Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-14880
LIONS GATE ENTERTAINMENT CORP.
(Exact name of registrant as specified in its charter)
BRITISH COLUMBIA, CANADA
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SUITE 3123, THREE BENTALL CENTRE
595 BURRARD STREET
VANCOUVER, BRITISH COLUMBIA V7X 1J1
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (604) 609-6100
Securities registered pursuant to Section 12(b) of the Act
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
-------------- ------------------------------------
Common Stock, without par value Toronto Stock Exchange
American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of July 2, 2002 was approximately $108 million.
As of July 2, 2002, 43,207,399 shares of the registrant's no par value
common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A AND
RELATING TO ITS 2002 ANNUAL MEETING OF STOCKHOLDERS ARE INCORPORATED BY
REFERENCE INTO PART III.
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. BUSINESS ................................................................ 3
2. PROPERTIES .............................................................. 20
3. LEGAL PROCEEDINGS ....................................................... 21
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..................... 21
PART II
5. MARKET OF REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS .... 22
6. SELECTED FINANCIAL DATA ................................................. 24
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION .................................................... 27
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .............. 36
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............................. 37
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE .................................................... 38
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ...................... 39
11. EXECUTIVE COMPENSATION .................................................. 39
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .......... 39
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......................... 40
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ........ 40
1
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," "might," "will,"
"should," "could," "would," "expect," "believe," "estimate," "potential,"
"expect," "plan" 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 "Risk Factors" or in the documents incorporated
by reference in this report.
CURRENCY AND EXCHANGE RATES
All dollar amounts set forth in this report are in Canadian dollars,
except where otherwise indicated. The following table sets forth (1) the rate of
exchange for the United States dollar, expressed in Canadian dollars, in effect
at the end of each period indicated; (2) the average exchange rate for such
period, based on the rate in effect on the last day of each month during such
period; and (3) the high and low exchange rates during such period, in each case
based on the noon buying rate in New York City for cable transfers in Canadian
dollars as certified for customs purposes by the Federal Reserve Bank of New
York.
Fiscal Year Ending March 31,
----------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Rate at end of period $ 1.5958 $ 1.5784 $ 1.4828 $ 1.5092 $ 1.4180
Average rate during period 1.5650 1.5041 1.4790 1.5086 1.4060
High rate 1.6128 1.5784 1.5140 1.5770 1.4637
Low rate 1.5102 1.4515 1.4470 1.4175 1.3705
On July 2, 2002, the noon buying rate in New York City for cable
transfer in Canadian dollars as certified for customs purposes by the Federal
Reserve Bank of New York was Canadian $1.5263= US$1.00.
2
PART I
ITEM 1. BUSINESS.
OVERVIEW
Lions Gate Entertainment Corp. ("Lions Gate", "Company", "we", "us" or
"our") is an integrated North American entertainment company. We develop,
produce and distribute a broad range of motion picture, television and other
filmed entertainment content through our operating divisions (Motion Pictures,
Television, Animation and Studio Facilities) as well as our CinemaNow Inc.
("CinemaNow") digital media platform. We have the following divisions and
businesses:
- Motion Pictures, which includes Production and Theatrical, Video,
Television and International Distribution;
- Television, which includes One-Hour Drama Series, Television
Movies, Non-Fiction Programming and International Distribution;
- Animation, which includes an interest in CineGroupe Corporation
("CineGroupe"), a producer and distributor of animated feature
films and television programming;
- Studio Operations, which includes Lions Gate Studios ("LG
Studios") and leased facilities at Eagle Creek Studios;
- a 63% interest in CinemaNow, a video on demand distributor of
feature films over the Internet; and
- a 45% interest in Mandalay Pictures, LLC ("Mandalay"), a United
States-based producer of class-A motion pictures.
Our registered office and principal executive offices are located at
Suite 3123, Three Bentall Centre, 595 Burrard Street, P.O. Box 49139, Vancouver,
British Columbia, V7X 1J1.
BACKGROUND OF THE COMPANY
On May 26, 1986, IMI Computer Corp. ("IMI"), a British Columbia
company, incorporated under the Company Act (British Columbia). IMI underwent
name changes in 1987 and 1994, and on November 18, 1996, changed its name to
Beringer Gold Corp.
On April 28, 1997, Lions Gate Entertainment Corp. ("Old Lions Gate"),
incorporated under the Canada Business Corporations Act using the name 3369382
Canada Limited. Old Lions Gate amended its articles on July 3, 1997, to change
its name to Lions Gate Entertainment Corp. and on September 24, 1997, continued
under the Company Act (British Columbia).
On November 13, 1997, Old Lions Gate and Beringer Gold Corp., merged
under the Company Act (British Columbia) to form Lions Gate Entertainment Corp.
On November 13, 1997 our shares began trading on The Toronto Stock
Exchange and on November 17, 1998 our shares began trading on the American Stock
Exchange under the symbol "LGF."
3
On November 12, 1998 we reverse split our common shares from 500
million common shares to 250 million common shares and increased the authorized
number of common shares to 500 million.
On December 21, 1999 we issued a total of 13,000 5.25% convertible,
non-voting, redeemable Series A preferred shares. These preferred shares are
entitled to cumulative dividends, as and when declared by the Board of Directors
at a rate of 5.25% of the offering price per annum, payable semi-annually on the
last day of March and September of each year. At our option, the dividend may be
paid in cash or additional preferred shares. The preferred shareholders, as a
class, have rights related to the election of between one and three directors,
depending on the number of preferred shares outstanding.
On October 13, 2000 we issued a total of 10 Series B preferred shares.
Holders of these shares have the right to elect one member of the Board of
Directors of the Company, which can only be Mark Amin.
INDUSTRY BACKGROUND
THE FEATURE FILM INDUSTRY
The feature film industry encompasses the development, production and
distribution of feature-length motion pictures and their subsequent distribution
in the home video, television and other ancillary markets. The major studios
dominate the industry, some of which have divisions that are promoted as
"independent" distributors of motion pictures, including Universal Pictures,
Warner Bros. (including New Line Cinema and Castle Rock Entertainment),
Twentieth Century Fox, Sony Pictures Entertainment (including Columbia Pictures
and Columbia Tristar Motion Picture Group), Paramount Pictures, The Walt Disney
Company (including Buena Vista Pictures, Touchstone Pictures and Miramax Film
Corp.) and Metro-Goldwyn-Mayer Inc. (including MGM Pictures and United Artists
Pictures Inc). In recent years, however, true "independent" motion picture
production and distribution companies have played an important role in the
production of motion pictures for the worldwide feature film market.
