PICTURES" and "TRIMARK
PICTURES" have been registered with the Commissioner of Patents
and Trademarks. We regard our trademarks as valuable assets and
believe that our trademarks are an important factor in marketing
our products.
Copyright protection is a serious problem in the video
cassette and DVD distribution industry because of the ease with
which cassettes and DVDs may be duplicated. In the past, certain
countries permitted video pirating to such an extent that we did
not consider these markets viable for distribution. Our
management believes the problem to be less critical at the
present time. We and other video distributors have initiated
legal actions to enforce copyright protection when necessary.
COMPETITION
Television and motion picture production and distribution
are highly competitive businesses. We face competition from
companies within the entertainment business and from alternative
forms of leisure entertainment, such as travel, sporting events,
outdoor recreation and other cultural activities. We compete
with the major studios, numerous independent motion picture and
television production companies, television networks and pay
television systems for the acquisition of literary and film
properties, the services of performing artists, directors,
producers and other creative and technical personnel and
production financing. In addition, our motion pictures compete
for audience acceptance and exhibition outlets with motion
pictures produced and distributed by other companies. As a
result, the success of any of our motion pictures is dependent
not only on the quality and acceptance of a particular
Page 14
picture, but also on the quality and acceptance of other
competing motion pictures released into the marketplace at
or near the same time.
EMPLOYEES
As of June 1, 2001 we had approximately 250 full-time and
25 part-time regular employees in our worldwide operations and
CineGroupe has a further 265 full-time and 75 part-time regular
employees. We also hire additional employees on a picture-by-
picture basis in connection with the production of our motion
pictures and television programming. We believe that our
employee and labour relations are good.
None of our full time employees are members of unions.
Many film and television productions employ members of a
number of unions, including without limitation the International
Alliance of Theatrical and Stage Employees and Teamsters. A
strike by one or more of the unions that provide personnel
essential to the production of motion pictures or television
programs could delay or halt our ongoing production activities.
Such a halt or delay, depending on the length of time involved,
could cause delay or interruption in our release of new motion
pictures and television programs and thereby could adversely
affect our cash flow and revenues. Our revenues from motion
pictures and television product in our library should not be
affected and may partially offset the effects of a strike to
the extent, if any, that television exhibitors buy more library
product to compensate for interruption in their first-run
programming.
GOVERNMENT INCENTIVES AND REGULATION
GOVERNMENT FINANCIAL SUPPORT. The Canadian Film Development
Corporation, also known as Telefilm Canada, provides financial
assistance in the form of equity investments, interest free and
low interest loans, development and interim financing. Canadian
film and television productions that have significant Canadian
creative, artistic and technical content and that meet certain
published criteria qualify for financial assistance. Telefilm
Canada's provincial counterparts in Quebec, Ontario, Manitoba,
Saskatchewan, British Columbia, New Brunswick and Nova Scotia
also provide financial support to qualifying Canadian content
productions. In 1996, the federal government established the
Canada Television and Cable Production Fund (now operating as
the CTF), a government-cable industry partnership that combined
the former Cable Production Fund, Telefilm Canada's Canadian
Broadcast Program Development Fund and a $100 million
contribution from the Department of Canadian Heritage to form
an approximately $200 million per year television funding
initiative.
"CANADIAN-CONTENT" PRODUCTIONS. Canadian television
broadcasters and cable services generally pay higher license
fees for television programs that meet the "Canadian content"
criteria established by the Canadian Radio-Television and
Telecommunications Commission ("CRTC"), the Canadian counterpart
to the U.S. Federal Communications Commission. The CRTC has
broad jurisdiction over Canadian domestic communications.
Since 1968 broadcasting undertakings, including specialty
television network licensees, have been and continue to be,
licensed and regulated by the CRTC pursuant to the Broadcasting
Act (Canada) and to the applicable regulations thereunder, the
policies and decisions of the CRTC as issued from time to time
and the conditions and expectations established in the license
for each undertaking. Under the Broadcasting Act, the CRTC is
responsible for regulating and supervising all aspects of the
Canadian broadcasting system with a view to ensuring compliance
with certain broadcasting policy objectives set out in the
Broadcasting Act. The CRTC is empowered, for example, under
the Broadcasting Act to issue
Page 15
licenses to eligible entities to operate specialty television
networks. In addition, the CRTC also imposes restrictions on
the transfer of ownership and control of television network
licenses.
The Canadian independent television program production
industry is assisted by the CRTC requirement that each Canadian
over-the-air private broadcaster must broadcast certain minimum
amounts of Canadian content programming. Such rules and
regulations mandating the broadcast of Canadian content programs
enable Canadian producers and distributors to make sales to
Canadian broadcasters that might otherwise have been made by
non-Canadian producers and distributors.
Canadian independent television producers are further
assisted by the CRTC rule permitting simultaneous substitution
in certain circumstances. Simultaneous substitution enables
a Canadian broadcaster to require Canadian cable operators to
delete the signal of a U.S. television broadcaster and to replace
those signals with the signals of the Canadian broadcaster,
including its Canadian television commercials, when the Canadian
broadcaster is broadcasting the same program at the same time as
the U.S. broadcaster. The substitution ensures that Canadians
are exposed to the Canadian broadcasters' commercials. This
result is higher commercial revenues to Canadian broadcasters
in general and enhances their financial capacity to license
programs.
TAX CREDITS. The federal government provides a refundable
tax credit for eligible Canadian-content film or video
productions produced by qualified taxable Canadian corporations.
The federal tax credit is for a maximum amount of 12% of eligible
production costs. The federal Canadian-content tax credits have
been joined by Canadian-content tax credit programs in most
provinces ranging from 9.6% to 22.5%
The federal government "production services" tax credit for
eligible film and television productions produced in Canada, but
which do not otherwise qualify as Canadian content is equal to
11% of qualifying Canadian labor expenditures. Assuming that
Canadian labor expenditures generally represent approximately 50%
of the total production budget, the federal production services
tax credit will net applicants approximately 5.5% of total
production costs. Most provincial governments have also
introduced refundable production services tax credit programs at
a rate ranging from 5.5% to 17.5% of eligible production costs.
CO-PRODUCTION TREATIES. Canada is a party to film and/or
television co-production treaties with over 50 countries, which
enables co-productions to qualify as local content and thus be
eligible for government assistance and financing in more than one
country, which reduces the cost of production. The most active
relationship has traditionally been with France, but recently the
United Kingdom has become a close second in volume of production.
For financial information about our operating segments for
each of the last three fiscal years, refer to "Notes to the
Consolidated Financial Statements Note 21. Segment Information."
For financial information about the results for our
geographic areas for each of the last three fiscal years, refer
to "Notes to the Consolidated Financial Statements Note 21.
Segment Information."
Page 16
RISK FACTORS
FAILURE TO COMBINE THE OPERATIONS OF RECENT ACQUISITIONS AND
MANAGE FUTURE GROWTH MAY ADVERSELY AFFECT OUR BUSINESS.
FAILURE TO INTEGRATE OUR DIVERSE OPERATIONS MAY ADVERSELY
AFFECT OUR BUSINESS. We have acquired several entities over the
last few years. While most of these companies have previously
operated in their respective fields, we face the problems
inherent in combining their different operations. Any failure
by us to do so could have an adverse effect on our potential
profitability.
RAPID GROWTH MAY STRAIN OUR RESOURCES. We are experiencing
a period of rapid growth that could place a significant strain
on our resources. If our management is unable to manage growth
effectively, then our operations could be adversely affected.
We are currently in the process of implementing appropriate
structures to deal with future growth, including management
information systems and internal and external communication
systems. However, there can be no assurance that we will be
able to achieve our growth as planned, increase our work force
or implement new systems to manage our anticipated growth, and
any failure to do so could have a material adverse effect on
our business, results of operations and financial condition.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FUNDING TO MEET
OUR REQUIREMENTS. Our ability to maintain and expand our
development, production and distribution of feature films and
television series and to cover our general and administrative
expenses depends upon our ability to obtain financing through
equity financing, debt financing (including credit facilities)
or the sale or syndication of some or all of our interests in
certain projects or other assets. If our access to existing
credit facilities is not available, and if other funding does
not become available, there could be a material adverse effect
on our business.
OUR SUCCESS DEPENDS ON EXTERNAL FACTORS IN THE FILM AND
TELEVISION INDUSTRY.
OUR SUCCESS DEPENDS ON THE UNPREDICTABLE COMMERCIAL SUCCESS
OF FILMS AND TELEVISION PROGRAMS. Operating in the television
and feature films industries involves a substantial degree of
risk. Each television program and feature film is an individual
artistic work, and unpredictable audience reactions primarily
determine commercial success. The commercial success of a
television program or a feature film also depends upon the
quality and acceptance of other competing programs or feature
films released into the marketplace at or near the same time,
critical reviews, the availability of alternative forms of
entertainment and leisure activities, general economic conditions
and other tangible and intangible factors, all of which are
subject to change and cannot be predicted with certainty. Our
success will depend on the experience and judgment of our
management to select and develop new investment and production
opportunities. There can be no assurance that our television
programs and feature films will obtain favorable ratings or
reviews or that broadcasters will license the rights to broadcast
any of our television programs in development or renew licenses
to broadcast programs currently produced by our predecessors.
Even if licenses to broadcast our television programming are
renewed, the popularity of a particular program and its ratings
may diminish over time.
WE FACE SUBSTANTIAL CAPITAL REQUIREMENTS AND FINANCIAL
RISKS. The production, completion and distribution of television
programs and feature films require a significant amount of
capital. Although we intend to continue to reduce the risks
of our financial involvement in the production costs of our
productions through financial assistance from broadcasters,
distributors, government and industry programs and studios,
there can be no assurance that we will continue to successfully
implement such arrangements or that we would not be subject to
substantial financial risks relating to the production,
completion and release of future television programs and feature
films. In addition, a significant amount
Page 17
of time may elapse between our expenditure of funds and the
receipt of revenues from our television programs or feature
films.
BUDGET OVERRUNS MAY ADVERSELY AFFECT OUR BUSINESS. Actual
motion picture costs may exceed their budget, sometimes
significantly, although television program costs typically do
not. Risks such as labor disputes, death or disability of star
performers, rapid high technology changes relating to special
effects or other aspects of production, shortages of necessary
equipment, damage to film negatives, master tapes and recordings
or adverse weather conditions may cause cost overruns and delay
or frustrate completion of a production. If a film incurs
substantial budget overruns, we may have to seek additional
financing from outside sources to complete production of a
television program or motion picture. No assurance can be
given as to the availability of such financing on terms
acceptable to us. In addition, if a film incurs substantial
budget overruns, there can be no assurance that such costs will
be recouped, which could have a significant impact on our
business, results of operations or financial condition.
DISTRIBUTORS' FAILURE TO PROMOTE OUR PROGRAMS MAY ADVERSELY
AFFECT OUR BUSINESS. Decisions regarding the timing of release
and promotional support of our television programs, feature films
and related products are important in determining the success of
a particular television program, feature film or related product.
As with most production companies, for our product distributed by
others we do not control the manner in which our distributors
distribute our television programs or feature films. Although
our distributors have a financial interest in the success of any
such television programs or feature films, any decision by our
distributors not to distribute or promote one of our television
programs, feature films or related products or to promote
competitors' programs, feature films or related products to a
greater extent than it promotes ours could have a material
adverse affect on our business, results of operations or
financial condition.
WE FACE COMPETITION.
OUR LACK OF DIVERSIFICATION MAY MAKE US VULNERABLE TO
OVERSUPPLIES IN THE MARKET. Most of the major U.S. studios are
part of large diversified corporate groups with a variety of
other operations, including television networks and cable
channels, which can provide both means of distributing their
products and stable sources of earnings that offset fluctuations
in the financial performance of their motion picture and
television operations. The number of films released by our
competitors, particularly the major U.S. film studios, in any
given period may create an oversupply of product in the market,
and that may reduce our share of gross box-office admissions and
make it more difficult for our films to succeed.
WE MAY NOT HAVE ACCESS TO THE LIMITED NUMBER OF PRIME TIME
SLOTS FOR TELEVISION PROGRAMMING. We compete for television
network time slots with a variety of companies that produce
television programming. The number of prime time slots remains
limited, even though the total number of outlets for television
programming has increased over the last decade. As a result,
there is intense competition for these prime time slots. In
addition, television networks are now producing more programs
internally, and thus possibly reducing such networks' demand for
programming from other parties. There can be no assurance that
we will be able to compete successfully against current or future
competitors.
TECHNOLOGICAL ADVANCES MAY REDUCE DEMAND FOR FILMS AND
TELEVISION PROGRAMS. The entertainment industry in general, and
the motion picture industry in particular, are continuing to
undergo significant changes, primarily due to technological
developments. Because of this rapid growth of technology,
shifting consumer tastes and the popularity and availability of
other forms of entertainment, it is impossible to predict the
overall effect these factors will have on the potential revenue
from and profitability of feature-length motion pictures and
television programming.
Page 18
WE ARE REQUIRED TO MAKE ESTIMATES AND ASSUMPTIONS WHEN REPORTING
OUR FILM OPERATING RESULTS AND ACTUAL RESULTS MAY DIFFER.
OUR OPERATING RESULTS DEPEND ON PRODUCT COSTS, PUBLIC TASTES
AND PROMOTION SUCCESS. We expect to generate a substantial
majority of our future revenue from the development and
production of feature films and television programs. Our future
revenues will depend upon the timing and the level of market
acceptance of our television programs and feature films, as well
as upon the cost to produce, distribute and promote these
programs and feature films. The revenues derived from the
production of a television program or feature film depend
primarily on the television program's or feature film's
acceptance by the public, which cannot be predicted and does not
necessarily bear a direct correlation to the production costs
incurred. The commercial success of a television program or a
feature film also depends upon promotion and marketing and
certain other factors. Accordingly, our revenues are, and will
continue to be, extremely difficult to forecast.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. We
expect that our future operating results will fluctuate
significantly as a result of, among other factors:
o the timing of domestic and international releases of
current and future television programs or feature films
we produce;
o the success of our television programs or feature films;
o the timing of the release of related products into their
respective markets;
o the costs to distribute and promote the television
programs and feature films;
o the success of our distributors in marketing our
television programs and feature films;
o the timing of receipt of proceeds generated by the
television programs and feature films from distributors;
o the introduction of new television programs and feature
films by our current and future competitors;
o the timing and magnitude of operating expenses and
capital expenditures;
o the level of unreimbursed production costs in excess of
budgeted maximum amounts;
o the timing of the recognition of advertising costs for
accounting purposes under SoP 00-2; and
o general economic conditions, including continued slowdown
in advertiser spending.
As a result, we believe that our results of operations may
fluctuate significantly, and it is possible that our operating
results could be below the expectations of equity research
analysts and investors.
WE MAY OVERSTATE OR UNDERSTATE OUR TOTAL REVENUES AND COSTS
BECAUSE OF ENTERTAINMENT ACCOUNTING POLICIES. In preparing our
financial statements in accordance with Canadian generally
accepted accounting principles, we follow the guidance issued by
the American Institute of Certified Public Accountants for
Accounting by Producers or Distributors of Films contained in
Statement of Position 00-2 ("SoP 00-2"). Under SoP 00-2, we
recognize revenue on films at the later of the following
Page 19
dates: when films are delivered, or access to the film is
available, to the customer; when the license period begins;
when the fee is determinable and when collection is reasonably
assured. As a result, our expected cash flows may not
necessarily relate to the revenue recognized in a given period.
We capitalize costs of producing and developing films and
television episodes. Capitalized costs include costs of film
rights and screenplays, direct costs of production, interest
and production overhead. We amortize those costs using the
film-forecast-computation method, which involves estimating
unrecognized ultimate revenues of each film. We revise our
ultimate revenue estimates on a quarterly basis. The cost
of film prints is deferred and charged to expense on a
straight-line basis over the period of theatrical release.
We also estimate participation costs each period, which may
vary from the actual participation costs. We assess the
valuation of our films on a quarterly basis. When events or
changes in circumstances indicate that the fair value of a film
is less than its unamortized film costs, we write down the film
to fair value. Fair value of a film is determined using the
discounted cash flow approach based on our estimate of the most
likely cash flows and an appropriate discount rate. As a result
of uncertainties in these estimation processes, actual results
may vary from the estimates.
OUR SUCCESS DEPENDS ON OUR PERSONNEL.
Loss of Key Personnel May Adversely Affect Our Business.
Our success depends to a significant extent on the performance of
a number of our senior management personnel and other key
employees of Lions Gate and our affiliates. In particular, we
will depend on the services of such personnel as Jon Feltheimer,
Tom Ortenberg, Peter Block, Kevin Beggs, Marni Wieshofer, Michael
Burns and Jacques Pettigrew. The loss of the services of key
persons could have a material adverse effect on the Company's
business, operating results and financial condition.
WE MAY FACE CHANGES IN REGULATORY ENVIRONMENT.
FAILURE TO MEET CANADIAN PROGRAMMING RESTRICTIONS MAY
DECREASE THE TIME SLOTS AND INCENTIVE PROGRAMS AVAILABLE TO US.
Canadian broadcasters and cable, pay television and pay-per-view
television services are typically required, as a condition of
their license, to broadcast significant minimum amounts of
programming, including prime time, with Canadian content
programs. The CRTC enforces compliance with these requirements,
and failure to comply can result in fines or the loss of license.
The CRTC has issued detailed criteria that must be met for a
television production to qualify as a "Canadian program." The
criteria require, among other things, that Canadians perform
financial and creative functions. If our productions cease to
qualify as Canadian programs under the regulations and policies
of the CRTC, we may find it more difficult to secure time slots
in Canada for our productions. In addition, if our productions
cease to meet minimum Canadian content requirements, we may be
unable to access various federal and provincial film and
television incentive programs, including refundable tax credits,
as discussed below. We could have an adverse impact on our
business, operations and financial condition if any change in the
policies of Canada or the provinces in connection with their
incentive programs occurs.
WE MAY LOSE INVESTMENT FUNDS AND TAX CREDITS IF WE FAIL TO
FOLLOW CANADIAN STATUTORY REQUIREMENTS. Certain programs
produced by us will be contractually required to be "Canadian
content" programs in accordance with the requirements established
from time to time by the CRTC, the Canadian Audio-Visual
Certification Office, the Income Tax Act (Canada) and the
regulations thereunder. In the event a program does not qualify
under the applicable requirements, we would be in default of our
commitments made in connection with such contracts. Such default
could result in reduction or the elimination of license fees from
the Canadian broadcasters, reduced or even no government
incentives and/or future ineligibility for Canadian government
incentive programs.
The federal government and a number of its provincial
counterparts have established refundable tax credit programs
based on eligible labor expenditures of qualifying production
entities. We expect that
Page 20
certain film and television productions we will produce will
incorporate such refundable tax credits as elements of
production financing. If such productions do not ultimately
qualify for anticipated refundable tax credits, the relevant
production may require additional funds for completion, which
may not be available from other sources.
For our film and television productions to continue to
qualify for several refundable tax credits, we must remain
Canadian-controlled pursuant to the Investment Canada Act, among
other statutory requirements. If we cease to be Canadian-
controlled under the Investment Canada Act, we would no longer
qualify or be entitled to access such refundable tax credits and
other Canadian government and private film industry incentives
which are restricted to Canadian-controlled corporations,
including the ability to produce under Canada's official
co-production treaties with other countries. Such a change in
status would also negatively affect our eligibility to retain the
benefit of refundable tax credits and other incentives arising
prior to a change of control. There are currently no transfer
restrictions on our Common Stock as a class, and we accordingly
may not be able to prevent a change of control. In addition,
certain provincial refundable tax credits require that the
applicable applicant be provincially-controlled. If any of our
affiliates that accesses or intends to access such credits ceases
to be provincially controlled, we would no longer be entitled to
access the applicable provincial refundable tax credit.
WE FACE INHERENT INTERNATIONAL TRADE RISKS THAT MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We distribute motion picture and television productions in
foreign countries and derive a significant percentage of our
revenues from sources outside the U.S. and Canada. As a result,
our business is subject to certain risks inherent in
international trade, many of which are beyond our control. These
risks include:
o changes in local regulatory requirements;
o changes in the laws and policies affecting trade;
o investment and taxes (including laws and policies
relating to the repatriation of funds and to withholding
taxes);
o differing degrees of protection for intellectual
property;
o instability of foreign economies and governments; and
o cultural barriers.
These factors can adversely affect our business and results of
operations.
OUR REVENUES AND OPERATING MARGINS ARE VULNERABLE TO CURRENCY
FLUCTUATIONS.
We cannot accurately predict the impact of future exchange
rate fluctuations between the Canadian dollar and the U.S. dollar
or other foreign currencies on revenues and operating margins,
and fluctuations could have a material adverse effect on our
business, financial condition and results of operations. In
addition, currency and exchange control regulations imposed by
the country in which a production is exploited may also adversely
affect our ability to repatriate to Canada funds arising in
connection with our foreign operations.
Page 21
PROTECTING AND DEFENDING AGAINST INTELLECTUAL PROPERTY CLAIMS MAY
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our ability to compete depends, in part, upon successful
protection of our proprietary property. We protect proprietary
and intellectual property rights to our productions through
available copyright and trademark laws and licensing and
distribution arrangements with reputable international companies
in specific territories and media for limited durations. Despite
these precautions, existing copyright and trademark laws afford
only limited practical protection in certain jurisdictions. We
distribute our products in other jurisdictions in which there is
no copyright and trademark protection. As a result, it may be
possible for unauthorized third parties to copy and distribute
our productions or certain portions or applications of our
intended productions.
In addition, litigation may be necessary in the future to
enforce intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement or
invalidity. Any such litigation could result in substantial
costs and the diversion of resources and could have a material
adverse effect on our business, operating results or financial
condition. From time to time, we may also receive notice of
claims of infringement of other parties' proprietary rights.
There can be no assurance that infringement or invalidity claims
will not materially adversely affect our business, financial
condition or results of operations. Regardless of the validity
or the success of the assertion of claims, we could incur
significant costs and diversion of resources in defending against
claims, which could have a material adverse effect on our
business, financial condition or results of operations.
ITEM 2. PROPERTIES.
Our corporate head office is located at Suite 3123, Three
Bentall Centre, 595 Burrard Street, Vancouver, British Columbia
and occupies approximately 5,401 square feet of space under a
lease agreement that expires on April 30, 2002. Our Canadian
operations and financial personnel are located in leased space of
7,800 square feet expiring in 2006 in Toronto, Ontario and U.S.
corporate executives and operations are located in leased space
of 35,000 square feet expiring in 2009 in Los Angeles,
California.
Christal Films' office is located in Ville St. Laurent,
Quebec, and occupies approximately 15,000 square feet under a
lease agreement expiring in August 2001. Christal Films leases
on a monthly basis a further 5,000 square feet of space in St.
Laurent for storage facilities.
CineGroupe operates from two leased premises in Montreal,
Quebec totalling approximately 70,000 square feet the leases for
which expire in 2006 and also has a 1,280 square feet office in
Los Angeles which lease expires October 2003.
The LG Studios complex is located at 555 Brooksbank Avenue,
North Vancouver, British Columbia. LG Studios' facilities occupy
an approximately 14-acre site in a landscaped, park-like setting.
The land on which the facilities are situated is owned by LG
Studios and is subject to mortgages under four separate term
loans. Loans in the amount of approximately $8.3 million and
$9.2 million mature in April 2003 and July 2003, respectively.
Loans in the amount of approximately $2.6 million mature in
October 2005. We have a five-year operating lease for 50,000
square feet with Eagle Creek Studios in Burnaby, British Columbia
expiring in 2005.
Termite Art has leased office space totalling approximately
10,000 square feet in Studio City, California which expires on
August 1, 2001.
Page 22
Mandalay occupies space on the Paramount Studios lot in Los
Angeles pursuant to the Paramount Agreement. See "Business -
Financing, Production and Distribution Agreement with Paramount."
We believe that our current facilities are adequate to
conduct our business operations for the foreseeable future. We
believe that we will be able to renew these leases on similar
terms upon expiration. If we cannot renew, we believe that we
could find other suitable premises without any material adverse
impact on our operations.
ITEM 3. LEGAL PROCEEDINGS.
We know of no actual, threatened or pending legal
proceedings to which we or any of our subsidiaries is a party
which are material or potentially material, either individually
or in the aggregate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders
during the fourth quarter of fiscal 2001.
Page 23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.
Our Common Stock is listed on the Toronto Stock Exchange
(the "TSE") and the American Stock Exchange ("AMEX") and trades
under the symbol "LGF."
TORONTO STOCK EXCHANGE
The following table sets forth the range of high and low
closing sale prices for our Common Stock, as reported by the TSE,
for our two most recent fiscal years:
High Low
------ ------
Year ended March 31, 2000
First Quarter.................... $5.50 $2.85
Second Quarter................... 3.00 2.20
Third Quarter.................... 3.65 2.50
Fourth Quarter................... 6.90 3.40
Year ended March 31, 2001
First Quarter.................... 5.25 3.05
Second Quarter................... 4.99 2.70
Third Quarter.................... 4.00 2.00
Fourth Quarter................... 4.10 2.75
AMERICAN STOCK EXCHANGE
The following table sets forth the range of high and low
closing sale prices for our Common Stock, as reported by AMEX,
for our two most recent fiscal years:
High Low
------ ------
Year ended March 31, 2000
First Quarter....................US$3.75 US$1.94
Second Quarter................... 2.06 1.50
Third Quarter.................... 2.56 1.63
Fourth Quarter................... 4.94 2.31
Year ended March 31, 2001
First Quarter.................... 3.75 2.00
Second Quarter................... 3.06 2.00
Third Quarter.................... 2.69 1.31
Fourth Quarter................... 2.75 1.75
HOLDERS
As of June 1, 2001, there were 42,449,496 shares issued and
outstanding and 395 registered holders of our Common Stock as
confirmed by our transfer agent.
DIVIDEND POLICY
We have not paid any dividends on our outstanding common
shares since our inception and do not anticipate doing so in the
foreseeable future. The declaration of dividends on our common
shares is within the discretion of our Board of Directors and
will depend upon the assessment of, among other things, our
earnings, financial requirements and operating and financial
condition. At the present time,
Page 24
our anticipated capital requirements are such that it intends
to follow a policy of retaining earnings in order to finance
further development of our business.
We are limited in our ability to pay dividends on our common
shares by limitations under the Company Act (British Columbia)
relating to the sufficiency of profits from which dividends may
be paid. We are also limited in our ability to pay dividends by
our revolving credit facility pursuant to a negative covenant.
The Series A preferred shares are entitled to cumulative
dividends, as and when declared by the Board of Directors at a
rate of 5.25% of the offering price per annum, payable semi-
annually on the last day of March and September of each year.
At our option, the dividend may be paid in cash or additional
preferred shares. We declared, and on September 30, 2000 and
March 31, 2001, respectively, paid in U.S. dollars, cash
dividends of US$817,000 or US$66.94 per share ($1.2 million or
$99.08 per share) and US$817,000 or US$66.94 per share ($1.3
million or $105.51 per share). (2000 - US$406,000 or US$33.29
per share, $591,000 or $48.40 per share).
