Back to GetFilings.com

Table of Contents

[X] Quarterly report pursuant to section 13 or 15(d)
of the Securities and Exchange Act of 1934

For the quarterly period ended June 30, 2003

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.

Suite 3123, Three Bentall Centre, Burrard Street
Vancouver, British Columbia V7X 1J1
And
4553 Glencoe Avenue, Suite 200
Marina del Rey, California 90292
(Address of principal executive offices)

Registrant’s telephone number, including area code: (604) 609-6100

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [   ]

     As of August 11, 2003, 59,410,068 shares of the registrant’s no par value common stock were outstanding.

Table of Contents

TABLE OF CONTENTS

2

Table of Contents

FORWARD LOOKING STATEMENTS

     All statements, other than statements of historical fact, contained within this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases you can identify forward-looking statements by terms such as “may,” “intend,” “will,” “should,” “could,” “would,” “expect,” “believe,” “estimate” or the negative of these terms, and similar expressions intended to identify forward-looking statements.

     These forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. Also, these forward-looking statements present our estimates and assumptions only as of the date of this report. Except for our ongoing obligation to disclose material information as required by federal securities laws, we do not intend to update you concerning any future revisions to any forward-looking statements to reflect events or circumstances occurring after the date of this report.

     Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to, those described in the Risk Factors section of our Annual Report on Form 10-K.

3

Table of Contents

PART I

Item 1. Financial Statements

LIONS GATE ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS

(All amounts in thousands of U.S. dollars, except share amounts)

See accompanying notes.

4

Table of Contents

LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(All amounts in thousands of U.S. dollars, except per share amounts)

See accompanying notes.

5

Table of Contents

LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(All amounts in thousands of U.S. dollars, except share amounts)

										Series A								Series B
		Common Stock								Preferred Shares								Preferred Shares																Cumulative
																										Contributed				Accumulated				Translation
		Number				Amount				Number				Amount				Number				Amount				Surplus				Deficit				Adjustments				Total
Balance at March 31, 2002			43,231,921			$	157,675				11,830			$	30,751				10			$	—			$	—			$	(105,435	)		$	(7,597	)		$	75,394
Net loss available to common shareholders																															(2,507	)							(2,507	)
Accretion of Series A preferred shares and amortization of issue costs											—				1,768																								1,768
Foreign currency translation adjustments																																			62				62
Balance March 31, 2003			43,231,921				157,675				11,830				32,519				10				—				—				(107,942	)			(7,535	)			74,717
Issuance of common stock			16,201,056				30,220																																30,220
Redemption of Series A preferred shares											(8,040	)			(22,349	)											4,259												(18,090	)
Net loss available to common shareholders																															(13,187	)							(13,187	)
Accretion of Series A preferred shares and amortization of issue costs											—				390																								390
Foreign currency translation adjustments																																			840				840
Balance June 30, 2003			59,432,977			$	187,895				3,790			$	10,560				10			$	—			$	4,259			$	(121,129	)		$	(6,695	)		$	74,890

See accompanying notes.

6

Table of Contents

LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands of U.S. dollars)

See accompanying notes.

7

Table of Contents

LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Operations

Lions Gate Entertainment Corp. (“the Company” or “Lions Gate”) is a fully integrated entertainment company engaged in the development, production and 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. As an independent distribution company, the Company also acquires distribution rights from a wide variety of studios, production companies and independent producers.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company include the accounts of Lions Gate and all of its majority-owned and controlled subsidiaries, with a provision for minority interests, and the Company’s proportionate share of assets, liabilities, revenues and expenses of jointly controlled companies. The Company controls a subsidiary company through a combination of existing voting interests and an ability to exercise various rights under certain shareholder agreements and debentures to acquire common shares.

These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada (“Canadian GAAP”) which conforms, in all material respects, with the accounting principles generally accepted in the United States (“U.S. GAAP”), except as described in note 9, for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by Canadian or U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these unaudited condensed consolidated financial statements. Operating results for the quarter are not necessarily indicative of the results that may be expected for the year ending March 31, 2004. Certain reclassifications have been made in the fiscal 2003 financial statements to conform to the fiscal 2004 presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for the year ended March 31, 2003.

The balance sheet at March 31, 2003 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.

Effective April 1, 2002, the Company adopted the United States dollar as its reporting currency as a substantial component of its operations are domiciled in the United States and the dominant market for trading volume of its common stock is on the American Stock Exchange. Prior to April 1, 2002, the Company’s consolidated financial statements were presented in Canadian dollars. The functional currencies of each of the Company’s operations in the United States and Canada are unchanged.

