LIONS GATE ENTERTAINMENT CORP /CN/ - 10-Q Quarterly Report

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

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

As of November 11, 2003, 88,529,142 shares of the registrant’s no par value common stock were outstanding.

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,” “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 sections of our Annual Report on Form 10-K for the year ended March 31, 2003 and our Registration Statement on Form S-3 filed September 25, 2003 and related Prospectus Supplement filed October 9, 2003.

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.

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. 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 10, 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.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company expects approximately 40% of completed films and television programs excluding acquired library, will be amortized during the one-year period ending September 30, 2004, and approximately 56% of accrued participants’ share (including producer participations and residuals) will be paid during the one-year period ending September 30, 2004.

Additionally, the Company expects approximately 80% of completed and released films and television programs excluding acquired library, will be amortized during the three-year period ending September 30, 2006.

The acquired library is being amortized over a period of twenty years from the acquisition date. The remaining amortization period as at September 30, 2003 is seventeen years on the unamortized costs of $36.3 million.

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 $2.7 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 September 30, 2003 totaled $193.3 million (March 31, 2003 — $166.4 million). At September 30, 2003, the revolving credit facility has an average variable interest rate of 3.65% on principal of $123.6 million under the U.S. dollar credit facility and an average variable interest rate of 5.21% on principal of $23.5 million under the Canadian dollar credit facility. 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

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

is less than 5.0%. Fair market value of the interest rate swap at September 30, 2003 is $2.9 million (March 31, 2003 — $3.2 million). Unrecognized fair valuation gains for the three and six months ended September 30, 2003 amount to $0.6 million and $0.3 million (2002 — $nil and $nil). On October 24, 2003, the Company received a waiver of any violations of certain covenants for the period ending September 30, 2003. These violations are a result of revisions required to the covenants.

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

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 offering expenses were approximately $1.0 million. 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.

In June 2003, the Company repurchased 8,040 Series A Preferred Shares at a per share purchase price of $2,250, or total purchase price of $18.1 million. The difference of $4.3 million, between the purchase price of the Series A Preferred Shares and the assigned value of the Series A Preferred Shares at the time of repurchase, represents a contribution by the preferred shareholders which accrues to the benefit of the remaining common shareholders and is classified on the balance sheet as contributed surplus.

On November 13, 2001, the Board of Directors of the Company resolved that 750,000 options, granted to certain officers of the Company, to purchase shares of the Company’s common stock be revised to entitle the holders to receive cash only and not common shares. The amount of cash received will be equal to the amount that the twenty-day average trading price prior to the exercise notice date exceeds the option price of $5.00 multiplied by the number of options exercised. These revised options are not considered part of the Employees’ and Directors’ Equity Incentive Plan. The Company will measure compensation cost as the amount by which the market value of the shares exceeds the option price. At September 30, 2003 the market price does not exceed the option price and therefore there is no additional compensation cost required.

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 and six months ended September 30, 2003 of 59,463,000 and 53,225,000 shares, respectively (2002 — 43,207,000 and 43,205,000 shares, respectively). The exercise of common share equivalents including employee stock options, share purchase warrants, and Series A preferred shares could potentially dilute income (loss) per share in the future, but were not reflected in fully diluted income per share during the periods presented 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.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The weighted average estimated fair value of each stock option granted during the three and six months ended September 30, 2003 was $0.86 and $0.78 respectively. The total stock compensation expense, based on the fair value, would be $0.1 million and $0.2 million respectively, for the three and six months ended September 30, 2003.

For disclosure purposes the fair value of each stock option granted 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 30%, risk-free interest rate of 2.6% and expected life of five years.

During the quarter ending September 30, 2003, the Company modified the terms of 3,048,000 options of certain officers of the Company, extending the expiry dates to coincide with their employment contract dates. The vesting period and exercise prices were unchanged. The modification of these options is treated as an exchange of the original award for a new award. The value of the new award is measured at the date the new award is granted and the value of the old award is its fair value immediately before its terms were modified. The additional compensation cost for the incremental value of the new award plus unallocated compensation costs for the old award is attributed over the remaining service period. In the case of the options modified there are no additional service requirements and the $0.2 million incremental value would be expensed in the quarter ending September 30, 2003.

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.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

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.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Interest paid during the six months ended September 30, 2003 amounted to $6.1 million (September 30, 2002 — $4.6 million).

Income taxes paid during the six months ended September 30, 2003 amounted to $1.5 million (September 30, 2002 — $1.0 million).

The Company is from time to time involved in various claims, legal proceedings and complaints arising in the ordinary course of business. Except as noted below, 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.

We are currently involved in an arbitration proceeding relating to our distribution of a motion picture. The plaintiff alleges that we did not release the film in accordance with the contract and has claimed damages for up to $35 million. Closing arguments were held in October 2003 and a final ruling is expected in the third quarter. While we deny these allegations and maintain that we acted within our rights, failure to prevail in this matter could have a material adverse effect on the results of operations of future periods.

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.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 and six months ended September 30, 2002, Mandalay’s net loss of $1.9 million and $2.6 million respectively would be recorded as a reduction in net income.