Independent Feature Film Production and Financing. Generally,
independent production companies do not have access to the extensive capital
required to make big budget motion pictures, such as the "blockbuster" product
produced by the major studios. They also do not have the capital necessary to
maintain the substantial overhead that is typical of such studios' operations.
Independent producers target their product at specialized markets and usually
produce motion pictures with budgets of less than US$20 million. Generally,
independent producers do not maintain significant infrastructure. They instead
hire only creative and other production personnel and retain the other elements
required for development, pre-production, principal photography and
post-production activities on a project-by-project basis. Also, independent
production companies typically finance their production activities from bank
loans, pre-sales, equity offerings, co-productions and joint ventures rather
than out of operating cash flow. They generally complete financing of an
independent motion picture prior to commencement of principal photography to
minimize risk of loss.
Independent Feature Film Distribution. Motion picture distribution
encompasses the exploitation of motion pictures in theatres and in markets, such
as the home video, pay-per-view, pay television, free television and ancillary
markets, such as hotels, airlines and streaming films on the Internet.
Independent producers do not typically have distribution capabilities and rely
instead on pre-sales to North American and international distributors as well as
equity financing. Generally, the local distributor will acquire distribution
rights for a motion picture in one or more of the aforementioned distribution
channels from an independent producer. The local distributor
4
will agree to advance the producer a non-refundable minimum guarantee. The local
distributor will then generally receive a distribution fee of between 20% and
35% of receipts, while the producer will receive a portion of gross receipts in
excess of the distribution fees, distribution expenses and monies retained by
exhibitors. The local distributor and theatrical exhibitor generally will enter
into an arrangement providing for the exhibitor's payment to the distributor of
a percentage (generally 40% to 50%) of the box-office receipts for the
exhibition period, depending upon the success of the motion picture.
THE TELEVISION INDUSTRY
The North American television industry serves the largest broadcast
market in the world, with a population of nearly 300 million people and more
than 120 million homes. Historically, the North American market has been the
source of the major portion of the revenues earned by television producers.
However, the broadcasting and cable television markets outside North America
have grown in the last decade through the privatization of broadcasting systems,
the proliferation of broadcast licenses and the introduction of sophisticated
delivery technology, such as cable and satellite transmission systems. This
growth has led to a higher proportion of revenues from international markets.
Generally, a production company will license the right to broadcast a
program to a combination of United States, Canadian and international
broadcasters, including free television and cable networks or individual
television stations in the first run syndication market. After the initial
network, cable licensing or first run syndication period, the production company
will make the program available for further commercial exploitation on cable
and/or in syndication.
North American Markets. In North America, programming is delivered to
the end user through free television networks, cable channels and networks,
individual television stations and satellite delivery services. The following
table identifies some of the specific delivery mediums available in the United
States and Canada:
Medium Channels in the United States Channels in Canada
- ------ ----------------------------- ------------------
Broadcast television networks NBC, CBS, ABC, Fox, PBS, PAXTV, UPN CBC, CTV, the Global Television
and The WB Network and CHUM
Basic Cable USA Network, Lifetime, ABC Family Bravo, Canal D, A&E, YTV,
Channel, TNT, F/X, Hallmark and TBS Showcase and Family Channel
Pay Cable HBO, Showtime, Starz/Encore Movie Central, TMN and Super
Ecran
Independent commercial television stations often purchase programming
from syndicators, including major studios and companies such as Pearson
Television and King World Productions, in exchange for advertising time. This
practice is known as barter syndication. Pay-per-view television allows cable
television subscribers to purchase individual programs, including recently
released motion pictures and live sporting, music or other events, on a "per
use" basis. The program distributor, the pay-per-view operator and the cable
system operator typically divide the subscriber fees.
Each major free television network in the United States and Canada
currently schedules approximately 22 hours of programming in prime time (from 8
p.m. to 11 p.m. Monday to Saturday, and 7 p.m. to 11 p.m. on Sunday) each week.
United States and Canadian network prime time programming generates the highest
license fees and generally consists of a mix of
5
television movies, mini-series, non-fiction/reality, half-hour comedy and
hour-length drama or action/adventure series. In recent years, the market share
of the free television networks in the United States has fallen significantly
due, in large part, to the expansion of other networks, cable channels and the
development of a first run syndication market.
International Markets. The development of new television broadcasting
systems outside of North America has sparked the growth of the worldwide
television industry. These broadcasting systems represent significant new
sources of revenue for television producers. European television is the most
striking example of this growth. Over the last 15 years, governments in Europe
have encouraged a major expansion of the public and private broadcasting sector.
For example, Germany and France have each added six television services in the
last 15 years, and the United Kingdom has added four. This process is just
beginning in the former East Bloc countries and in Japan, Southeast Asia and
Australia. The East Bloc countries represent a potential market of more than 300
million people, with Japan, Southeast Asia and Australia representing an even
greater combined market. Other factors contributing to the growth of the
worldwide television industry include the introduction of direct broadcast
satellite services and pay television, increased cable penetration and the
growth of home video. Most foreign broadcasters seek out both indigenous
programming, to satisfy the local content regulations of their broadcast
licenses, and international programming largely from North America to appeal to
a wide audience.
CANADA'S ROLE IN THE TELEVISION AND FEATURE FILM INDUSTRY
Over the past several years, the Canadian film and television
production industry has grown and matured, and at present, represents an
approximately $3 billion annual business. At the same time as the Canadian
domestic industry has matured, Canada has become a leading location for
internationally originated productions. Over the past few years, U.S. studios,
television networks and cable services have increasingly produced in Canada,
attracted by the low Canadian dollar, first-class Canadian casts, crews,
locations and facilities and government support for the industry. U.S. companies
with a strong presence in Canada include:
- major U.S. studios, such as Paramount, The Walt Disney Company,
Universal Pictures and Columbia Tri-Star;
- U.S. networks, such as ABC, NBC, CBS, Fox and PAXTV;
- cable services, such as Showtime, TNT, Disney Channel and HBO; and
- film companies, such as The Hearst Corporation.