3. Investment in Films and Television Programs

8

Table of Contents

The Company expects approximately 44% of completed films and television programs, net of accumulated amortization will be amortized during the one-year period ending June 30, 2004, and approximately 55% of accrued participants’ share will be paid during the one-year period ending June 30, 2004.

Additionally, the Company expects approximately 80% of completed and released films and television programs, net of accumulated amortization will be amortized during the three year period ending June 30, 2006.

The acquired library is being amortized using the straight-line method over a period of twenty years from the acquisition date. The remaining amortization period as at June 30, 2003 is seventeen and one-quarter years on the unamortized costs of $36.9 million.

4. Bank Loans

The Company has a $175 million U.S. dollar—denominated revolving credit facility, a $25 million Canadian dollar—denominated revolving credit facility, $3.7 million in operating lines of credit and $2.2 million in demand loans.

The revolving credit facility expires September 2005 and bears interest at 2.5% over the Adjusted LIBOR or the Canadian Bankers Acceptance rate, or 1.5% over the U.S. or Canadian prime rates. The availability of funds under the revolving credit facilities is limited by the borrowing base, which is calculated on a monthly basis. The borrowing base assets at June 30, 2003 totaled $171.8 million (March 31, 2003 —$166.4 million). At June 30, 2003, the revolving credit facility has an average variable interest rate of U.S. prime minus 0.21% on principal of $96.6 million and an average variable interest rate of Canadian prime plus 0.72% on principal of $23.6 million. U.S. and Canadian prime interest rates at June 30, 2003 were 4.0% and 5.0% respectively. The Company is required to pay a monthly commitment fee of 0.375% on the total revolving credit facilities of $200.0 million less the amount drawn. The Company entered into a $100 million interest rate swap at an interest rate of 3.08%, commencing January 2003 and ending September 2005. The swap is in effect as long as three month LIBOR is less than 5.0%. Fair market value of the interest rate swap at June 30, 2003 is $3.5 million (March 31, 2003 — $3.2 million). Unrecognized fair valuation losses for the three months ended June 30, 2003 amount to $0.3 million (2002 -$nil).

The operating lines of credit bear interest at Canadian prime plus 0%-1% and the demand loans at Canadian prime plus 2% — 4%.

5. Income (Loss) per Common Share

Basic income (loss) per share is calculated after adjusting net income (loss) for dividends and accretion on the Series A preferred shares and using the weighted average number of common shares outstanding during the three months ended June 30, 2003 of 46,918,000 shares (2002 — 43,202,000 shares). The exercise of common share equivalents including employee stock options, share purchase warrants, convertible promissory notes and Series A preferred shares could potentially dilute earnings per share in the future, but were not reflected in fully diluted income per share because to do so would be anti-dilutive.

The Company has elected to use the intrinsic value method in accounting for stock based compensation. In accordance with CICA 3870, 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 during the three months ended June 30, 2003 was $0.47. The total stock compensation expense, based on the fair value, would be $0.1 million for the three months ended June 30, 2003 and would have no effect on loss per common share for the period.

For disclosure purposes the 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%, risk-free interest rate of 2.6% and expected life of five years.

6. Segment Information

CICA Section 1701 “Segment Disclosures” requires the Company to make certain disclosures about each reportable segment. The Company has four reportable business segments: Motion Pictures, Television, Animation and Studio Facilities. The Company’s reportable business segments are strategic business units that offer different products and services, and are managed separately.

Motion Pictures consists of the development and production of films, acquisition of North American and worldwide distribution rights, North American theatrical, video and television distribution of films produced and acquired and worldwide licensing of distribution rights to films produced and acquired.

Television consists of the development, production and worldwide licensing of distribution rights and North American video distribution of television productions including television series, television movies and mini-series and non-fiction programming.

Animation consists of the development, production and worldwide licensing of distribution rights of animated and live action television series, television movies and feature films.

9

Table of Contents

Studio Facilities consists of management of an eight-soundstage studio facility in Vancouver, Canada. Rental revenue is earned from soundstages, production offices and other services such as equipment rental to tenants that produce or support the production of feature films, television series, movies and commercials. Tenancies vary from a few days to five years depending on the nature of the project and the tenant.

Segmented information by business is as follows:

Segment profit (loss) is defined as segment revenue less segment direct operating, distribution and marketing and general and administrative expenses. The reconciliation of total segment profit (loss) to the Company’s income (loss) before income taxes is as follows:

7. Supplementary Cash Flow Statement Information

Interest paid during the three months ended June 30, 2003 amounted to $2.1 million (2002 — $2.2 million).