RECENT SALES OF UNREGISTERED SECURITIES
On March 7, 2001, we issued 600,000 unregistered shares of
our Common Stock to Peter Strauss pursuant to a Settlement and
Partial Release Agreement dated March 6, 2001. Mr. Strauss has
served as President of LG Pictures, International Movie Group,
Inc. and The Movie Group since June 30, 1998. Subsequent to the
commencement of such employment, we became involved in a dispute
with Mr. Strauss. As part of the Settlement and Partial Release
Agreement, pursuant to which we and Mr. Strauss settled and
resolved all claims against each other, we agreed to issue Mr.
Strauss 600,000 shares of our Common Stock. The issuance was
exempt from registration under Section 4(2) of the Securities Act
of 1933 as amended, as a sale of securities not involving a
public offering.
TAXATION
The following is a general summary of certain Canadian
income tax consequences to U.S. Holders (who deal at arm's length
with the Company) of the purchase, ownership and disposition of
Common Shares. For the purposes of this discussion, a "U.S.
Holder" means a holder of Common Shares who (1) for the purposes
of the Income Tax Act (Canada) is not, has not, and will not be
resident in Canada at any time while he or she holds Common
Shares, (2) at all relevant times is a resident of the United
States under the Canada-United States Income Tax Convention
(1980) (the "Convention"), and (3) does not and will not use or
be deemed to use the Common Shares in carrying on a business in
Canada. This summary does not apply to U.S. Holders who are
insurers. Such U.S. Holders should seek tax advice from their
advisors. An actual or prospective investor that is a U.S.
limited liability company in some circumstances may not be
considered to be a resident of the United States for the purposes
of the Convention and therefore may not be entitled to benefits
thereunder.
This summary is not intended to be, and should not be
construed to be, legal or tax advice to any prospective investor
and no representation with respect to the tax consequences to any
particular investor is made. The summary does not address any
aspect of any provincial, state or local tax laws or the tax laws
of any jurisdiction other than Canada or the tax considerations
applicable to non-U.S. Holders. Accordingly, prospective investors
should consult with their own tax advisors for advice with respect
to the income tax consequences to them having regard to their own
particular circumstances, including any consequences of an
investment in Common Shares arising under any provincial, state
or local tax laws or the tax laws of any jurisdiction other than
Canada.
Page 25
This summary is based upon the current provisions of the
Income Tax Act (Canada), the regulations thereunder and the
proposed amendments thereto publicly announced by the Department
of Finance, Canada prior to the date hereof. It does not
otherwise take into account or anticipate any changes in law,
whether by legislative, governmental or judicial action.
The following summary applies only to U.S. Holders who hold
their Common Shares as capital property. In general, Common
Shares will be considered capital property of a holder where the
holder is neither a trader nor dealer in securities, does not
hold the Common Shares in the course of carrying on a business
and is not engaged in an adventure in the nature of trade in
respect thereof. This summary does not apply to holders who are
"financial institutions" within the meaning of the mark-to-market
rules contained in the Income Tax Act (Canada).
Amounts in respect of Common Shares paid or credited or
deemed to be paid or credited as, on account or in lieu of
payment of, or in satisfaction of, dividends to a shareholder who
is not a resident of Canada within the meaning of the Income Tax
Act (Canada) will generally be subject to Canadian non-resident
withholding tax. Such withholding tax is levied at a basic rate
of 25% which may be reduced pursuant to the terms of an
applicable tax treaty between Canada and the country of residence
of the non-resident. Under the Convention, the rate of Canadian
non-resident withholding tax on the gross amount of dividends
beneficially owned by a U.S. Holder is generally 15%. However,
where such beneficial owner is a company which owns at least 10%
of the voting stock of the Company, the rate of such withholding
is 5%.
A purchase of Common Shares by the Company (other than by a
purchase in the open market in the manner in which shares are
normally purchased by a member of the public) will give rise to a
deemed dividend equal to the amount paid by the Company on the
purchase in excess of the paid-up capital of such shares,
determined in accordance with the Income Tax Act (Canada). Any
such dividend deemed to have been received by a person not
resident in Canada will be subject to non-resident withholding
tax as described above. The amount of any such deemed dividend
will reduce the proceeds of disposition to a holder of Common
Shares for purposes of computing the amount of the holder's
capital gain or loss arising on the disposition.
A U.S. Holder will generally not be subject to tax under the
Income Tax Act (Canada) in respect of any capital gain arising on
a disposition of Common Shares (including on a purchase by the
Company) unless at the time of disposition such shares constitute
taxable Canadian property of the holder for purposes of the
Income Tax Act (Canada) and such holder is not entitled to relief
under an applicable tax treaty. If the Common Shares are listed
on a prescribed stock exchange at the time they are disposed of,
they will generally not constitute taxable Canadian property of a
U.S. Holder unless, at any time during the five year period
immediately preceding the disposition of the Common Shares, the
U.S. Holder, persons with whom he or she does not deal at arm's
length, or the U.S. Holder together with non-arm's length
persons, had an interest in or option in respect of, 25% or more
of the issued shares of any class of the capital stock of the
Company. In any event, under the Convention, gains derived by a
U.S. Holder from the disposition of Common Shares will generally
not be subject to tax in Canada unless the value of the Company's
shares is derived principally from real or certain other
immovable property situated in Canada.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be
read in conjunction with the Financial Statements and the Notes
thereto and Item 9, "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The consolidated
statement of operations data and balance sheet data set forth
below have been derived from and are qualified by reference to the
Page 26
Consolidated Financial Statements and Notes thereto for the year
ended March 31, 2001, which have been audited by
PriceWaterhouseCoopers, LLP, included elsewhere herein. Historical
results are not necessarily indicative of the results of operations
which may be expected in the future. See "Currency and Exchange
Rates" for historical exchange rate information.
The financial statements of the Company have been prepared
in accordance with Canadian generally accepted accounting
principles ("GAAP") and, except as noted, the financial data set
forth below is presented in accordance with Canadian GAAP. These
principles differ in some respects from United States GAAP. For
a description of the principal differences between Canadian GAAP
and United States GAAP, see Note 25, "Reconciliation to United
States GAAP" in the Notes to the Consolidated Financial
Statements.
Page 27
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(all amounts in thousands of Canadian dollars, except per share
information)
Fiscal Years Ended March 31,
------------------------------------------
2001 2000 1999 1998
--------- --------- --------- ---------
In accordance with Canadian GAAP:
Revenue........................... $282,226 $271,251 $118,297 $ 64,149
Direct Operating Expenses......... 156,420 222,875 92,931 49,175
--------- --------- --------- ---------
Gross Profit...................... 125,806 48,376 25,366 14,974
--------- --------- --------- ---------
Other Expenses
Distribution and marketing
costs.......................... 51,776 - - -
General and administrative...... 37,710 31,388 23,555 10,337
Amortization.................... 9,887 7,074 5,279 1,781
Interest........................ 10,283 4,466 3,655 951
Non-controlling interest........ 881 1,308 612 1,019
Severance and restructuring
costs......................... - 1,698 1,647 -
--------- --------- --------- ---------
110,537 45,934 34,748 14,088
--------- --------- --------- ---------
Income (Loss) Before Undernoted 15,269 2,442 (9,382) 886
Gain on dilution of investment
in a subsidiary............... - - 839 -
--------- --------- --------- ---------
Income (Loss) Before Income
Taxes and Equity Interests.... 15,269 2,442 (8,543) 886
Income taxes.................... (3,292) 2,000 304 1,439
--------- --------- --------- ---------
Income (Loss) Before Equity
Interest...................... 18,561 442 (8,847) (553)
Equity interest in loss of
Mandalay Pictures, LLC........ (8,298) (5,894) (5,449) -
Other equity interests.......... (1,535) 159 140 -
--------- --------- --------- ---------
Net Income (Loss) for the Year.. 8,728 (5,293) (14,156) (553)
Dividends paid on preferred
shares........................ (2,497) (591) - -
Accretion on Series A preferred
shares........................ (3,115) (727) - -
Adjusted Deficit, Beginning of
Year.......................... (83,016) (14,709) (553) -
--------- --------- --------- ---------
Deficit, End of Year............ $(79,900) $(21,320) $(14,709) $ (553)
========= ========= ========= =========
Basic and Diluted Income
(Loss) Per Common Share....... $ 0.09 $ (0.22) $ (0.58) $ (0.04)
========= ========= ========= =========
Deficit, Beginning of Year........ $(21,320) $(14,709) $ (553) $ -
Effect of change in accounting
policy.......................... (61,696) - - -
--------- --------- --------- ---------
Adjusted Deficit, Beginning of
Year............................ $(83,016) $(14,709) $ (553) $ -
========= ========= ========= =========
In accordance with U.S. GAAP:
Revenue......................... $264,047 $247,264 $114,377 $ 56,942
========= ========= ========= =========
Net Loss for the Year........... $(28,805) $ (2,424) $(25,697) $ (1,435)
========= ========= ========= =========
Basic and Diluted Loss
Per Common Share.............. $ (0.99) $ (0.11) $ (1.05) $ (0.10)
========= ========= ========= =========
Page 28
CONSOLIDATED BALANCE SHEETS
(all amounts in thousands of Canadian dollars)
At March 31,
------------------------------------------
2001 2000 1999 1998
--------- --------- --------- ---------
In accordance with Canadian GAAP
Assets
Cash and equivalents............. $ 10,485 $ 19,283 $ 26,254 $ 9,064
Accounts receivable.............. 183,787 107,344 60,673 47,816
Investment in films and
television programs............. 228,349 128,375 88,949 56,305
Long term investments... ........ 77,230 64,058 72,932 71,048
Capital assets................... 44,212 44,505 40,691 38,757
Goodwill, net of accumulated
amortization.................... 34,924 29,163 31,636 27,207
Other assets..................... 15,233 8,960 6,029 317
Future income taxes.............. - 285 448 -
--------- --------- --------- ---------
$594,220 $401,973 $327,612 $250,514
========= ========= ========= =========
Liabilities
Bank loans....................... 159,765 13,936 $ 12,185 15,581
Accounts payable and accrued
liabilities..................... 123,370 74,965 44,668 26,441
Production and distribution
loans........................... 24,045 41,838 48,415 30,227
Long-term debt................... 65,987 40,607 41,145 27,414
Deferred revenue................. 22,283 19,269 10,780 4,999
Future income taxes.............. 757 - - 1,255
Non-controlling interest......... 1,224 4,944 3,635 646
--------- --------- --------- ---------
397,431 195,559 160,828 106,563
Shareholders' Equity
Capital stock.................... 266,523 226,290 177,068 144,524
Deficit.......................... (79,900) (21,320) (14,709) (553)
Cumulative translation
adjustments..................... 10,166 1,444 4,425 (20)
--------- --------- --------- ---------
196,789 206,414 166,784 143,951
--------- --------- --------- ---------
$594,220 $401,973 $327,612 $250,514
========= ========= ========= =========
In accordance with U.S. GAAP:
Total assets...................... $599,170 $395,219 $318,089 $263,621
========= ========= ========= =========
Page 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.
The following discussion and analysis for the years ended
March 31, 2001, 2000 and 1999 should be read in conjunction with
the Consolidated Financial Statements and the notes to the
Consolidated Financial Statements included in this report.
The functional currency of our business, defined as the
economic environment in which we primarily generate and expend
cash, is the Canadian dollar and United States dollar for the
Canadian and United States-based businesses respectively. In
accordance with generally accepted accounting principles in both
Canada and the United States, the financial statements of United
States-based subsidiaries are translated for consolidation
purposes using current exchange rates, with translation
adjustments accumulated in a separate component of shareholders'
equity.
We develop, produce and distribute a targeted range of film
and television content in North America and around the world. To
reflect our core businesses, this discussion focuses on Motion
Pictures, Television, Animation, Studio Facilities and CineGate.
Please also refer to the table in note 21 to the consolidated
financial statements.
In June 2000, the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants issued
SoP 00-2. SoP 00-2 establishes new accounting standards for
producers or distributors of films, including changes in revenue
recognition and accounting for exploitation costs, including
advertising and marketing expenses. Additionally, in June 2000,
the Financial Accounting Standards Board ("FASB") issued
Statement 139 ("SFAS 139") that rescinded SFAS 53 "Financial
Reporting by Producers and Distributors of Motion Picture Films."
Companies that were previously subject to the requirements of
SFAS 53 must now comply with SoP 00-2. We elected to adopt SoP
00-2 early and, as a result, recorded a one-time after-tax
adjustment to opening retained earnings at April 1, 2000 of $58.9
million (including $5.5 million relating to Mandalay) for the
initial adoption of SoP 00-2.
The new rules require that advertising costs be expensed as
incurred as opposed to the old rules, which generally allowed
advertising costs to be capitalized as part of film costs, and
amortized using the "individual film forecasts" method. All
other exploitation costs, including marketing costs, must also
now be expensed as incurred. Due to the significant advertising
and other exploitation costs incurred in the early stages of a
film's release, we anticipate that the new rules will
significantly impact its results of operations for the
foreseeable future. For example, in the financial quarter where
we release a film theatrically it is likely that significant
losses would be realized on that film. In subsequent financial
quarters when the film is released into other media, such as
video and television, it is likely that a significantly favorable
gross margin would be recorded on that film. In the current
year, "pre-SoP" EBITDA would have been approximately $46.2
million, a $9.9 million difference, compared to "post-SoP" EBITDA
of $36.3 million. A significant portion of the decline due to
the SoP adjustment relates to the allocation of the fair value of
Trimark's library on acquisition under the SoP and advertising
costs relating to the fiscal 2001 theatrical releases of American
Psycho and Shadow of the Vampire. The $9.9 million decrease in
EBITDA equates to a decrease in net income of $5.9 million or
$0.16 per share.
Advertising and other exploitation costs expensed in the
year are now separately disclosed in the Consolidated Statements
of Operations and Deficits as "distribution and marketing costs."
Additionally, under SFAS 53, we classified additions to films
costs as an investing activity in the Consolidated Statement of
Cash Flows, which must now be disclosed as an operating activity
in the Consolidated Statement of Cash Flows.
Page 30
In September 2000, we announced that we had entered into a
joint venture with Cinegate Holdings Inc. to provide services to
CineGate. CineGate provides management services to Canadian
limited partnerships using the Film or Video Production Services
Tax Credit and the Canadian Federal Tax Act to finance production
in Canada.
We also elected early adoption of CICA Handbook Section 3465
- - Income Taxes - which is similar in many respects to FAS 109
under U.S. GAAP. A onetime adjustment to opening retained
earnings at April 1, 2000 of $2.7 million was recorded as
described in note 2(r) to the consolidated financial statements.
In September 2000, we announced we had closed a US$200
million five-year revolving credit facility arranged by J.P.
Morgan Securities, agented by Chase Manhattan Bank in a syndicate
of fifteen nationally and internationally significant banks.
Dresdner Bank AG acted as Syndication Agent and National Bank of
Canada acted as the Canadian Facility Agent.
In October 2000, we announced we had completed the
acquisition of Trimark. The total consideration of US$49.6
million consisted of cash consideration of US$22.0 million,
10.2 million Lions Gate common shares with an estimated fair
value of US$23.6 million and US$4.0 million of acquisition
costs. The acquisition was accounted for as a purchase, with
the results of Trimark consolidated from October 13, 2000 onwards.
The transaction generated goodwill of $8.5 million. We have
successfully integrated Trimark into our operations and the
synergies are expected to exceed the projected US$7 million in
annual costs savings.
As part of the reorganization of our operations as a result
of the acquisition of Trimark the New York office was closed in
January 2001 and the Toronto office was downsized in March 2001.
In November 2000, we acquired the 50% remaining third party
interest in Sterling Home Entertainment (referred to as "Studio
Home Entertainment"). The total consideration of US$2.8 million
consisted of cash consideration of US$2.0 million, forgiveness of
an account receivable of US$0.7 million and US$0.1 million of
acquisition costs. The acquisition gave us access to 100% of the
Studio Home Entertainment library that consists of many
significant straight-to-video titles including Legionnaire,
Letters From a Killer, Murder of Crows, and New Rose Hotel, as
well as distribution rights to the top-selling Komodo.
In December 2000, CinemaNow, our Internet video on demand
business, acquired with Trimark, announced the completion of a
second round of preferred share financing consisting of 5.3
million shares for US$4.5 million. Significant participants in
this round of financing included Blockbuster, Microsoft and
private venture funds. This transaction resulted in a dilution
of our interest from 77.2% to 63%.
OVERVIEW
Including the non-cash equity interests in the operating
losses of Mandalay and CinemaNow, totaling $9.8 million as
disclosed in the Consolidated Statements of Operations and
Deficits, net income for the year ended March 31, 2001 was $8.7
million or $0.09 per share (including the Series A preferred
share dividends and accretion on the Series A preferred shares)
on 36.2 million weighted average commons shares outstanding
compared to a net loss of $5.3 million or $0.22 per share
(including the Series A preferred share dividends and accretion
on the Series A preferred shares) on 30.7 million weighted
average common shares outstanding for the year ended March 31,
2000 and a net loss of $14.2 million or $0.58 per share on 24.6
million weighted average common shares outstanding for the year
ended March 31, 1999. Our $8.3 million (2000-$5.9 million)
non-cash equity interest in the loss of Mandalay is comprised
of 100% of the operating losses of Mandalay for the year of
$6.4 million, plus
Page 31
amortization of previously capitalized pre-operating period
costs of $1.9 million. Our $1.5 million non-cash equity
interest in the loss of CinemaNow comprises 66.9% of the
non-cash operating losses of CinemaNow for the period
October 13, 2000 to March 31, 2001 of $1.2 million, plus
amortization of goodwill amounting to $0.3 million, which
arose at the time of the purchase of Trimark.
Excluding the non-cash equity interests in the operating
losses of Mandalay and CinemaNow, we generated earnings for the
year ended March 31, 2001 of $18.6 million, an improvement of
$18.2 million compared to the equivalent earnings amount of $0.4
million in the year ended March 31, 2000 and a loss of $8.8
million in the year ended March 31, 1999. These results are
equivalent to earnings per share of $0.32 in fiscal 2001, loss per
share of $0.02 in fiscal 2000 and a loss per share of $0.35 in
fiscal 1999, all other things being equal.
Excluding the adoption of SoP 00-2, net income for the year
ended March 31, 2001 would have been $14.6 million or $0.25 per
share (including the Series A preferred share dividends and
accretion on the Series A preferred shares).
EBITDA (defined as earnings before interest, provisions for
income taxes, amortization, non-controlling interests, equity
interests in losses and severance and relocation costs) of $36.3
million for the year ended March 31, 2001 has increased $19.3
million or 113.5% compared to $17.0 million for the year ended
March 31, 2000 and increased $34.5 million or more than twenty-
fold compared to $1.8 million for the year ended March 31, 1999.
EBITDA should be considered in addition to, but not as a
substitute for, operating income, net income and other measures
of financial performance reported in accordance with generally
accepted accounting principles.
RESULTS OF OPERATIONS
FISCAL 2001 COMPARED TO FISCAL 2000
Revenue in fiscal 2001 of $282.2 million increased $10.9
million or 4.0% compared to $271.3 million in fiscal 2000.
Revenue increased significantly in Motion Pictures and was
down slightly in Television and Animation due to the timing of
deliveries.
Motion Pictures fiscal 2001 revenue of $173.9 million
increased $34.9 million or 18.4% compared to $146.9 million in
fiscal 2000. The increase is due primarily to the inclusion of
Trimark's post-acquisition revenue for the period October 13,
2000 to March 31, 2001 of $50.3 million, partially offset by
decreased revenue in Lions Gate Films of $23.3 million year-over-
year. In Lions Gate Films, the majority of the year over year
decrease was in theatrical distribution. In fiscal 2000, Dogma
(a theatrical distribution service deal) contributed theatrical
revenue of close to $20.0 million and to a large extent explains
the decrease in fiscal 2001. The Dogma service deal generated
fees of 15%, which put negative pressure on the prior year's
gross margin. Significant theatrical releases in the current
year included: American Psycho; Shadow of the Vampire; and Big
Kahuna. Significant video releases in the current year included:
American Psycho; Big Kahuna; and Million Dollar Hotel.
Television and international sales revenue were relatively
consistent year-over year. Trimark contributed video revenue of
approximately $30.0 million, international sales revenue of
approximately $14.0 million and television revenue of
approximately $7.0 million. Significant revenue generators for
Trimark included Shriek, Saturday Night Live "Best of" comedy
series, and Held Up.
Television revenue of $71.5 million decreased by $10.3
million or 12.6% from $81.8 million in the prior year, due
primarily to fewer television movie deliveries partially offset
by increased deliveries in
Page 32
Termite Art. Trimark contributed Television revenue of
$3.7 million. In the current year, the one-hour drama series
business contributed revenue of $44.5 million. Deliveries
in the current year included 22 episodes of Mysterious Ways
to PAX TV, NBC (13 of 22 episodes), CTV and Columbia Tristar
and 7 episodes of Higher Ground to Fox Family, WIC and Paramount.
In the prior year, 37 hours of one-hour drama series were
delivered for revenue of $46.0 million. Termite Art contributed
revenue of $18.4 million in the current year on the delivery of
68.5 hours of non-fiction programming including 6.5 hours of
Incredible Vacation Videos to Travel Channel; 6.5 hours of After
Midnight to Discovery; 6 hours of VH1 Confidential to VH1; 5
hours of MTV Video Party; and 4 hours of Great Streets to PBS.
In addition, producers fees were earned on the delivery of 19
episodes of Ripley's Believe It Or Not to UPN. In the prior
year, Termite Art delivered 35 hours of proprietary programming
and 12 hours of Ripley's Believe It or Not for total revenue of
$11.3 million. The first Avalanche project, The Void, was
delivered to international territories in the current year and
producer fees were earned on four productions. In the prior
year, four television movies were delivered for revenue of $24.3
million. Under Canadian GAAP, tax credits earned are included in
revenue. Under U.S. GAAP, tax credits earned are recorded as an
offset to income tax expense. In fiscal 2001, $18.2 million of
tax credits earned were included in revenue.
In Animation, CineGroupe's revenue of $29.7 million
decreased $5.9 million or 16.6% compared to $35.6 million in the
prior year. The decrease was due to the timing of deliveries -
several episodes were not available for delivery at March 31 and
were subsequently delivered in the first quarter of fiscal 2002.
In the current year a total of 81.5 half-hours of television
programming were delivered - 40 half-hours of Wunchpunch to Radio
Canada and Saban, 18 half-hours of Kids From Room 402 to TQS and
Fox Family, 13.5 half-hours of Sagwa, the Chinese Siamese Cat to
PBS and TVO and 7 half-hours of Mega Babies to Teletoon and Fox,
as well as the television movie Lion of Oz to Disney Channel and
TMN. Library revenue of $1.2 million, interactive revenue of
$0.8 million and service and other revenue of $1.3 million was
earned in the current year.
Studio Facilities revenue of $5.5 million decreased $1.5
million or 21.4% from the prior year's revenue of $7.0 million
due to the elimination on financial statement consolidation of
$1.5 million of intercompany revenue earned from our productions
filmed at our Studio Facilities. Stage and office occupancy
levels averaged 94% and 85% respectively for the year compared to
96% and 92% respectively in the prior year.
Since commencing CineGate operations in September 2000,
Lions Gate has earned commission revenue of $1.6 million on
approximately $270.0 million of production financing arranged
through the Cinegate joint venture. An additional $200.0 million
of production financing is expected to be completed in the first
quarter of fiscal 2002.
Gross profit for the year ended March 31, 2001 was $125.8
million with a 44.6% gross margin, compared to gross profit of
$48.4 million with a gross margin of 17.8% in the prior year.
Gross profit increased $77.4 million while the gross margin
increased 26.8 percentage points year-over-year. The primary
reason for the increase year-over-year is due to the adoption of
SoP 00-2 whereby advertisering expenses are now disclosed as a
component of other expenses rather than as a component of gross
profit. In addition, the gross margin by business improved
year-over-year in all businesses, with the exception of
Studio Facilities, which decreased primarily due to the
revenue elimination relating to our productions.
The most significant influence on the gross margin compared
to the prior year was in Motion Pictures, where the gross margin
of 28.1% earned in the current year exceeded the gross margin of
18.7% earned in the prior year by 9.4 percentage points. The
majority of the increase is due to the contribution of the Trimark
library post acquisition, which accounts for 5.1% of the increase
and favorable gross margins earned on library sales during the
year, partially offset by the net impact of the adoption of SoP
00-2 of $8.3 million.
Page 33
Television's gross margin of 17.1% compares favorably to the
prior year's gross margin of 9.2%. Gross margin improvement can
be attributed partially to the elimination of intercompany studio
costs (see above) which contributed to a favorable gross margin
achieved on Mysterious Ways, partially offset by the net impact
of the adoption of SoP 00-2 of $2.5 million.
The gross margin in Animation improved to 28.4% in the
current year from 24.9% in the prior year as in the prior year
the gross margin was negatively impacted by the delivery of the
feature film Heavy Metal, which generated a gross margin of
approximately 15% compared to animation television series, which
typically generate gross margins in the 25% to 30% range. In
addition, CineGroupe recognized a favorable SoP adjustment in the
year of $0.7 million.
Cinegate revenues are at a 100% gross margin due to the
nature of the services provided, and did not exist in the prior
year.
Other expenses, which consist primarily of distribution and
marketing costs of $51.8 million and general and administrative
expenses of $37.7 million, increased $58.1 million or 185.0%
over other expenses in the prior year of $45.9 million.
In prior years, distribution and marketing costs were expensed
as a component of gross profit. In Motion Pictures, general and
administrative expenses increased $6.8 million or 42.0% to $23.0
million from $16.2 million in the prior year primarily as a
result of combining operations with Trimark in the current year
and the growth of the production and video distribution businesses.
General and administrative expenses in corporate increased
primarily due to increased salaries and benefits expenses.
General and administrative expenses decreased in Television
as a result of cost savings initiatives and remained relatively
consistent year-over-year in Animation and Studio Facilities.
Year-over-year interest expense increased by $5.4 million due to
borrowings related to the purchase of Trimark and increased production
and acquisition activity and bank charges related to bank facilities.
Goodwill arising on the Trimark acquisition contributed to an increase
in amortization of $2.8 million. Partially offsetting these
increases, in the prior year $1.6 million of severance and
relocation costs were expensed, which did not exist in the
current year.
On March 16, 2001 Mandalay delivered its second feature
film, Enemy at the Gates starring Jude Law, Joseph Feinnes, Ed
Harris and Rachel Weicz, directed by internationally-acclaimed
director Jean Jacques Annaud and filmed in Germany. Enemy at the
Gates generated a domestic box office in excess of US$50 million
and has performed well overseas. Mandalay's investment in Enemy
at the Gates is not significant and Mandalay expects it to
generate a favorable cash return. Mandalay's next release is The
Score, an action suspense thriller, starring Robert DeNiro,
Edward Norton, Marlon Brando and Angela Basset and directed by
Frank Oz, filmed in Montreal. The Score is expected to be
released theatrically in the U.S. in July 2001. Principal
photography was recently completed on Servicing Sarah, a romantic
comedy starring Matthew Perry and Elizabeth Hurley. Servicing
Sarah is expected to be released next winter. Other Mandalay
projects currently in development include: Beyond Borders, Kung
Fu Theatre and End Game. The non-cash equity interest in the
loss of Mandalay consists of operating losses of $6.4 million
and amortization of previously deferred pre-operating costs of
$1.9 million. We regularly investigate opportunities that would
enable us to realize the value added to our investment in
Mandalay.