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 for the three and six months ended September 30, 2003 of $0.1 million and $0.2 million respectively (September 30, 2002 — $0.1 million and $0.2 million respectively).

Under U.S. GAAP, the interest swap does not meet the criteria of an effective hedge and therefore fair valuation gains for the three and six months ended September 30, 2003 of $0.6 million and $0.3 million respectively (September 30, 2002 — $nil and $nil respectively) are recorded in the statements of operations. Under Canadian GAAP, the interest swap is an effective hedge and no fair valuation adjustment is recorded.

Under Canadian GAAP, the Company has elected to use the intrinsic value method in accounting for stock based compensation. During the quarter ended September 30, 2003 the Company modified terms of 3,048,000 options of certain officers of the Company. Such modification did not result in additional compensation expense under Canadian GAAP. Under U.S. GAAP, the modification of these options is treated as an exchange of the original award for a new award. The additional compensation cost of $0.2 million

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

is calculated by multiplying the market price on the date of the modification times the number of options vested less the original exercise price times the number of options vested. The additional compensation cost is attributed over the remaining service period. In the case of the options modified there are no additional service requirements and the $0.2 million is expensed in the quarter ending September 30, 2003.

Under Canadian GAAP, the Company has elected to use the intrinsic value method in accounting for stock based compensation and options granted to a certain employee of the Company with an exercise price determined at a future date did not result in additional compensation expense. Under U.S. GAAP, these options are valued using variable accounting for stock-based compensation. The additional compensation cost of $nil million is calculated by multiplying the market price on September 30, 2003 times the number of options vested less the market price on the date the options were granted times the number of options vested. The additional compensation cost is expensed in the current reporting period and adjusted each reporting period until such time as the exercise price is determined.

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.

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 (September 30, 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 September 30, 2003 (March 31, 2003 — $1.9 million).

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.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

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 income (loss) comprises unrealized losses on investments available for sale based on the market price of the shares at September 30, 2003 net of income taxes of $nil (September 30, 2002 — $nil).

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 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 September 30, 2003 would be a reduction in total assets to $378.0 million (March 31, 2003 — $340.6 million) and a reduction in debt (including bank loans, production loans and long-term debt) to $198.3 million (March 31, 2003 — $182.0 million.).

On October 8, 2003, the Company issued a prospectus to sell 25,000,000 common shares at a public offering price of $2.70 per share. On October 15, 2003, the Company received $63.9 million of net proceeds, after deducting underwriting discounts, and issued 25,000,000 common shares. The Company estimates the offering expenses will be approximately $0.5 million. On October 16, the underwriters exercised their over allotment option and on October 21, 2003 the Company received $9.6 million of net proceeds, after deducting underwriting discounts, and issued an additional 3,750,000 common shares.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On October 24, 2003, the Company entered into a definitive merger agreement with Film Holdings Co., the parent company of Artisan Entertainment. Under the terms of the merger agreement, the Company will acquire Film Holdings Co. by means of a merger of a subsidiary of the Company with and into Film Holding Co., pursuant to which Film Holdings Co. shall continue as the surviving corporation and shall be a subsidiary of the Company. Under the merger agreement, the Company shall pay $160 million in cash, plus assume debt. The $160 million in cash is payable as follows: $10 million upon signing and $150 million upon closing. The anticipated closing date is December 15, 2003. The closing is subject to customary conditions, one of which, termination of the waiting period under the Hart-Scott-Rodino Act, has been met.

In October 2003, the Company entered into a Commitment Letter agreement and Fee Letter agreement with JP Morgan Chase Bank and JP Morgan Securities Inc. (collectively “JP Morgan”) in which JP Morgan is to provide a $350 million credit facility, consisting of a $100 million five-year term loan and a $250 million five-year revolving credit facility, and serve as administrative agent for the credit facility. The credit facility will be used to finance the merger, as referred to above, refinance indebtedness of the Company and Film Holdings Inc. and for general business purposes. As consideration, the Company agreed to pay to JP Morgan an underwriting, structuring and arrangement fee and an annual administration fee.

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.

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 and operate a film and television production studio and own a majority interest in CinemaNow, an internet video-on-demand provider.


	•	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.


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

Sale of Common Shares. On October 8, 2003, the Company issued a prospectus to sell 25,000,000 common shares at a public offering price of $2.70 per share. On October 15, 2003, the Company received $63.9 million of net proceeds, after deducting underwriting discounts, and issued 25,000,000 common shares. The Company estimates the offering expenses will be approximately $0.5 million. On October 16, the underwriters exercised their over allotment option and on October 21, 2003 the Company received

Merger Agreement. On October 24, 2003, the Company entered into a definitive merger agreement with Film Holdings Co., the parent company of Artisan Entertainment. Under the terms of the merger agreement, the Company will acquire Film Holdings Co. by means of a merger of a subsidiary of the Company with and into Film Holding Co., pursuant to which Film Holdings Co. shall continue as the surviving corporation and shall be a subsidiary of the Company. Under the merger agreement, the Company shall pay $160 million in cash, plus assume debt. The $160 million in cash is payable as follows: $10 million upon signing and $150 million upon closing. The anticipated closing date is December 15, 2003. The closing is subject to customary conditions, one of which, termination of the waiting period under the Hart-Scott-Rodino Act, has been met.