Income taxes paid during the three months ended June 30, 2003 amounted to $0.2 million (2002 — $nil).

8. Commitments and Contingencies

The Company is from time to time involved in various claims, legal proceedings and complaints arising in the ordinary course of business. The Company does not believe that adverse decisions in any 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.

9. Reconciliation to United States GAAP

10

Table of Contents

The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with Canadian GAAP. The material differences between the accounting policies used by the Company under Canadian GAAP and U.S. GAAP are disclosed below in accordance with the provisions of the Securities and Exchange Commission.

Under U.S. GAAP, the net income (loss) and income (loss) per share figures for the three months ended June 30, 2003 and 2002, and the shareholders’ equity as at June 30, 2003 and March 31, 2003 are as follows:

Reconciliation of movement in Shareholders’ Equity under U.S. GAAP:

(a)  Accounting for Discontinued Operation

Under Canadian GAAP, effective April 1, 2002 and continuing until November 8, 2002, the date of the sale of the Company’s investment in Mandalay, the carrying value of the investment is presented as a discontinued operation and the results of Mandalay are reported separately for the current and comparable period. Under U.S. GAAP, the investment in Mandalay was not considered a discontinued operation and would be accounted for using the equity method. Accordingly, in the three months ended June 30, 2002, Mandalay’s net loss of $0.6 million would be recorded as a reduction in net income.

(b)  Accounting for Capitalized Pre—Operating Period Costs — One—Hour Series Business

11

Table of Contents

Under Canadian GAAP, the Company deferred certain pre-operating costs related to the launch of the television one-hour series business amounting to $3.0 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 $0.2 million (2002 — $0.2 million).

(c)  Interest Swap Mark-to-Market

Under U.S. GAAP, the interest swap does not meet the criteria of an effective hedge and therefore fair valuation losses for the three months ended June 30, 2003 of $0.3 million (2002 — $nil) are recorded in the statements of operations. Under Canadian GAAP, the interest swap is an effective hedge and no fair valuation adjustment is recorded.

(d)  Accounting for Business Combinations

Under Canadian GAAP, prior to January 1, 2001, costs related to activities or employees of an acquiring company were considered in the purchase price allocation. In fiscal 2001, the Company included $1.4 million of such costs in the purchase price for an acquired company. Under U.S. GAAP, costs related to the acquiring company must be expensed as incurred. The amount is presented net of income taxes of $0.3 million.

(e)  Accounting for Income Taxes

Under Canadian GAAP, commencing in the year ended March 31, 2001, the Company used the asset and liability method to recognize future income taxes which is consistent with the U.S. GAAP method required under SFAS 109 except that Canadian GAAP requires use of the substantively enacted tax rates and legislation, whereas U.S. GAAP only permits use of enacted tax rates and legislation. For the year ended March 31, 2000, 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 $0.2 million (2002 — $0.1 million), with a corresponding increase in valuation allowances by $0.2 million (2002 — $0.1 million).

SFAS 109 requires deferred tax assets and liabilities be recognized for temporary differences, other than non-deductible goodwill, arising in a business combination. In the year ended March 31, 2000, under U.S. GAAP, goodwill was increased to reflect the additional deferred tax liability resulting from temporary differences arising on the acquisition of Lions Gate Studios in fiscal 1999. 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 $1.9 million as at June 30, 2003 (March 31, 2003 — $1.9 million).

(f)  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.

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 carrying amount of the preferred shares is the residual value arrived at by taking proceeds less the fair value of the share purchase warrants less share issue costs.

Under Canadian GAAP, the difference between the carrying value and the redemption price is being accreted as a charge to accumulated deficit on a straight-line basis over five years whereas, under U.S. GAAP, the difference is being accreted using the effective interest method over five years.

(g)  Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting shareholders’ equity that, under U.S. GAAP are excluded from the determination of net income or loss. Adjustment to cumulative translation adjustments comprises foreign currency translation gains and losses. Other comprehensive loss comprises unrealized losses on investments available for sale based on the market price of the shares at June 30, 2003 net of income taxes of $nil (2002 — $nil).

(h)  Consolidated Financial Statements

Under Canadian GAAP, the Company consolidates the financial statements of CinéGroupe Corporation (“CinéGroupe”). On July 10, 2001, as a condition of a $9.2 million equity financing with a third party, CinéGroupe’s Shareholders’ Agreement was amended to allow for certain participatory super-majority rights to be granted to the shareholders. Therefore, under U.S. GAAP, the Company is

12

Table of Contents

now precluded from consolidating CinéGroupe and accounts for its 29.4% ownership of CinéGroupe, commencing April 1, 2001, using the equity method.