European and Asian film companies have also found Canada to be an
attractive location and have often been able to access Canada's numerous
international film and television co-production treaties. Of Canada's ten
provinces and three territories, the provinces of British Columbia, Ontario and
Quebec are most actively involved in the television and motion picture
production industries, and many other provinces are actively soliciting this
business.
BUSINESS OF THE COMPANY
We produce, distribute and market feature-length films, television
series and mini-series, and television movies, from initial creative development
through principal photography, post-production, distribution and ancillary
sales.
6
MOTION PICTURES
We develop and produce theatrical motion picture projects through three
separate production entities - Lions Gate Films, Christal Films and Mandalay.
These production units are operated independently with separate management
teams, which provide distinct creative talents and perspectives. Independent
operation results in greater diversity within our overall release slate. We
produce quality films in the low to mid-budget range through Lions Gate Films
and Christal Films and produce class-A feature films in the US$15 million to
US$75 million range through Mandalay.
Film Production
We produce and distribute English and French-language films generally
budgeted at US$20 million or less. In fiscal 2002, we completed principle
photography on seven productions and delivered eleven films, and in fiscal 2001,
we completed principle photography on ten productions and delivered one film. We
are expanding our production and co-production of feature films. Our current
strategic plan calls for the production or co-production of ten to twenty
features annually. In fiscal 2003, we anticipate our theatrical releases to
include the following:
- Frailty - released April 12, 2002, starring Bill Paxton and
Matthew McConaughey;
- Rules of Attraction - starring James Vanderbeek, Jessica Biel and
Shannyn Sossamon;
- Confidence - starring Ed Burns, Dustin Hoffman, Andy Garcia and
Rachel Weitz;
- Shattered Glass - starring Hayden Christensen and Greg Kinnear;
and
- Hittin' It - an urban comedy.
Distribution
We also actively distribute feature films for theatrical, television
and home video audiences worldwide. In addition to distributing films that we
produce or co-produce, we also acquire distribution rights and licenses for
feature films produced by others.
Theatrical Distribution. We distribute major motion pictures
theatrically in North America in English, French and other languages and have
been responsible for the release of such prominent films as Monsters Ball,
Dogma, American Psycho, The Red Violin, Shadow of the Vampire, Amores Perros,
Gods and Monsters and Affliction. In fiscal 2002 Christal Films has distributed
the following prominent films; Le Placard, Les Boys 3 and Le Collectionneur. Les
Boys, Les Boys 2 and Les Boys 3 are the highest grossing films in Quebec
history.
Home Video Distribution. Lions Gate Home Entertainment has two United
States video distribution labels - Trimark Home Video and Studio Home
Entertainment. We exploit our own films such as Monsters Ball, The Wash and
Frailty and we also distribute our acquired theatrical releases such as O, State
Property and Lantana. In addition we have been able to acquire high quality,
star-driven films that, while not on par with a wide theatrical release, are
exploitable from a video and ancillary media perspective such as Stephen King's
Rose Red and Larry Clark's Bully.
7
We distribute to the rental market using direct distribution and
revenue share output arrangements with Blockbuster, Hollywood Entertainment
Corporation, Movie Gallery, Inc. and Rentrak Corporation.
We distribute or sell directly to mass merchandisers, such as Wal-Mart
Stores Inc., Costco Wholesale Corporation, Target Corporation, Best Buy Co.
Inc., and others who buy large volumes of our videos and DVDs to sell directly
to the consumer.
In Canada, we release our titles to the home video market through our
own labels and currently through a distribution arrangement with Columbia
TriStar Home Video which will expire during the current fiscal year. In Canada
we have entered into a distribution overhead sharing arrangement with TVA
International.
Pay and Free Television Distribution. We currently have more than 250
titles in active distribution in the domestic cable, free and pay television
markets.
International Distribution. We license our own productions and
productions acquired from third parties to the international marketplace on a
territory-by-territory basis. We currently have approximately 175 films in
active international distribution.
Class-A Feature Film Production
Mandalay. Mandalay is a co-venture with Tigerstripes, a company
controlled by Peter Guber. Mandalay develops and produces Class A-level feature
length motion pictures with budgets ranging from US$15 to US$75 million.
Mandalay is accounted for using the equity method.
In November 1999, Mandalay released its first feature film production -
Sleepy Hollow starring Johnny Depp and Christina Ricci. The film was nominated
for three Academy Awards and received an Oscar for Art Direction from the
Academy of Motion Picture Arts and Sciences. It grossed in excess of US$100
million in each of the North American and international box offices.
Enemy at the Gates starring Jude Law, Joseph Fiennes, Ed Harris and
Rachel Weitz was released in North America on March 16, 2001. It has grossed in
excess of US$75 million worldwide. Mandalay released The Score, an action
suspense thriller starring Robert DeNiro, Marlon Brando, Ed Norton and Angela
Bassett, in July 2001. The Score has grossed in excess of $115 million
worldwide. Serving Sara, a romantic comedy starring Matthew Perry and Elizabeth
Hurley, will be released on August 23, 2002. Principal photography on Beyond
Borders, a worldwide epic film starring Angelina Jolie and Clive Owen, has been
completed and is expected to be released in early 2003. Numerous other projects
are in various stages of development.
Mandalay has recently terminated its production and distribution
arrangement at Paramount, and its output agreements in the United Kingdom,
Germany, France, Japan, Spain, Australia and Greece all expired at the end of
2001. Mandalay has also been experiencing recurring losses over the past several
years. Given the above factors, Mandalay has re-evaluated its business plan.
Although Paramount made an offer to renew the Mandalay deal, the fundamental
change in the foreign marketplace for films on an output basis requires that the
domestic rights bear a greater burden of the cost. Therefore, Mandalay has
concluded that, in order to maximize the opportunities to produce films and to
protect the downside while maintaining the upside potential, it is best served
by primarily relying on major studios to finance 100% of its production costs by
being independent of any one major studio and is embarking on an independent
program of placing films at different major studios or entering into a first
look
8
agreement with one studio. Accordingly, Mandalay has revised its business plan
with the film program objectives of making two to three pictures each year with
100% studio financing and at least one picture each year with independent
financing.