Credit Facility. In October 2003, the Company entered into a Commitment Letter agreement and Fee Letter agreement with JP Morgan Chase Bank and JP Morgan Securities Inc. (collectively “JP Morgan”) in which JP Morgan is to provide a $350 million credit facility, consisting of a $100 million five-year term loan and a $250 million five-year revolving credit facility, and serve as administrative agent for the credit facility. The credit facility will be used to finance the merger, as referred to above, refinance indebtedness of the Company and Film Holdings Inc. and for general business purposes. As consideration the Company agreed to pay to JP Morgan an underwriting, structuring and arrangement fee and an annual administration fee.

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 in our Annual Report on Form 10-K for the year then ended.

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 10 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


	•	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. 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.

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 delivered to the distributor for exploitation or is available to the distributor 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.

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.

Consolidated revenues for the three months ended September 30, 2003 of $99.8 million increased $22.0 million, or 28.3%, compared to $77.8 million in the comparable period.

Motion pictures revenue of $69.3 million this quarter increased $19.1 million, or 38.1%, compared to $50.2 million in the prior year’s quarter. Theatrical revenue of $7.3 million increased $5.1 million, or 231.8%, compared to $2.2 million in the prior year’s quarter. The significant theatrical release in the current quarter was Cabin Fever with revenue of approximately $7.3 million. The most significant theatrical release in the prior year’s quarter was Lovely and Amazing with revenue of $1.2 million. Video revenue of $48.2 million increased $14.8 million, or 44.3%, this quarter compared to $33.4 million in the prior year’s quarter. Significant video releases in the current quarter included House of 1000 Corpses with revenue of $10.5 million, Confidence with revenue of $8.4 million and Will & Grace with revenue of $4.6 million. Significant video releases in the prior year’s quarter included Frailty with revenue of $9.8 million. International revenue of $9.8 million increased $2.1 million, or 27.3%, compared to $7.7 million in the prior year’s quarter. The most significant international revenue in the current quarter was for Cabin Fever with revenue of $1.8 million. The most significant international revenue in the prior year’s quarter was for Cat’s Meow with revenue of $1.4 million. Television revenue from motion pictures of $2.6 million decreased $2.4 million, or 48.0%, this quarter compared to $5.0 million in the prior year’s quarter. The prior year’s quarter included license fee revenue for O.

Television production revenue of $24.9 million this quarter increased by $7.1 million, or 39.9%, from $17.8 million in the prior year’s quarter, due primarily to an increase in one-hour series deliveries. In the current quarter, 14 hours of one-hour drama series were delivered domestically contributing revenue of $14.0 million, international and other revenue on one-hour drama series contributed revenue of $4.8 million, television movies contributed revenue of $3.1 million, video releases of television product contributed $0.7 million and 18.5 hours of non-fiction programming were delivered contributing revenue of $1.9 million. In the prior year’s quarter, 9 hours of one-hour drama series were delivered domestically contributing revenue of $10.0 million, international and other revenue on one-hour drama series contributed revenue of $5.2 million, television movies contributed revenue of $0.6 million and 9.5 hours of non-fiction programming were delivered contributing revenue of $1.8 million. Domestic deliveries of one-hour drama series in the current quarter included 1-800 Missing and Dead Zone and in the prior year’s quarter included Dead Zone.

In animation, CinéGroupe’s revenue of $3.9 million this quarter decreased $4.6 million, or 54.1%, compared to $8.5 million in the prior year’s quarter. The current quarter included 13 half-hours of television programming deliveries and the prior year’s quarter included 28 half-hours of television programming deliveries. Most of animation’s television programming deliveries are scheduled for delivery in the remainder of the fiscal year.

Studio facilities revenue of $1.6 million in the current quarter increased $0.2 million, or 14.3%, compared to $1.4 million in the prior year’s quarter due primarily to an increase in rental rates and occupancy rates.

Direct operating expenses include amortization, participation and residual expenses. Direct operating expenses of $51.5 million this quarter were 51.6% of revenue, compared to direct operating expenses of $45.4 million, which were 58.3% of revenue in the prior year’s quarter. Direct operating expenses as a percent of revenue decreased primarily because the current quarter included higher margin television series and television movie releases and the release of television titles on video.

In the current quarter, we decreased the provision for doubtful accounts by $1.5 million to $6.5 million at September 30, 2003 compared to $8.0 million at June 30, 2003. The decrease in the provision is primarily due to the reversal of a $1.5 million provision for tax credits receivable, which will now be collected due to a determination that the Company is eligible for such tax credits.

Distribution and marketing expenses of $37.4 million this quarter increased by $19.0 million, or 103.3%, compared to $18.4 million in the prior year’s quarter. Theatrical P&A this quarter was $16.1 million, compared to $5.0 million in the prior year’s quarter. Theatrical P&A in the current quarter included significant expenditures on Cabin Fever. Video distribution and marketing costs on motion picture and television product this quarter was $19.5 million, compared to $11.7 million in the prior year’s quarter. Video distribution and marketing costs in the current quarter included significant expenditures on Confidence, House of 1000 Corpses and Will & Grace and in the prior year’s quarter included Frailty.