There is no impact on net income (loss) under U.S. GAAP. Accounting for CinéGroupe using the equity method under U.S. GAAP would reduce the unaudited condensed consolidated statements of operations items to the following amounts:

The impact of using the equity method under U.S. GAAP on the unaudited condensed consolidated balance sheet at June 30, 2003 would be a reduction in total assets to $365.6 million (March 31, 2003 — $340.6 million) and a reduction in debt (including bank loans, production loans and long-term debt) to $184.3 million (March 31, 2003 — $182.0 million.).

13

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes.

Overview

     We are an independent producer and distributor of film and television entertainment content. We release approximately 15 motion pictures theatrically per year. Our theatrical releases include films we produce in-house and films we acquire from third parties. We also have produced over 150 hours of television programming on average each of the last four years. Our disciplined approach to production, acquisition and distribution is designed to maximize our profit by balancing our financial risks against the probability of commercial success of each project. We distribute our library of approximately 2,000 motion picture and television program titles directly to retailers, video rental stores, pay and free television channels and indirectly to international markets through third parties. We also own a majority interest in CinemaNow, a development stage internet video-on-demand provider, and own and operate a film and television production studio.

     Our revenues are derived from the following business units:

	•		Motion Pictures, which includes Theatrical, Home Entertainment, Television and International Distribution. Theatrical revenues are derived from the domestic theatrical release of motion pictures in North America. Home entertainment revenues are derived from the sale of video and DVD releases of our own productions and acquired films, including theatrical releases and direct-to-video releases. Television revenues are primarily derived from the licensing of our product to the domestic cable, free and pay television markets. International revenues are derived from the licensing of our productions and acquired films to international markets on a territory-by-territory basis.
	•		Television, which includes the licensing to domestic and international markets of one-hour drama series, television movies and non-fiction programming.
	•		Animation, which includes an interest in CinéGroupe Corporation, a producer and distributor of animated feature films and television programming.
	•		Studio Facilities, which includes Lions Gate Studios and the leased facility Eagle Creek Studios, which derive revenue from rental of sound stages, production offices, construction mills, storage facilities and lighting equipment to film and television producers.

     Our primary operating expenses include the following:

	•		Direct Operating Expenses, which include amortization of production or acquisition costs, participation and residual expenses.
	•		Distribution and Marketing Expenses, which primarily include the costs of theatrical “prints and advertising” and of video and DVD duplication and marketing.
	•		General and Administrative Expenses, which include salaries and other overhead.

     The functional currency of our business, based on the economic environment in which we primarily generate and expend cash, is the Canadian dollar and the U.S. dollar for the Canadian and U.S.-based businesses, respectively. Commencing with the period beginning April 1, 2002, condensed consolidated financial statements are presented in U.S. dollars, as a substantial component of our operations are domiciled in the U.S. and the principal market for trading of our common shares is the American Stock Exchange.

14

Table of Contents

The functional currencies of each of the Company’s operations in the United States and Canada are unchanged.

     Sale of Common Shares. On June 4, 2003, the Company issued a prospectus to sell 15,000,000 common shares at a public offering price of $2.05 per share. On June 9, 2003, the Company received $28.9 million of net proceeds, after deducting underwriting discounts, and issued 15,000,000 common shares. The Company estimates the offering expenses will be approximately $1.0 million. The Company used $18.1 million of the net proceeds to repurchase 8,040 Series A Preferred Shares at a per share purchase price of $2,250 and used the remaining net proceeds for repayment of bank loans and general business purposes. On June 13, 2003, the underwriters exercised a portion of their over allotment option and the Company received $2.3 million of net proceeds, after deducting underwriting discounts, and issued an additional 1,201,056 common shares.

Critical Accounting Policies

     The application of the following accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management. For a summary of all of our accounting policies, including the accounting policies discussed below, see note 2 to the March 31, 2003 audited consolidated financial statements.