Other equity interests consists primarily of our 66.9%
non-cash equity interest in CinemaNow's operating loss
of $1.2 million and amortization of goodwill of $0.3 million.
In the current year, we recognized the benefit of previously
unrecognized income tax loss carry forwards of approximately $5.5
million. At March 31, 2001, we have Canadian non-capital losses
of approximately $52.8 million available to reduce Canadian
income taxes carried forward for seven years and US$21.3 million
for U.S. income tax losses carried forward for twenty years.
Page 34
Our consolidated financial statements have been prepared in
accordance with Canadian GAAP. The material differences between
the accounting policies used by us under Canadian GAAP and U.S.
GAAP are disclosed in note 25 to the financial statements.
Under U.S. GAAP the net loss was $50.2 million (2000
- - $2.4 million net loss; 1999 - $25.7 million net loss). The
U.S. GAAP net loss per share in the current year including the
equity interest in the non-cash operating loss of Mandalay, the
accounting change and dividends and accretion relating to the
preferred shares issued in the current year would have been $1.50
(2000 - $0.11).
In the year ended March 31, 2001 the earnings under U.S. GAAP
are lower than under Canadian GAAP due primarily to the recognition
of the opening SoP adjustment as a reduction in net income under
U.S. GAAP.
FISCAL 2000 COMPARED TO FISCAL 1999
Revenue in fiscal 2000 of $271.3 million, increased $153.0
million or 129% compared to $118.3 million in fiscal 1999.
Revenue increased significantly in all businesses. The most
significant year-over-year percentage increase was in Television
where revenue of $81.8 million increased $69.3 million or more
than 5-fold over the prior year's revenue of $12.5 million. The
one-hour series business, which did not exist in the prior year,
contributed revenue in excess of $46 million. Fiscal 2000
deliveries included: 15 hours of the drama series Higher Ground
to Paramount, Fox Family and WIC; and 22 hours of the one hour
drama series Hope Island to Paramount, PAX and Showcase
Television. Television movie revenue of $24.3 million increased
$22.9 million over fiscal 1999 revenue of $1.4 million as the
prior year's revenue consisted of producer fees and revenue
participations compared to license fees earned on proprietary
productions delivered in the current year. Television movies
delivered in fiscal 2000 included Final Run to CBS, King of the
World to ABC, Shutterspeed to TNT and First Daughter to TBS. 47
hours of non-fiction programming were delivered in fiscal 2000 by
Termite Art including 13 hours of Wild Rescues to Discovery and
12 hours of Ripley's Believe It or Not. Under Canadian GAAP, tax
credits earned are included in revenue. Under U.S. GAAP, tax
credits earned are recorded as an offset to income tax expense.
In fiscal 2000, $24.0 million of tax credits earned were included
in revenue.
In Motion Pictures, revenue of $146.9 million also increased
$69.3 million, or 89.3% on a percentage basis, over the prior
year's revenue of $77.6 million. In Lions Gate Films revenue in
all divisions increased year-over-year. The most significant
increases were in theatrical distribution where revenue increased
$24.5 million or 213% to $36.0 million compared to $11.5 million
in the prior year and video distribution where revenue increased
$24.0 million or 61.5% to $63 million compared to $39.0 million
in the prior year. Significant theatrical releases in fiscal
2000 included: Dogma and Red Violin (Oscar winner for Best
Original Score) in the U.S. and Elvis Gratton in Canada.
Significant video releases in fiscal 2000 included: Affliction;
Gods and Monsters; Red Violin and Dinner Game. The most
significant production in fiscal 2000 was American Psycho, which
was delivered in several international territories prior to March
31, 2000. American Psycho was released theatrically in North
America on April 14 and achieved North American box office in
excess of US$15 million. Revenue generated in North America and
the majority of the international territories was recognized in
fiscal 2001.
In Animation, CineGroupe's revenue of $35.6 million
increased $13.6 million or 61.8% over the prior year's revenue of
$22.0 million. This increase occurred despite the fact that
CineGroupe delivered 79 half-hours of animation programming in
fiscal 2000 compared to 135 half-hours in the prior year. Fiscal
2000 deliveries included: 22 half-hours of Kids From Room 402 to
Fox Family; 20 half-hours of Jim Bouton to Radio Canada and
Television France (TF1); 19 half-hours of Mega Babies and 14 half-
Page 35
hours of Bad Dog to Fox Family and Teletoon and the feature film
Heavy Metal. The fiscal 2000 revenue per half-hour was
significantly increased by the delivery of Heavy Metal which was
distributed by Columbia Tristar in the U.S. and Lions Gate Films
in Canada. In addition, the prior year's deliveries included 44
half-hours of Funamble, which had a relatively low average revenue
per half hour, and several co-productions.
Studio Facilities revenue of $7.0 million increased $800,000
or 13% over the prior year's revenue of $6.2 million. This was
due in part to the opening of a seventh sound stage in September
1999. Stage and office occupancy levels averaged 96% and 92%
respectively for the year.
Gross profit for the year ended March 31, 2000 was $48.4
million with a 17.8% gross margin compared to gross profit of
$25.4 million with a 21.4% gross margin in fiscal 1999. Gross
profit increased $23.0 million or 91% and the gross margin
decreased 3.67 percentage points compared to the prior year.
The most significant influence on the gross margin compared
to the prior year was in Television where the gross margin came
in at 9.2% in fiscal 2000 compared to 20.4% in the prior year.
In the prior year, a significant portion of Television revenue
consisted of producer-for-hire fees and revenue participations
relating to television movies, not proprietary productions. As
noted in fiscal 1999's Management Discussion and Analysis, as a
result of our strategy to concentrate on proprietary productions
rather than earning producer-for-hire fees only, Television
revenue was expected to increase going forward, however, it would
not be possible to maintain a gross margin for the Television
business at the rate that was enjoyed in fiscal 1999. We
expected the ongoing gross margin for this business to be in the
11% to 12% range in the short term. We were in the process of
expanding its international television distribution capabilities
and expected that the Television gross margin would improve in
the future when we were able to more accurately assess
international sales risk.
The gross margins in the other businesses were essentially
flat, except that Motion Pictures gross margin increased from
17.3% in 1999 to 18.7% in fiscal 2000 primarily due to growth in
the video distribution business and a reduction in the required
provision for investment in film.
Other expenses of $45.9 million increased $11.2 million or
32.2% over other expenses in fiscal 1999 of $34.7 million,
primarily due to an increase in general and administrative
expenses of $7.8 million year-over-year. Approximately half of
the year-over-year increase in general and administrative
expenses was in Motion Pictures where general and administrative
expenses increased $4.2 million to $16.2 million in fiscal 2000
compared to $12.0 million in the prior year. This increase was
due to the significant growth experienced in all divisions of
Lions Gate Films. Television general and administrative expenses
increased $3.9 million over the prior year. However, excluding
$4.6 million of capitalized costs in fiscal 1999 relating to the
pre-operating period of the one hour series business that
otherwise would have been classified as general and
administrative expenses, general and administrative expenses on a
gross basis in Television decreased year-over-year. Animation
general and administrative expenses increased $0.7 million over
fiscal 1999 due to head count increases as a result of the
creation of the new media department and the opening of offices
in Toronto and Los Angeles. Corporate overhead decreased $1
million year-over-year due to the consolidation of administrative
functions and cost saving initiatives instituted at head office.
Severance and relocation costs recorded in fiscal 2000 primarily
related to severance for several senior executives compared to
severance and relocation costs recorded in fiscal 1999 that
related to severance and relocation associated with the
centralizing of certain head office functions in Toronto.
Overall, as a percentage of revenue, general and administrative
expenses decreased to 11.6% of revenue in fiscal 2000 compared to
19.9% in fiscal 1999.
Page 36
In fiscal 2000 Mandalay delivered its first feature film,
Sleepy Hollow starring Johnny Depp and Christina Ricci. Sleepy
Hollow generated North American box office and foreign box office
each in excess of US$100 million and was nominated for three
Academy Awards. In March 2000 Sleepy Hollow won the Oscar for
Art Direction.
The fiscal 2000 provision for income taxes consisted of a
$1.7 million provision at CineGroupe and a $0.3 million tax
provision at LG Studios. In fiscal 1999, the tax recovery was
due primarily to the benefit of approximately $3.6 million of
losses arising in the U.S. operations and at corporate, which
were not tax effected. At March 31, 2000 we had income tax
losses in excess of $13.8 million available to reduce future
income taxes payable. Income tax losses can be carried forward
seven years in Canada and twenty years in the U.S.
In fiscal 2000 the financial statements were restated to be
in compliance with Item 18 of Form 20-F, which includes full U.S.
GAAP disclosure not required under Item 17, the basis of previous
filings. This change was required due to the filing requirements
of an F-4 registration statement in the U.S. in connection with
the Trimark acquisition. Comparative amounts for the year ended
March 31, 1999 were restated to conform to Item 18 disclosure.
Under U.S. GAAP the fiscal 2000 net earnings excluding the
equity interest in the non-cash operating loss of Mandalay would
have been $3.5 million (1999 - $20.4 million net loss). The U.S.
GAAP net earnings per share in fiscal 2000 including the equity
interest in the non-cash operating loss of Mandalay and dividends
and accretion relating to the preferred shares issued in the
current year would have been $0.11. This represented a
significant improvement over the prior year's loss per share of
$1.05.
In fiscal 2000 the net loss under U.S. GAAP was lower than
the net loss under Canadian GAAP due to the reversal of the
amortization of deferred pre-operating costs under Canadian GAAP,
which were expensed under U.S. GAAP in the year ended March 31,
1999.
LIQUIDITY AND CAPITAL RESOURCES
Earnings before interest, provision for income taxes,
deprecation, amortization, minority interest and equity interests
("EBITDA") before severance and relocation costs more than
doubled to $36.3 million from $17.0 million in fiscal 2000 and
increased more than twenty-two-fold from $1.8 million in fiscal
1999.
Cash flows from operating activities before working capital
decreased $2.0 million or 6.3% to negative $29.7 million in
fiscal 2001 from negative $31.7 million in fiscal 2000 and
decreased $2.8 million or 9.7% to negative $31.7 million in
fiscal 2000 from negative $28.9 million in fiscal 1999, all
primarily due to the increased investment in films and television
programs.
Working capital (defined as cash and equivalents, accounts
receivable and investment in films and television programs less
bank loans and accounts payable and accrued liabilities) as at
March 31, 2001 of $139.5 million decreased $26.6 million from
$166.1 million at March 31, 2000 and increased $47.1 million over
working capital of $119.0 million at March 31, 1999. Working
capital as of March 31, 2001, excluding the effects of the
adoption of SoP 00-2, would have been $149.4 million, a decrease
of $16.7 million compared to working capital of $166.1 million at
March 31, 2000. The decrease in working capital from fiscal 2001
to fiscal 2000 is primarily the result of incremental financing
relating to the Trimark acquisition and, in addition, at March
31, 2001 there are several significant productions in work-in-
progress which we expect to be delivered in the first and second
quarters of fiscal 2002.
Page 37
Our liquidity and capital resources were provided during the
year ended March 31, 2000 principally through cash generated from
operations, a US$200 million "borrowing base" revolving credit
facility with J.P. Morgan Securities which closed in September
2000, and German tax shelter financing, which has been made
available to us on several productions including Frailty, Cat's
Meow, Liberty Stands Still and I Fought the Law, all scheduled
for fiscal 2002 delivery. The credit facility is secured by our
borrowing base, which includes accounts receivable, and "library"
credits, which is projected over the next four quarters to allow
for borrowing base excesses. In February 2001, we completed a
third party valuation of our films and television programs
library. Trimark completed a third party valuation of its
library in August 2000. At March 31, 2001 the borrowing base
assets totaled US$120.1 million.
The nature of our business is such that significant initial
expenditures are required to produce and acquire films and
television programs, while revenues from these films and
television programs are earned over an extended period of time
after their completion and acquisition. As our operations grow,
its financing requirements are expected to grow. We believe that
cash flow from operations, cash on hand, credit lines available
and tax shelter financing available will be adequate to meet
known operational cash requirements for the future, including the
funding of future film and television production, film rights
acquisitions, and theatrical and video release schedules. We
monitor our cash flow, interest coverage, liquidity, capital base
and debt-to-total capital ratios with the long-term goal of
maintaining our creditworthiness.
At March 31, 2001 our subsidiaries have entered into
unconditional purchase obligations relating to the purchase of
motion picture rights for future delivery and to pay advances to
producers amounting to approximately $39.1 million that are
payable over the next twelve months (2000 - $10.2 million). One
of our subsidiaries has provided guarantees up to a maximum of
$6.8 million (2000 - $2.1 million) for bank loans used to finance
productions costs of unrelated production companies.
Our current financing strategy is to finance substantially
with equity at the corporate level and to leverage investment in
film and television programs through operating credit facilities
and single-purpose production financing. We usually obtain
financing commitments, including, in some cases, funds from
government incentive programs and foreign distribution
commitments to cover, on average, at least 70% of the budgeted
hard costs of a project before commencing production.
At March 31, 2001, we had total net debt, consisting of bank
loans, production and distribution loans, and long-term debt net
of cash and short-term deposits, of $239.3 million (2000 - $77.1
million). Our net debt to equity ratio at March 31, 2001 of
1.21:1.0 (0.93:1.00 excluding the effect of the one-time non-cash
opening retained earnings adjustments) compares to 0.37:1.00 a
year earlier. The increase in the net debt to equity ratio is
due to the significant ramping up of feature film production, the
financing of the Trimark acquisition and the debt assumed as a
result of the Trimark acquisition. At March 31, 2001 we had
drawn US$97.4 million ($153.5 million) of our US$200.0 million
revolving operating credit facility.
Bank loans consist of a five-year revolving credit facility
and demand loans bearing interest at rates not exceeding Canadian
prime plus 4.0%. Production loans consist of bank demand loans
bearing interest at various rates between Canadian prime and
9.25%. The distribution loan, a revolving credit facility of
US$10 million bearing interest at U.S. prime, was repaid in the
current year. Long-term debt consists primarily of mortgages on
the Studio Facility at interest rates ranging from 6.63% to
7.51%, convertible promissory notes bearing interest at a rate of
6% and non-interest bearing sales guarantees with respect to the
German tax shelter financings. For the year ended March 31, 2001
the weighted average interest rates on bank loans and productions
loans were 8.06% and 8.18% respectively (2000 - 9.02% and 8.34%
respectively).
Page 38
We do not pay and do not intend to pay dividends on common
shares, giving consideration to our business strategy and
investment opportunities. We believe it to be in the best
interest of shareholders to invest all available cash in the
expansion of our business. In the current year we paid dividends
totaling $2.5 million on the convertible preferred shares issued
in the prior year.
RISKS AND UNCERTAINTIES
We capitalize costs of production and distribution to
investment in films and television programs. These costs are
amortized to direct operating expenses in accordance with SoP 00-
2. Under SoP 00-2, costs incurred in connection with an
individual film or television program, including production and
financing costs, are capitalized to investment in film and
television programs. These costs are stated at the lower of
unamortized film or television program costs and fair value.
These costs for an individual film or television program are
amortized in the proportion that current period actual revenue
realized relates to management's estimates of the total revenue
expected to be received from such film or television program over
a period not to exceed ten years from the date of delivery. As a
result, if revenue estimates change with respect to a film or
television program, we may be required to write down all or a
portion of the unamortized costs of such film or television
program. No assurance can be given that unfavorable changes to
revenue estimates will not occur, resulting in significant write
downs affecting our results of operations and financial
condition.
We currently finance a portion of our production budgets
from third parties, from Canadian government agencies and
incentive programs as well as international sources in the case
of our co-productions, and from German tax shelter arrangements.
There can be no assurance that third party financing, government
incentive programs and German tax shelter arrangements will not
be reduced, amended or eliminated. Any change in these programs
may have an adverse impact on our financial condition.
Revenue is driven by audience acceptance of a film or
television program, which represents a response not only to
artistic merits but also to critics' reviews, marketing and the
competitive market for entertainment, general economic
conditions, and other intangible factors, all of which can change
rapidly. Actual production costs may exceed budgets. Risk of
labor disputes, disability of a star performer, rapid changes in
production technology, shortage of necessary equipment and
locations or adverse weather conditions may cause cost overruns.
We generally maintain insurance policies ("completion bonds" and
"essential elements insurance" on key talent) mitigating certain
of these risks.
Profitability depends on revenue and on the cost to acquire
or produce a film or television program and the amount spent on
the prints and advertising campaign used to promote it. Results
of operations for any period are significantly dependent on the
timing and number of films or television programs produced. Our
operating results may fluctuate materially from period to period,
and the results for any one period are not necessarily indicative
of results for future periods.
Our five-year revolving operating credit facilities are
either alternate base rate loans or Eurodollar loans as we may
request. Significant increases in the base interest rates could
have an unfavorable impact on us, and vice versa.
A significant portion of our revenue and expenses are in
U.S. dollars, and, are therefore subject to fluctuation in
exchange rates. Significant fluctuations in exchange rates may
have a favorable or unfavorable impact on our results of
operation.
Page 39
CURRENCY RISK MANAGEMENT
Additionally, as part of its overall risk management
program, we evaluate and manage our exposure to changes in
interest rates and currency exchange risks on an ongoing basis.
In the current year we entered into foreign currency contracts to
hedge foreign currency risk on two productions. These forward
exchange contracts do not subject us to risk from exchange rate
movements because gains and losses on the contracts offset losses
and gains on the transactions being hedged. No collateral or
other security was pledged as security to support these financial
instruments. Other hedges and derivative financial instruments
may be used in the future, within guidelines to be approved by
the Board of Directors for counterparty exposure, limits and
hedging practices, in order to manage our interest rate and
currency exposure.
The principal currency exposure is between Canadian and U.S.
dollars, although this exposure has been significantly mitigated
in the current year. Our US$200 million revolving credit
facility is structured as two separate facilities - a US$25
million Canadian dollar facility and a US$175 million U.S. dollar
credit facility. Each facility is borrowed and repaid in the
respective country of origin, in local currency.
From time to time there will be currency exposure on
distribution revenue from foreign, principally European
countries. We do not intend to enter into financial derivative
contracts, other than to hedge its financial risks.
OUTLOOK
We are a fully integrated independent entertainment company
with film and television production, worldwide distribution
capabilities and studio facilities. Management's long-term
strategy is to expand film, television and animation libraries
and increase its production slate and distribution reach to
become the first new independent mini-major in years. The
following growth pillars will fuel this expansion:
o Diversified content - We have a reputation for producing and
distributing independent, edgy, sophisticated films;
o North American distribution network - We are the only
Canadian company that distributes class-A theatrical and video
titles in the U.S.;
o International television product - We produce one-hour drama
series and non-fiction programming for the international
marketplace;
o Merger and acquisition strategy - We propose to acquire high
quality film and television assets, such as Trimark, that
complement our existing assets;
o Additional strategic partners; and
o New complementary businesses - We received approval from the
CRTC for a Canadian English language digital specialty channel -
Jackpot TV - with third parties (a game and gaming channel).
We believe that the success we have achieved in producing
and distributing high quality product, and in raising the
necessary capital, positions us to achieve our growth objectives.
Page 40
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Market risks relating to our operations result primarily
from changes in interest rates and changes in foreign currency
exchange rates. Our exposure to interest rate risk results from
the financial debt instruments that arise from transactions
entered into during the normal course of business.
DEBT. We are exposed to cash flow risk due to changes in
market interest rates related to our outstanding debt. For
example, our credit facilities and some of our long-term debt
bears interest on borrowings outstanding at various time
intervals and at market rates based on either the Canadian prime
rate or the U.S. prime rate, plus a margin ranging from 1.2% to
4.0%. Our principal risk with respect to our long-term debt is
changes in these market rates.
The table below presents principal cash flows and related
weighted average interest rates for our credit facilities and
long-term debt obligations at March 31, 2001 by expected maturity
date.
Expected Maturity Date
-------------------------------------------------------------------
2001 2002 2003 2004 2005 2006
---- ---- ---- ---- ---- ----
(Amounts in thousands)
Credit Facilities:
Variable(1) $ 40,858
Variable(2) $118,907
Long-term Debt:
Fixed (3) $ 38,277 $2,665 $1,156 $32,249 $143 $2,064
Fixed (4) $ 25,560 $25,560
Variable (5) $ 26,195 $24,211 $751 $486 $405 $114
- -------------------
(1) Variable interest rate equal to Canadian Prime Plus 4.0%.
(2) Variable interest rate equal to U.S. Prime plus 1.2%. US$75.4 million.
(3) Fixed interest rate equal to 6%.
(4) Non interest-bearing. US$16.2 million.
(5) Variable interest rate equal to Canadian Prime plus 1.4%.
FOREIGN CURRENCY. We incur certain operating and production
costs in foreign currencies and are subject to market risks
resulting from fluctuations in foreign currency exchange rates.
In certain instances, we enter into foreign currency exchange
contracts in order to reduce exposure to changes in foreign
currency exchange rates that affect the value of our firm
commitments and certain anticipated foreign currency cash flows.
We currently intend to continue to enter into such contracts to
hedge against future material foreign currency exchange rate
risks.
We have entered into foreign exchange contracts to hedge
future production expenses denominated in Australian and New
Zealand dollars. Gains and losses on the foreign exchange
contracts are capitalized and recorded as production costs
when the gains and losses are realized. At March 31, 2001,
the Company had contracts to sell $7.0 million in exchange
for 10.4 million New Zealand dollars over a period of three
months at a weighted average exchange rate of Cdn$0.67 and
to sell $3.5 million in exchange for 4.4 million Australian
Dollars over a period of three months at a weighted average
exchange rate of Cdn$0.79. These contracts are entered
into with a major financial institution. 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. Unrecognized gains at
March 31, 2001 amounted to $0.5 million.
Page 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Auditors' Report and our Consolidated Financial
Statements and Notes thereto appear in a separate section of this
report (beginning on page 57 following Part IV). The index to
our Consolidated Financial Statements is included in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
We have nothing to report under this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below is certain information concerning the
directors, executive officers and key employees of the Company.
Name and Place of Residence Position (1) Age (2)
- ------------------------------- ------------------------------ -------
Mark Amin...................... Vice Chairman and Director 51
Los Angeles, California
Bill Boersma................... Vice President of Finance 43
Los Angeles, California
Michael Burns.................. Vice Chairman and Director 42
Los Angeles, California
Drew Craig..................... Director 43
Calgary, Alberta
John Dellaverson............... Executive Vice President 55
Los Angeles, California
Jon Feltheimer................. CEO and Director 50
Los Angeles, California
Frank Giustra (4).............. Chairman and Director 43
West Vancouver, British Columbia
Joe Houssian................... Director 52
West Vancouver, British Columbia
Gordon Keep.................... Senior Vice President and Director 44
Vancouver, British Columbia
Herbert Kloiber................ Director 54
Munich, Germany
Howard Knight(3) (4)........... Director 59
Stamford, Connecticut
Morley Koffman (3)(5).......... Director 71
Vancouver, British Columbia
Patrick Lavelle................ Director 62
Toronto, Ontario
Wayne Levin.................... Executive Vice President, Legal & 38
Los Angeles, California Business Affairs
Andre Link..................... President and Director 69
Montreal, Quebec
Page 42
Harald Ludwig (4).............. Director 47
West Vancouver, British Columbia
James Nicol (5)................ Director 47
Aurora, Ontario
G. Scott Paterson(3)(5)........ Director 37
Toronto, Ontario
Julie Rennie................... Secretary 34
Vancouver, British Columbia
Marni Wieshofer................ Chief Financial Officer 38
Los Angeles, California
Cami Winikoff.................. Executive Vice President 38
Los Angeles, California
______________________________
(1) The term of office of each director concludes at the
Company's next annual general meeting of shareholders, unless
the director's office is earlier vacated in accordance with
the articles of the Company. Each officer serves at the
pleasure of the Board of Directors.
(2) As of June 1, 2001.
(3) Member of Audit Committee.
(4) Member of Compensation Committee.
(5) Member of Corporate Governance Committee.
MARK AMIN. Mr. Amin has been our Vice Chairman since
October 2000. From 1984 to October 2000, Mr. Amin served as
Chief Executive Officer or Chairman of Trimark, which he founded.
Mr. Amin became a director in October 2000.
BILL BOERSMA. Mr. Boersma has been our Vice President of
Finance since November 2000. From April 1995 to November 2000,
Mr. Boersma served as Controller or Division Controller of AMC
Film Marketing, a motion picture exhibitor.
MICHAEL BURNS. Mr. Burns has been our Vice Chairman since
March 2000. From 1991 to March 2000, Mr. Burns served as
Managing Director and Head of Prudential Securities Inc.'s Los
Angeles Investment Banking Office. Mr. Burns became a director
in August 1999.
DREW CRAIG. Mr. Craig became a director in September 2000.
Mr. Craig has served as President of Craig Broadcast Systems
Inc., a broadcasting company, since September 1997 and prior
thereto was a Vice President since 1985.
JOHN DELLAVERSON. Mr. Dellaverson has been our Executive
Vice President since April 2000. Prior to joining us, Mr.
Dellaverson was a partner, Loeb & Loeb LLP, a law firm based in
Los Angeles, CA. Mr. Dellaverson, who is currently Of Counsel,
has practiced at Loeb & Loeb since 1981.
JON FELTHEIMER. Mr. Feltheimer has been our Chief Executive
Officer since March 2000. From 1997 to 1999, Mr. Feltheimer
served as Executive Vice President of Sony Pictures Entertainment.
From 1995 to 1997, Mr. Feltheimer served as President of Columbia
Tri-Star Television Group. Mr. Feltheimer became a director in
January 2000.
Page 43
FRANK GIUSTRA. Mr. Giustra has been our Chairman since
April 1997. From 1995 to December 1996, Mr. Giustra served as
Chairman and Chief Executive Officer of Yorkton Securities Inc.,
an investment banking firm ("Yorkton"). Mr. Giustra became a
director in April 1997.
JOE HOUSSIAN. Mr. Houssian has been a director since
October 2000. Mr. Houssian has been Chairman, President & Chief
Executive Officer of Intrawest Corporation, a developer and
operator of mountain resorts, since 1975.
GORDON KEEP. Mr. Keep has been our Senior Vice President
since October 1997. From 1987 to October 1997, Mr. Keep served
as Vice President, Corporate Finance of Yorkton. Mr. Keep has
been a director since June 2000.
HERBERT KLOIBER. Mr. Kloiber has been a director since
January 2000. Mr. Kloiber has served as Managing Director of
Tele-Muchen Group, an integrated media company, since 1977.
HOWARD KNIGHT. Mr. Knight has been a director since January
2000. Mr. Knight has served as Executive Vice Chairman of SBS
Broadcasting SA, a European commercial television and radio
broadcasting company, since February 2001, having previously served
as Chief Operating Officer since January 1998 and as Vice Chairman
since September 1996.
MORLEY KOFFMAN. Mr. Koffman has been a director since
November 1997. Mr. Koffman is a partner with the law firm of
Koffman Kalef, where he has practiced since 1993.
PATRICK LAVELLE. Mr. Lavelle has been a director since
October 2000. Mr. Lavelle has been Chairman and a director of
Export Development Corporation, a commercial financial
institution, since December 1997. From 1994 to December 1997,
Mr. Lavelle served as Chairman of the Business Development Bank
of Canada.