General and administration expenses of $8.6 million this quarter compare to $7.8 million of expenses in the prior year’s quarter. In the current quarter production overhead of $0.8 million is capitalized to investment in films and television programs. Due to increased internal production spending on films and television programs, the Company began to capitalize production overhead from the beginning of fiscal 2004. Without capitalized production overhead, general and administrative expenses increased $1.6 million quarter-over-quarter, primarily due to an increase in salaries and benefits and professional fees.

Amortization of $1.6 million this quarter increased by $0.2 million, or 14.3%, compared to $1.4 million in the prior year’s quarter.

Interest expense of $2.5 million this quarter compares to $2.6 million of interest expense in the prior year’s quarter. The current quarter includes $0.3 million interest capitalized to production costs, resulting from an increase in production financed by the revolving credit facility in this quarter. Without capitalized interest, interest expense increased $0.2 million, or 7.7%, over the prior year’s quarter. The increase in interest expense is primarily due to an increase in the effective interest rate and in the revolving credit facility balance quarter-over-quarter.

Net loss for the three months ended September 30, 2003 was $0.8 million or loss per share of $0.02 on 59.5 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 September 30, 2002 of $1.2 million or income per share of $0.01 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 September 30, 2003 was $0.3 million. The loss under U.S. GAAP is less than under Canadian GAAP, due primarily to the fair valuation gains 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 gains are recorded in the statement of operations, as described in note 10(c) of our accompanying financial statements.

Consolidated revenues for the six months ended September 30, 2003 of $154.7 million decreased $17.4 million, or 10.1%, compared to $172.1 million in the comparable period.

Motion pictures revenue of $112.4 million this period decreased $7.3 million, or 6.1%, compared to $119.7 million in the prior period. Theatrical revenue of $17.3 million increased $7.4 million, or 74.8%, compared to $9.9 million in the prior period. Significant theatrical releases in the current period included

Cabin Fever, House of 1000 Corpses and Confidence with revenue of approximately $17.0 million. The most significant theatrical releases in the prior period were Frailty and Lovely and Amazing with revenue of approximately $5.0 million. Video revenue of $73.2 million decreased $10.5 million, or 12.6% this period, compared to $83.7 million in the prior period. Significant video releases in the current period included House of 1000 Corpses with revenue of $10.5 million, Confidence with revenue of $8.4 million, Will & Grace with revenue of $4.6 million, Secretary with revenue of $5.0 million and Cube 2 with revenue of $1.1 million. Significant video releases in the prior period included Monster’s Ball with revenue of $29.6 million, Frailty with revenue of $9.8 million, Rose Red with revenue of $6.1 million, State Property with revenue of $4.6, The Wash with revenue of $3.0 million and O with revenue of $2.5 million. International revenue of $15.9 million increased $1.0 million, or 6.7%, compared to $14.9 million in the prior period. The most significant international revenue in the current period was for Confidence with revenue of $6.1 million and Cabin Fever with revenue of $1.8 million. The most significant international revenue in the prior period was for Monster’s Ball with revenue of $6.7 million and Frailty with revenue of $3.4 million. Television revenue from motion pictures of $4.3 million decreased $4.1 million, or 48.8%, this period compared to $8.4 million in the prior period. The prior period included a library sale to a cable network for $1.8 million and license fee revenue for O.

Television production revenue of $34.6 million this period increased by $4.6 million, or 15.3%, from $30.0 million in the prior period, due primarily to an increase in television movie and video revenue, partially offset by a decrease in one-hour series and non-fiction programming revenue. In the current period, 16 hours of one-hour drama series were delivered domestically contributing revenue of $16.3 million, international and other revenue on one-hour drama series contributed revenue of $5.7 million, television movies contributed revenue of $6.4 million, video releases of television product contributed $2.1 million and 31.5 hours of non-fiction programming were delivered contributing revenue of $3.2 million. In the prior period, 19 hours of one-hour drama series were delivered domestically contributing revenue of $14.4 million, international and other revenue on one-hour drama series contributed revenue of $8.9 million, television movies contributed revenue of $1.1 million and 28.5 hours of non-fiction programming were delivered contributing revenue of $5.1 million. Domestic deliveries of one-hour drama series in the current period included 1-800 Missing and Dead Zone and in the prior period included Dead Zone, Tracker and No Boundaries.

In animation, CinéGroupe’s revenue of $4.3 million this period decreased $15.4 million, or 78.2%, compared to $19.7 million in the prior period. The current period included 13 half-hours of television programming deliveries and the prior period included 52 half-hours of television programming deliveries. Most of animation’s television programming deliveries are scheduled for delivery in the remainder of the fiscal year.

Studio facilities revenue of $3.3 million in the current period increased $0.5 million, or 17.9%, compared to $2.8 million in the prior period due primarily to an increase in rental rates and occupancy rates.

Direct operating expenses include amortization, participation and residual expenses. Direct operating expenses of $74.2 million this period were 48.0% of revenue, compared to direct operating expenses of $89.3 million, which were 51.9% of revenue in the prior period. Direct operating expenses as a percent of revenue decreased primarily because the current period included higher margin television series and television movie releases, the release of television titles on video and additionally the prior period included write-downs on Tracker.