     Generally Accepted Accounting Principles. Our consolidated financial statements have been prepared in accordance with Canadian GAAP, which conforms, in all material respects, with U.S. GAAP, except as described in note 9 to the unaudited condensed consolidated financial statements. The U.S. dollar and the Canadian dollar are the functional currencies of our U.S. and Canadian-based businesses, respectively. Commencing with the period beginning April 1, 2002, our consolidated financial statements are presented in U.S. dollars as a substantial component of our operations are domiciled in the U.S. and the primary market for trading volume of our common shares is on the American Stock Exchange. Prior to April 1, 2002, our consolidated financial statements were presented in Canadian dollars. In accordance with generally accepted accounting principles in both Canada and the U.S., the financial statements of Canadian-based subsidiaries are translated for consolidation purposes using current exchange rates, with translation adjustments accumulated in a separate component of shareholders’ equity. The functional currencies of each of the Company’s operations in the United States and Canada are unchanged.

     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. We elected early adoption of SoP 00-2 and retroactively adopted SoP 00-2 effective as of April 1, 2000. We also elected to adopt SoP 00-2 for Canadian GAAP purposes. The prior years’ financial statements were not restated, as the effect of the new policy on the prior periods was deemed not reasonably determinable. Accordingly, opening accumulated deficit for the year ended March 31, 2001 was increased to reflect the cumulative effect of the accounting change in the amount of $40.7 million (net of income taxes of $1.5 million). The principal changes as a result of applying SoP 00-2 are as follows:

	•		Advertising and marketing costs, which were previously capitalized to investment in films and television programs on the balance sheet and amortized using the individual film forecast method, are now expensed the first time the advertising takes place.
	•		The capitalization of production costs for episodic television series is limited to revenue that has been contracted for on an episode-by-episode basis until such time as the criteria for recognizing secondary market revenues are met.

     We capitalize costs of production, including financing costs, to investment in motion pictures and television programs. These costs are amortized to direct operating expenses in accordance with SoP 00-2. These costs are stated at the lower of unamortized motion picture or television program costs or fair value (net present value). These costs for an individual motion picture or television program are amortized in the proportion that current period actual revenues bear to management’s estimates of the total revenue expected to be received from such motion picture or television program over a period not to exceed ten years from the date of delivery. Management regularly reviews and revises when necessary, its total revenue estimates, which may result in a change in the rate of amortization and/or write-down of all or a portion of the unamortized costs of the motion picture or television program to its fair value. No assurance can be given that unfavorable changes to revenue estimates will not occur, which may result in significant write-downs affecting our results of operations and financial condition.

15

Table of Contents

     Revenue Recognition. Revenue from the sale or licensing of motion pictures and television programs is recognized upon meeting all recognition requirements of SoP 00-2. 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. Revenue from the sale of DVDs in the retail market, net of an allowance for estimated returns, is recognized on the later of shipment to the customer or “street date” (when it is available for sale by the customer). Under revenue sharing arrangements, rental revenue is recognized when we are entitled to receipts and such receipts are determinable. Revenues from television licensing are recognized when the motion picture or television program is available to the licensee for telecast. For television licenses that include separate availability “windows” during the license period, revenue is allocated over the “windows.” Revenue from sales of international territories are recognized when the feature film or television program is available to the distributor for exploitation and no conditions for delivery exist, which under most sales contracts requires that full payment has been received from the distributor. For contracts that provide for rights to exploit a program on multiple media (e.g. theatrical, video, television) with a fee for a single motion picture or television program where the contract specifies the permissible timing of release to various media, 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 the program is released to each media. 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. Rental revenue from short-term operating leases of studio facilities is recognized over the term of the lease. Prior to December 2001, we earned fees from management services provided to Canadian limited partnerships, whose purpose was to assist in the financing of motion pictures produced in Canada, and those fees were recognized as revenue when the financing was completed. We no longer provide these management services due to the rescission of certain tax shelter provisions by the Canadian government. Cash payments received are recorded as deferred revenue until all the conditions of revenue recognition have been met. We accrue for video returns and provide for allowances in the financial statements based on previous returns and our allowances history on a title-by-title basis in each of the video businesses. There may be differences between actual returns and allowances and our historical experience.

     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.

     Goodwill. In November 2001, the CICA released Handbook Section 3062, “Goodwill and Other Intangible Assets,” to be applied by companies for fiscal years beginning on or after January 1, 2002. Early adoption of CICA 3062 was permitted for companies with their fiscal year beginning on or after April 1, 2001, provided the first interim period financial statements had not been previously issued. We elected to early-adopt CICA 3062 on April 1, 2001. Under CICA 3062, goodwill is no longer amortized but is reviewed annually for impairment, or more frequently if impairment indicators arise, unless certain criteria have been met. CICA 3062 is similar, in many respects, to SFAS 142, “Goodwill and Other Intangible Assets,” under U.S. GAAP. Goodwill is required to be tested for impairment between the annual tests if an event occurs or circumstances change that more-likely-than-not reduce the fair value of a reporting unit below its carrying value.