WAYNE LEVIN. Mr. Levin as been our Executive Vice
President, Legal and Business Affairs since November 2000. From
September 1996 to November 2000 Mr. Levin was General Counsel or
Vice President for Trimark Pictures, Inc. and from 1991 to
September 1996 was Senior Partner of the Law Offices of Wayne
Levin.
ANDRE LINK. Mr. Link has been our President since April
2000. Since 1962 Mr. Link has been Chief Executive Officer of LG
Films. Mr. Link has been a director since November 1997.
HARALD LUDWIG. Mr. Ludwig has been a director since
November 1997. Since 1985 Mr. Ludwig has served as President of
Macluan Capital Corporation, a leverage buy-out company.
JAMES NICOL. Mr. Nicol has been a director since August
1999. Mr. Nicol has been President and Chief Operating Officer
of Magna International, an automotive parts manufacturer, since
February 2001. From May 1998 to February 2001, Mr. Nicol served
as Vice Chairman of Magna International. From February 1994 to
July 1998, Mr. Nicol was Chairman and Chief Executive Officer of
TRIAM Automotive, Inc., an automotive parts manufacturer.
G. SCOTT PATERSON. Mr. Paterson has been a director since
November 1997. Mr. Paterson has served as Chairman and Chief
Executive Officer of Yorkton since October 1998. From May 1997 to
October 1998, Mr. Paterson served as President of Yorkton.
From May 1995 to May 1997, Mr. Paterson served as Executive Vice
President of Yorkton.
Page 44
JULIE RENNIE. Ms. Rennie has been our Executive Assistant
since April 1997. From January 1996 to April 1997, Ms Rennie was
Executive Assistant at Yorkton.
MARNI WIESHOFER. Ms. Wieshofer as been our Chief Financial
Officer since April 1999. From February 1999 to April 1999, Ms.
Wieshofer was our Vice President, Finance. From October 1995 to
January 1999, Ms. Wieshofer served as Vice President, Finance of
Alliance Atlantis Communications, an entertainment company.
CAMI WINIKOFF. Ms. Winikoff has been our Executive Vice
President since November 2000. From 1990 to November 2000, Ms.
Winikoff was a Senior Vice President, Executive Vice President
and Vice President of Production of Trimark.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF
1934
While Lions Gate was a foreign private issuer our officers,
directors and ten percent beneficial owners were exempt from
Section 16 of the Securities Exchange Act of 1934. Before the
end of fiscal 2001, we became a domestic issuer. The following
individuals filed a Form 3 later than the tenth day after we
became a domestic issuer: Mark Amin, Bill Boersma, Michael Burns,
Drew Craig, John Dellaverson, Jon Feltheimer, Frank Giustra, Joe
Houssian, Gordon Keep, Herbert Kloiber, Howard Knight, Morley
Koffman, Patrick Lavelle, Wayne Levin, Andre Link, Harald Ludwig,
James Nicol, G. Scott Paterson, Julie Rennie, Marni Wieshofer and
Cami Winikoff.
Page 45
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes the compensation paid or
accrued to our Chief Executive Officer and our four most highly
compensated executive officers, other than the Chief Executive
Officer, who served as executive officers and whose salary plus
bonus exceeded $100,000 (the "Named Executive Officers"). The
position identified in the table for each person is their current
position with us unless we indicate otherwise.
SUMMARY COMPENSATION TABLE
Long Term
Officer Annual Compensation Compensation(1)
- ----------------- ---------------------------- ---------------
Name and Position Year Salary Bonus Other Securities
($) ($) Annual Underlying
Compen- Options
sation (#)
($)
- ----------------- ---- ------- ------- ------- -----------
Jon Feltheimer, 2001 846,000 376,000 9,289 1,000,000
Chief Executive 2000 65,077 125,333 1,321 1,375,000
Officer (2)(3) 1999 - - - -
Michael Burns, 2001 752,000 520,384 - -
Vice Chairman 2000 62,667 125,333 6,072 1,425,000
(2)(4) 1999 - - - -
Marni Wieshofer, 2001 382,333 37,600 - 75,000
Chief Financial 2000 175,555 - - -
Officer (5) 1999 29,167 - - 100,000
John Dellaverson, 2001 376,000 - - 100,000
Executive Vice 2000 17,113 37,600 - -
President (2)(6) 1999 - - - -
Gordon Keep, 2001 312,500 74,950 - 75,000
Senior Vice 2000 285,115 - 4,957 -
President 1999 255,000 - 2,131 100,000
(1) The Company has not granted any Restricted Stock Awards,
SARs or LTIPs to any of the Named Executive Officers.
(2) The named executive officer is compensated in U.S. dollars.
The figures presented are converted to Canadian dollars at a rate
of 1.504 Canadian dollars per U.S. dollar.
(3) Mr. Feltheimer was appointed CEO on March 21, 2000.
(4) Mr. Burns was appointed Vice Chairman on March 21, 2000.
(5) Ms. Wieshofer was compensated in Canadian and U.S. dollars.
The figures presented are converted to Canadian dollars at a rate
of 1.504 Canadian dollars per U.S. dollar.
(6) Mr. Dellaverson was appointed Executive Vice President on
April 28, 2000.
Page 46
STOCK OPTION GRANTS.
The following table provides details regarding stock option
grants to our Named Executive Officers in fiscal 2001 pursuant to
our Employees' and Directors' Equity Incentive Plan ("the Plan").
Option Grants - Last Fiscal Year (1)
Potential Realizable Value
Number of % of Total Exercise at Assumed Annual Rates
Securities Options Price of Stock Price
Underlying Granted to Per Appreciation for Option
Options Employees in Share Expiration Term
Name Granted (#) Fiscal Year (US$) Date 5%(US$) 10%(US$)
- ----------------- ------------ ------------ --------- ---------- ----------- -----------
Jon Feltheimer 1,000,000(2) 25.3% 3.00 2/26/06 - 543,122
Marni Wieshofer 75,000 1.9% 2.55 8/15/05 36,088 95,622
John Dellaverson 100,000 2.5% 2.55 8/15/05 48,117 127,496
Gordon Keep 75,000 1.9% 2.55 8/15/05 36,088 95,622
_________________
(1) We did not grant any SARs in fiscal 2001 to any of the Named Executive Officers.
(2) A portion of these options are subject to shareholder approval to increase the size
of the Plan.
OPTION EXERCISES AND HOLDINGS.
The following table provides information for the Named
Executive Officers concerning options they exercised during
fiscal 2001 and unexercised options that they held at the end of
fiscal 2001.
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
Securities Number of Securities
on Value Underlying Unexercised Value of Unexercised In-the-
Exercise Realized Options at FY-End Money Options at FY-End
Name (#) ($) Exercisable/Unexercisable(#) Exercisable/Unexercisable($)
- ---------------- -------- -------- ---------------------------- ----------------------------
Jon Feltheimer - - 125,000 2,250,000 -
Michael Burns - - 141,666 1,283,334 -
Marni Wieshofer - - 66,666 108,334 -
John Dellaverson - - 100,000 - -
Gordon Keep - - 125,000 50,000 -
COMPENSATION OF DIRECTORS
Persons elected at our annual general meetings as directors
and who hold no executive office with us or any of our affiliates
are entitled to receive an annual retainer of $5,000 and a
further retainer of $2,500 if such director acts as a chairman of
a committee of directors. Also, each non-executive director is
entitled to receive a fee of $500 per meeting of the directors or
any committee thereof, and to be reimbursed for reasonable fees
and expenses incurred in connection with their service as
directors. During the last fiscal year, nine directors received
the annual retainer. Non-employee directors are granted options
to purchase 50,000 common shares when they join the Board of
Directors. In fiscal 2001
Page 47
we granted options to purchase 250,000 common shares to persons who
served as directors during that period pursuant to our Plan.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-
CONTROL ARRANGEMENTS
During the fiscal year ended March 31, 2001 we were a party
to an employment agreement with each of the Named Executive
Officers.
JON FELTHEIMER. We entered into an employment agreement
with Mr. Feltheimer effective January 1, 2001, which provides
that he will serve as Chief Executive Officer for an initial term
that ends March 31, 2004. Mr. Feltheimer's annual base salary
under his agreement is US$750,000. Mr. Feltheimer is also
entitled to an annual discretionary bonus determined by the Board
of Directors. In addition, Mr. Feltheimer will receive a stock
price bonus of US$1,000,000 if our share price exceeds US$6.00
for any consecutive six months during the term. If he terminates
his employment for "Good Reason," which includes a change of
control, he will be entitled to continue to receive his annual
salary and all other benefits for the remainder of the employment
agreement. Upon a change of control, 50% of his unvested options
vest immediately if the share price is below US$4.00 and 100% of
his options vest immediately if the share price exceeds US$4.00.
MICHAEL BURNS. Mr. Burns's employment agreement has
expired. We currently have an oral agreement with Mr. Burns that
entitles him to receive an annual base salary of US$300,000 and a
bonus based on potential investment banking fees earned in excess
of US$300,000. We are currently negotiating in good faith with
Mr. Burns and expect to sign a written agreement with him that
formalizes our oral agreement.
MARNI WIESHOFER. We have entered into an employment
agreement with Ms. Wieshofer effective August 26, 2000, which
provides that she will serve as Chief Financial Officer for an
initial term that ends August 26, 2003. Ms. Wieshofer's annual
base salary under her agreement is US$310,000. If a change of
control occurs all of her options will vest immediately.
JOHN DELLAVERSON. We have entered into an employment
agreement with Mr. Dellaverson effective April 1, 2001, which
provides that he will serve as Executive Vice President for an
initial term that ends April 1, 2003. Mr. Dellaverson's annual
base salary under his agreement is US$300,000. Mr. Dellaverson
is also entitled to a bonus of 20% of any amount that the
CineGate joint venture's net income exceeds US$1.5 million. Mr.
Dellaverson's contract has no change of control provisions and if
terminated without cause he is entitled to continue to receive
his salary and benefits.
GORDON KEEP. We have entered into an employment agreement
with Mr. Keep effective October 1, 2000, which provides that he
will serve as Senior Vice President for an initial term that ends
September 30, 2001. We have an option to renew for a subsequent
year. Mr. Keep's annual base salary under his agreement is
$325,000. Mr. Keep is also entitled to an annual discretionary
bonus determined by the Board of Directors. If a change of
control occurs all of his options will vest immediately.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This section of this report will not be deemed incorporated
by reference of any general statement incorporating by reference
this report in any filing under the Securities Act of 1933 or
under the Securities Exchange Act of 1934, except to the extent
that we specifically incorporate this information by reference,
and will not otherwise be deemed filed under such Acts.
Page 48
The Compensation Committee consists of Messrs. Giustra,
Knight and Ludwig, each of whom is a non-employee director. The
Compensation Committee determines the Chief Executive Officer's
salary and the equity awards for all executive officers under the
Plan. Our executive compensation program is designed to attract,
retain and motivate the senior executive talent required to
ensure our success. The program also aims to support the
creation of shareholder value and ensure that pay is consistent
with performance.
BASE SALARY. In fiscal 2001 the Compensation Committee
negotiated an employment agreement with Mr. Feltheimer, our Chief
Executive Officer. For more information, see "Employment
Contracts, Termination of Employment and Change-in-Control
Arrangements." In determining his compensation, the Compensation
Committee considered Mr. Feltheimer's experience and
responsibilities, as well as other subjective factors. Mr.
Feltheimer established the base compensation paid to our
executives in fiscal 2001 based on each executive's experience,
responsibilities and other subjective factors.
EQUITY BASED COMPENSATION. We established the Plan in order
to award equity-based incentives to our employees and directors.
The Compensation Committee believes in linking long-term
incentives to an increase in stock value as it awards stock
options at the fair market value or higher on the date of grant
that vest over time. The Compensation Committee believes that
stock ownership in the Company is a valuable incentive to
executives that (1) aligns their interests with the interests of
shareholders as a whole, (2) encourages them to manage the
Company in a way that seeks to maximize its long-term
profitability, and (3) encourages them to remain an employee of
the Company. Generally, the Plan requires vesting over a three
year period. Some options are also subject to market price
targets prior to vesting.
The Compensation Committee may consider other forms of
compensation, both short-term and long-term, in addition to those
described above.
THE DEDUCTIBILITY OF EXECUTIVE COMPENSATION. Section 162(m)
of the Internal Revenue Code does not permit us to deduct cash
compensation in excess of US$1 million paid to the Chief
Executive Officer and the four other most highly compensated
executive officers during any taxable year, unless such
compensation meets certain requirements. We believe that the
Plan complies with the rules under Section 162(m) for treatment
as performance based compensation, allowing us to fully deduct
compensation paid to executives under the Plan.
COMPENSATION COMMITTEE
Frank Giustra
Howard Knight
Harald Ludwig
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Giustra served as a member of the Compensation Committee
during fiscal 2001 and was formerly our Chief Executive Officer.
Mr. Giustra's tenure as Chief Executive Officer ended on March
21, 2000. No member of our Compensation Committee has a
relationship that would constitute an interlocking relationship
with executive officers or directors of another entity.
STOCK PRICE PERFORMANCE GRAPH
The following graph compares our cumulative total
shareholder return with those of the TSE 300 Total Return Index
and the TSE Cable and Entertainment Total Return Index for the
period commencing November 17, 1997 (the first day of trading of
the common shares on the Toronto Stock Exchange) and ending March
31, 2001. All values assume that $100 was invested on November
13, 1997 in our
Page 49
Common Stock and each applicable index and all dividends were
reinvested. Note: We caution that the stock price performance shown
in the graph below should not be considered indicative of potential
future stock price performance.
This section of this report will not be deemed incorporated
by reference of any general statement incorporating by reference
this report in any filing under the Securities Act of 1933 or
under the Securities Exchange Act of 1934, except to the extent
that we specifically incorporate this information by reference,
and will not otherwise be deemed filed under such Acts.
[PERFORMANCE GRAPH APPEARS HERE]
Company/Index 11/17/97 3/31/98 3/31/99 3/31/00 3/31/01
- ----------------------------- -------- ------- ------- ------- -------
Lions Gate Entertainment $100 $ 81 $ 53 $ 54 $ 31
TSE 300 Total Return Index 100 117 104 151 123
TSE Cable & Ent. Total Return 100 123 221 272 208
Page 50
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table presents certain information about
beneficial ownership of our Common Stock as of June 1, 2001, by
(1) each person (or group of affiliated persons) who is known by
us to own beneficially more than 5% of our Common Stock, (2) each
director, each officer named on the Executive Officer
Compensation Table and (3) all directors and executive officers
as a group. Except as indicated in the footnotes to this table,
the persons named in the table have sole voting and investment
power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws,
where applicable.
Name of Beneficial Owner (1) Number of Shares Percent of Total
- ------------------------------------------- ---------------- ----------------
Capital Research and Management Company.... 2,879,280 4.4 %
Fidelity Management and Research Company... 4,250,000 6.5
Mark Amin.................................. 3,533,104 (2) 5.4
Michael Burns.............................. 693,304 (3) 1.1
Drew Craig................................. 16,667 (4) *
John Dellaverson........................... 445,000 (5) *
Jon Feltheimer............................. 464,188 (6) *
Frank Giustra.............................. 3,307,401 (7) 5.1
Joe Houssian............................... 16,667 (8) *
Gordon Keep................................ 233,878 (9) *
Herbert Kloiber............................ 178,033 (10) *
Howard Knight.............................. 33,333 (11) *
Morley Koffman............................. 55,000 (12) *
Patrick Lavelle............................ 17,667 (13) *
Andre Link................................. 1,369,831 (14) 2.1
Harald Ludwig.............................. 241,000 (15) *
James Nicol................................ 41,133 (16) *
G. Scott Paterson.......................... 200,000 (17) *
Marni Wieshofer............................ 66,667 (18) *
All executive officers and directors as
a group (21 persons)..................... 11,005,547 16.8
__________________________
* Less than 1%
(1) The address for the listed beneficial owners are as follows:
for Capital Research and Management Company 333 South Hope St.,
Los Angeles, California 90071; for Fidelity Management and
Research Company 82 Devonshire St., Boston, Massachusetts 02109-
3614; for each other listed individual c/o the Company, Suite
3123, Three Bentall Centre, 595 Burrard Street, Vancouver,
British Columbia, V7X 1J1.
(2) Includes 125,000 shares subject to options exercisable on or
before July 31, 2001.
(3) Includes (a) 141,667 shares subject to options exercisable
on or before July 31, 2001, (b) 262,650 shares from the possible
conversion of the Series A preferred shares and (c) 43,987 shares
from warrants exercisable into shares.
(4) Includes 16,667 shares subject to options exercisable on or
before July 31, 2001.
(5) Includes 100,000 shares subject to options exercisable on or
before July 31, 2001.
Page 51
(6) Includes (a) 125,000 shares subject to options exercisable
on or before July 31, 2001, (b) 265,200 shares from the possible
conversion of the Series A preferred shares and (c) 43,988 from
warrants exercisable into shares.
(7) Includes (a) 250,000 shares subject to options exercisable
on or before July 31, 2001 and (b) 500,000 common shares not
beneficially owned by him but for which he retains voting
control.
(8) Includes 16,667 shares subject to options exercisable on or
before July 31, 2001.
(9) Includes (a) 125,000 shares subject to options exercisable
on or before July 31, 2001, (b) 24,691 shares from the possible
conversion of a debenture, (c) 23,115 shares from the conversion
of a debenture owned by his spouse, and (d) 53,000 shares held by
his spouse. Mr. Keep disclaims beneficial ownership of the
23,115 shares from the debentures and the 53,000 shares held by
his spouse.
(10) Includes 33,333 shares subject to options exercisable
on or before July 31, 2001.
(11) Includes 33,333 shares subject to options exercisable
on or before July 31, 2001.
(12) Includes 50,000 shares subject to options exercisable
on or before July 31, 2001.
(13) Includes (a) 16,667 shares subject to options
exercisable on or before July 31, 2001 and (b) 1,000 shares held
by his spouse. Mr. Lavelle disclaims beneficial ownership of the
1,000 shares held by his spouse.
(14) Includes (a) 100,000 shares subject to options
exercisable on or before July 31, 2001 and (b) 1,269,831 shares
held by Cinepix Inc., which is 50% owned by Mr. Link.
(15) Includes 50,000 shares subject to options exercisable
on or before July 31, 2001.
(16) Includes (a) 33,333 shares subject to options
exercisable on or before July 31, 2001 and (b) 1,800 shares held
by his children. Mr. Nicol disclaims beneficial ownership of the
1,800 shares held by his children.
(17) Includes 50,000 shares subject to options exercisable
on or before July 31, 2001.
(18) Includes 66,667 shares subject to options exercisable
on or before July 31, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Jon Feltheimer, our Chief Executive Officer, and Michael
Burns, our Vice Chairman, each hold convertible preferred stock
and options to purchase common stock of CinemaNow, a majority
owned Trimark subsidiary, and have served on its Board of
Directors since February 2000. Each of Mr. Feltheimer and Mr.
Burns owns approximately 2% of the outstanding convertible
preferred stock, and the options they own, which vest over a
three year term commencing March 1, 2000, are exercisable for
less than 1% of the common stock of CinemaNow.
Mark Amin, our Vice chairman, who was Chairman and Chief
Executive Officer of Trimark, entered into a three-year
employment agreement with us, which became effective on
consummation of the merger with Trimark. The Agreement provides
for, among other things, an annual salary of US$500,000, a
forgiveness of a loan by Trimark in the amount of approximately
US$795,000, a grant of stock options to purchase up to 1,360,000
shares of Lions Gate Common Stock, and Mr. Amin's election to
Lions Gate's board.
Michael Burns, our Vice Chairman, owns approximately a 40%
interest in Ignite, LLC, which has entered into an agreement
with us dated February 15, 2001. We have agreed to terminate the
"first look" agreement and this agreement provides that Ignite
would be paid a producer's fee and 15% of our Adjusted Gross
Receipts for any project produced by us and developed through a
development fund financed by Ignite, LLC.
Except as disclosed herein, none of our directors or
officers, or affiliates of such persons, has or has had any
material interest, direct or indirect, in any transaction since
the commencement of our last completed fiscal year, or in any
proposed transaction, which in either such case has materially
affected or will materially affect us or any of our subsidiaries.
We are not aware of any conflicts of interest or other risks
associated with any of the above transactions.
Page 52
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS
Other than routine indebtedness as that term is defined in
applicable Canadian provincial securities legislation, none of
our directors or executive officers, or associates or affiliates
of any such directors or executive officers, are or have been
indebted to us since the beginning of our last completed fiscal
year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
The financial statements listed on the accompanying Index
to Financial Statements are filed as part of this report
at pages 57 to 108.
2. Exhibits
The exhibits listed on the accompanying Index to Exhibits
are filed as part of this report at pages 111 to 188.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter
ended March 31, 2001.
Page 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LIONS GATE ENTERTAINMENT CORP.
DATE: July 24, 2001 By: /s/ Frank Giustra
--------------------------------
Frank Giustra
Chairman and Director
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
We the undersigned directors and officers of Lions Gate
Entertainment Corp. hereby constitute and appoint Frank Giustra
our true and lawful attorneys and agents, to do any and all acts
and things in our name and behalf in our capacities as directors
and officers and to execute any and all instruments for us and in
our names in the capacities indicated below, that said attorneys
and agents, or either of them, may deem necessary or advisable to
enable said corporation to comply with the Securities and
Exchange Act of 1934, as amended, any rules, regulations, and
requirements of the Securities and Exchange Commission, in
connection with this report, including specifically, but not
limited to, power and authority to sign for us or any of us in
our names and in the capacities indicated below, any and all
amendments and supplements to this report, and we hereby ratify
and confirm all that the said attorneys and agents, or any of
them, shall do or cause to be done by virtue hereof.
Signatures Title Date
/s/ Mark Amin Vice Chairman and July 24, 2001
------------------- Director
Mark Amin
/s/ Bill Boersma Vice President of July 24, 2001
------------------- Finance
Bill Boersma
/s/ Michael Burns Vice Chairman and July 24, 2001
------------------- Director
Michael Burns
/s/ Drew Craig Director July 24, 2001
-------------------
Drew Craig
/s/ Jon Feltheimer Chief Executive Officer July 24, 2001
------------------- and Director
Jon Feltheimer
/s/ Joe Houssian Director July 24, 2001
-------------------
Joe Houssian
/s/ Gordon Keep Senior Vice President July 24, 2001
------------------- and Director
Gordon Keep
Page 54
/s/ Herbert Kloiber Director July 24, 2001
-------------------
Herbert Kloiber
/s/ Howard Knight Director July 24, 2001
-------------------
Howard Knight
/s/ Morley Koffman Director July 24, 2001
-------------------
Morley Koffman
/s/ Patrick Lavelle Director July 24, 2001
-------------------
Patrick Lavelle
/s/ Andre Link President and Director July 24, 2001
-------------------
Andre Link
/s/ Harald Ludwig Director July 24, 2001
-------------------
Harald Ludwig
/s/ James Nicol Director July 24, 2001
-------------------
James Nicol
/s/ G. Scott Paterson Director July 24, 2001
-------------------
G. Scott Paterson
/s/ Marni Wieshofer Chief Financial Officer July 24, 2001
-------------------
Marni Wieshofer
Page 55
INDEX TO FINANCIAL STATEMENTS
Page
Description of Financial Statement Number
- -------------------------------------------------------------------- ------
Auditors' Report 57
Lions Gate Entertainment Corp. Consolidated Balance Sheets 59
Lions Gate Entertainment Corp. Consolidated Statements of
Operations and Deficit 60
Lions Gate Entertainment Corp. Consolidated Statements of
Cash Flows 61
Lions Gate Entertainment Corp. Notes to the Consolidated
Financial Statements 62
Report of Independent Accountants 97
Mandalay Pictures, LLC Consolidated Balance Sheets 98
Mandalay Pictures, LLC Consolidated Statements of Operations 99
Mandalay Pictures, LLC Consolidated Statement of Changes in
Members' Equity 100
Mandalay Pictures, LLC Consolidated Statements of Cash Flows 101
Mandalay Pictures, LLC Notes to Consolidated Financial Statements 102
Page 56
AUDITORS' REPORT
To the Shareholders of Lions Gate Entertainment Corp.
We have audited the consolidated balance sheets of Lions Gate
Entertainment Corp. as at March 31, 2001 and 2000 and the consolidated
statements of operations, deficit and cash flows for each of the years
in the three-year period ended March 31, 2001. These consolidated
financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian and United States
generally accepted auditing standards. Those standards require that
we plan and perform an audit to obtain reasonable assurance whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation.
In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the
company as at March 31, 2001 and 2000 and the results of its
operations and its cash flows for each of the years in the
three-year period ended March 31, 2001 in accordance with
Canadian generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Ontario
June 22, 2001 [Except for Note 27(b) which is at July 10, 2001]
Page 57
Comments by Auditor for U.S. Readers on Canada-U.S. Reporting
Difference
In the United States, reporting standards for auditors require the
addition of an explanatory paragraph (following the opinion paragraph)
when there is a change in accounting principles that has a material
effect on the comparability of the Company's consolidated financial
statements, such as the changes described in Note 2(r) to the
consolidated financial statements. Our report to the shareholders
dated June 22, 2001 [except for Note 27(b) which is at July 10, 2001]
is expressed in accordance with Canadian reporting standards, which do
not require a reference to such a change in accounting principles in
the auditor's report when the change is properly accounted for and
adequately disclosed in the financial statements.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Ontario
June 22, 2001
Page 58
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31, 2001 AND MARCH 31, 2000
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
AUDITED AUDITED
--------------------
MAR 31 Mar 31
2001 2000
$ $
ASSETS
Cash and equivalents 10,485 19,283
Accounts receivable (note 3) 183,787 107,344
Investment in films and television programs (note 4) 228,349 128,375
Long term investments (note 5) 77,230 64,058
Capital assets (note 6) 44,212 44,505
Goodwill, net of accumulated amortization of $8,184 34,924 29,163
(2000 - $5,476)
Other assets (note 7) 15,233 8,960
Future income taxes (note 18) - 285
---------------------
594,220 401,973
=====================
LIABILITIES
Bank loans (note 9) 159,765 13,936
Accounts payable and accrued liabilities (note 10) 123,370 74,965
Production and distribution loans (note 11) 24,045 41,838
Long-term debt (note 12) 65,987 40,607
Deferred revenue 22,283 19,269
Future income taxes (note 18) 757 -
Non-controlling interest 1,224 4,944
---------------------
397,431 195,559
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 22)
SHAREHOLDERS' EQUITY
Capital stock (note 13) 266,523 226,290
Deficit (79,900) (21,320)
Cumulative translation adjustments (note 25) 10,166 1,444
---------------------
196,789 206,414
---------------------
594,220 401,973
=====================
The accompanying notes form an integral part of these consolidated financial statements.
Page 59
Lions Gate Entertainment Corp.