In the current period, we decreased the provision for doubtful accounts by $1.2 million to $6.5 million at September 30, 2003 compared to $7.7 million at March 31, 2003. The decrease in the provision is primarily due to the reversal of $1.5 million previously provided for tax credits receivable, which will now be collected due to a determination that the Company is eligible for such tax credits.

Distribution and marketing expenses of $72.2 million this period increased by $17.8 million, or 32.7%, compared to $54.4 million in the prior period. Theatrical P&A this period was $38.4 million, compared to $19.8 million in the prior period. Theatrical P&A in the current period included significant expenditures on titles such as Confidence, Cabin Fever and House of 1000 Corpses and in the prior period on Frailty and pre-release expenditure on Rules of Attraction. Video distribution and marketing costs on motion picture and television product this period was $30.4 million, compared to $31.5 million in the prior period. Marketing and

General and administration expenses of $15.8 million this period compare to expenses of $15.3 million in the prior period. In the current period, $1.4 million of production overhead was capitalized to investment in films and television programs. Due to increased internal production spending on films and television programs, the Company began to capitalize production overhead from the beginning of fiscal 2004. Without capitalized production overhead, general and administrative expenses increased $1.9 million period-over-period, primarily due to an increase in salaries and benefits.

Amortization of $3.1 million this period increased by $0.4 million, or 14.8%, compared to $2.7 million in the prior period. The increase is primarily due to increased capital asset amortization for the new accounting system implemented in June 2002.

Interest expense of $4.9 million this period compares to $5.2 million of interest expense in the prior period. The current period includes $0.7 million interest capitalized to production costs, resulting from an increase in production financed by the revolving credit facility in this period. Without capitalized interest, interest expense increased $0.4 million, or 7.7%, over the prior period. The increase in interest expense is primarily due to an increase in the effective interest rate and in the revolving credit facility balance period-over-period.

Other equity interests for the period include $0.2 million equity interest in the loss of CinemaNow, which represents 55% of the 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 Company recorded equity interest in the loss of CinemaNow from the date of the new investment. Other equity interests for the period 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 period.

Net loss for the six months ended September 30, 2003 was $13.4 million or loss per share of $0.27 on 53.2 million weighted average common shares outstanding (after giving effect to the Series A preferred share dividends and accretion on the Series A preferred shares). This compares to net income for the six months ended September 30, 2002 of $3.9 million or income per share of $0.05 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 six months ended September 30, 2003 was $13.1 million. The loss under U.S. GAAP is less than under Canadian GAAP, due primarily to the fair valuation gains 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 gains are recorded in the statement of operations, as described in note 10(c) of our accompanying financial statements.

EBITDA, defined as earnings before interest, income taxes, amortization and minority interests of $2.3 million for the three months ended September 30, 2003 decreased $3.9 million, or 62.9%, compared to EBITDA of $6.2 million for the three months ended September 30, 2002. EBITDA of negative $7.7 million for the six months ended September 30, 2003 decreased $21.2 million, or 157.0%, compared to EBITDA of $13.5 million for the six months ended September 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.

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 September 30, 2003, the borrowing base assets totaled $193.3 million and we had drawn $147.1 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 September 30, 2003, the revolving credit facility has an average variable interest rate of 3.65% on principal of $123.6 million under the U.S. dollar credit facility and an average variable interest rate of 5.21% on principal of $23.5 million under the Canadian dollar credit facility. 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 September 30, 2003 is $2.9 million. Unrecognized fair valuation gains for the three months and six months ended September 30, 2003 amount to $0.6 million and $0.3 million, respectively. Our credit facility contains various covenants, including limitations on indebtedness, dividends and capital expenditures, and maintenance of certain financial ratios. On October 24, 2003, the Company received consent to enter into a merger agreement with Film Holdings Co. and received a waiver of any violations of certain covenants for the period ending September 30, 2003. These violations are a result of revisions required to the covenants. With this waiver, 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.

In October 2003, the Company entered into a Commitment Letter agreement and Fee Letter agreement with JP Morgan Chase Bank and JP Morgan Securities Inc. (collectively “JP Morgan”) in which JP Morgan is to provide a $350 million credit facility, consisting of a $100 million five-year term loan and a $250 million five-year revolving credit facility, and serve as administrative agent for the credit facility. As consideration the Company agreed to pay to JP Morgan an underwriting, structuring and arrangement fee and an annual administration fee.

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 September 30, 2003 is $59.8 million.

Cash flows provided by (used in) operating activities. Cash flows used in operating activities in the six months ended September 30, 2003 were $25.6 million compared to cash flows provided by operating activities of $nil million in the six months ended September 30, 2002. The decrease in cash flow from operating activities is a result of the decline in operating results and an increase in accounts receivable, partially offset by an increase in accounts payable and deferred revenue.