Results of Operations

     Three Months Ended June 30, 2003 compared to Three Months Ended June 30, 2002

     Consolidated revenues for the three months ended June 30, 2003 of $54.9 million decreased $39.3 million, or 41.7%, compared to $94.2 million in the comparable period.

     Motion pictures revenue of $43.1 million this quarter decreased $26.4 million, or 38.0%, compared to $69.5 million in the prior year’s quarter. Theatrical revenue of $10.0 million increased $2.3 million, or 29.9%, compared to $7.7 million in the prior year’s quarter. Significant theatrical releases in the current quarter included House of 1000 Corpses and Confidence with revenue of approximately $10.0 million. The most significant theatrical release in the prior year’s quarter was Frailty with revenue of $3.5 million. Video revenue of $25.0 million decreased $25.1 million, or 50.1%, this quarter compared to $50.1 million in the prior year’s quarter. Significant video releases in the current quarter included Secretary with revenue of $5.0 million and Cube 2 with revenue of $1.1 million. Significant video releases in the prior year’s quarter included Monster’s Ball with revenue of $25.7 million and State Property with revenue of $4.1 million. International revenue of $6.1 million decreased $1.1 million, or 15.3%, compared to $7.2 million in the prior year’s quarter. The most significant international revenue in the current quarter was for Confidence with revenue of $2.1 million. The most significant international revenue in the prior year’s quarter was for Frailty with revenue of $3.1 million.

16

Table of Contents

Television revenue from motion pictures of $1.7 million decreased $1.7 million, or 50%, this quarter compared to $3.4 million in the prior year’s quarter. The prior year’s quarter included a library sale to a cable network for $1.8 million.

     Television production revenue of $9.7 million this quarter decreased by $2.5 million, or 20.5%, from $12.2 million in the prior year’s quarter, due primarily to a decrease in one-hour series and non-fiction programming deliveries, partially offset by an increase in television movie and video revenue. In the current quarter, 2 hours of one-hour drama series were delivered domestically contributing revenue of $2.0 million, international and other revenue on one-hour drama series contributed revenue of $1.3 million, television movies contributed revenue of $3.2 million, video releases of television product contributed $1.4 million and 14 hours of non-fiction programming were delivered contributing revenue of $1.3 million. In the prior year’s quarter, 15.0 hours of one-hour drama series were delivered domestically contributing revenue of $4.5 million, international and other revenue on one-hour drama series contributed revenue of $3.7 million, television movies contributed revenue of $0.4 million and 19 hours of non-fiction programming were delivered contributing revenue of $3.3 million. Domestic deliveries of one-hour drama series in the current quarter include Dead Zone and in the prior year’s quarter include Dead Zone, Tracker and No Boundaries.

     In animation, CinéGroupe’s revenue of $0.4 million this quarter decreased $10.7 million, or 96.4%, compared to $11.1 million in the prior year’s quarter. The current quarter includes library sales of previously delivered product and the remainder of the fiscal year will include new television programming deliveries. The prior year’s quarter includes 24 half-hours of television programming deliveries.

     Studio facilities revenue of $1.7 million in the current quarter increased $0.3 million, or 21.4%, compared to $1.4 million in the prior year’s quarter due primarily to an increase in rental rates and production office occupancy rates.

     Direct operating expenses include amortization, participation and residual expenses. Direct operating expenses of $22.7 million this quarter were 41.4% of revenue, compared to direct operating expenses of $43.9 million, which were 46.6% of revenue in the prior year’s quarter. Direct operating expenses as a percent of revenue for motion pictures, studios and animation remained fairly constant. Direct operating expenses as a percent of revenue for television decreased as the prior year’s quarter included write-downs on Tracker and the current quarter included higher margin video releases and delivery of the television movie Inappropriate Behavior.

     In the current quarter, we increased the provision for doubtful accounts by $0.3 million compared to a decrease of $0.8 million in the prior year’s quarter. The provision for doubtful accounts represents 9.9% of accounts receivable (excluding tax credits receivable) at June 30, 2003 and 8.3% at March 31, 2003. The increase in the provision as a percent of accounts receivable is due to a decrease in gross accounts receivable due to significant collections during the quarter.