Consolidated Statements of Operations and Deficit
For the Years Ended March 31, 2001, March 31, 2000 and March 31, 1999
(ALL AMOUNTS IN THOUSANDS OF CANADIAN
DOLLARS, EXCEPT PER SHARE AMOUNTS)
Year Year Year
Ended Ended Ended
March 31 March 31 March 31
2001 2000 1999
$ $ $
REVENUE 282,226 271,251 118,297
DIRECT OPERATING EXPENSES 156,420 222,875 92,931
- -----------------------------------------------------------------------
Gross Profit 125,806 48,376 25,366
- -----------------------------------------------------------------------
OTHER EXPENSES
Distribution and marketing costs 51,776 - -
General and administration 37,710 31,388 23,555
Amortization (note 15) 9,887 7,074 5,279
Interest (note 16) 10,283 4,466 3,655
Non-controlling interest 881 1,308 612
Severance and relocation costs - 1,698 1,647
- -----------------------------------------------------------------------
110,537 45,934 34,748
- -----------------------------------------------------------------------
INCOME (LOSS) BEFORE UNDERNOTED 15,269 2,442 (9,382)
Gain on dilution of investment in a
Subsidiary (note 17) - - (839)
- -----------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND
EQUITY INTERESTS 15,269 2,442 (8,543)
Income taxes (note 18) (3,292) 2,000 304
- -----------------------------------------------------------------------
INCOME BEFORE EQUITY INTERESTS 18,561 442 (8,847)
Equity interest in loss of Mandalay
Pictures, LLC (note 5) (8,298) (5,894) (5,449)
Other equity interest (note 5) (1,535) 159 140
- -----------------------------------------------------------------------
NET INCOME (LOSS) FOR THE YEAR 8,728 (5,293) (14,156)
Dividends paid on Series A
preferred Shares (2,497) (591) -
Accretion on Series A preferred
Shares (note 2(n)) (3,115) (727) -
ADJUSTED DEFICIT, BEGINNING OF
YEAR (83,016) (14,709) (553)
- -----------------------------------------------------------------------
DEFICIT END OF YEAR $(79,900) $(21,320) $(14,709)
- -----------------------------------------------------------------------
BASIC AND DILUTED INCOME
(LOSS) PER COMMON SHARE (note 19) $0.09 $(0.22) $(0.58)
- -----------------------------------------------------------------------
DEFICIT, BEGINNING OF YEAR $(21,320) $(14,709) $(553)
EFFECT OF CHANGES IN ACCOUNTING
POLICIES (NOTE 2(r)) (61,696) - -
- -----------------------------------------------------------------------
ADJUSTED DEFICIT, BEGINNING OF $(83,016) $(14,709) $(553)
YEAR
- -----------------------------------------------------------------------
The accompanying notes form an integral part of these
consolidated financial statements.
Page 60
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2001, MARCH 31, 2000 AND MARCH 31, 1999
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
Year Year Year
Ended Ended Ended
Mar 31, Mar 31, Mar 31,
2001 2000 1999
$ $ $
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) for the period 8,728 (5,293) (14,156)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Amortization of capital assets 3,309 2,584 2,081
Amortization of goodwill 2,708 2,473 2,145
Write-off of projects in development 1,586 856 1,053
Amortization of pre-operating costs 962 962 -
Amortization of deferred financing costs 1,322 199 -
Amortization of films and television programs 153,797 220,423 90,667
Gain on dilution of investment in a subsidiary - - (839)
Non-controlling interest 881 1,308 612
Other equity interest 1,535 (159) (140)
Equity interest in loss of Mandalay Pictures, LLC 8,298 5,894 5,449
Increase in investment in films and television
programs (212,820) (260,905) (115,770)
- ----------------------------------------------------------------------------------------
(29,694) (31,658) (28,898)
CHANGES IN ASSETS AND LIABILITIES, EXCLUDING THE EFFECTS
OF ACQUISITIONS:
Accounts receivable (26,087) (46,671) (11,140)
Other assets (3,812) (3,272) (5,084)
Future income taxes (4,708) 163 (1,703)
Accounts payable and accrued liabilities 11,685 30,297 14,174
Deferred revenue 1,282 8,489 921
- ----------------------------------------------------------------------------------------
(51,334) (42,652) (31,730)
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issue of capital stock 14 48,495 28,965
Dividends paid on Series A preferred shares (2,497) (591) -
Financing fees (6,876) (461) -
Increase (decrease) in bank loans 86,368 2,200 (4,965)
Increase in production and distribution loans 13,880 35,900 38,189
Repayment of production and distribution loans (32,661) (42,477) (20,457)
Increase in long-term debt 26,792 3,162 14,744
Repayment of long-term debt (2,584) (4,149) (5,173)
- ----------------------------------------------------------------------------------------
82,436 42,079 51,303
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Non-controlling investment in subsidiary - - 3,000
Investment in Mandalay Pictures, LLC - - (338)
Acquisition of International Movie Group, net of
cash acquired - - (880)
Acquisition of Termite Art Productions, net of
cash acquired - - (165)
Acquisition of Sterling Home Entertainment, LLC (3,168) - -
Acquisition of Trimark Holdings Inc. (39,370) - -
Redemption of capital stock - - (25)
Purchase of capital assets (2,515) (6,398) (3,975)
- ----------------------------------------------------------------------------------------
(45,053) (6,398) (2,383)
- ----------------------------------------------------------------------------------------
NET CHANGE IN CASH AND EQUIVALENTS (13,951) (6,971) 17,190
FOREIGN EXCHANGE EFFECT ON CASH 5,153
CASH AND EQUIVALENTS-BEGINNING OF PERIOD 19,283 26,254 9,064
- ----------------------------------------------------------------------------------------
CASH AND EQUIVALENTS-END OF PERIOD 10,485 19,283 26,254
========================================================================================
The accompanying notes form an integral part of these
consolidated financial statements.
Page 61
1. NATURE OF OPERATIONS
Lions Gate Entertainment Corp. ("the Company" or "Lions
Gate") is a fully integrated entertainment company engaged
in the development, production and distribution of feature
films, television series, television movies and mini-series,
non-fiction programming and animated programming, as well as
the management of Canadian-based studio facilities and
management services provided to Canadian limited
partnerships. As an independent distribution company, the
Company also acquires distribution rights from a wide
variety of studios, production companies and independent
producers.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared
in accordance with generally accepted accounting principles
in Canada ("Canadian GAAP") which conforms, in all material
respects, with the accounting principles generally accepted
in the United States ("U.S. GAAP"), except as described in note
25. The Canadian dollar and the U.S. dollar are the
functional currencies of the Company's Canadian and U.S.
based businesses, respectively. These consolidated financial
statements are expressed in Canadian dollars, with the
translation of financial statements of individual entities
in accordance with note 2(m).
The Company's normal operating cycle is longer than one
year, and accordingly, the Company has not presented a
classified balance sheet. Details of amounts realizable or
payable after more than one year are set out in these notes
to the financial statements.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts
of Lions Gate and its subsidiary companies, with a provision
for non-controlling interests, and the Company's
proportionate share of assets, liabilities, revenues and
expenses of jointly controlled companies. The Company
controls its subsidiary companies through a combination of
existing voting interests and an ability to exercise various
rights under certain shareholder agreements and debentures
to acquire common shares.
(c) REVENUE RECOGNITION
Revenue from the sale or licensing of films and television
programs is recognized when the Company has persuasive evidence
of an arrangement, such as a contract that irrevocably transfers
the rights to a licensee, for example, the production has been
completed, the contractual delivery arrangements have been
satisfied, such as actual physical delivery or the granting of
access to a lab, for example, the licensing period has commenced,
the fee is fixed or determinable, and collectibility is reasonably
assured.
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 management's assessment of the relative fair value of
the rights to exploit each media and is recognized as each
holdback is released. For multiple-title contracts with a fee,
the fee is allocated on a title-by-title basis, based on
management's assessment of the relative fair value of each title.
Revenue from the theatrical release of motion pictures is
recognized at the time of exhibition based on the Company's
participation in box office receipts provided that all of the
other conditions in the first paragraph are met.
Revenue from the sale of video cassettes and digital video
disks ("DVDs") in the retail market is recognized on
delivery to the customer provided that all of the other
conditions in the first paragraph are met. Appropriate
provision is made for product returns and rebates. Rental
revenue is recognized
Page 62
when the Company is entitled to receipts provided that all
of the other conditions in the first paragraph are met.
Rental revenue from short-term operating leases of studio
facilities is recognized over the term of the lease.
Revenues from the sale or licensing of multi-media software,
under a contract that irrevocably transfers the software to
a customer or the rights to the software to a licensee, is
recognized when delivery has occurred, the price is fixed or
determinable and collection is reasonably assured. Appropriate
provision is made for product returns.
The Company earns fees from management services provided to
Canadian limited partnerships, whose purpose is to assist in the
financing of films produced in Canada, that are recognized when
the financing is completed.
Advances presently due pursuant to an arrangement or cash
payments received are recorded as deferred revenue until all
the conditions of revenue recognition have been met.
(d) CASH AND EQUIVALENTS
Cash and equivalents include cash and liquid investments
with original maturities of ninety days or less when purchased.
(e) INVESTMENT IN FILMS AND TELEVISION PROGRAMS
Investment in films and television programs includes the
unamortized costs of completed films and television programs
which have been produced by the Company or for which the
Company has acquired distribution rights, films and
television programs in progress and projects in development.
Costs of acquiring and producing films and television
programs are capitalized and amortized using the individual
film-forecast method, whereby capitalized costs are
amortized and ultimate participation costs are accrued in
the proportion that current revenue bears to management's
estimate of ultimate revenue expected to be recognized from
the exploitation, exhibition or sale of the films or
television programs. For acquired titles, these capitalized
costs consist of minimum guarantee payments to the producer
to acquire the distribution rights. For films and
television programs produced by the Company, these
capitalized costs include all production and financing costs
incurred during production that are expected to benefit
future periods and be recovered from estimated future
revenue, net of estimated future liabilities. For
episodic television series, until estimates of secondary
market revenue can be established, capitalized costs for each
episode produced are limited to the amount of revenue contracted
for each episode. Costs in excess of this limitation are expensed
as incurred on an episode-by-episode basis.
Films and television programs in progress represents the
accumulated costs of uncompleted films and television programs
that are being produced by the Company. Projects in development
include costs of acquiring film rights to books, stage plays or
original screenplays and costs to adapt such projects. Such costs
are capitalized and, upon commencement of production, are transferred
to production costs. Projects in development are written off at the
earlier of the date determined not to be recoverable or when projects
under development are abandoned, and three years from the date of
the initial investment.
For films other than episodic television series, ultimate
revenue includes estimates over a period not to exceed ten
years following the date of initial release. For episodic
television series, ultimate revenue includes estimates of
revenue over a period not to exceed ten years from the date
of delivery
Page 63
of the first episode or, if still in production, five years
from the date of delivery of the most recent episode, if later.
For previously released films 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.
Revenue estimates are prepared on a title-by-title basis and
are reviewed periodically based on current market
conditions. For films, revenue estimates include box office
receipts, sale of video cassettes and DVDs, rental revenue
generated by video cassettes and DVDs, sale of television
broadcasting rights and licensing of film rights to third
parties. For television programs, revenue estimates include
principally license rights to broadcast television programs
in development or rights to renew licenses for episodic
television programs in subsequent seasons. For episodic
television series, ultimate revenue includes estimates of
secondary market revenue for produced episodes when the
Company can demonstrate through its experience or industry
norms that the number of episodes already produced, plus
those for which a firm commitment exists and the Company
expects to deliver, can be licensed successfully in the
secondary market. Estimates of future revenue involve
measurement uncertainty and it is therefore possible that
reductions in the carrying value of investment in films and
television programs may be required as a consequence of
changes in management's future revenue estimates. In the
current year, the effect of changes in management's future
revenue estimates increased net income by $2.9 million and
basic income per common share by $0.08.
The valuation of investment in films and television
programs, including acquired film libraries, is reviewed on
a title-by-title basis, when an event or change in
circumstances indicate that the fair value of a film or
television program is less than its unamortized cost. The
fair value of the film or television program is determined
using management's future revenue estimates and a
discounted cash flow approach. A write-down is
recorded equivalent to the amount by which the unamortized
costs exceed the estimated fair value of the film or
television program.
(f) PRINTS, ADVERTISING AND MARKETING EXPENSES
The cost of film prints is deferred under investment in
films and television programs and charged to expense on a
straight-line basis over the period of theatrical release.
The costs of advertising and marketing expenses are expensed
as incurred.
(g) LONG-TERM INVESTMENTS
Investments in companies over which the company can exercise
significant influence are accounted for using the equity
method. The Company's long-term investments are periodically
reviewed to determine whether there has been a loss in value
that is other than a temporary decline. Estimates of net
future cash flows on an undiscounted basis are used to assess
whether there is a loss in value.
(h) CAPITAL ASSETS
Capital assets are carried at cost less accumulated
amortization. Amortization is provided for using the
following rates and methods:
Buildings 25 years straight-line
Computer equipment and software 2-4 years straight-line and 30%
declining balance
Automobile 30% declining balance
Furniture and equipment 10 years straight-line and 20%-
30% declining balance
Leasehold improvements over the lease term
Equipment under capital lease is amortized using the above
rates.
Page 64
Costs incurred to develop internal use software during the
application development stage are capitalized.
The Company periodically reviews and evaluates the
recoverability of capital assets. Where applicable,
estimates of net future cash flows, on an undiscounted
basis, are calculated based on future revenue estimates,
and where deemed necessary, a reduction in the carrying
amount would be recorded.
(i) GOODWILL
Goodwill, which is the excess of the purchase price of the
Company's interest in subsidiaries over the fair value of
the underlying identifiable assets and liabilities at
acquisition, is amortized using the straight-line method
over periods ranging from five to twenty years.
An assessment of the carrying value of goodwill is
undertaken in response to any change in conditions that might
trigger impairment. These conditions might include an
unfavourable change in one or more of the elements giving
rise to goodwill, a change in the likelihood of occurrence
of an assumed event that was a significant factor in setting
the acquisition price, or a significant deterioration in the
financial condition of an acquired business. The impairment
assessment involves the determination of the expected
undiscounted future cash flows of the related business,
including applicable interest and other financing costs, and
comparison to the carrying amount of goodwill. Any shortfall
identified by this assessment would be charged against
earnings in the period in which the impairment is determined
to have occurred.
(j) PRE-OPERATING PERIOD COSTS
Pre-operating period costs related to the period before
commencement of commercial operations of new businesses are
deferred and amortized on a straight-line basis over a
period not to exceed five years commencing once the pre-
operating period has ended.
(k) INCOME TAXES
The Company recognizes future income tax assets and
liabilities for the expected future income tax consequences
of transactions that have been included in the financial
statements or income tax returns. Future income taxes are
provided for using the liability method. Under the
liability method, future income taxes are recognized for all
significant temporary differences between the tax and
financial statement bases of assets and liabilities.
Future income tax assets, after deducting valuation
allowances, are recognized to the extent that it is more
likely than not that they will be realized in the
foreseeable future. Future income tax assets and
liabilities are adjusted for the effects of changes in tax
laws and rates at the date of substantive enactment.
(l) Government Assistance
The Company has access to several government programs that
are designed to assist film and television production and
distribution in Canada.
Federal and provincial refundable income tax credits earned
with respect to production expenditures are included in
revenue in accordance with the Company's revenue recognition
policy for completed films and television programs. Federal
and provincial refundable income tax credits are considered
earned when the qualifying expenditures have been incurred
provided that there is reasonable assurance that the credits
will be realized.
Page 65
Amounts received with respect to the acquisition of
distribution rights are recorded as a reduction of
investment in films and television programs. Amounts
received are repayable on a title-by-title basis once the
title has achieved cash break-even to the extent of profit
earned on that title. There are no fixed repayment terms,
no interest payments and no claims on any assets of the
Company or for the recovery of the amount invested, other
than those that might be repayable out of future distribution
revenue attached to the film rights. To the extent an
individual film does not perform to pre-agreed levels, no
amounts are repayable by the Company.
Government assistance toward operating expenses is recorded
as a reduction of those expenses.
(m) FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities denominated in currencies
other than Canadian dollars are translated at exchange rates
in effect at the balance sheet date. Resulting translation
gains and losses are included in the determination of
earnings.
For self-sustaining subsidiaries and the investment in
Mandalay Pictures, assets and liabilities in foreign
currencies are translated into Canadian dollars at the
exchange rate in effect at the balance sheet date. Revenue
and expense items are translated at the average rate of
exchange for the year. Gains or losses arising on the
translation of the accounts of self-sustaining subsidiaries
and the investment in Mandalay Pictures are included in
cumulative translation adjustments, a separate component of
shareholders' equity.
For integrated subsidiaries, monetary assets and liabilities
denominated in foreign currencies are translated into
Canadian dollars at the exchange rates in effect at the
balance sheet date. Non-monetary items are translated at
historical exchange rates. Revenue and expense items are
translated at the average rates of exchange for the year,
with the exception of amortization, which is translated at
historical rates. Gains or losses arising on the
translation of the accounts of integrated subsidiaries are
included in the determination of net income.
Effective April 1, 2000 the Company classified its U.S.
operations as self-sustaining following a significant change
in the economic status of these operations, including a
restructuring of certain operating entities and the ability
to self-finance certain operations. A loan in the amount of
US$20.4 million (Cdn$32.2 million) from a U.S. subsidiary
company to the Canadian parent company, has been treated as
a hedge of the net investment in self-sustaining U.S.
subsidiaries.
(n) SERIES A PREFERRED SHARES
The Company's Series A preferred shares have been included
in shareholders' equity since the terms of the instrument do
not provide a probable contractual obligation under which
the Company would be required to transfer cash or other
financial instruments to the holders under terms that would
be potentially unfavourable to the Company.
The difference between the initial fair value of the basic
preferred shares of US$25.9 million (Cdn$37.5 million), and
the redemption price of US$34.8 million (Cdn$50.5 million),
amounting to US$8.9 million (Cdn$13.0 million), is being
accreted to shareholders' equity on a straight-line basis
over the five-year period from the date of issuance to the
first available redemption date.
The basic preferred shares and conversion feature are
presented on a combined basis within shareholders' equity.
Page 66
Costs amounting to $2.4 million incurred on the issuance of
the preferred shares and share purchase warrants have been
deferred and are being amortized over a five-year period to
the first redemption date of the preferred shares.
(o) DEBT FINANCING COSTS
Amounts incurred in connection with obtaining debt financing
are deferred and amortized over the term to maturity of the
related debt obligation using the effective rate method.
(p) RESEARCH AND DEVELOPMENT
Research and development expenses incurred relating to
multimedia products and other interactive software are
expensed until all of the following criteria are met:
the product is clearly defined and the costs attributable
thereto can be identified; the technical feasibility of
the product as demonstrated by a working model has been
established; a decision has been made to produce and market,
or use, the product; the future market for the product is
clearly defined; and adequate resources exist, or are
expected to be available, to complete the project.
All expenses incurred after technological feasibility is
established are capitalized and will be amortized against
future revenues generated from the sale of the resulting
products.
(q) STOCK-BASED COMPENSATION PLAN
The Company has a stock-based compensation plan, which is
described in Note 13(e). No compensation expense is
recognized for this plan when stock or stock options are
issued to employees of the Company, its subsidiaries and
equity investees. Consideration paid by employees on
exercise of stock options or purchase of stock is credited
to share capital.
(r) ACCOUNTING CHANGES
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 new 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. The Company elected early adoption of SoP 00-2
and retroactively adopted SoP 00-2 effective as of
April 1, 2000. Prior years' financial statements have
not been restated, as the effect of the new policy on
prior periods was deemed not reasonably determinable.
Accordingly, opening retained earnings for the year
ended March 31, 2001 was reduced to reflect the cumulative
effect of the accounting change in the amount of $58.9
million (net of income taxes of $2.2 million). The
principal changes as a result of applying SoP 00-2 are
as follows:
Cash outflows incurred to acquire and produce films and
television programs, which were previously presented under
investing activities in the consolidated statement of cash
flows, are presented under cash flows from operating
activities.
Advertising and marketing costs, which were previously
capitalized to investment in film and television programs
and amortized using the individual film forecasts
method, are now expensed as incurred. This change resulted
in a reduction of investment in films and television
programs of $19.9 million.
The capitalization of production costs for episodic
television series is limited to contracted-for revenue on an
episode-by-episode basis until the criteria for recognizing
secondary market revenues are met. This change resulted in
a reduction of investment in films and television programs
of $34.8 million.
Page 67
Revenue relating to multiple media contracts for a single
film or television program where the contract provides for
media holdbacks where the holdback had not yet been released
resulted in a reduction of investment in films and
television programs of $6.4 million.
The effect of the change on the income statement for the
year ended March 31, 2001 was an increase in net income
of approximately $5.4 million.
ACCOUNTING FOR INCOME TAXES-
In December 1997, the Canadian Institute of Chartered Accountants
released Section 3465, "Income Taxes", to be applied by companies
for fiscal years beginning on or after January 1, 2000. The
standard requires recognition of future income tax assets and
liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns,
and is similar, in many respects, to Statement of Financial
Accounting Standards No.109, "Accounting for Income Taxes"
(SFAS 109) under US GAAP. Future income taxes are provided for
using the liability method. The Company retroactively adopted
Section 3465 effective as of April 1, 2000, without restatement
of prior years. Prior to adopting the new standard, the Company
used the deferral method of accounting for income taxes. The
application of Section 3465 resulted in increasing future
income tax liabilities by $2.7 million as at April 1, 2000
with an equivalent charge to retained earnings. The effect
of the change on the income statement for the year ended
March 31, 2001 was an increase in the tax recovery of $5.5 million
due to benefit recognized of previously unrecognized income tax
assets, where realization is judged "more likely than not" in
accordance with Section 3465 whereas previously realization had to
be based on the concept of "virtual certainty."
EARNINGS PER SHARE-
In December 2000, the Canadian Institute of Chartered
Accountants released revised Section 3500, "Earnings per
share". The revised standard requires the use of the
treasury stock method for calculating diluted earnings per
share, consistent with US GAAP. Previously, fully diluted
earnings per share was calculated using the imputed interest
method. The Company adopted the new standard for its fiscal
2001 financial statements. The revised section did not
impact previously reported losses per share, as there were
no potentially dilutive common shares outstanding.
(t) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles 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 include: future revenue
projections for investment in films and television programs;
provisions for doubtful debts to reflect credit risk
exposures; valuation allowances and impairment assessments
of various assets including investment in films and
television programs, capital assets, long-term investments
and goodwill. Actual results could differ from those
estimates.
3. ACCOUNTS RECEIVABLE
2001 2000
Trade accounts receivable, net $145,864 $75,891
Government assistance 35,927 27,720
Other 1,996 3,733
- -------------------------------------------------------------
$183,787 $107,344
- -------------------------------------------------------------
Page 68
The provision for doubtful accounts included in trade
accounts receivable at March 31, 2001 was $6.1 million
(2000 - $2.5 million).
4. INVESTMENT IN FILMS AND TELEVISION PROGRAMS
2001 2000
THEATRICAL FILMS
Released, net of accumulated amortization $58,378 $21,620
Acquired library, net of accumulated amortization 77,827 -
In progress 30,690 49,834
In development 4,972 1,008
- -------------------------------------------------------------------------
171,867 72,462
- -------------------------------------------------------------------------
NON-THEATRICAL FILMS AND
DIRECT-TO-TELEVISION PROGRAMS
Released, net of accumulated amortization 24,343 26,421
In progress 27,221 26,907
In development 4,918 2,585
- -------------------------------------------------------------------------
56,482 55,913
- -------------------------------------------------------------------------
$228,349 $128,375
- -------------------------------------------------------------------------
The Company earns revenue from certain productions that have
been fully amortized and are not reflected on the balance
sheet.
During the year ended March 31, 2001 the Company recorded
provisions totaling $3.0 million to reduce the carrying
amounts of certain investments in films and television
programs to their fair values as a consequence of a decrease
in management's future revenue estimates.
The Company expects that 84% of completed and released films
and television programs and distribution rights acquired,
net of amortization will be amortized during the three year
period ending March 31, 2004.
The remaining life of the acquired film library as at March
31, 2001 is 19.5 years.
5. LONG-TERM INVESTMENTS
The Company's investment in Mandalay Pictures is comprised of
a 45% common stock interest, and a 100% interest in preferred
stock with a stated value of US$50.0 million. The Company
records 100% of the operating losses of Mandalay Pictures as
equity interest in the loss of Mandalay Pictures, LLC.
Included in the carrying amount of the Company's investment
in Mandalay Pictures are pre-operating costs of $8.2 million
(2000 - $10.1 million) net of amortization of $4.4 million
(2000 - $2.5 million) and costs incurred totaling $2.5
million that were directly related to the acquisition of the
investment. These pre-operating costs, incurred in fiscal
1998 and fiscal 1999, are being amortized on a straight-line
basis over seventeen fiscal quarters, and amortization of
$1.9 million (2000 - $1.9 million) is included in the equity
interest in loss of Mandalay Pictures.
Page 69
Summarized financial information of Mandalay Pictures is as
follows:
2001 2000
ASSETS
Cash and equivalents $25,399 $19,193
Restricted cash 33,336 46,400
Accounts receivable 70,426 10,710
Investment in films 221,664 72,558
Other assets 13 980
- ---------------------------------------------------------------------
350,838 149,841
- ---------------------------------------------------------------------
LIABILITIES
Accounts payable and accrued liabilities 13,990 15,517
Production and bank loans 151,659 48,349
Contractual obligations 56,510 23,440
Deferred revenue 81,336 7,401
- ---------------------------------------------------------------------
303,495 94,707
- ---------------------------------------------------------------------
NET ASSETS $47,343 $55,134
- ---------------------------------------------------------------------
2001 2000 1999
Revenue $89,646 $139,301 $ -
Direct operating expenses 89,311 140,706 1,406
Gross income (loss) 335 (1,405) (1,406)
Indirect operating expenses 9,327 6,272 15,016
Interest income 2,679 3,708 4,033
- ---------------------------------------------------------------------
NET LOSS FOR THE YEAR $(6,313) $(3,969) $(12,389)
- ---------------------------------------------------------------------
Mandalay Pictures is a non-taxable entity. Accordingly, all
tax effects attributable to the operations of Mandalay are
included directly in the Company's tax provision.
Mandalay Pictures adopted, on a retroactive basis, SoP 00-2
effective as of April 1, 2000 on a basis consistent with the
Company's adoption of accounting changes as explained in
note 2(r). The cumulative adjustment made to the net equity
of Mandalay Pictures on April 1, 2000 was $5.5 million, net
of the benefit of income tax losses attributable to the
Company of $nil.
The Company's investment in CinemaNow is comprised of a
90.1% common stock interest, representing a 63% voting interest
after taking into account the voting rights held by the holders
of preferred shares. The investment in CinemaNow is accounted
for using the equity method because the Company does not have
the ability to control the strategic operating, investing and
financing policies of CinemaNow as a consequence of the Company's
inability to elect the majority of the board of directors of
CinemaNow.
The company's investment in CinemaNow consists of its 63%
share of the voting interests, recorded at the estimated
fair value at the time of the Trimark acquisition of $23.6
million. The Company's carrying value in CinemaNow includes
63% of the losses of CinemaNow since October 13, 2000.
The difference between the net carrying amount of the assets
and liabilities of CinemaNow at the date of acquisition and
the fair value of the investment was allocated as follows:
Page 70
Identifiable assets acquired:
Investment in films and television programs $3,496
Capital assets 14,682
Goodwill 5,366
Other assets 7
--------------------------------------------------------------
Net assets acquired: $23,551
Investment in films and television programs will be
amortized on a straight-line basis over a period of twenty
years, beginning with the commencement of commercial
operations of the website.