At March 31, 2002 we have committed to a plan to divest our ownership
interest in Mandalay. Given the factors described above, the investment in
Mandalay has been written down to an amount that approximates its fair value at
that date. Refer to additional information included in Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
TELEVISION
One-Hour Drama Series. In fiscal 2002, we delivered the second 22
episode season of Mysterious Ways, which is broadcast on PAXTV in the United
States and CTV in Canada and is distributed by Columbia Tristar internationally.
We have completed production on 13 episodes of No Boundaries, an adventure
reality show for The WB and CanWest Global. We are completing 22 episodes of
Tracker, a sci-fi fugitive drama, sold to the competitive first run syndication
market in the United States and to Telemunchen in Germany as well as several
international broadcasters. We are in production on 22 episodes of the show Dead
Zone, a series based on Stephen King's novels for USA Network which premiered on
June 16, 2002. We have also recently completed a pilot for Hooters Sports
Challenge for Fox Sports Network and The Game for MTV.
Television Movies. We are actively involved in the development,
acquisition, production and distribution of television productions in the
movie-of-the-week and mini-series formats. We produced The Pilot's Wife, a
two-hour television movie for CBS starring Christine Lahti and Campbell Scott
based on the best-selling novel by Anita Shreve, which aired in April and was
the highest rated two-hour movie of the week this season and Superfire, a
two-hour television movie about smokejumpers battling an inferno in the Oregon
backcountry, which aired in April on ABC starring D.B. Sweeney. We also produced
Counterstrike to be aired later this year for TBS, starring Rob Estes and Joe
Lando about two brothers trying to rescue the President who is taken hostage
aboard the QEII during a summit meeting. In addition to the television movies
already completed or nearing completion, we have approximately 22 hours of
television movie programming in development with U.S. broadcasters and cable
companies.
Non-Fiction Programming. Termite Art Productions ("Termite Art") has
created documentary and reality-based programs for such notable clients as all
five Discovery Networks, Bravo, Court TV, MTV, VH1, A&E and The History Channel,
as well as CBS, Fox and UPN. Over the last few years, Termite Art has produced
When Good Times Go Bad and Busted on the Job for Fox, Great Streets for PBS,
Amazing Animal Videos for Animal Planet, Hi Tech History for the Discovery
Channel, and Ripley's Believe It or Not for TBS. In addition to distributing
Termite Art programs to domestic and international markets, we acquire third
party productions for distribution.
ANIMATED MOTION PICTURE AND TELEVISION PRODUCTION
In addition to our live-action film and television productions, we are
also involved in animation and interactive production through CineGroupe located
in Montreal.
CineGroupe develops and produces animated and live-action television
series and television movies and feature film product using 2D and 3D computer
generated imagery and traditional ink and paint techniques. CineGroupe has
produced more than 800 half-hour animated episodes for television, including
such series as Galidor: Defenders of the Outer Dimension,
9
Sagwa, the Chinese Siamese Cat, What's with Andy, Kids from Room 402, Big Wolf
on Campus and a made-for-television movie, Lion of Oz. During fiscal 2002,
CineGroupe delivered 113.5 half-hours of programming, including:
- 26 half-hours of What's with Andy to ABC Family and Teletoon;
- 12 half-hours of Wounchpounch to Saban SINV and Radio-Canada;
- 12 half-hours of Kids from Room 402 (Season 3) to ABC Family and
Teletoon;
- 9 half-hours of Galidor: Defenders of the Outer Dimension to Fox
Kids and YTV;
- 26.5 half hours of Sagwa, the Chinese Siamese Cat to PBS Kids and
TV Ontario;
- the live action feature film The Edge of Madness, a co-production
with Credo Entertainment that Lions Gate will distribute;
- 21 half-hours of Big Wolf on Campus (Season 3) to ABC Family and
YTV; and
- 3 half-hours of Pig City, a co-production with Animakids of
France, to Fox Kids Europe and Teletoon.
CineGroupe has entered into an exclusive corporate sponsor agreement
with Kellogg Company for the series Sagwa, the Chinese Siamese Cat.
Projects currently in production include:
- 23 half-hours of Pig City;
- 17 half-hours of Galidor: Defenders of the Outer Dimension;
- the animation feature film Pinocchio 3001, a co-production with
Credo Entertainment that Lions Gate may distribute;
- 26 half-hours of Seriously Weird to ITV (UK) and YTV;
- 13 half-hours of Daft Planet to Teletoon; and
- 13 half-hours of Tripping the Rift to USA Network (Sci-Fi Channel)
and CITY-TV in Canada.
In the coming years, CineGroupe plans to expand production volume in
response to heightened international demand for animated product and plans to
build its library.
STUDIO OPERATIONS
Film and television production has increased dramatically over the past
five years in Canada. This increase can be attributed to:
- close professional contacts between Canadian and U.S. studios,
independent producers, distributors and buyers, resulting from
Canada's geographic proximity to the United States and shared
North American values and interests;
10
- lower production costs in Canada than in the United States and
other countries due, in part, to lower guild and union minimums;
- the favorable exchange rate of the Canadian dollar;
- government tax incentives;
- the availability of location assistance to film and television
producers offered by many Canadian cities and several provinces;
- a large number of highly trained and professional crews,
technicians and production personnel;
- intensive training for Canadian directors, writers and producers
provided by the Canadian Film Centre;
- flexible trade unions that insist upon less onerous requirements
than their United States counterparts; and
- Canada's wide ranging topography (3,400 miles from coast to coast)
and small population (approximately 27 million people) that make
Canada ideally suited for location shooting. (Urban centers such
as Toronto, Vancouver and Montreal have been disguised as London,
Paris, New York and Chicago.)
We have benefited through our ownership in LG Studios and a lease on
the Eagle Creek Studios from the high demand for sound stages and production
office space created by this increase in production. Occupying nearly 14 acres
in North Vancouver, British Columbia, LG Studios is one of the largest film and
television studio complexes in Canada. Although the majority of its revenues are
generated from the rental of its sound stages, production offices, construction
mills and storage facilities to independent film and television producers, LG
Studios is host to a number of long-term industry tenants, such as:
- Pinewood Sound, a supplier of audio post-production services;
- Sim Video Productions, Ltd., a supplier of cameras and
post-production editing equipment;
- the local union of one of the major film and entertainment
industry craft guilds; and
- various production companies.