     Distribution and marketing expenses of $34.8 million this quarter decreased by $1.2 million, or 3.3%, from the prior year’s quarter. Theatrical P&A this quarter was $22.3 million, compared to $14.8 million in the prior year’s quarter. Theatrical P&A in the current quarter included significant expenditures on titles such as Confidence and House of 1000 Corpses and in the prior year’s quarter on Frailty. Video distribution and marketing costs on motion picture and television product this quarter was $10.3 million, compared to $19.8 million in the prior year’s quarter. Marketing and duplication costs in the prior year’s quarter were higher than in the current quarter due to the video release of Monster’s Ball.

     General and administrative expenses of $7.2 million this quarter decreased $0.3 million, or 4.0%, compared to $7.5 million in the prior year’s quarter. The decrease is primarily due to the capitalization of production overhead of $0.7 million to investment in films and television programs in the current quarter. Due to increased internal production spending on films and television programs, the Company began to capitalize production overhead from the beginning of fiscal 2004.

     Amortization of $1.5 million this quarter increased $0.2 million, or 15.4%, from $1.3 million in the prior year’s quarter due primarily to increased capital asset amortization for the new accounting system implemented in June 2002.

     This quarter’s interest expense of $2.4 million decreased $0.2 million, or 7.7%, from $2.6 million in the prior year’s quarter primarily due to an increase in interest capitalized to production costs, resulting from an increase in new television production financed by the revolving credit facility in this quarter.

     Other equity interests for the quarter include $0.2 million equity interest in the loss of CinemaNow, which represents 55% of losses of CinemaNow. During the quarter ending March 31, 2003, the Company purchased $0.4 million of Series C Convertible Preferred Shares of CinemaNow as part of a CinemaNow round of financing. The round of financing and conversion of a debenture decreased the Company’s voting and economic interests from 63% to 55%. As a result of the new investment in CinemaNow, the

17

Table of Contents

Company recorded equity interest in the loss of CinemaNow from the date of the new investment. Other equity interests for the quarter also includes $nil equity interest in Christal Films Distribution Inc. (“Christal”), which consists of 75% of the net income of Christal compared to $0.4 million equity interests in Christal for the prior year’s quarter.

     Net loss for the three months ended June 30, 2003 was $12.6 million or loss per share of $0.28 on 46.9 million weighted average common shares outstanding (after giving effect to the Series A preferred share dividends and accretion on the Series A preferred shares). This compares to net income for the three months ended June 30, 2002 of $2.7 million or income per share of $0.04 on 43.2 million weighted average common shares outstanding (after giving effect to the Series A preferred share dividends and accretion on the Series A preferred shares).

     Under U.S. GAAP, the net loss for the three months ended June 30, 2003 was $12.8 million. The loss under U.S. GAAP is more than under Canadian GAAP, due primarily to the fair valuation losses on the interest swap mark-to-market. Under U.S. GAAP, the interest swap does not meet the criteria of an effective hedge and therefore the fair market valuation losses are recorded in the statement of operations, as described in note 9 (c) of our accompanying financial statements.

EBITDA

     EBITDA, defined as earnings before interest, income taxes, amortization and minority interests of negative $10.0 million for the three months ended June 30, 2003 decreased $17.3 million, or 237.0%, compared to EBITDA of $7.3 million for the three months ended June 30, 2002.

     EBITDA is a non-GAAP financial measure. Management believes EBITDA to be a meaningful indicator of our performance that provides useful information to investors regarding our financial condition and results of operations. Presentation of EBITDA is consistent with our past practice, and EBITDA is a non-GAAP financial measure commonly used in the entertainment industry and by financial analysts and others who follow the industry to measure operating performance. While management considers EBITDA to be an important measure of comparative operating performance, it should be considered in addition to, but not as a substitute for, operating income (loss), net income (loss) and other measures of financial performance reported in accordance with GAAP. EBITDA does not reflect cash available to fund cash requirements. Not all companies calculate EBITDA in the same manner and the measure as presented may not be comparable to similarly-titled measures presented by other companies.

     The following table reconciles EBITDA to net income (loss):

Liquidity and Capital Resources

     Our liquidity and capital resources are provided principally through cash generated from operations and sale of common stock, a $200 million revolving credit facility with J.P. Morgan Chase Bank, German tax shelter financing and production loans.