Capital assets, representing the estimated fair value of the
CinemaNow website and film streaming technology and goodwill
arising in the consolidated financial statements of Lions
Gate is amortized on a straight-line basis over a period of
five years, beginning with the commencement of commercial
operations of the website and from the date of acquisition
of Trimark, respectively.
6. CAPITAL ASSETS
2001
Accumulated Net Book
Cost Amortization Value
Land $14,500 $ - $14,500
Buildings 22,692 2,418 20,274
Leasehold improvements 1,301 474 827
Furniture and equipment 5,892 2,733 3,159
Automobile 38 35 3
Computer equipment and software 7,138 2,510 4,628
Equipment under capital leases 1,197 376 821
- -----------------------------------------------------------------------
$52,758 $8,546 $44,212
- -----------------------------------------------------------------------
2000
Accumulated Net Book
Cost Amortization Value
Land $14,500 $ - $14,500
Buildings 22,782 1,376 21,406
Leasehold improvements 1,574 430 1,144
Furniture and equipment 5,447 2,162 3,285
Automobile 38 33 5
Computer equipment and software 4,959 1,300 3,659
Equipment under capital leases 684 178 506
- -----------------------------------------------------------------------
$49,984 $5,479 $44,505
- -----------------------------------------------------------------------
Buildings represent studio production property held by Lions
Gate Studios. Lions Gate Studios rents sound stages, office
and related support space to tenants that produce or support
the production of feature films, television series and
movies and commercials. Tenancies vary from a few days
to five years depending on the nature of the project and
tenant. Lions Gate Studios also provides other services
including rental of furniture, telephones and equipment.
Page 71
7. OTHER ASSETS
2001 2000
Deferred financing costs $ 7,786 $2,425
Pre-operating costs 3,012 3,835
Other 4,435 2,700
- ----------------------------------------------------------------
$15,233 $8,960
- ----------------------------------------------------------------
8. Jointly Controlled Companies
As at March 31, 2001, the Company holds a 50% investment in
Eaton Entertainment, LLC ("Eaton") under a joint venture
arrangement. On September 30, 1999 the Company acquired an
additional 16.67% interest bringing its total ownership in
Eaton to 50%, and resulting in Eaton becoming a jointly
controlled company. Since September 30, 1999 the Company
has accounted for its investment in Eaton using the
proportionate consolidation method. Prior to September 30,
1999, the Company held a 33.33% interest in Eaton and
accounted for the investment using the equity method.
The Company held a 50% investment in Sterling Home
Entertainment LLC ("Sterling") under a joint venture
arrangement until November 27, 2000 at which time the
Company acquired the remaining 50% interest in Sterling
(see note 14).
Summarized financial information regarding the Company's
interests in jointly controlled companies is as follows:
2001 2000 1999
Assets $3,999 $7,705 $9,584
Liabilities (3) 4,558 8,511
Revenue 4,820 15,079 9,685
Direct operating expenses 3,586 10,783 6,209
Net income (loss) for the year (258) 2,251 1,073
Cash flows from operating activities 963 1,147 2,810
Cash flows from financing activities (518) (2,181) 1,449
Cash flows from investing activities (204) 1,797 (2,920)
- ----------------------------------------------------------------------
Net cash flows $ 241 $763 1,339
- ----------------------------------------------------------------------
The summarized financial information above includes net
losses related to Sterling of $429,000 (2000 - net earnings
of $1.8 million, 1999 - net earnings of $1.1 million) and
net income related to Eaton of $0.2 million (2000 - $0.5
million, 1999 - $nil).
9. BANK LOANS
2001 2000
Bank loans $159,765 $13,936
- ---------------------------------------------------------------------
Bank loans consist of revolving five-year credit facilities,
an operating line of credit and demand loans, and bear
interest at rates at March 31, 2001 not exceeding Canadian
prime plus 4%. Amounts due on demand and within one year
totaled $4.5 million at March 31, 2001.
Right, title and interest in and to all personal property of
Lions Gate Entertainment Corp. and Lions Gate Entertainment
Inc. is provided as security for the revolving five-year
credit facilities. The
Page 72
carrying value of certain accounts receivable, investment in
films and television programs and capital assets totaling
$5.8 million at March 31, 2001 is provided as security for
the operating line of credit. Certain accounts receivable
and a corporate guarantee provided by Lions Gate Entertainment
Corp. in the amount of $1.5 million are provided as security
for the demand loans.
The Company has credit facilities available of US$200.0
million (Cdn$315.3 million) and Cdn $2.0 million as at March
31, 2001 (2000 - Cdn$22.0 million), expiring September 25,
2005 and July 31, 2001 respectively. The availability of
funds under the US$200 million credit facility is limited
by the borrowing base, which is calculated on a monthly
basis. The borrowing base assets at March 31, 2001 totaled
US$120.1 million (Cdn$189.3 million). As at March 31, 2001,
US$97.4 million (Cdn$153.5 million) and $1.7 million was
drawn on the facilities. The Company is required to pay a
monthly commitment fee of 0.50% on the US$200.0 million less
the amount drawn where this amount is less than US$100.0
million, or 0.375% on the US$200.0 million less the amount
drawn, where this amount is equal to or exceeds US$100.0
million.
The weighted average interest rate on bank loans at March
31, 2001 was 8.06% (2000 - 9.02%, 1999 - 8.75%).
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2001 2000
Trade accounts payable $55,608 $18,037
Accrued liabilities 15,007 13,937
Accrued participation costs 36,398 28,109
Minimum guarantees 8,127 7,425
Other 8,230 7,457
- ---------------------------------------------------------------
$123,370 $74,965
- ---------------------------------------------------------------
11. PRODUCTION AND DISTRIBUTION LOANS
2001 2000
Production Loans (a) $24,045 $32,095
Distribution Loan (b) - 9,743
- ---------------------------------------------------------------
$24,045 $41,838
- ---------------------------------------------------------------
(a) PRODUCTION LOANS
Production loans consist of bank demand loans bearing
interest at various rates between Canadian prime and 9.25%.
Rights to certain films and television programs, a floating
charge on certain book debts, certain film rights, and
certain tangible assets and an assignment of all expected
future revenue from exploitation of certain films and
television programs have been provided as collateral. The
carrying value of investment in films and television
programs relating to these motion pictures was $22.3 million
at March 31, 2001. Federal and Provincial film tax credits
receivable with a carrying value $25.0 million at March 31,
2001, guarantees from SODEC (Societe de Developpement des
Enterprises Culturelles), and general security agreements
are also provided as collateral for certain of the loans.
Security agreements are also provided as collateral for
certain of the loans. Of the outstanding amount, US$2.9
million (Cdn$4.6 million) (2000 - US$13.0 million; Cdn$18.9
million) is repayable in US dollars.
The weighted average interest rate on production loans at
March 31, 2001 was 8.18% (2000 - 8.34%, 1999 - 8.35%).
Page 73
(b) DISTRIBUTION LOAN
The distribution loan consists of a US$10.0 million
revolving credit facility bearing interest at U.S. prime.
At March 31, 2001 US$nil was outstanding (2000 - US$6.7
million). The Company may draw up to US$3 million per
production in order to finance distribution costs. The
drawings are repayable from the receipts of each production
with final repayment due two years after the initial
drawdown. As consideration for providing the funding, the
lender will receive 5% of the net proceeds of each
production financed. The carrying value of investment
in films and television programs relating to these
productions amounting to $nil (2000 - Cdn$3.3 million; US$2.3
million) at March 31, 2001, has been provided as collateral.
The commitment period of this facility ends June 30, 2001.
The weighted average interest rate on the distribution loan
at March 31, 2001 was 9.0% (2000 - 9.0%, 1999 - 7.75%).
12. LONG-TERM DEBT
2001 2000
Obligations under capital leases, bearing interest
at 8.47% to 20.69%, due 2002 and 2004, with certain
equipment provided as collateral. $ 491 $ 485
Loans bearing interest at 5.75% to Canadian prime
plus 2%, due in fiscal 2002 and 2005, with certain
equipment provided as collateral. 1,613 884
Promissory notes, bearing interest at 6.0%, due
July 31, 2003. The outstanding principal is
convertible at the option of the holder into common
shares of the Company at $8.10 per share. 16,487 16,487
Loans bearing interest at Canadian prime plus 1.75%,
due in 2001, 2003, and 2004, with guarantees from SDI
(Societe de Developpement Industriel de Quebec). 33 43
Loans bearing interest at 6.63% to 7.51%, due in May
and July 2003 and September 2005, with property,
building and equipment with carrying values of
approximately $36.0 million provided as collateral. 20,205 21,216
Loans bearing interest at Canadian prime plus 1%,
repayable on demand and due October 2001 and October
2004, with income tax credits up to $1.3 million
provided as collateral. 1,057 449
Non-interest bearing convertible promissory note issued
on the acquisition of a Company subsidiary, Termite
Art Productions, repayable as US$0.3 million
(Cdn$0.5 million) (2000 - US$0.7 million, Cdn$1.0
million), due in August 2001. The outstanding principal
is convertible at the option of the holder into common
shares of the Company at $6.50 per share. 541 1,043
Non-interest bearing sales guarantees, repayable as
US$16.2 million (Cdn$25.6 million), due October 2003
and February 2004. 25,560 -
- -----------------------------------------------------------------------------
$ 65,987 $ 40,607
- -----------------------------------------------------------------------------
Page 74
Required principal payments on long-term debt during
future fiscal years are as follows:
2002 $3,061
2003 1,906
2004 58,296
2005 547
2006 2,177
$65,987
Minimum future payments required under capital leases total
$0.6 million (2000 - $0.5 million), including interest of
$0.1 million (2000 - $0.1 million) and are due $0.3
million in 2002, $0.2 million in 2003 and $0.1 million in
2004.
Non interest-bearing sales guarantees represents amounts due
under production financing arrangements whereby the Company
has contracted with a third party and the third party has
financed 100% of the production budgets for certain films,
and in turn the Company retains the worldwide distribution
rights for a period of at least twenty-five years. The
Company has guaranteed to repay minimum amounts at the dates
indicated. Under the terms of the arrangement, the third
party is entitled to participate in future net revenue after
deduction of certain specified items including, without
limitation, distribution fees payable to the Company and
distribution expenses paid by the Company.
13. CAPITAL STOCK
(a) AUTHORIZED CAPITAL STOCK
The authorized capital stock of the Company consists of 500
million common shares without par value and 200 million
preference shares, issuable in series, including 1 million
Series A preferred shares that were authorized in fiscal
2000 and 10 Series B preferred shares that were authorized
in fiscal 2001. The terms of the Series A and Series B
preferred shares are described in (c) and (d), respectively,
below.
(b) CONTINUITY OF CAPITAL STOCK
Continuity of issued and outstanding capital stock is as
follows:
Number Amount
COMMON SHARES:
Balance at March 31, 1998 23,326,209 $144,524
Issued upon exercise of warrants at $9.00
per share 345,834 3,113
Issued upon acquisition of subsidiary at
$5.30 per share 675,375 3,579
Normal course issuer bid (36,000) (128)
Public offering at $4.60 per share - less
issue costs of $0.9 million 6,256,000 25,786
Issued on exercise of stock options 40,000 194
- -------------------------------------------------------------------------------
Balance at March 31, 1999 30,607,418 177,068
Issued on conversion of series A preferred
shares 795,000 2,446
Issued on exercise of stock options 58,333 239
Balance at March 31, 2000 31,460,751 179,753
Issued upon acquisition of subsidiary - less
issue costs of US$0.5 million
(Cdn$0.8 million) 10,229,837 34,976
Issued pursuant to a settlement agreement
with an employee 600,000 2,250
Issued on exercise of stock options 6,250 14
- -------------------------------------------------------------------------------
Balance at March 31, 2001 42,296,838 216,993
- -------------------------------------------------------------------------------
Page 75
SERIES A PREFERRED SHARES:
Public offering in fiscal 2000 at US$2,250
per share 13,000 42,711
Accretion - 613
Conversion to common shares (note 13(c)) (795) (2,446)
- --------------------------------------------------------------------------------
Balance at March 31, 2000 12,205 40,878
Accretion - 2,660
- --------------------------------------------------------------------------------
Balance at March 31, 2001 12,205 43,538
- -------------------------------------------------------------------------------
SERIES B PREFERRED SHARES:
Issued pursuant to Trimark acquisition
(note 13(d)) 10 -
- -------------------------------------------------------------------------------
Balance at March 31, 2001 10 -
- --------------------------------------------------------------------------------
STOCK OPTIONS:
Granted in conjunction with acquisition of subsidiary - 333
- --------------------------------------------------------------------------------
Balance at March 31, 2001 - 333
- -------------------------------------------------------------------------------
COMPENSATION WARRANTS:
Issued during fiscal 1999 380,800 -
- --------------------------------------------------------------------------------
Balance at March 31, 2000 380,800 -
Expired during the year (380,800) -
- --------------------------------------------------------------------------------
Balance at March 31, 2001 - -
- --------------------------------------------------------------------------------
SHARE PURCHASE WARRANTS:
Issued in fiscal 2000 in conjunction with public
offering at US$0.706 per warrant 5,525,000 5,659
- --------------------------------------------------------------------------------
Balance at March 31, 2001 and 2000 5,525,000 5,659
- --------------------------------------------------------------------------------
Total capital stock at March 31, 2001 $266,523
- --------------------------------------------------------------------------------
Each compensation warrant entitled the holder to purchase
one common share at a price of $5.25. The warrants expired
on September 2, 2000.
Each share purchase warrant entitles the holder to purchase
one common share at a price of US$5.00. The warrants expire
on January 1, 2004, and are not transferable except with the
consent of the Company.
(c) SERIES A PREFERRED SHARES AND SHARE WARRANTS
On December 21, 1999, the Company issued 13,000 units at a
price of US$2,550 per unit. Each unit consisted of one
5.25% convertible, non-voting (except for the right to elect
between one and three directors, depending on the number of
preferred shares outstanding) redeemable Series A preferred
shares and 425 detachable common share purchase warrants.
The net proceeds received on the offering was allocated as
follows: common purchase warrants were valued at fair value,
using the Black-Scholes option pricing model, of US$3.9
million (Cdn$5.7 million); conversion features were valued
at fair value, using the Black-Scholes option pricing model,
of US$3.4 million (Cdn$4.9 million); and the basic preferred
shares were valued at the residual value of $US25.9 million
(Cdn$37.5 million). The basic preferred shares and the
conversion option are presented on a combined basis in note
(b) above.
Page 76
The preferred shares are entitled to cumulative dividends,
as and when declared by the Board, payable semi-annually on
the last day of March and September of each year. The
Company may pay the dividends in cash or additional
preferred shares. During the year, the Company declared and
paid cash dividends of US$1.6 million or US$133.88 per share
(Cdn$2.5 million or Cdn$201.35 per share).
The preferred shares have a liquidation preference entitling
the holders to receive an amount equal to the US$2,550 per
share plus the cumulative amount of all dividends accrued
and unpaid. The holders of the preferred shares may convert
all, but not less than all, of the preferred shares at any
time into common shares at a rate of 1,000 common shares for
each preferred share, subject to certain anti-dilution
adjustments. During the year ended March 31, 2000, 795
preferred shares were converted. On or after January 1,
2003, the Company may convert the preferred shares, in whole
or in part, to common shares on the same terms as the
holders, subject to certain conditions.
The Company may redeem the preferred shares, in whole or
part, on or after January 1, 2005 for a cash payment of 105%
of the stated value of US$2,550 per share plus accrued and
unpaid dividends up to the date of redemption. A holder has
a right to require redemption of all, but not less than all,
of the preferred shares, for a cash payment of 100% of the
stated value of US$2,550 per share in the event that the
composition of the board of directors ceases to be in
compliance with certain provisions relating to the
nomination and election of up to three directors.
Management believes the occurrence of such an event is
remote.
The difference between the initial carrying value of the
preferred shares of US$25.9 million (Cdn$37.5 million) and
the redemption price of US$34.8 million (Cdn$50.5 million)
is being accreted as a charge to retained earnings over the
five-year period from the date of issuance to the first
available redemption date.
(d) SERIES B PREFERRED SHARES
As a condition of the purchase of Trimark, on October 13, 2000, the
Company issued 10 shares at US$10 per share. The shares are
nontransferable and not entitled to dividends. The shares are
nonvoting except that the holder, who was a principal of Trimark,
has the right to elect himself to the Board of Directors. The
shares are redeemable by the Company if certain events occur. The
shares have a liquidation preference equal to the stated value of
US$10 per share.
(e) Stock-Based Compensation Plan
The shareholders have approved an Employees' and Directors'
Equity Incentive Plan (the "Plan") that provides for the
issue of up to 7.6 million common shares of the Company to
eligible employees, directors and service providers of the
Company and its affiliates. Of the 7.6 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. As of March
31, 2001, no shares have been issued under the share bonus
plan. The Board of Directors approved an additional 1.4
million options to be issued outside of the Plan to a
certain principal of Trimark upon acquisition of the
company.
The Plan authorizes the granting of options to purchase
shares of the Company's common stock at an option price at
least equal to the weighted average price of the shares for
the five trading days prior to the grant. The options
generally vest with the recipient within three years of
grant, and have a maximum term of 5 years.
Page 77
Changes in share options granted and outstanding for fiscal
1999, 2000 and 2001 were as follows:
Number of Weighted
Shares Average
Exercise
Price
Outstanding at March 31, 1998 2,963,800 $8.20
Granted to December 14, 1998 842,250 8.16
Forfeited to December 14, 1998 (687,505) 8.10
Expired to December 14, 1998 (46,300) 11.33
- --------------------------------------------------------------------------
Outstanding at December 14, 1998 3,072,245 8.14
- --------------------------------------------------------------------------
Outstanding at December 14, 1998 after repricing 3,072,245 5.62
Granted to March 31, 1999 601,250 4.99
Exercised to March 31, 1999 (40,000) 4.85
Forfeited to March 31, 1999 (187,373) 8.10
Expired to March 31, 1999 (33,332) 5.31
- --------------------------------------------------------------------------
Outstanding at March 31, 1999 3,412,790 5.51
Granted to March 31, 2000 1,157,500 5.81
Exercised to March 31, 2000 (58,333) 4.09
Forfeited to March 31, 2000 (575,213) 6.64
Expired to March 31, 2000 (167,081) 5.39
- --------------------------------------------------------------------------
Outstanding at March 31, 2000 3,769,663 5.46
Granted to March 31, 2001 5,887,334 4.35
Exercised to March 31, 2001 (6,250) 2.30
Forfeited to March 31, 2001 (149,501) 4.69
Expired to March 31, 2001 (605,829) 5.08
- --------------------------------------------------------------------------
Outstanding at March 31, 2001 8,895,417 $4.82
- --------------------------------------------------------------------------
On December 14, 1998, the shareholders approved the
repricing of all but 395,831 outstanding options on that
date to $5.25 per common share.
Outstanding and exercisable options at March 31, 2001 were
as follows:
Weighted average
remaining contractual
Price Range life of outstanding options Outstanding Exercisable
$2.30 to $2.55 3.35 years 216,250 119,581
$4.00 to $5.50 3.76 years 7,479,167 3,092,664
$6.31 to $8.10 3.82 years 1,200,000 50,000
- -------------------------------------------------------------------------------
3.76 years 8,895,417 3,262,245
- -------------------------------------------------------------------------------
The Company has a commitment to grant options for 362,998
common shares at an exercise price of US$3.00, which are not
exercisable, until such time as shareholder approval has
been granted. Shareholder approval will be sought at the
Company's annual general meeting in September 2001.
14. Acquisitions
(a) On November 27, 2000, the Company acquired the remaining
50% interest in Sterling for total consideration of US$2.8
million (Cdn$4.2 million), consisting of US$2.0 million
(Cdn$3.1 million)
Page 78
of cash, forgiveness of an account receivable of US$0.7 million
(Cdn$1.0 million) and acquisition expenses of US$0.1 million
(Cdn$0.1 million). The acquisition was accounted for as a purchase,
with the incremental 50% of the results of the acquired company
consolidated from November 27, 2000 onwards. Goodwill arising on
the acquisition amounting to $0.1 million is being amortized over
a period of five years.
Identifiable assets acquired:
Cash and equivalents $2,492
Accounts receivable 914
Investment in films and television programs 2,837
Other 31
-----------------------------------------------------
6,274
-----------------------------------------------------
Liabilities assumed:
Accounts payable and accrued liabilities 2,186
Other 4
-----------------------------------------------------
2,190
-----------------------------------------------------
Net assets acquired: $4,084
-----------------------------------------------------
(b) On October 13, 2000, the Company acquired the shares of
Trimark Holdings, Inc. for total consideration of US$49.6 million
(Cdn$75.1 million) consisting of US$22.0 million (Cdn$33.3
million) cash, 10,229,837 common shares with a fair value of
US$23.6 million (Cdn$35.7 million) and acquisition costs of
US$4.0 million (Cdn$6.1 million). These costs include: amounts
totaling US$1.1 million (Cdn $1.7 million) paid to lawyers,
accountants and other consultants; amounts totaling US$0.7 million
(Cdn$1.1 million) relating to the closure of offices and facilities
not required in the Company's operations after the acquisition;
involuntary termination benefits totaling US$1.7 million (Cdn$2.6
million) payable to certain employees terminated under a
reorganization plan contemplated at the time of acquisition
and various other amounts totaling US$0.5 million (Cdn$0.8 million).
At March 31, 2001 there were no significant actions remaining to
be performed to complete the restructuring plan, and the remaining
liabilities under the plan totaled $2.9 million. The acquisition
was accounted for as a purchase, with the results of operations of
the acquired company consolidated from October 13, 2000 onwards.
Goodwill arising on the acquisition amounting to $8.5 million
is being amortized over a period of twenty years.
Identifiable assets acquired:
Accounts receivable $31,215
Investment in films and television programs 87,139
Investment in CinemaNow 23,551
Capital assets 400
Other assets 1,728
------------------------------------------------------
144,033
------------------------------------------------------
Page 79
Liabilities assumed:
Bank loans 57,127
Accounts payable 23,309
Deferred revenue 814
Future income taxes 1,170
------------------------------------------------------
82,420
------------------------------------------------------
Net assets acquired: 61,613
Previously unrecognized income tax
assets of the Company 4,600
------------------------------------------------------
$66,213
------------------------------------------------------
(c) On September 30, 1999, the Company acquired an additional
16.67% interest in Eaton by way of a membership interest
repurchase agreement with the third partner. Under the
agreement the partner's cumulative share of earnings up to
September 30, 1999 was paid out in cash. This amounted to
$0.2 million and was paid directly from Eaton. The Company's
total ownership in Eaton is now 50% and is being accounted for
using the proportionate consolidation method after September
30, 1999.
(d) On June 30, 1998, the Company acquired the shares of
International Movie Group Inc., for total consideration of
$4.5 million, consisting of $0.6 million cash and 675,375
common shares with a fair value of $3.6 million and
acquisition expenses of $0.3 million. The acquisition was
accounted for as a purchase, with results of operations of
the acquired company consolidated from June 30, 1998
onwards.
Identifiable assets acquired: $5,508
Liabilities assumed: 1,049
------------------------------------------------------
Net assets acquired: $4,459
------------------------------------------------------
(e) On August 28, 1998, the Company acquired the business
and net operating assets of Termite Art Productions, for
total consideration consisting of promissory notes with a
fair value of US$2.8 million (Cdn$4.0 million). The
acquisition was accounted for as a purchase, with results of
operations of the acquired business consolidated from August
28, 1998 onwards. Goodwill arising on the acquisition
amounting to $6.2 million is being amortized over a period
of ten years.
Identifiable assets acquired: $4,851
Liabilities assumed: 6,887
------------------------------------------------------
Net liabilities assumed: $(2,036)
------------------------------------------------------
(f) The supplemental unaudited consolidated statement of
operations presented below illustrates the results of
operations of the Company assuming the acquisition of
Trimark had occurred at the beginning of the period ended
March 31, 2000:
Page 80
2001 2000
Unaudited Unaudited
Revenue $349,807 $407,960
Direct operating expenses 269,649 338,301
- ------------------------------------------------------------------
Gross profit 80,158 69,659
Other expenses
General and administration 54,288 49,656
Amortization 10,060 7,388
Interest 14,726 7,229
Non-controlling interest 881 1,308
Severance and relocation costs - 1,698
- ------------------------------------------------------------------
79,955 67,279
Earnings before income taxes 203 2,380
Income taxes (2,190) 866
Equity interest in Mandalay Pictures 8,298 5,894
Other equity interests 2,006 (159)
- ------------------------------------------------------------------
Net loss for the year $(7,911) $(4,221)
- ------------------------------------------------------------------
Basic and diluted loss per common share $($0.37) $(0.18)
- ------------------------------------------------------------------
15. Amortization
2001 2000 1999
Amortization of capital assets $3,309 $2,584 $2,081
Amortization of goodwill 2,708 2,473 2,145
Write-off of projects in development 1,586 856 1,053
Amortization of pre-operating costs 962 962 -
Amortization of deferred financing costs 1,322 199 -
- ------------------------------------------------------------------------
Total $9,887 $7,074 $5,279
- ------------------------------------------------------------------------
16. Interest
2001 2000 1999
Interest expense on long-term debt $6,030 $3,023 $3,520
Interest expense on bank loans 5,796 518 83
Interest income (1,543) (527) (527)
Other interest expense - 1,452 579
- -------------------------------------------------------------------------
$10,283 $4,466 $3,655
- -------------------------------------------------------------------------
Interest capitalized relating to productions during the year
ended March 31, 2001 amounted to $2.2 million (2000 - $3.6
million; 1999 - $3.0 million).
17. Gain
On June 23, 1998 a third party invested $3.0 million in the
Company's animation partner to obtain a 20% interest. The
gain on dilution of the Company's investment was $0.8
million (net of income taxes $nil) and resulted in a
decrease of $0.2 million in goodwill.