Studio capacity usage is consistently above 90%. Current studio
productions include New Line's feature film Willard, Warner Bros.'s feature
Dreamcatchers and the MGM television pilot Dead Like Me.
We expect to have continued high occupancy rates for both our studios
and offices for the next year. We have entered into an operating lease with
Eagle Creek Studios in Burnaby, British Columbia. Eagle Creek Studios has two
17,000 square foot sound stages with accompanying office space. Its current
tenant is Warner Bros. The addition of Eagle Creek Studios increases LG Studios'
sound stage inventory to ten. We have also entered into a revenue sharing
equipment supply contract with William F. White Limited for equipment on the
stages.
11
CINEMANOW
We are involved in video-on-demand distribution over the Internet
through our majority ownership in CinemaNow. CinemaNow is accounted for by the
equity method because we do not have the ability to control the strategic
operating, investing and financing policies of CinemaNow as a consequence of our
inability to elect a majority of the board of directors of CinemaNow.
CinemaNow distributes feature films on demand over the Internet and is
currently delivering over 2.5 million streams to over 1.2 million users per
month via its website, www.cinemanow.com.
CinemaNow currently streams and downloads over 350 feature length
films, using the Windows Media Player as its viewing platform. CinemaNow's fee
based, on demand selections are securely streamed using Microsoft's Digital
Rights Management. CinemaNow controls exclusive Internet distribution rights to
nearly 2,000 films from 100 licensors including partnerships with Lions Gate,
Allied Artists Entertainment Group, Inc., Tai Seng Video Marketing and Salvation
film libraries. CinemaNow makes select CinemaNow movies available through
syndication partners including WindowsMedia.com and numerous international
distribution partnerships. In December 2000, CinemaNow closed its series B round
of financing led by Microsoft and included Blockbuster and Kipco.
At March 31, 2002 we fully provided for our investment in CinemaNow.
Refer to additional information included in Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
INTELLECTUAL PROPERTY
We are currently using the trademarks "TRIMARK HOME VIDEO" in
connection with our domestic home video distribution, "LIONS GATE FILMS" and
"TRIMARK PICTURES" in connection with films distributed domestically and
licensed internationally and "LIONS GATE TELEVISION" and "TRIMARK TELEVISION" in
connection with licenses to free, pay and cable television. The trademarks
"LIONS GATE ENTERTAINMENT", "LIONS GATE PICTURES" and "TRIMARK PICTURES" have
been registered with the Commissioner of Patents and Trademarks in the United
States. Additionally we have registered the trademark "TRIMARK ULTRA SPORTS"
which is used in connection with our extreme sports video releases. We regard
our trademarks as valuable assets and believe that our trademarks are an
important factor in marketing our products.
Copyright protection is a serious problem in the video cassette and DVD
distribution industry because of the ease with which cassettes and DVDs may be
duplicated. In the past, certain countries permitted video pirating to such an
extent that we did not consider these markets viable for distribution. Our
management believes the problem to be less critical at the present time. We and
other video distributors have initiated legal actions to enforce copyright
protection when necessary.
COMPETITION
Television and motion picture production and distribution are highly
competitive businesses. We face competition from companies within the
entertainment business and from alternative forms of leisure entertainment, such
as travel, sporting events, outdoor recreation and other cultural activities. We
compete with the major studios, numerous independent motion picture and
television production companies, television networks and pay television systems
for the acquisition of literary and film properties, the services of performing
artists, directors,
12
producers and other creative and technical personnel and production financing.
In addition, our motion pictures compete for audience acceptance and exhibition
outlets with motion pictures produced and distributed by other companies. As a
result, the success of any of our motion pictures is dependent not only on the
quality and acceptance of a particular picture, but also on the quality and
acceptance of other competing motion pictures released into the marketplace at
or near the same time.
EMPLOYEES
As of June 3, 2002 we had approximately 253 full-time and 13 part-time
regular employees in our worldwide operations and CineGroupe has a further 300
full-time and 10 part-time regular employees. We also hire additional employees
on a picture-by-picture basis in connection with the production of our motion
pictures and television programming. We believe that our employee and labour
relations are good.
None of our full-time employees are members of unions.
Many film and television productions employ members of a number of
unions, including the International Alliance of Theatrical and Stage Employees
and Teamsters. A strike by one or more of the unions that provide personnel
essential to the production of motion pictures or television programs could
delay or halt our ongoing production activities. Such a halt or delay, depending
on the length of time involved, could cause delay or interruption in our release
of new motion pictures and television programs and thereby could adversely
affect our cash flow and revenues. Our revenues from motion pictures and
television product in our library should not be affected and may partially
offset the effects of a strike to the extent, if any, that television exhibitors
buy more library product to compensate for interruption in their first-run
programming.
GOVERNMENT INCENTIVES AND REGULATION
Government Financial Support. The Canadian Film Development
Corporation, also known as Telefilm Canada, provides financial assistance in the
form of equity investments, interest free and low interest loans, development
and interim financing. Canadian film and television productions that have
significant Canadian creative, artistic and technical content and that meet
certain published criteria qualify for such financial assistance. Telefilm
Canada's provincial counterparts in Quebec, Ontario, Manitoba, Saskatchewan,
British Columbia, Prince Edward Island, New Brunswick and Nova Scotia also
provide financial support to qualifying Canadian content productions. In 1996,
the federal government established the Canada Television and Cable Production
Fund (now operating as the CTF), a government-cable industry partnership that
combined the former Cable Production Fund, Telefilm Canada's Canadian Broadcast
Program Development Fund and a $100 million contribution from the Department of
Canadian Heritage to form an approximately $230 million per year television
funding initiative.
"Canadian-Content" Productions. Canadian conventional television
broadcasters and specialty and pay television services generally pay higher
license fees for television programs that meet the "Canadian content" criteria
established by the Canadian Radio-television and Telecommunications Commission
("CRTC"), the Canadian counterpart to the U.S. Federal Communications
Commission. The CRTC has broad jurisdiction over communications companies
carrying on broadcasting undertakings in Canada.