     Bank loans. The $200 million revolving credit facility with J.P. Morgan Chase Bank is limited by our borrowing base, which includes certain accounts receivable and credits for our film and television program library. At June 30, 2003, the borrowing base assets totaled $171.8 million and we had drawn $120.2 million of our $200 million revolving credit facility. Currently, the credit facility bears interest at 2.5% over the Adjusted LIBOR, or the Canadian Banker Acceptance rate, or 1.5% over the U.S. or Canadian prime rates. At June 30, 2003, the revolving credit facility has an average variable interest rate of U.S. prime minus 0.21% on principal of $96.6 million and an average variable interest rate of Canadian prime plus 0.72% on principal of $23.6 million. U.S. and Canadian prime interest rates at June 30, 2003 were 4.0% and 5.0% respectively. The Company entered into a $100 million interest

18

Table of Contents

rate swap at an interest rate of 3.08%, commencing January 2003 and ending September 2005. The swap is in effect as long as three month LIBOR is less than 5.0%. Fair market value of the interest rate swap at June 30, 2003 is $3.5 million. Unrecognized fair valuation losses for the three months ended June 30, 2003 amount to $0.3 million. Our credit facility contains various covenants, including limitations on indebtedness, dividends and capital expenditures, and maintenance of certain financial ratios. Although we are in compliance with all terms of our credit facility, there can be no assurances that we will remain in compliance with such covenants or other conditions under our credit facility in the future. We anticipate continued borrowing under our credit facility.

     Filmed Entertainment Backlog. Backlog represents the amount of future revenue not yet recorded from executed contracts for the licensing of motion pictures and television product for television exhibition and in international markets. Backlog at June 30, 2003 is $59.5 million.

     Cash flows used in operating activities. Cash flows used in operating activities in the three months ended June 30, 2003 were $5.9 million compared to cash flows used in operating activities of $3.3 million in the three months ended June 30, 2002. The decrease in cash flow from operating activities is a result of the decline in operating results, partially offset by an increase in cash provided by collection of accounts receivable, an increase in accounts payable and an increase in cash receipts recorded as deferred revenue.

     Cash flows provided by (used in) financing activities. Cash flows provided by financing activities in the three months ended June 30, 2003 were $8.5 million compared to cash flows used in financing activities of $2.9 million in the three months ended June 30, 2002 due primarily to $30.2 million net proceeds from the issuance of common stock, offset by $18.1 million payment for the repurchase of Series A preferred shares in the three months ended June 30, 2003.

     Cash flows used in investing activities. Cash flows used in investing activities in the three months ended June 30, 2003 were $0.1 million, compared to cash flows used in investing activities of $0.8 million in the three months ended June 30, 2002, due to a decrease in capital expenditure.

     Anticipated cash requirements. The nature of our business is such that significant initial expenditures are required to produce and acquire motion pictures and television programs, while revenues from these motion pictures and television programs are earned over an extended period of time after their completion or acquisition. As our operations grow, our financing requirements are expected to grow and management projects the continued use of cash in operating activities and therefore we are dependent on continued access to external sources of financing. We believe that cash flow from operations, cash on hand, credit lines available, tax shelter and production loan financing available will be adequate to meet known operational cash requirements for the foreseeable future, including the funding of future motion picture and television production, motion picture 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.

     Our current financing strategy is to finance corporate operations and to leverage investment in motion picture and television programs through equity, 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. These commitments have averaged at least 70% of the budgeted third-party costs of a project before commencing production. In addition, we may acquire businesses or assets, including individual films or libraries that are complementary to our business. Such a transaction could be financed through equity, cash flow from operations or debt facilities.

     Principal debt repayments due during the nine months ending March 31, 2004 of $72.2 million consist principally of $11.4 million of mortgages on the studio facilities, $19.9 million of production loans, $19.8 million of German tax shelter financings and $12.2 million of convertible subordinated notes. Mortgages were refinanced in July 2003 for $16.2 million. Production loans of $13.1 million are secured by accounts receivable, which we expect to collect and use for repayment of these loans. Other repayments due are expected to be paid through cash generated from operations or from the available borrowing capacity from our $200 million credit facility with J.P. Morgan Chase Bank.

     Our 5.25% Convertible Redeemable Series A Preferred Shares are entitled to cumulative dividends, as and when declared by the board of directors, payable semi-annually on the last day of March and September of each year. Dividends payable on Series A preferred shares for the year ending March 31, 2004 is estimated to be $0.5 million after taking into account the effect of the repurchase of Series A preferred shares in June 2003. We have the option of paying such dividends either in cash or additional Series A preferred shares. We do not pay and do not intend to pay, and are restricted from paying by our revolving credit facility, dividends on common shares. We believe it to be in the best interest of shareholders to invest all available cash in the expansion of our business.

19

Table of Contents

     Commitments. The table below presents future commitments under contractual obligations and commercial commitments at June 30, 2003 by expected maturity date.