Page 81
18. Income Taxes
Income before income taxes and equity interests by tax
jurisdiction is as follows:
2001 2000 1999
Canada $5,356 $6,587 $(5,060)
United States 9,913 (4,145) (3,483)
- ---------------------------------------------------------------------------
$15,269 $2,442 $(8,543)
- ---------------------------------------------------------------------------
The provision for (recovery of) income taxes is as follows:
2001 2000 1999
Current $2,239 $1,510 $2,007
Future - 490 (1,703)
Adjustments to opening future income tax valuation
allowances following change in circumstances (5,531) - -
- --------------------------------------------------------------------------
$(3,292) $2,000 $304
- --------------------------------------------------------------------------
2001 2000 1999
Canada
Current $1,412 $1,510 $2,007
Future - 490 (1,703)
- --------------------------------------------------------------------------
1,412 2,000 304
- --------------------------------------------------------------------------
United States
Current 827 - -
Future (5,531) - -
- --------------------------------------------------------------------------
(4,704) - -
- --------------------------------------------------------------------------
Total $(3,292) $2,000 $304
- --------------------------------------------------------------------------
The Company's provision for income tax expense differs from
the provision computed at statutory rates as follows:
2001 2000 1999
Income tax expense (recovery) computed at Canadian
combined federal and provincial statutory rates $6,928 $1,088 $(3,896)
Foreign and provincial operations subject to
different income tax rates (606) (64) 1,322
Expenses not deductible for income tax purposes 1,217 862 114
Tax benefits received from Mandalay Pictures (6,041) - -
Release of valuation allowances (5,531) (636) 2,122
Non-controlling interest 317 584 279
Other 424 166 363
-----------------------------------------------------------------------------
$(3,292) $2,000 $304
-----------------------------------------------------------------------------
The Company has certain income tax loss carry-forwards,
the benefits of which have not yet been recognized in the
financial statements. These losses amount to approximately
$52.8 million for Canadian income tax purposes, and US$21.3
million for U.S. income tax purposes. The expiry dates of
these losses, which are available to reduce future taxable
income in each country, are as follows:
Page 82
Canada United States
Year ending March 31, 2002 $ 2,600 US$ -
2003 1,900 -
2004 2,600 300
2005 300 -
2006 14,800 -
2007 4,200 -
2008 26,400 -
2019 7,900
2020 11,600
2021 1,500
Following are the components of the Company's future income tax
assets at March 31, 2001. The fiscal 2000 comparative amounts
have been presented after reflecting the cumulative effect of
implementing the changes in accounting policies as described in
note 2(r).
2001 2000
Canada
Assets
Net operating losses $18,100 $13,061
Accounts payable 304 491
Investment in films and television programs - 6,210
Other assets 745 -
Valuation allowance (15,353) (17,437)
-----------------------------------------------------------------
3,796 2,325
Liabilities
Investment in film and television programs (1,719) -
Capital assets (2,077) (2,758)
Other assets - (153)
-----------------------------------------------------------------
Net - (586)
-----------------------------------------------------------------
Page 83
United States
Assets
Net operating losses 7,304 5,775
Accounts payable 6,647 258
Investment in films and television programs - 4,717
Other assets 1,479 -
Investment in Mandalay 10,544 (6,703)
Valuation allowance (6,441) (17,072)
-----------------------------------------------------------------
19,533 381
Liabilities
Investment in film and television programs (11,190) -
Investment in CinemaNow (9,100) -
Other assets - (381)
-----------------------------------------------------------------
Net (757) -
-----------------------------------------------------------------
$(757) $(586)
-----------------------------------------------------------------
Included under Canadian future income tax assets is an amount of
$0.6 million relating to part VI.1 tax on Series A preferred share
dividends, which is presented as an offset to the cost of the
dividends.
The Company has recorded a partial valuation allowance against
its Canadian future tax assets based on the extent to which it
is not more likely than not that sufficient taxable income will
be realized during the carry-forward periods to utilize all the
future tax assets. The valuation allowances recorded against
Canadian and United States future income tax assets decreased by
$4.5 million and decreased by $10.6 million respectively during
fiscal 2001. Realization of the future tax benefit is
dependent upon many factors including the Company's ability to
generate taxable income in the applicable jurisdictions within the
loss-carry-forward periods. It is reasonably possible that changes
in circumstances could occur in the future requiring a significant
adjustment to the amount of the valuation allowances against future
income tax assets.
The amount of unrecognized future income tax liability for temporary
differences related to the Company investments in United States
subsidiaries and its equity investee Mandalay Pictures, which are
not expected to reverse in the foreseeable future, is $4.0 million
(2000 - $nil).
Page 84
19. Income (Loss) per Share
2001 2000 1999
$ $ $
Numerator:
Net income (loss) $8,728 $(5,293) $(14,156)
Less:
Series A preferred share dividends (2,497) (591) -
Accretion on Series A preferred shares (3,115) (727) -
- ---------------------------------------------------------------------------
Income available (loss attributable)
to common shareholders $ 3,116 $(6,611) $(14,156)
- ---------------------------------------------------------------------------
Denominator:
Weighted average common shares 36,196 30,665 24,575
outstanding (number/'000s)
- ---------------------------------------------------------------------------
Basic income (loss) per share $0.09 $(0.22) $(0.58)
- ---------------------------------------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
Diluted income per share -
year ended March 31, 2001
Basic income per common share $3,116 36,196 $0.09
Effect of dilutive securities:
Termite promissory notes - 83 -
IMG acquisition notes - 43 -
- ------------------------------------------------------------------------------
Income available to common
shareholders and assumed conversions $3,116 36,322 $0.09
- ------------------------------------------------------------------------------
Options to purchase 8,895,417 common shares (2000 - 3,769,663 common
shares, 1999 - 3,412,790 common shares) at an average price of $4.82
(2000 - $5.46, 1999 - $5.51) and share purchase warrants to purchase
5,525,000 common shares (2000 - 5,525,000 common shares) at an exercise
price of US$5.00 (2000 - $US 5.00) were outstanding during the year but
were not included in the computation of diluted earnings per share because
the option's and share purchase warrants exercise prices were greater
than the average market price of the common shares during fiscal 2001.
12,205 Series A preferred share units which are each convertible into
1,000 common shares for no additional consideration were outstanding at
March 31, 2001 (2000 - 12,205 units). Additionally, convertible
promissory notes with a principal amount of $16.5 million were
outstanding at March 31, 2001 (2000 - $16.5 million, 1999 - $16.5
million). These notes are convertible into common shares at a price
of $8.10 per share. Under the "if converted" method of calculating
diluted earnings per share, the conversion of Series A preferred shares
and convertible promissory notes was anti-dilutive in each of the years
presented and was not reflected in diluted earnings per share.
Page 85
20. Government Assistance
Revenue includes tax credits earned totaling approximately
$18.2 million (2000 - $24.0 million; 1999 - $3.9 million).
Investment in films and television programs as at March 31,
2001 includes a reduction of $13.3 million (2000 - $13.0
million; 1999 - $13.5 million) with respect to government
assistance for distribution of certain programs, which
represents the gross assistance from inception of the
Company and its subsidiaries, net of repaid amounts. This
government assistance is repayable in whole or in part based
on profits generated by certain individual film and
television programs, but is forgivable in the event that
sufficient profits are ultimately not generated by the
individual film and television programs.
Direct operating expenses include a reduction of $0.1
million (2000 - $0.6 million and 1999 - $nil) with respect
to government assistance towards print and advertising
expenses.
The Company is subject to routine inquiries and review by
Regulatory authorities of its various incentive claims which
have been received or are receivable. Adjustments of
claims, if any, as a result of such inquiries or reviews,
will be recorded at the time of such determination.
21. Segment Information
The Company has five reportable business segments as
follows:
Motion Pictures
o Development and production of feature films.
o Acquisition of North American and worldwide distribution
rights.
o North American theatrical, video and television
distribution of feature films produced and acquired.
o Worldwide licensing of distribution rights to feature
films produced and acquired.
Television
o Development, production and worldwide distribution of
television productions including television series, television
movies and mini-series and non-fiction programming.
Animation
o Development, production and worldwide distribution of
animated and live action television series, television movies
and feature films.
Studio Facilities
o Management of Canadian-based Studio facilities.
CineGate
o Management services to Canadian limited partnerships,
including accessing tax credits to finance productions in
Canada.
The Company evaluates performance based on revenue, gross
profit and EBITDA, defined as net earnings before interest,
income taxes, amortization, non-controlling interests,
equity interests and severance and relocation costs.
The Company's reportable segments are strategic business
units that offer different products and services, and are
managed separately. Senior operating management does not
review balance sheet
Page 86
information analyzed by operating segment, and accordingly
details of segment assets have not been presented.
2001 2000 1999
Revenue
Motion Pictures $173,941 $146,910 $77,608
Television 71,452 81,758 12,466
Animation 29,658 35,620 22,035
Studio Facilities 5,532 6,963 6,188
CineGate 1,643 - -
- ---------------------------------------------------------------------------
$282,226 $271,251 $118,297
- ---------------------------------------------------------------------------
Gross profit
Motion Pictures $100,320 $27,475 $13,446
Television 12,498 7,509 2,544
Animation 8,436 8,881 5,452
Studio Facilities 2,909 4,511 3,924
CineGate 1,643 - -
- ---------------------------------------------------------------------------
$125,806 $48,376 $25,366
- ---------------------------------------------------------------------------
EBITDA
Motion Pictures $25,774 $11,291 $1,474
Television 6,841 (509) (1,532)
Animation 5,658 6,286 3,528
Studio Facilities 2,628 4,238 3,625
CineGate 1,643 - -
- ---------------------------------------------------------------------------
$42,544 $21,306 $7,095
- ---------------------------------------------------------------------------
The reconciliation of total segment EBITDA to the Company's
total EBITDA is as follows:
2001 2000 1999
EBITDA of reportable segments $42,544 $21,306 $7,095
Head office general and administration
expenses 6,224 4,318 5,284
--------------------------------------------------------------------------
$36,320 $16,988 $1,811
--------------------------------------------------------------------------
The reconciliation of total segment EBIDTA to the
Company's income before income taxes is as follows:
2001 2000 1999
Company's total EBITDA $36,320 $16,988 $1,811
Less:
Amortization (9,887) (7,074) (5,279)
Interest (10,283) (4,466) (3,655)
Non-controlling interest (881) (1,308) (612)
Severance and restructuring costs - (1,698) (1,647)
Gain on dilution of investment in
a subsidiary - - 839
- ------------------------------------------------------------------------------
$15,269 $2,442 $(8,543)
- ------------------------------------------------------------------------------
Page 87
Revenue by geographic location, based on the location of
the customers, is as follows:
2001 2000 1999
Canada $57,223 $70,050 $41,687
United States 177,287 131,433 51,735
Other Foreign 47,716 69,768 24,875
- ---------------------------------------------------------------------------
$282,226 $271,251 $118,297
- ---------------------------------------------------------------------------
Assets by geographic location are as follows:
2001 2000
Canada $334,713 $325,044
United States 259,507 76,929
- -----------------------------------------------------------------------------
$594,220 $401,973
- -----------------------------------------------------------------------------
22. Commitments and Contingent Liabilities
(a) Minimum future payments under operating lease commitments
are as follows:
2002 $2,471
2003 2,103
2004 1,952
2005 1,913
2006 1,900
Thereafter 3,272
(b) As at March 31, 2001, subsidiaries of the Company in the normal
course of business have entered into unconditional purchase
obligations relating to the purchase of film rights for future
delivery and to pay advances to producers amounting to approximately
$41.1 million that are payable over the next twelve months
(2000 - $10.2 million).
(c) A subsidiary of the Company in the normal course of business
has provided guarantees up to a maximum of $6.8 million
(2000 - $2.1 million) for bank loans used to finance production
costs of unrelated production companies.
(d) Pre-sales of the future revenue from certain television
series and motion pictures totaling $25.6 million (2000 -
$15.7 million) have been pledged as collateral against certain
accounts payable.
(e) 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 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.
23. Financial Instruments
(a) Fair Value
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments:
Page 88
Cash and short-term deposits-
The carrying amount approximates fair value because of the
short maturity of these instruments.
Bank loans, production and distribution loans and long-term
debt-
The fair value of the Company's bank loans, production and
distribution loans and long-term debt is estimated based on
the borrowing rates currently available to the Company for
loans with similar terms and average maturities.
Forward contracts-
The fair value of forward contracts is estimated using net
present value techniques, incorporating assumptions
including current market exchange rates and the time
value of money.
The estimated fair values of the Company's financial
instruments are as follows:
2001 2001 2000 2000
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and short-term deposits $ 10,485 $ 10,485 $ 19,283 $ 19,283
Bank loans $(159,765) $(159,765) $(13,936) $(13,936)
Production and distribution loans $ (24,045) $ (24,045) $(41,838) $(41,838)
Long-term debt $ (65,987) $ (66,511) $(40,607) $(39,479)
Forward contracts $ - $ 514 $ - $ -
(b) Credit Risk
The Company's maximum credit risk exposure arising in
relation to its financial assets is equivalent to their
carrying amounts at March 31, 2001.
Accounts receivable include amounts receivable from Canadian
governmental agencies in connection with government
assistance for productions as well as amounts due from
customers. Amounts receivable from governmental agencies
amounted to 19% of total accounts receivable at March 31,
2001 (2000 - 25.8%). Concentration of credit risk with the
Company's customers is considered to be limited due to the
Company's customer base and the diversity of its sales
throughout the world. The Company performs ongoing credit
evaluations and maintains a provision for potential credit
losses. The Company generally does not require collateral
for its trade accounts receivable.
(c) Interest Rate Risk
The Company's exposure to interest rate risk is summarized
as follows:
Cash and short-term deposits floating interest rate, see below
Accounts receivable non-interest bearing
Bank loans floating interest rate, see also note 9
Accounts payable and accrued liabilities non-interest bearing
Production and distribution loans floating interest rate, see also note 11
Long-term debt disclosed in note 12
Page 89
Cash and short-term deposits carry interest rates as follows:
Canadian dollar bank accounts prime minus 2.50%
US dollar bank accounts US base rate minus 4.25%
Short-term deposits fixed rate - 6.0%
(d) Forward Contracts
The Company has entered into foreign exchange contracts to
hedge future production expenses denominated in Australian
and New Zealand dollars. Gains and losses on the foreign
exchange contracts are capitalized and recorded as production
costs when the gains and losses are realized. As at
March 31, 2001, the Company had contracts to sell $7.0
million in exchange for 10.4 million New Zealand dollars
over a period of three months at a weighted average exchange
rate of Cdn$0.67 and to sell $3.5 million in exchange for
4.4 million Australian Dollars over a period of three months
at a weighted average exchange rate of Cdn$0.79. These
contracts are entered into with a major financial institution.
The Company is exposed to credit loss in the event of
nonperformance by the counterparty, which is limited to the
cost of replacing the contracts, at current market rates. The
Company does not require collateral or other security to
support these contracts. Unrecognized gains as at March 31,
2001 amounted to $0.5 million.
24. Supplementary Cash Flow Statement Information
The following investing and financing activities are on a
non-cash basis and are therefore excluded from the
consolidated statement of cash flows:
2001 2000 1999
Business combinations financed by debt to the seller $ - $ - $3,968
Common shares issued in conjunction with business
combinations $34,975 $ - $3,579
Interest paid for the year ended March 31, 2001 amounted to
$7.6 million (2000 - $7.0 million; 1999 - $6.0 million).
Income taxes paid during the year ended March 31, 2001
amounted to $2.5 million (2000 - $473,000; 1999 - $1.1
million).
25. Reconciliation to United States GAAP
The consolidated financial statements of the Company have
been prepared in accordance with Canadian GAAP. The
material differences between the accounting policies used by
the Company under Canadian GAAP and U.S. GAAP are disclosed
below in accordance with the provisions of the Securities
and Exchange Commission.
Under U.S. GAAP, the net loss and loss per share figures for
the years ended March 31, 2001, 2000 and 1999, and the
shareholders' equity as at March 31, 2001 and 2000 were as
follows:
Page 90
Net Income (Loss) Shareholders' Equity
2001 2000 1999 2001 2000
As reported under Canadian GAAP $8,728 $(5,293) $(14,156) $196,789 $206,414
Equity interest in loss of Mandalay
Pictures (a) 1,150 1,907 (6,982) (4,569) (5,719)
Adjustment for capitalized
pre-operating costs (b) 580 962 (4,797) (3,255) (3,835)
Restructuring costs (d) (1,733) - - (1,733) -
Accounting for income taxes (e) - - - 2,754 -
Other differences (f) - - 238 - -
Presentation of Series A preferred
Shares outside shareholders
equity (g) - - - (38,986) (37,886)
----------------------------------------------------------------------------------------------
Net income (loss) before accounting
change/shareholders' equity under
U.S. GAAP 8,725 (2,424) (25,697) 151,000 158,974
Cumulative effect of accounting
changes, net of income taxes (c) (58,942) - - - -
---------------------------------------------------------------------------------------------
Net loss/shareholders' equity under
U.S. GAAP (50,217) (2,424) (25,697) 151,000 $158,974
Adjustment to cumulative translation
adjustments account (net of tax
of $nil) 8,722 (2,981) 4,445
----------------------------------------------------------------------
Comprehensive loss attributable
to common shareholders
under U.S. GAAP $(41,495) $(5,405) $(21,252)
-----------------------------------------------------------------------
Basic and fully diluted income (loss)
per common share under U.S.
GAAP before accounting
change $0.13 $(0.11) $(1.05)
-----------------------------------------------------------------------
Basic and fully diluted loss per
common share under
U.S. GAAP $(1.50) $(0.11) $(1.05)
-----------------------------------------------------------------------
Page 91
Reconciliation of the movement in the cumulative translation
adjustments account:
2001 2000 1999
Balance at beginning of the year $1,444 $4,425 $(20)
- -----------------------------------------------------------------------------------
Change in underlying assets of Mandalay
Pictures March 31, 1998 at 1.4198 - - (71,386)
Investment in Mandalay Pictures carried at
March 31, 1999 at 1.5087 - (75,831) 75,831
Investment in Mandalay Pictures carried at
March 31, 2000 at 1.4494 (72,850) 72,850 -
Investment in Mandalay Pictures carried at
March 31, 2001 at 1.5763 76,508 - -
Change in net investment US self-sustaining
Subsidiaries March 31, 2001 at 1.5763 5,064 - -
---------------------------------------------------------------------------------
Net change in year 8,722 (2,981) 4,445
---------------------------------------------------------------------------------
Balance - end of the year $10,166 $1,444 $4,425
---------------------------------------------------------------------------------
Reconciliation of movement in Shareholders' Equity under
U.S. GAAP:
2001 2000 1999
Balance at beginning of the year $158,974 $154,361 $143,069
Increase in capital stock 37,573 11,055 32,544
Dividends paid on preferred shares (2,497) (591) -
Accretion on preferred shares (g) (1,555) (446) -
Net loss under U.S. GAAP (50,217) (2,424) (25,697)
Adjustment to cumulative translation
adjustments account 8,722 (2,981) 4,445
--------------------------------------------------------------------------------
Balance - end of the year $151,000 $158,974 $154,361
--------------------------------------------------------------------------------
(a) Equity Interest in loss of Mandalay Pictures, LLC
The Company accounts for Mandalay Pictures using the equity
method. As described in note 5, under Canadian GAAP, pre-
operating costs incurred by Mandalay were deferred and are
being amortized to income. Under U.S. GAAP, all start-up
costs are required to be expensed as incurred. The amounts
are presented net of income taxes of $0.8 million (2000 -
$nil, 1999 - $nil).
(b) Accounting for Capitalized Pre-Operating Period Costs
In the year ended March 31, 1999, under Canadian GAAP, the
Company deferred certain pre-operating costs related to the
launch of the television one-hour series business amounting
to $4.8 million. This amount is being amortized over five
years commencing in the year ended March 31, 2000. Under
U.S. GAAP, all start-up costs are to be expensed as
incurred. The amounts are presented net of income taxes of
$0.4 million (2000 - $nil, 1999 - $nil).
(c) Accounting changes
In the year ended March 31, 2001, the Company elected early
adoption of Statement of Position 00-2 "Accounting by
Producers or Distributors of Films" ("SoP 00-2"). Under
Canadian GAAP, the one-time after-tax adjustment for the
initial adoption of SoP 00-2 was made to opening retained
earnings. Under SoP 00-2, the cumulative effect of changes
in accounting principles caused by adopting the
Page 92
provisions of SoP 00-2 should be included in the determination
of net earnings for GAAP purposes. The cumulative effect of the
adjustment comprises $58.9 million net of income taxes of
$2.2 million for the Company and its subsidiaries as well
as $5.5 million, net of income taxes of $nil for the Company's
equity investee Mandalay Pictures.
(d) Accounting for Business Combinations
Under Canadian GAAP, costs related to activities or
employees of an acquiring company are not considered in the
purchase price allocation. The Company included $2.1 million
of such costs in the purchase equation for Trimark as
described in Note 14(b). Under US GAAP, costs related to the
acquiring Company must be expensed as incurred. The amount
is presented net of income taxes of $0.9 million.
(e) Accounting for Income Taxes
Under Canadian GAAP, for the year ended March 31, 2001, the
Company used the asset and liability method to recognize
future income taxes which is consistent with the US GAAP
method required under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", ("SFAS
109") except that Canadian GAAP requires use of the
substantively enacted tax rates and legislation, whereas US
GAAP only permits use of enacted tax rates and legislation.
For the years ended March 31, 2000 and March 31, 1999, the
Company used the deferral method for accounting for deferred
income taxes, which differs from the requirements of SFAS
109. The use of substantively enacted tax rates under
Canadian GAAP to measure future income tax assets and
liabilities resulted in an increase in Canadian net future
income tax assets (before valuation allowances) by $2.3
million, with a corresponding increase in valuation
allowances by $2.3 million.
SFAS 109 requires deferred tax assets and liabilities be
recognized for temporary differences, other than non-
deductible goodwill, arising in a business combination. As a
result of the acquisition of Lions Gate Studios in the year
ended March 31, 2000, under US GAAP, goodwill was increased
to reflect the additional deferred tax liability resulting
from temporary differences arising on the acquisition. Under
Canadian GAAP, the company did not restate income taxes for
years prior to March 31, 2001, accordingly, there is a
difference in the carrying amount of goodwill arising in the
business combination of $2.8 million as at March 31, 2001.
(f) Accounting for Development Costs
Under Statement of Financial Accounting Standards No. 53,
"Financial Reporting by Producers and Distributors of Motion
Picture Films" ("SFAS 53"), certain costs related to the
development of film and television projects must be written
off after three years unless the project has been set for
production. The effect of writing off costs more than three
years old associated with projects not abandoned is treated
as a GAAP reconciling item. The corresponding impact would
reduce investment in films and television programs by a
corresponding amount. In fiscal 1999, management wrote off
certain development projects under Canadian GAAP, therefore
$0.2 million written off in 1998 under U.S. GAAP reversed
in that fiscal year.
(g) Accretion on Preferred Shares
Under Canadian GAAP, the Company's preferred shares have
been included in shareholders' equity as the Company
considers the likelihood of redemption by the holders to be
remote. Under U.S. GAAP, the preferred shares would be
presented outside of shareholders equity as temporary
equity.
As explained in note 13(c), under Canadian GAAP, the fair
value of the basic preferred shares was determined using the
residual value method after determining the fair value of
the common share purchase warrants and the preferred share
conversion feature. Under U.S. GAAP, the proceeds received
would be allocated to the common share purchase warrants and
the preferred shares based on
Page 93
the relative fair values of the two instruments. Under U.S.
GAAP, the preferred shares would have been valued at $40.0
million and the warrants at $48.4 million.
Under Canadian GAAP, the difference between the carrying
amount and the redemption value of $50.5 million is being
accreted as a charge to retained earnings on a straight line
basis over five years whereas, under US GAAP, the difference
is being accreted using the effective interest method over
the five year period to the first available date that the
preferred shares are redeemable.
(h) Accounting for Tax Credits
Under Canadian GAAP, tax credits earned are included in
revenue. Accounting Principles Board Opinion No. 4,
"Accounting for the Investment Credit" requires tax credits
to be presented as reduction of income tax expense. The
corresponding impact would be a reduction of revenue and
credit to income tax expense of $18.2 million (2000 - $24.0
million, 1999 - $3.9 million).
(i) Accounting for Stock Based Compensation
Under Canadian GAAP, compensation cost is not recorded for
stock based compensation to employees. Under US GAAP, the
company follows the intrinsic value method to measure stock
based compensation to employees in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and its interpretations. Under
the intrinsic value method, the compensation cost would be
measured as the difference between the quoted market price
on the date of grant and the exercise price, if any. For
the three years ended March 31, 2001, no compensation cost
resulted under U.S. GAAP.
As the Company has elected to use the intrinsic value
method, the following disclosures are provided about the
costs of stock based compensation awards using the fair
value method:
The weighted average estimated fair value of each stock
option granted in the year ended March 31, 2001 was $1.64
(2000 - $1.76; 1999 - $2.11). On December 14, 1998 the
Company modified the terms of 2,676,414 options outstanding
on that date, reducing the exercise price from $8.10 to
$5.25, with the effect that it effectively issued new
options with an exercise price of $5.25. The vesting period
and remaining contractual term were unchanged. For proforma
purposes, the Company has recognized additional compensation
cost for the excess of the fair value of the modified
options issued over the value of the original options at the
date of the exchange measured using the Black-Scholes option
pricing model, with the following assumptions: $4.75 market
common share price, $5.25 exercise price, 6.0% risk-free
interest rate, 35% volatility, and a 0% dividend yield. The
total excess fair value of the stock options affected was
estimated to be $1.4 million and is being recognized over
the remaining vesting period of the options. The total
stock compensation expense in the year ended March 31, 2001
would be $5.4 million. (2000 - $4.0 million; 1999 - $2.7
million).
For disclosure purposes fair value of each stock option
grant was estimated on the date of grant using the Black-
Scholes option pricing model with the following assumptions
used for stock options granted: a dividend yield of
0%, expected volatility of 50% (2000 - 35%), risk-free
interest rate of 5.5% (2000 - 6.0%) and expected life of
five years.
The resulting pro forma U.S. GAAP net income and loss per
share for the year ended March 31, 2001 before the accounting
change was $3.3 million and $0.02 respectively (2000 - loss
and loss per share $6.4 million and $0.24 respectively; 1999
- loss and loss per share $28.4 million and $1.16
respectively).
Page 94
The resulting pro forma U.S. GAAP loss and loss per share
for the year ended March 31, 2001 was $55.6 million and
$1.54 respectively (2000 - loss and loss per share $6.4
million and $0.24 respectively; 1999 - loss and loss per
share $28.5 million and $1.16 respectively).
(j) Income (Loss) Per Share
2001 2000 1999
Numerator:
Net income (loss) before accounting change $8,725 $(2,424) $(25,697)
Less:
Series A preferred share dividends (2,497) (591) -
Accretion on Series A preferred shares (1,555) (1,008) -
- --------------------------------------------------------------------------------
Income available (loss attributable) to common $4,673 $(4,023) $(25,697)
shareholders
- --------------------------------------------------------------------------------
(k) Consolidated Statements of Cash Flows
The Company's cash flow statement prepared in accordance
with Canadian GAAP complies with U.S. GAAP.
(l) Proportionate Consolidation
The accounts of all jointly controlled companies are
proportionately consolidated according to the Company's
ownership interest. Under U.S. GAAP, proportionate
consolidation is not permitted for jointly controlled
companies and the cost, equity or full consolidation methods
of accounting must be followed, as appropriate. As permitted
by the United States Securities and Exchange Commission, the
effect of this difference in accounting principles is not
reflected above.
(m) Impairment of Long-Lived Assets
Under Canadian GAAP, capital assets and goodwill are
reviewed for impairment as described in note 2. Under U.S.
GAAP, in addition to the review for impairment of goodwill
described in note 2, the Company reviews long-lived assets
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability is measured by a comparison of
the carrying amount of an asset to the net cash flows
expected to be generated from the asset. If an asset is
considered to be impaired, its carrying amount is reduced to
fair value.
(n) Impact of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities". In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB
Statement No. 133", which deferred the required date of
adoption of SFAS No. 133 for one year, to fiscal years
beginning after June 15, 2000. This standard is applicable
for the Company's 2002 fiscal year and currently its impact,
if any, has not been determined.
In September, 2000, Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities", was
issued to replace Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities".