Cash flows provided by financing activities. Cash flows provided by financing activities in the six months ended September 30, 2003 were $23.5 million compared to cash flows provided by financing activities of $2.6 million in the six months ended September 30, 2002 due primarily to $30.8 million net proceeds from the issuance of common stock and $20.3 million proceeds from bank loans, offset by $18.1 million payment for the repurchase of Series A preferred shares and $9.3 million repayment of production loans and long-term debt in the six months ended September 30, 2003.

Cash flows provided by (used in) investing activities. Cash flows used in investing activities in the six months ended September 30, 2003 were $0.3 million, compared to cash flows provided by investing activities of $0.6 million in the six months ended September 30, 2002. Cash flows used in investing activities in the six months ended September 30, 2003 were for the purchase of capital assets. Cash flows provided by investing activities in the six months ended September 30, 2002 were from cash received from a discontinued operation, offset by the purchase of capital assets.

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.

On October 24, 2003, the Company entered into a definitive merger agreement with Film Holdings Co., the parent company of Artisan Entertainment. Under the terms of the merger agreement, the Company will acquire Film Holdings Co. by means of a merger of a subsidiary of the Company with and into Film Holding Co., pursuant to which Film Holdings Co. shall continue as the surviving corporation and shall be a subsidiary of the Company. Under the merger agreement, the Company shall pay $160 million in cash, plus assume debt. The $160 million in cash is payable as follows: $10 million upon signing and $150 million upon closing. The anticipated closing date is December 15, 2003. The Company currently expects to finance $150 million due upon closing through funds received from the Company’s sale of shares pursuant to a prospectus issued in October 2003 (as described in the Overview section) and through a $350 million credit facility to be provided by JP Morgan (as described in the Overview section).

Principal debt repayments due during the six months ending March 31, 2004 of $43.3 million consist principally of $14.7 million of production loans and $19.8 million of German tax shelter financings. Production loans of $13.4 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.

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

Market risks relating to our operations result primarily from changes in interest rates and changes in foreign currency exchange rates. Our exposure to interest rate risk results from the financial debt instruments that arise from transactions entered into during the normal course of business. As part of our overall risk management program, we evaluate and manage our exposure to changes in interest rates and currency exchange risks on an ongoing basis. Hedges and derivative financial instruments will be used in the future, within guidelines approved or to be approved by the Board of Directors for counterpart exposure, limits and hedging practices, in order to manage our interest rate and currency exposure. We have no intention of entering into financial derivative contracts, other than to hedge a specific financial risk.

Currency Rate Risk. We incur certain operating and production costs in foreign currencies and are subject to market risks resulting from fluctuations in foreign currency exchange rates. Our principal currency exposure is between Canadian and U.S. dollars, although this exposure has been significantly mitigated through the structuring of the $200 million revolving credit facility as a $25 million Canadian dollar facility and a $175 million U.S. dollar credit facility. Each facility is borrowed and repaid in the respective country of origin, in local currency. We also enter into foreign exchange contracts to hedge future production expenses denominated in Canadian dollars. Gains and losses on the foreign exchange contracts are capitalized and recorded as production costs when the gains and losses are realized. During the six months ended September 30, 2003, we completed foreign exchange contracts denominated in Canadian dollars. The net gains resulting from the completed contracts for the three and six months ended September 30, 2003 amounted to $0.3 million and $0.9 million, respectively. As at September 30, 2003, we had contracts to sell US$2.2 million in exchange for Canadian $3.0 million over a period of four weeks at a weighted average exchange rate of 1.38. Net unrecognized gains at September 30, 2003 amounted to $nil. These contracts are entered into with a major financial institution as counterpart. The Company is exposed to credit loss in the event of nonperformance by the counterpart, which is limited to the cost of replacing the contracts, at current market rates. 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

Interest Rate Risk. We are exposed to cash flow risk due to changes in market interest rates related to our outstanding debt. For example, our credit facilities, production loans 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 -0.39% to 4.0%. Our principal risk with respect to our long-term debt is interest rate risk, to the extent not mitigated by interest rate swap and foreign exchange contracts. We entered into a $100.0 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 September 30, 2003 is $2.9 million. Unrecognized fair valuation gains for the three months and six months ended September 30, 2003 amount to $0.6 million and $0.3 million, respectively. The table below presents principal debt repayments and related weighted average interest rates for our credit facilities and other debt obligations at September 30, 2003 by expected maturity date.


(1)	Revolving credit facilities, which expire September 25, 2005. Average variable interest rate on principal of $23.5 million equal to Canadian prime plus 0.7% and average variable interest rate on principal of $123.6 million equal to U.S. prime minus 0.4%.

(2)	Demand loans at Canadian prime plus 2%-4% and lines of credit due July 31, 2004 and September 1, 2004, at Canadian prime plus 1% and at Canadian prime, respectively.

(3)	Average fixed interest rate equal to 4.88%.

(4)	Non interest-bearing.

(5)	Average fixed interest rate equal to 10.8%.

(6)	Majority consists of production loans secured by accounts receivable. Average variable interest rate on production loans equal to Canadian prime plus 1.44%.

(7)	Production loans with an average variable interest rate equal to US prime minus 0.39%.

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. As of June 30, 2003, the end of the period covered by this report, the Company had carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and

Chief Financial Officer of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures were effective. The Company reviews its disclosure controls and procedures on an ongoing basis and may from time to time make changes aimed at enhancing their effectiveness and to ensure that they evolve with the Company’s business.