Broadcasting undertakings, including specialty television services,
have been and continue to be, licensed and regulated by the CRTC pursuant to the
Broadcasting Act (Canada) and to the applicable regulations thereunder, the
policies and decisions of the CRTC as issued from time to time and the
conditions and expectations established in the license for each
13
undertaking. Under the Broadcasting Act, the CRTC is responsible for regulating
and supervising all aspects of the Canadian broadcasting system with a view to
ensuring compliance with certain broadcasting policy objectives set out in the
Broadcasting Act. The CRTC is empowered, for example, under the Broadcasting Act
to issue licenses to eligible entities to carry on specialty television
programming services. In addition, the CRTC also imposes restrictions on the
transfer of ownership and control of all licensed broadcasting undertakings,
including television programming services.
The Canadian independent television program production industry is
assisted by the CRTC requirement that each licensed Canadian conventional, pay
and specialty television service must broadcast certain minimum amounts of
Canadian content programming. Such rules and regulations mandating the broadcast
of Canadian content programs enable Canadian producers and distributors to make
sales to Canadian broadcasters that might otherwise have been made by
non-Canadian producers and distributors.
Canadian independent television producers are further assisted by the
CRTC rule permitting simultaneous substitution in certain circumstances.
Simultaneous substitution enables Canadian conventional television broadcasters
to require Canadian cable and direct-to-home ("DTH") satellite operators to
delete the signal of a U.S. television broadcaster and to replace those signals
with the signals of the Canadian broadcaster, including its Canadian television
commercials, when the Canadian broadcaster is broadcasting the same program at
the same time as the U.S. broadcaster (more recently, further rules for
non-simultaneous substitution have been extended to DTH operators.) The
substitution ensures that Canadian cable and DTH subscribers are exposed to the
Canadian broadcasters' commercials. This results in higher commercial revenues
to Canadian broadcasters in general and enhances their financial capacity to
license programs.
Tax Credits. The federal government provides a refundable tax credit
for eligible Canadian-content film or video productions produced by qualified
taxable Canadian corporations. The federal tax credit is for a maximum amount of
approximately 12% of the total production costs of an eligible production. The
federal Canadian-content tax credits have been joined by Canadian-content tax
credit programs in most provinces ranging from 9.6% to 22.5%.
The federal government "production services" tax credit for eligible
film and television productions produced in Canada, but which do not otherwise
qualify as Canadian content is equal to 11% of qualifying Canadian labor
expenditures. Assuming that Canadian labor expenditures generally represent
approximately 50% of the total production budget, the federal production
services tax credit will net applicants approximately 5.5% of total production
costs. Most provincial governments have also introduced refundable production
services tax credit programs at a rate ranging from 5.5% to 17.5% of eligible
production costs.
Co-Production Treaties. Canada is a party to film and/or television
co-production treaties with over 50 countries, which enables co-productions to
qualify as local content and thus be eligible for government assistance and
financing in more than one country, which reduces the cost of production. The
most active relationship has traditionally been with France, but recently the
United Kingdom has become a close second in volume of production.
For financial information about our government incentives for each of
the last three fiscal years, refer to the consolidated financial statements note
16 - Government Assistance.
14
RISK FACTORS
FAILURE TO MANAGE FUTURE GROWTH MAY ADVERSELY AFFECT OUR BUSINESS.
Rapid Growth May Strain Our Resources. We are experiencing a period of
rapid growth that could place a significant strain on our resources. If our
management is unable to manage growth effectively, then our operations could be
adversely affected. We are currently in the process of implementing appropriate
structures to deal with future growth, including management information systems
and internal and external communication systems. However, there can be no
assurance that we will be able to achieve our growth as planned, increase our
work force or implement new systems to manage our anticipated growth, and any
failure to do so could have a material adverse effect on our business, results
of operations and financial condition.
We May Not Be Able to Obtain Additional Funding to Meet Our
Requirements. Our ability to maintain and expand our development, production and
distribution of feature films and television series and to cover our general and
administrative expenses depends upon our ability to obtain financing through
equity financing, debt financing (including credit facilities) or the sale or
syndication of some or all of our interests in certain projects or other assets.
If our access to existing credit facilities is not available, and if other
funding does not become available, there could be a material adverse effect on
our business.
OUR SUCCESS DEPENDS ON EXTERNAL FACTORS IN THE FILM AND TELEVISION INDUSTRY.
Our Success Depends On the Unpredictable Commercial Success of Films
and Television Programs. Operating in the television and feature film industries
involves a substantial degree of risk. Each television program and feature film
is an individual artistic work, and unpredictable audience reactions primarily
determine commercial success. The commercial success of a television program or
a feature film also depends upon the quality and acceptance of other competing
programs or feature films released into the marketplace at or near the same
time, critical reviews, the availability of alternative forms of entertainment
and leisure activities, general economic conditions and other tangible and
intangible factors, all of which are subject to change and cannot be predicted
with certainty. Our success will depend on the experience and judgment of our
management to select and develop new investment and production opportunities.
There can be no assurance that our television programs and feature films will
obtain favorable ratings or reviews or that broadcasters will license the rights
to broadcast any of our television programs in development or renew licenses to
broadcast programs currently produced by our predecessors. Even if licenses to
broadcast our television programming are renewed, the popularity of a particular
program and its ratings may diminish over time.
We Face Substantial Capital Requirements and Financial Risks. The
production, completion and distribution of television programs and feature films
require a significant amount of capital. Although we intend to continue to
reduce the risks of our financial involvement in the production costs of our
productions through financial assistance from broadcasters, distributors,
government and industry programs and studios, there can be no assurance that we
will continue to successfully implement such arrangements or that we would not
be subject to substantial financial risks relating to the production, completion
and release of future television programs and feature films. In addition, a
significant amount of time may elapse between our expenditure of funds and the
receipt of revenues from our television programs or feature films.
Budget Overruns May Adversely Affect Our Business. Actual motion
picture costs may exceed their budget, sometimes significantly, although
television program costs typically do not. Risks such as labor disputes, death
or disability of star performers, rapid high technology changes relating to
special effects or other aspects of production, shortages of necessary
equipment,
15
damage to film negatives, master tapes and recordings or adverse weather
conditions may cause cost overruns and delay or frustrate completion of a
production. If a film incurs substantial budget overruns, we may have to seek
additional financing from outside sources to complete production of a television
program or motion picture. No assurance can be given as to the availability of
such financing on terms acceptable to us. In addition, if a film incurs
substantial budget overruns, there can be no assurance that such costs will be
recouped, which could have a significant impact on our business, results of
operations or financial condition.