SFAS 140 provides accounting and reporting standards for
transfers and servicing of financial assets and
extinguishments of liabilities. As the
Page 95
company currently does not transfer or service any financial
assets, the new standard is not expected to have any affect
on the Company.
In June 2000, the Financial Accounting Standards Board
approved Statement No. 141, "Business Combinations" (SFAS
141), and Statement No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). Those Statements will change the
accounting for business combinations and goodwill. SFAS 141
requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Use
of the pooling-of-interests method will be prohibited. SFAS
142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Thus, amortization of
goodwill, including goodwill recorded in past business
combinations, will cease upon adoption of that Statement,
presently expected to occur in the Company's 2003 fiscal
year. The Company has not yet determined the effects of the
new standards as the full text of the standards have not
yet been published.
In June 2000, the Financial Accounting Standards Board
approved Statement No. 143, "Accounting for Asset Retirement
Obligations". That standard requires entities to record the
fair value of a liability for an asset retirement obligation
in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by
increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is amortized
over the useful life of the related asset. Upon settlement
of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon
settlement. The Company has not yet determined the effects
of this new standard as the full text of the standard is not
yet available.
26. Comparative Figures
Certain amounts presented in the prior year have been
reclassified to conform to the current year's presentation.
27. Subsequent Events
(a) On April 27, 2001, in accordance with the terms of the
Company's share bonus plan, 200,000 common shares were issued
to a senior executive of the Company as compensation for
services rendered in connection with the Trimark
acquisition and the Company's long-term financing
arrangements. The market value of the shares was accrued
in the Company's financial statements in fiscal 2001.
(b) On July 10, 2001 a subsidiary of the Company
completed an equity financing with a third party for
$14.0 million.
Page 96
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of
Mandalay Pictures, LLC:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, change in
members' equity and cash flows present fairly, in all material
respects, the financial position of Mandalay Pictures, LLC (the
"Company") at March 31, 2001 and 2000, and the results of its
operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
generally accepted auditing standards in the United States which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 to the consolidated financial statements,
the Company changed its method of film accounting on April 1,
2000.
/s/ Pricewaterhouse Coopers LLP
- --------------------------------
June 22, 2001
Page 97
MANDALAY PICTURES, LLC
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2001 and 2000
2001 2000
-------------- --------------
ASSETS
Cash and cash equivalents $ 16,113,095 $ 13,241,574
Restricted cash 21,147,617 32,012,751
Accounts receivable - trade 29,105,253 3,563,139
Other receivables 15,225,000 3,824,034
Film inventory 133,127,349 50,060,931
Due (to) from affiliates (32,806) 244,180
Other assets and prepaid expenses 113,815 434,136
-------------- --------------
TOTAL ASSETS $ 214,799,323 $ 103,380,745
============== ==============
LIABILITIES
Accounts payable and accrued
expenses $875,163 $7,505,458
Accrued participations and
residuals 9,847,001 3,200,000
Bank loan 3,085,380 2,801,184
Production loans 93,126,648 30,557,227
Contractual obligations 36,574,600 16,171,948
Deferred revenue 41,256,404 5,106,294
-------------- --------------
TOTAL LIABILITIES 184,765,196 65,342,111
-------------- --------------
MEMBERS' EQUITY
Contributions from members 50,001,000 50,001,000
Accumulated deficit (19,966,873) (11,962,366)
-------------- --------------
TOTAL MEMBERS' EQUITY 30,034,127 38,038,634
-------------- --------------
TOTAL LIABILITIES and MEMBERS' EQUITY $214,799,323 $103,380,745
============== ==============
THE ACCOMPANYING NOTES ARE
AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
Page 98
MANDALAY PICTURES, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2001 and 2000
2001 2000
-------------- --------------
REVENUES $ 42,671,932 $ 87,033,801
OPERATING EXPENSES
Amortization of film costs (42,448,780) (87,988,812)
General and administration (6,110,105) (4,165,285)
Depreciation (92,262) (98,494)
LOSS FROM OPERATIONS (5,979,215) (5,218,790)
INTEREST INCOME 1,972,026 2,520,559
INTEREST EXPENSE (191,000) -
LOSS BEFORE PROVISION FOR TAXES (4,198,189) (2,698,231)
PROVISION FOR TAXES (22,318) (12,050)
LOSS BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE (4,220,507) (2,710,281)
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (3,784,000) -
NET LOSS $ (8,004,507) $ (2,710,281)
THE ACCOMPANYING NOTES ARE
AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
Page 99
MANDALAY PICTURES, LLC
CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S EQUITY
FOR THE YEARS ENDED MARCH 31, 2001 and 2000
Tigerstripes, LG Pictures,
LLC Inc. Total
------------- -------------- --------------
Balance at March 31, 1999 $ 550 $ 40,748,365 $ 40,748,915
Net loss - (2,710,281) (2,710,281)
Balance at March 31, 2000 550 38,038,084 38,038,634
Net loss - (8,004,507) (8,004,507)
Balance at March 31, 2001 $ 550 $ 30,033,577 $ 30,034,127
THE ACCOMPANYING NOTES ARE
AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
Page 100
MANDALAY PICTURES, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2001 and 2000
2001 2000
-------------- --------------
Cash flows from operating activities:
Net loss $ (8,004,507) $ (2,710,281)
Adjustments to reconcile net loss to
net cash used in operating activities:
Cumulative effect of a change in
accounting principle 3,784,000 -
Depreciation 92,262 98,494
Write off of abandoned film projects 341,090 -
Amortization of film costs 42,448,780 87,988,812
(Increase) decrease in assets:
Restricted cash 10,865,134 (29,310,552)
Accounts receivable - trade (25,542,114) (3,563,139)
Other receivables (11,400,966) (3,452,857)
Additions to film costs (129,299,198) (97,671,705)
Due to/from affiliates, net 276,986 37,149
Other assets and prepaid expenses 320,321 27,322
(Decrease) increase in liabilities:
Accounts payable and accrued expenses (6,630,295) (620,834)
Accrued participations and residuals 6,647,001 3,200,000
Contractual obligations 20,402,652 16,171,948
Deferred revenue 36,150,110 644,402
-------------- --------------
Total adjustments (51,544,237) (26,450,960)
-------------- --------------
Net cash used by operating activities (59,548,744) (29,161,241)
-------------- --------------
Cash flows from financing activities:
Proceeds (repayments) from bank loan, net 284,196 (1,153,795)
Repayments on production loans (21,614,163) (33,969,467)
Proceeds from production loans 84,183,584 45,712,935
Payments relating to financing costs
and other assets (433,352) (518,122)
-------------- --------------
Net cash provided by financing activities 62,420,265 10,071,551
-------------- --------------
Net increase (decrease) in cash and
cash equivalents 2,871,521 (19,089,690)
Cash and cash equivalents, beginning of year 13,241,574 32,331,264
-------------- --------------
Cash and cash equivalents, end of year $16,113,095 $13,241,574
============== ==============
Supplemental disclosure of cash flow information:
Interest paid $5,926,277 $2,218,759
Income taxes paid $22,318 $12,050
THE ACCOMPANYING NOTES ARE
AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
Page 101
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization:
Mandalay Pictures, LLC (the "Company") was incorporated on March
1, 1998 as a Delaware corporation. The Company develops,
finances, produces and distributes major motion pictures.
2. Summary of Significant Accounting Policies:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant inter-
company transactions and accounts have been eliminated.
ACCOUNTING CHANGES
In June 2000, 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
established new accounting standards for producers and
distributors of films, including changes in revenue recognition
concepts and accounting for exploitation, development and
overhead costs. SoP 00-2 requires that advertising costs be
expensed in accordance with SoP 93-7, "Reporting on Advertising
Costs" while all other exploitation costs are to be expensed as
incurred. Development costs for abandoned projects and indirect
overhead costs are to be charged to expense instead of being
capitalized to film costs. In addition, methodology for
determining net realizable value includes a discounted cash flow
approach. The Company adopted the pronouncement effective April
1, 2000 and recorded a one-time charge for the initial adoption
totaling $3,784,000, which has been reflected as a cumulative
effect of a change in accounting principle in the Consolidated
Statement of Operations for the year ended March 31, 2001. Also
as a result of the adoption, the Company recognized approximately
$18,748,000 of revenue in the current year which was recognized
last year. It is estimated $6,250,000 of previously recognized
revenue will be recorded in future periods. The effect on net
income (loss) of recognizing these revenues is not material.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin 101, Revenue Recognition in
Financial Statements ("SAB 101"), which summarized the SEC
staff's view in applying generally accepted accounting principles
to revenue recognition in financial statements. The Company has
reviewed its revenue recognition policies and revised them to
conform to SAB 101, specifically with respect to distributor-for-
hire arrangements. Accordingly, revenues in the prior year have
been restated to conform to the current period presentation, with
no net effect on net loss.
REVENUE RECOGNITION.
Revenue is recognized in accordance with the provisions of SoP-02
and SAB 101. The Company licenses certain film rights through
international distribution agreements that provide for the
payment of minimum license fees ("Minimum Guarantees" or "MG's"),
usually payable on delivery of the respective completed film,
that are subject to further increase based on the actual
distribution results in the respective territory. Minimum
Guarantees related to contracts which contain hold-back
provisions precluding the distributor from exploiting secondary
markets until certain time periods have lapsed are allocated
across those markets and recognized as revenue when each hold-
back provision expires.
Page 102
Revenue allocated to the primary market, usually the theatrical
market, is recognized as revenue on the date the completed film
is available for exploitation in the related territory and
certain other conditions of sale have been met pursuant to
criteria specified by SoP-00-2.
The Company has entered into a first look financing and
distribution agreement with Paramount Pictures Corporation
("Paramount") that gives Paramount the option to acquire the
distribution rights in all territories other than those covered
by the various international distribution agreements, under terms
which are similar to the international agreements. Any amounts
received from Paramount at the commencement of the license period
are treated as minimum guarantees with revenue being recognized
in a manner similar to the international distribution agreements
discussed above. Paramount also pays annual overhead
contribution fees to the Company to help offset the costs of
operation of the Company. These fees are presented as reductions
to general and administration expenses in the Statement of
Operations.
DEFERRED REVENUE
Deferred revenue represents MG's received from distributors for
which holdback provisions have not yet lapsed, thus, precluding
the Company from recognizing revenue.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
Cash and cash equivalents are carried at cost, which approximates
fair value. At times, cash balances held at financial
institutions are in excess of the Federal Deposit Insurance
Corporation's limits.
RESTRICTED CASH
Restricted cash represents amounts on deposit with financial
institutions that are contractually designated for the production
of certain films and require third party approvals prior to the
disbursement of any funds.
FILM COSTS:
o FILM INVENTORY
Film inventory represents the unamortized cost of films
which have been developed and produced by the Company or for
which the Company has acquired distribution rights. Film
inventory costs are capitalized and amortized against
revenues guaranteed by the delivery and subsequent
exploitation of the film. Such costs include all
development and production costs (including an allocation of
direct overhead and financing costs).
Film inventory is stated at the lower of cost, net of
amortization, or net realizable value. Amortization is
determined using the individual film forecast method,
whereby costs accumulated in the development and production
of a film are amortized in the proportion that current gross
revenues bear to management's estimate of the total gross
revenues expected to be received from all sources within ten
years of release. Revenue estimates on a film-by-film basis
are reviewed periodically by management and are revised, if
warranted, based on management's appraisal of current market
conditions. Where applicable, unamortized inventory is
written down to net realizable value using a discounted cash
flows model based on this appraisal.
Page 103
Included in film inventory costs are development costs.
Development costs represent expenditures directly
attributable to projects which are incurred prior to their
production. Such inventory items are capitalized and, upon
commencement of production, are charged to the production.
Development costs not charged to the production are written
off when the project is abandoned or when more than three
years has passed from the first expenditure.
o PARTICIPATIONS AND RESIDUALS
Estimated liabilities for participations and residuals are
amortized in the same manner as film inventory costs.
Based on management's estimates, $5,534,001 of the balance
of accrued participations and residuals at March 31, 2001
will be paid during the year ending March 31, 2002.
INCOME TAXES
For federal income tax purposes, profits and losses are passed
through to the members. Accordingly, no provision has been made
in these financial statements for federal income taxes. For the
years ended March 31, 2001, and March 31, 2000, the Company
recorded a provision related to California Limited Liability
Company taxes of $22,318 and $12,050, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, accounts receivable,
other assets, accounts payable and accrued expenses, bank and
production loans, contractual obligations, accrued participations
and residuals, and amounts due from affiliates as reflected in
the financial statements approximate their carrying value at
March 31, 2001 and March 31, 2000, respectively.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The new standard requires companies to
record derivatives on their balance sheets as assets or
liabilities, measured at fair value. Under SFAS No. 133, gains or
losses resulting from changes in the values of derivatives are to
be reported in the statement of operations or as a deferred item,
depending on the use of the derivatives and whether they qualify
for hedge accounting. The Company is required to adopt SFAS No.
133 in the first quarter of fiscal 2002. The impact on the
financial statements of adopting this standard is currently
anticipated to be immaterial.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the year. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to
the current-year presentation.
Page 104
3. Film inventory:
Film inventory consist of the following at March 31:
2001 2000
---- ----
Projects released, net of amortization $ 56,885,456 $ 7,020,184
Projects in production 64,948,138 37,773,547
Projects in development / pre-production 11,293,755 5,267,200
-------------- -------------
Total $ 133,127,349 $ 50,060,931
============== =============
The Company estimates that approximately 90% of unamortized costs
of released films at March 31, 2001 will be amortized within the
next three years. Approximately $39,500,000 of released film
inventory is expected to be amortized during the next twelve
months.
During the years ended March 31, 2001 and 2000, the Company
capitalized to film projects interest of approximately $5,200,602
and $2,335,000, respectively, and production overhead of
$7,000,000 in each of 2001 and 2000, respectively.
4. Bank Loan:
On February 12, 1999, the Company entered into a credit facility,
which provided a line of credit of $32,500,000, which was reduced
to $6,000,000 during the current year, bearing an interest rate
of LIBOR plus 1.75%. At March 31, 2001 and 2000, the Company had
$414,620 and $26,500,000 of unused available credit with this
facility. Borrowings under this credit facility are guaranteed
by a group of insurance companies, are non-recourse to the
Company and are collateralized by certain revenues and copyrights.
Amounts outstanding under this facility at March 31, 2001 and
2000 were $3,085,380 and $2,801,184, respectively, and are due no
later than November 19, 2002.
5. Production Loans:
On December 15, 2000, the Company entered into a non-recourse
credit facility, which provides a line of credit of $20,614,797,
bearing an interest rate of LIBOR + 1.5%, with a final maturity of
January 7, 2003. At March 31, 2001 the outstanding balance was
$12,200,000, leaving $8,414,797 of unused available credit with
this facility. Borrowings under this facility are collateralized
by, and will be paid from, contractual MG's due on certain
distribution contracts entered into with foreign distributors.
Approximately $6,000,000 of the available credit facility is
temporarily collateralized with the Company's restricted cash and
will be released to the general account of the Company as
additional distribution contracts are delivered to the bank.
On May 19, 2000, the Company entered into a non-recourse credit
facility, which provides a line of credit of $57,458,000, bearing
an interest rate of LIBOR + 1.5%, with a final maturity of July 3,
2002. At March 31, 2001, the outstanding balance was
$53,191,000, leaving $4,267,000 of unused available credit with
this facility. Borrowings under this facility are also
collateralized by, and will be paid from, contractual MG's due on
certain distribution contracts.
On October 15, 1999, the Company entered into a non-recourse
credit facility, providing a line of credit of $46,336,190,
bearing an interest rate of LIBOR + 1.5%, with a final maturity
of February 27, 2002. The Company had $27,734,918 and
$27,534,590 outstanding on this facility at March 31, 2001 and
2000, respectively. The unused available credit with this
facility was $0 and $18,791,853 at March 31, 2001 and 2000,
respectively. Consistent with the credit facilities discussed
above, borrowings under this
Page 105
facility are collaterized by, and are being repaid from, contractual
MG's due on certain distribution contracts entered into with foreign
distributors.
For each of the three production loans discussed above, the bank
has required the Company to enter into foreign exchange options
to hedge the Japanese yen translation fluctuation applicable to
the distribution contracts entered into with the Japanese
distributor. These options, which are exercisable during 2002,
have a fair value of $113,800 at March 31, 2001.
On December 1, 1998, the Company entered into a credit facility
which provided a line of credit of $36,993,000, bearing an
interest rate of LIBOR plus 1.25%. The Company had $0 and
$3,022,638 outstanding on this facility at March 31, 2001 and
2000, respectively, and no unused available credit at both March
31, 2001 and 2000. Borrowings under this credit facility were
collateralized by certain distribution contracts entered into
with foreign distributors.
For each of the credit facilities discussed above, the Company
deposited cash into a restricted account from which the bank can
withdraw interest and related expenses over the term of the
credit facilities. The amount of restricted cash on deposit with
the bank was $11,547,999 and $4,278,785 at March 31, 2001 and
2000, respectively. Any unused funds will be returned to the
Company upon repayment of the related facility.
6. Film Financing Transactions:
During the current fiscal year, the Company entered into three
separate financing transactions with third parties to assist in
the financing of three of its films.
The first transaction provided for the third party to contribute
approximately $23,750,000 in exchange for a share of all
distribution proceeds, as defined, generated by the film in
perpetuity. Approximately $14,500,000 of the proceeds were
recorded as a reduction to the costs of the related film. The
remaining amount of $9,250,000 is guaranteed to be returned to
the investor, plus interest at LIBOR + 0.4%, through the defined
distribution proceeds of the film, but in no event later than 42
months after delivery of the completed film to Paramount. This
amount has been recorded as a contractual obligation in the
balance sheet.
The second transaction provided for the third party to contribute
approximately $15,560,000 in exchange for a share of the
distribution proceeds, as defined, generated by the film and was
recorded as a reduction to the costs of the related film.
The third transaction utilized the same sale and leaseback
structure used in December 1999 as discussed below. Proceeds of
$10,558,000 received therefrom have been reflected as a
contractual obligation at March 31, 2001, as the film project to
which it related has not yet commenced production and certain
refund provisions apply if a film is not delivered by December
31, 2002.
In order for the unrelated third party in the first and second
transactions to fulfill its obligations to fund these films,
$14,500,000 of cash deposited into the restricted cash account,
plus interest earned thereon, at March 31, 2000 was lent to the
investor and is repayable out of 100% of the investor's
entitlement to proceeds from the distribution of its other films
financed with the Company and a pledge against any money raised
through its ongoing fundraising efforts, but in no event later
than September 30, 2001. Therefore, $14,500,000 plus interest
has been recorded as other receivables at March 31, 2001 and the
restricted cash has been reduced accordingly.
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During the prior fiscal year, the Company entered into three
separate financing transactions with unrelated third parties to
assist in the financing of three of its films.
The first provided for the third party to contribute
approximately $23,000,000 which was recorded as a reduction to
the costs of the related film, and provides for a contingent
participation interest in the results of distribution.
The second was structured as a sale and leaseback arrangement
whereby the Company sold all of its rights to one film and
immediately leased back the attendant distribution rights for a
17.5 year term. Under the terms of that arrangement, the Company
has agreed to make certain fixed annual payments to the purchaser
over the length of the term. These payments have been legally
assumed by a German bank, in exchange for the Company depositing
a certain amount in cash, and the purchaser has relinquished any
claim against the Company for the payments. Upon the payment of
the final amount in the 18th year, all rights previously sold
revert back to the Company.
The deposit and corresponding fixed payment obligations are not
presented in the financial statements, as they are no longer the
property nor the responsibility of the Company. The net gain
from the transaction of approximately $4,100,000 has been
recorded as a reduction to film costs.
In the third, the Company received $16,000,000 from an investor
related to the intended production of a motion picture, that as
of March 31, 2001, remains in development / pre-production. Of
this amount, $14,500,000 was placed on restricted deposit with a
German bank and $1,500,000 was deposited into the general bank
account of the Company to fund development costs. The amount
placed in the restricted cash account was subsequently loaned
back to the investor to fund other financing commitments with the
Company, as discussed above. Should the project be abandoned,
the Company must return these funds, plus all interest earned on
the restricted deposit. At March 31, 2001 and 2000, $16,766,600
and $16,171,948 are included in contractual obligations related
thereto.
7. Commitments and Contingencies:
EMPLOYMENT AGREEMENTS:
It has been the Company's policy to employ all executives under
formal employment agreements. The terms of these agreements have
generally terminated on or about February 28, 2001 and have been
temporarily extended through December 31, 2001 while the Company
develops its long-term strategy. During the next fiscal year the
Company plans to further extend the terms of employment of those
executives necessary to fulfill its business plan.
The employment and compensation agreements with the Company's two
most senior executives, who are also members, provided for
minimum annual base compensation of $4,444,000 and $1,280,000
respectively, through the year ending February 28, 2003. These
executives have agreed to defer 50% of these amounts to be
conditionally recouped out of the results of future productions,
under certain specific instances, if at all. Based upon the
results as of March 31, 2001, no such recoupment is expected.
The Company terminated the contract of its next ranking officer,
which had an expiration date of December 31, 2001, and provided
for no mitigation offset, by paying the amount of $1,265,799.
This amount has been included in general and administration
expenses in the Statement of Operations for the year ended March
31, 2001.
Page 107
DISTRIBUTION AGREEMENTS
Under the distribution agreements with Paramount related to the
motion picture "Sleepy Hollow" the Company assumed responsibility
for certain amounts payable to unions and actors based on the
performance of the motion picture in certain territories.
Paramount is the primary obligor of these obligations. Based
upon the performance of the picture to date, the Company has
accrued $5,534,001 at March 31, 2001 as an estimate of this
obligation. The Company is in the process of negotiating a
settlement of this arrangement due to certain actions of
Paramount during the production and distribution of the film.
Any formal relief of this obligation will be recorded as income
when legally binding.
8. Members' Equity:
The Company's equity structure is as follows at each of March 31,
2001 and March 31, 2000:
Class A Preferred Membership Units $ 50,000,000
Class B Common Membership Units 450
Class C Common Membership Units 550
-------------
$ 50,001,000
=============
The Class A Preferred membership units have a pro-rata claim,
with that of the two senior executives' salary deferrals, on any
non-tax related distribution until fully redeemed.
9. Related Parties:
Due (to) from affiliates consists of the following at March 31:
2001 2000
---- ----
Lions Gate Entertainment Corp. $ (84,466) $ 244,180
Other Mandalay companies* 51,662 34,000
----------- ----------
$(32,806) $278,180
=========== ==========
* - Includes various Mandalay named companies in which members of
the Company have significant interest.
LG Pictures, Inc., a wholly owned subsidiary of Lions Gate
Entertainment Corp., the member that owns class A preferred and
class B common membership units, was required to compensate the
Company for any interest income foregone on a required equity
contribution that was replaced by the establishment of the bank
loan (see Note 4). During the current year, this obligation was
terminated. During the years ended March 31, 2001 and 2000, the
Company received $ 190,000 and $1,237,000, respectively under
this agreement, which amounts are included in interest income.
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INDEX TO EXHIBITS
Exhibit Page
Number Description of Documents Number
- --------- --------------------------------------------- ------
3.1* Articles of Incorporation ...................
3.2*** Amendment to Articles of Incorporation
to Provide Terms of the Series A
Preferred Shares dated as of December
20, 1999.....................................
3.3 Amendment to Articles of Incorporation
to Provide Terms of the Series B
Preferred Shares dated as of September
26, 2000..................................... 111
3.4 Amendment to Articles of Incorporation
to change the size of the Board of
Directors dated as of September 26, 2000..... 115
4.1* Trust Indenture between the Company and
CIBC Mellon Trust Company dated as of
April 15, 1998...............................
4.2*** Warrant Indenture between the Company
and CIBC Mellon Trust Company dated as
of December 30, 1999.........................
10.1* Employees' and Directors' Equity
Incentive Plan...............................
10.2* Incentive Plan Stock Option Agreement No. 1..
10.3* Incentive Plan Stock Option Agreement No. 2..
10.4*+ Memorandum of Understanding among the
Company, LG Pictures Inc., Tigerstripes,
Peter Guber, Paul Schaeffer and Adam
Platnick dated March 6, 1998.................
10.5* Amendment to Memorandum of
Understanding among the Company, LG
Pictures Inc., Tigerstripes, Peter
Guber, Paul Schaeffer and Adam Platnick
dated December 29, 1998......................
10.6* Amendment to Memorandum of
Understanding among the Company, LG
Pictures Inc., Tigerstripes, Peter
Guber, Paul Schaeffer and Adam Platnick
dated December 30, 1998......................
10.7*+ Agreement between Paramount and
Mandalay Pictures dated March 9, 1998........
10.8** Credit and Security Agreement among
IDC, LLC, Mandalay Pictures, MP
Finance, LLC, the Production Servicers
referred to therein, the Lenders
referred to therein and the Chase
Manhattan Bank dated as of February 12,
1999.........................................
10.9*** Agreement and Plan of Merger among the
Company, LGE Merger Sub and Trimark
dated June 6, 2000...........................
10.10**** Registration Rights Agreement dated as
of June 6, 2000, by and among the
Company, Mark Amin and Reza Amin.............
10.11**** Trimark Stockholders Voting Agreement
dated June 6, 2000, by and among the
Company and the stockholders of Trimark
Holdings, Inc. listed on Schedule A
thereto......................................
10.12**** Lions Gate Stockholders Voting
Agreement dated June 6, 2000, by and
among Trimark Holdings, Inc. and the
stockholders of the Company listed on
Schedule A thereto...........................
10.13 Amended and Restated Unanimous
Shareholders Agreement among
CineGroupe, Animation Cinepix Inc.,
Jacques Pettigrew, Fiducie Famille
Pettigrew, Robert Paul and Fox Family
Worldwide, Inc. dated as of September
8, 2000...................................... 116
Page 109
Exhibit Page
Number Description of Documents Number
- --------- --------------------------------------------- ------
10.14**** Employment Agreement dated as of June
6, 2000, between the Company and Mark Amin...
10.15 Employment Agreement between the
Company and Marni Wieshofer dated
August 26, 2000.............................. 157
10.16 Employment Agreement between the
Company and Gordon Keep dated October
1, 2000...................................... 163
10.17 Employment Agreement between the
Company and Jon Feltheimer dated
February 27, 2001............................ 169
10.18 Employment Agreement between the
Company and John Dellaverson dated
April 1, 2001................................ 177
10.19 Ignite, LLC and Lions Gate Films Inc.
deal memo dated February 15, 2001............ 181
21.1 List of Subsidiaries......................... 186
23.1 Consent of Independent Accountant............ 187
23.2 Consent of Independent Accountant............ 188
24.1 Power of Attorney (Contained on
Signature Page)..............................
* Incorporated by reference to the Company's Annual Report on
Form 20-F for the fiscal year ended March 31, 1998 (File No.
000-27730).
** Incorporated by reference to the Company's Annual Report on
Form 20-F for the fiscal year ended March 31, 1999 (File No.
000-27730).
*** Incorporated by reference to the Company's Annual Report on
Form 20-F for the fiscal year ended March 31, 2000 (File No.
000-27730).
**** Incorporated by reference to the Company's Form F-4
Registration Statement under the Securities Act of 1933
dated August 2000.
+ Portions of these exhibits have been omitted pursuant to a
request for confidential treatment.
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