On September 10, 2003, the Company held its annual meeting of shareholders. Below is a summary of the matters voted on at the meeting.

An election of directors was held with the following persons being elected directors:

Other matters voted upon and approved at the meeting, and the number of votes cast with respect to each matter were as follows:

Under applicable British Columbia law, abstentions and broker non-votes are not tabulated. Abstentions and broker non-votes are not counted in determining a quorum or the number of shares necessary for approval.

The Company’s Series B preferred shareholder, Mark Amin, elected himself as a director.


(1)	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).

(2)	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).

(3)	Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2001 (File No. 1-14880).

(4)	Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2001 (File No. 1-14880).


	(i)	On August 14, 2003, the Company filed a report on Form 8-K furnishing its press release dated August 14, 2003, announcing its financial results for its fiscal quarter ending June 30, 2003.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


(1)	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).

(2)	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).

(3)	Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2001 (File No. 1-14880).

(4)	Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2001 (File No. 1-14880).


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2003

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

		For the transition period from to .


PART I
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
	Item 3. Quantitative and Qualitative Disclosures About Market Risk.
	Item 4. Controls and Procedures
PART II
	Item 1. Legal Proceedings.
	Item 4. Submissions of Matters to a Vote of Security Holders.
	Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
SIGNATURES
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


	September 30,			March 31,
	2003			2003

	(Unaudited)			(Note 2)

	(All amounts in thousands
	of U.S. dollars, except
	share amounts)
ASSETS
Cash and cash equivalents	$	5,712		$	7,440
Accounts receivable, net of reserve for video returns of $13,972 (March 31, 2003 — $11,364) and provision for doubtful accounts of $6,535 (March 31, 2003 — $7,677)		112,570			94,908
Investment in films and television programs		230,668			206,275
Property and equipment		33,431			32,390
Goodwill, net of accumulated amortization of $5,643		25,048			25,048
Other assets		19,059			19,135
Future income taxes		1,708			1,350

	$	428,196		$	386,546


LIABILITIES
Bank loans	$	153,361		$	130,921
Accounts payable and accrued liabilities		65,190			48,888
Accrued participations and residuals costs		29,077			26,158
Production loans		15,074			20,339
Long-term debt		53,800			54,379
Deferred revenue		29,888			22,116
Minority interests		7,700			9,028

		354,090			311,829

Commitments and contingencies

SHAREHOLDERS’ EQUITY
Preferred shares, 200,000,000 shares authorized, issued in series, including 1,000,000 series A (3,790 and 11,830 shares issued and outstanding) and 10 series B (10 shares issued and outstanding) (liquidation preference $9,665 and $30,167)		10,653			32,519
Common stock, no par value, 500,000,000 shares authorized, 59,627,885 and 43,231,921 shares issued and outstanding		188,441			157,675
Contributed surplus		4,259			—
Accumulated deficit		(122,246	)		(107,942	)
Cumulative translation adjustments		(7,001	)		(7,535	)

		74,106			74,717

	$	428,196		$	386,546


			Three			Three
			Months			Months			Six Months			Six Months
			Ended			Ended			Ended			Ended
			September 30,			September 30,			September 30,			September 30,
			2003			2002			2003			2002


			(All amounts in thousands of U.S. dollars, except per share amounts)
Revenues			$	99,765		$	77,845		$	154,703		$	172,057

Expenses:
	Direct operating			51,485			45,419			74,233			89,294
	Distribution and marketing			37,421			18,412			72,239			54,381
	General and administration			8,596			7,850			15,760			15,333
	Amortization			1,633			1,365			3,113			2,703

		Total expenses		99,135			73,046			165,345			161,711

Operating Income (Loss)				630			4,799			(10,642	)		10,346

Other Expenses:
	Interest on debt initially incurred for a term of more than one year			2,486			2,579			4,934			5,215
	Minority interests			(994	)		166			(2,056	)		631

		Total other expenses		1,492			2,745			(2,878	)		5,846

Income (Loss) Before Equity Interests and Income Taxes				(862	)		2,054			(13,520	)		4,500
Other equity interests				56			52			(157	)		446

Income (Loss) Before Income Taxes				(806	)		2,106			(13,677	)		4,946
Income taxes				12			908			(267	)		1,042

Net Income (Loss)				(818	)		1,198			(13,410	)		3,904
Dividends on Series A preferred shares				(127	)		(386	)		(254	)		(792	)
Accretion on Series A preferred shares				(172	)		(500	)		(640	)		(1,023	)

Net Income (Loss) Available to Common Shareholders			$	(1,117	)	$	312		$	(14,304	)	$	2,089

Basic and Diluted Income (Loss) Per Common Share			$	(0.02	)	$	0.01		$	(0.27	)	$	0.05



					Series A						Series B
	Common Stock				Preferred Shares						Preferred Shares									Cumulative
															Contributed		Accumulated			Translation
	Number		Amount		Number			Amount			Number		Amount		Surplus		Deficit			Adjustments			Total


	(All amounts in thousands of U.S. dollars, except share amounts)
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						—			1,768															1,768
Foreign currency translation adjustments																					62			62