Distributors' Failure to Promote Our Programs May Adversely Affect Our
Business. Decisions regarding the timing of release and promotional support of
our television programs, feature films and related products are important in
determining the success of a particular television program, feature film or
related product. As with most production companies, for our product distributed
by others we do not control the timing and manner in which our distributors
distribute our television programs or feature films. Although our distributors
have a financial interest in the success of any such television programs or
feature films, any decision by our distributors not to distribute or promote one
of our television programs, feature films or related products or to promote
competitors' programs, feature films or related products to a greater extent
than it promotes ours could have a material adverse affect on our business,
results of operations or financial condition.
WE FACE COMPETITION.
Our Lack of Diversification May Make Us Vulnerable to Oversupplies in
the Market. Most of the major U.S. studios are part of large diversified
corporate groups with a variety of other operations, including television
networks and cable channels, which can provide both means of distributing their
products and stable sources of earnings that offset fluctuations in the
financial performance of their motion picture and television operations. The
number of films released by our competitors, particularly the major U.S. film
studios, in any given period may create an oversupply of product in the market,
and that may reduce our share of gross box-office admissions and make it more
difficult for our films to succeed.
We May Not Have Access to the Limited Number of Prime Time Slots for
Television Programming. We compete for television network time slots with a
variety of companies that produce television programming. The number of prime
time slots remains limited, even though the total number of outlets for
television programming has increased over the last decade. As a result, there is
intense competition for these prime time slots. In addition, television networks
are now producing more programs internally, and thus possibly reducing such
networks' demand for programming from other parties. There can be no assurance
that we will be able to compete successfully against current or future
competitors.
Technological Advances May Reduce Demand for Films and Television
Programs. The entertainment industry in general, and the motion picture industry
in particular, are continuing to undergo significant changes, primarily due to
technological developments. Because of this rapid growth of technology, shifting
consumer tastes and the popularity and availability of other forms of
entertainment, it is impossible to predict the overall effect these factors will
have on the potential revenue from and profitability of feature-length motion
pictures and television programming.
WE ARE REQUIRED TO MAKE ESTIMATES AND ASSUMPTIONS WHEN REPORTING OUR FILM
OPERATING RESULTS AND ACTUAL RESULTS MAY DIFFER.
Our Operating Results Depend on Product Costs, Public Tastes and
Promotion Success. We expect to generate a substantial majority of our future
revenue from the development and
16
production of feature films and television programs. Our future revenues will
depend upon the timing and the level of market acceptance of our television
programs and feature films, as well as upon the cost to produce, distribute and
promote these programs and feature films. The revenues derived from the
production of a television program or feature film depend primarily on the
television program's or feature film's acceptance by the public, which cannot be
predicted and do not necessarily bear a direct correlation to the production
costs incurred. The commercial success of a television program or a feature film
also depends upon promotion and marketing and certain other factors.
Accordingly, our revenues are, and will continue to be, extremely difficult to
forecast.
Our Operating Results May Fluctuate Significantly. We expect that our
future operating results will fluctuate significantly as a result of, among
other factors:
- the timing of domestic and international releases of current and
future television programs or feature films we produce;
- the success of our television programs or feature films;
- the timing of the release of related products into their
respective markets;
- the costs to distribute and promote the television programs and
feature films;
- the success of our distributors in marketing our television
programs and feature films;
- the timing of receipt of proceeds generated by the television
programs and feature films from distributors;
- the introduction of new television programs and feature films by
our current and future competitors;
- the timing and magnitude of operating expenses and capital
expenditures;
- the level of unreimbursed production costs in excess of budgeted
maximum amounts;
- the timing of the recognition of advertising costs for accounting
purposes under SoP 00-2; and
- general economic conditions, including continued slowdown in
advertiser spending.
As a result, we believe that our results of operations may fluctuate
significantly, and it is possible that our operating results could be below the
expectations of equity research analysts and investors.
Revenues and Costs Recognized in Certain Periods May be Overstated or
Understated Due to Estimates Inherent in the Application of Entertainment
Accounting Policies. In preparing our financial statements in accordance with
Canadian generally accepted accounting principles, we follow the guidance issued
by the American Institute of Certified Public Accountants for Accounting by
Producers or Distributors of Films contained in Statement of Position 00-2 ("SoP
00-2"). Under SoP 00-2, we recognize revenue on films at the later of the
following dates: when films are delivered, or access to the film is available to
the customer; when the license period begins; and when the film is
unconditionally available to the customers. In addition, the fee must be
determinable and collection must be reasonably assured. As a result, our
expected cash flows
17
may not necessarily relate to the revenue recognized in a given period. We
capitalize costs of producing and developing films and television programs.
Capitalized costs include costs of film rights and screenplays, direct costs of
production, interest and production overhead. We amortize those costs using the
individual film-forecast method, which involves estimating ultimate revenues of
each film. We revise our ultimate revenue estimates on a quarterly basis. The
cost of film prints is deferred and charged to expense on a straight-line basis
over the period of theatrical release. We also estimate participation and
residual costs each period, which may vary from the actual paid participation
and residual costs. We assess the valuation of our films on a quarterly basis.
When events or changes in circumstances indicate that the fair value of a film
is less than its unamortized film costs, we write down the film to fair value.
Fair value of a film is determined using the discounted cash flow approach based
on our estimate of the most likely cash flows and an appropriate discount rate.
As a result of uncertainties in these estimation processes, actual results may
vary from the estimates.
OUR SUCCESS DEPENDS ON OUR PERSONNEL.
Loss of Key Personnel May Adversely Affect Our Business. Our success
depends to a significant extent on the performance of a number of our senior
management personnel and other key employees of Lions Gate and our affiliates.
In particular, we will depend on the services of such personnel as Jon
Feltheimer, Tom Ortenberg, Peter Block, Mike Paseornek, Kevin Beggs, Marni
Wieshofer, Michael Burns, James Keegan, Andre Link and Jacques Pettigrew. The
loss of the services of key persons could have a material adverse effect on our
business, operating results and financial condition.
WE MAY FACE CHANGES IN REGULATORY ENVIRONMENT.