Balance at 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
Exercise of stock options		194,908		546																				546
Redemption of Series A preferred shares						(8,040	)		(22,349	)						4,259								(18,090	)
Net loss available to common shareholders																		(14,304	)					(14,304	)
Accretion of Series A preferred shares						—			483															483
Foreign currency translation adjustments																					534			534

Balance at September 30, 2003		59,627,885	$	188,441		3,790		$	10,653			10	$	—	$	4,259	$	(122,246	)	$	(7,001	)	$	74,106

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents


British Columbia, Canada
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


Item			Page

PART I
	1.	Financial Statements		2
	2.	Management’s Discussion and Analysis of Condition and Results of Operations		17
	3.	Quantitative and Qualitative Disclosures About Market Risk		26
	4.	Controls and Procedures		27
PART II
	1.	Legal Proceedings		28
	4.	Submissions of Matters to a Vote of Security Holders		28
	6.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		30


			Three Months			Six Months
			Ended			Ended
			September 30,			September 30,
			2003			2003


			(All amounts in thousands of
			U.S. dollars, except per share
			amounts)
The resulting pro-forma basic loss per common share is calculated as follows:
	Numerator:
		Net loss available to common shareholders	$	(1,117	)	$	(14,304	)
		Less: stock compensation expense calculated using intrinsic value method		—			—
		Add: stock compensation expense calculated using fair value method		(286	)		(363	)

		Adjusted net loss available to common shareholders	$	(1,403	)	$	(14,667	)

	Denominator:
		Weighted average common shares outstanding (thousands)		59,463			53,225
		Adjusted basic and diluted loss per common share	$	(0.02	)	$	(0.28	)


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


	*(g) Reclassification of Series A Preferred Shares and Accretion on Series A Preferred Shares*


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


	*Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002*


	*Six Months Ended September 30, 2003 Compared to Six Months Ended September 30, 2002*



	Expected Maturity Date
	Year Ended March 31,

	2004		2005		2006		2007		2008		Thereafter


	(Amounts in thousands of U.S. dollars)
Operating leases	$	1,396	$	2,406	$	1,600	$	1,143	$	704	$	942
Employment contracts		5,932		4,865		2,110		563		34		—
Unconditional purchase obligations		12,005		12,000		1,875		—		—		—
Distribution and marketing commitments		2,385		—		—		—		—		—

	$	21,718	$	19,271	$	5,585	$	1,706	$	738	$	942


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk.*


	September 30,		March 31,
	2003		2003


	(All amounts in thousands
	of U.S. dollars)
Theatrical Films
Released, net of accumulated amortization	$	67,689	$	70,160
Completed and not released		25,108		11,359
Acquired library, net of accumulated amortization		36,296		37,422
In progress		38,125		31,783
In development		1,544		1,031

		168,762		151,755

Non-Theatrical Films and Direct-to-Television Programs
Released, net of accumulated amortization		43,741		36,324
In progress		15,630		15,536
In development		2,535		2,660

		61,906		54,520

	$	230,668	$	206,275


	*(a) Common Stock*


	*(c) Phantom Options*


7.	Segment Information


Name	Votes For		Votes Withheld

Michael Burns		27,975,515		1,246,331
Drew Craig		25,517,449		3,704,397
Arthur Evrensel		27,913,489		1,308,357
Jon Feltheimer		27,981,731		1,240,115
Gordon Keep		27,977,496		1,244,350
Morley Koffman		27,980,381		1,241,465
Patrick Lavelle		27,983,731		1,238,115
Andre Link		27,979,346		1,242,500
Harald Ludwig		25,640,339		3,581,507
Gary Newton		27,979,996		1,241,850
G. Scott Paterson		27,970,796		1,251,050
Jeff Saganksy		27,851,881		1,369,965
Harry Sloan		27,977,881		1,243,965
Mitchell Wolfe		27,984,631		1,237,215


Matter	Votes For		Votes Against		Abstentions

1. To approve a resolution to amend the Company’s articles to adjust the terms of the Series A preferred shares to change the initial conversion price of the Series A preferred shares from US$2.55 to US$2.30.		28,972,660		206,362		35,924
2. To approve a resolution to increase the number of the common shares reserved for issuance under the Employees’ and Directors’ Equity Incentive Plan by 1,068,750.		22,925,266		6,246,084		65,396


Exhibit
Number		Description of Documents

	3.1(1)	Articles of Incorporation
	3.2(2)	Amendment to Articles of Incorporation to Provide Terms of the Series A Preferred Shares dated as of December 20, 1999
	3.3(3)	Amendment to Articles of Incorporation to Provide Terms of the Series B Preferred Shares dated as of September 26, 2000
	3.4(4)	Amendment to Articles of Incorporation to change the size of the Board of Directors dated as of September 12, 2001
	4.1(1)	Trust Indenture between the Company and CIBC Mellon Trust Company dated as of April 15, 1998
	4.2(2)	Warrant Indenture between the Company and CIBC Mellon Trust Company dated as of December 30, 1999
	31.1	Chief Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	Chief Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1	Chief Executive Officer’s Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2	Chief Financial Officer’s Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002