Failure to Meet Canadian Programming Restrictions May Decrease the Time
Slots and Incentive Programs Available to Us. Canadian broadcasters and cable,
pay television and pay-per-view television services are typically required, as a
condition of their license, to broadcast significant minimum amounts of
programming, including prime time, with Canadian content programs. The CRTC
enforces compliance with these requirements, and failure to comply can result in
fines or the loss of license. The CRTC has issued detailed criteria that must be
met for a television production to qualify as a "Canadian program." The criteria
require, among other things, that Canadians perform financial and creative
functions. If our productions cease to qualify as Canadian programs under the
regulations and policies of the CRTC, we may find it more difficult to secure
time slots in Canada for our productions. In addition, if our productions cease
to meet minimum Canadian content requirements, we may be unable to access
various federal and provincial film and television incentive programs, including
refundable tax credits, as discussed below. There could be an adverse impact on
our business, operations and financial condition if any change in the policies
of Canada or the provinces in connection with their incentive programs occurs.
We May Lose Investment Funds and Tax Credits if We Fail to Follow
Canadian Statutory Requirements. Certain programs produced by us will be
contractually required to be "Canadian content" programs in accordance with the
requirements established from time to time by the CRTC, the Canadian
Audio-Visual Certification Office, the Income Tax Act (Canada) and the
regulations thereunder. In the event a program does not qualify under the
applicable requirements, we would be in default of our commitments made in
connection with such contracts. Such default could result in reduction or the
elimination of license fees from the Canadian broadcasters, reduced or
eliminated government incentives and/or future ineligibility for Canadian
government incentive programs.
18
The Canadian federal government and a number of its provincial
counterparts have established refundable tax credit programs based on eligible
labor expenditures of qualifying production entities. We expect that certain
film and television productions we will produce will incorporate such refundable
tax credits as elements of production financing. If such productions do not
ultimately qualify for anticipated refundable tax credits, the relevant
production may require additional funds for completion, which may not be
available from other sources.
For our film and television productions to continue to qualify for
several refundable tax credits, we must remain Canadian-controlled pursuant to
the Investment Canada Act, among other statutory requirements. If we cease to be
Canadian-controlled under the Investment Canada Act, we would no longer qualify
or be entitled to access such refundable tax credits and other Canadian
government and private film industry incentives which are restricted to
Canadian-controlled corporations, including the ability to produce under
Canada's official co-production treaties with other countries. Such a change in
status would also negatively affect our eligibility to retain the benefit of
refundable tax credits and other incentives arising prior to a change of
control. There are currently no transfer restrictions on our Common Stock as a
class, and we accordingly may not be able to prevent a change of control. In
addition, certain provincial refundable tax credits require that the applicable
applicant be provincially-controlled. If any of our affiliates that accesses or
intends to access such credits ceases to be provincially controlled, we would no
longer be entitled to access the applicable provincial refundable tax credit.
WE FACE INHERENT INTERNATIONAL TRADE RISKS THAT MAY HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS.
We distribute motion picture and television productions in foreign
countries and derive a significant percentage of our revenues from sources
outside the United States and Canada. As a result, our business is subject to
certain risks inherent in international trade, many of which are beyond our
control. These risks include:
- changes in local regulatory requirements;
- changes in the laws and policies affecting trade;
- investment and taxes (including laws and policies relating to the
repatriation of funds and to withholding taxes);
- differing degrees of protection for intellectual property;
- instability of foreign economies and governments; and
- cultural barriers.
These factors can adversely affect our business and results of operations.
OUR REVENUES AND OPERATING MARGINS ARE VULNERABLE TO CURRENCY FLUCTUATIONS.
We cannot accurately predict the impact of future exchange rate
fluctuations between the Canadian dollar and the U.S. dollar or other foreign
currencies on revenues and operating margins, and fluctuations could have a
material adverse effect on our business, financial condition and results of
operations.
Our principal currency exposure is between Canadian and U.S. dollars,
although this exposure is mitigated through the structuring of the US$200
million revolving credit facility as a
19
US$25 million Canadian dollar facility and a US$175 million U.S. dollar credit
facility. Each facility is borrowed and repaid in the respective country of
origin, in local currency.
From time to time we may experience currency exposure on distribution
and production revenues and expenses from foreign countries. From time to time
we may enter into financial derivative contracts to hedge such exposure. We have
no intention of entering into derivative contracts other than to hedge a
specific financial risk.
PROTECTING AND DEFENDING AGAINST INTELLECTUAL PROPERTY CLAIMS MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our ability to compete depends, in part, upon successful protection of
our proprietary property. We protect proprietary and intellectual property
rights to our productions through available copyright and trademark laws and
licensing and distribution arrangements with reputable international companies
in specific territories and media for limited durations. Despite these
precautions, existing copyright and trademark laws afford only limited practical
protection in certain jurisdictions. We distribute our products in other
jurisdictions in which there is no copyright and trademark protection. As a
result, it may be possible for unauthorized third parties to copy and distribute
our productions or certain portions or applications of our intended productions.
In addition, litigation may be necessary in the future to enforce
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement or invalidity. Any such litigation could result in
substantial costs and the diversion of resources and could have a material
adverse effect on our business, operating results or financial condition. From
time to time, we may also receive notice of claims of infringement of other
parties' proprietary rights. There can be no assurance that infringement or
invalidity claims will not materially adversely affect our business, financial
condition or results of operations. Regardless of the validity or the success of
the assertion of claims, we could incur significant costs and diversion of
resources in defending against claims, which could have a material adverse
effect on our business, financial condition or results of operations.
ITEM 2. PROPERTIES.
Our corporate head office is located at Suite 3123, Three Bentall
Centre, 595 Burrard Street, Vancouver, British Columbia and occupies
approximately 600 square feet of space under a month to month agreement. Our
Canadian operations and financial personnel are located in leased space of 6,000
square feet expiring in 2006 and 1,800 square feet expiring in 2002 in Toronto,
Ontario and United States corporate executives and operations, including
CinemaNow, are located in leased space of 35,000 square feet expiring in 2009 in
Marina del Rey, California.
Christal Films' office is located in the borough of Westmount,
Montreal, Quebec, and occupies approximately 11,000 square feet under a lease
agreement expiring in 2007. Christal Films leases a further 5,000 square feet of
space in St. Laurent for storage facilities on a monthly basis.
CineGroupe operates from two premises in Montreal, Quebec totalling
approximately 70,000 square feet, the leases which expire in 2006. They also
have a 1,280 square foot office in Los Angeles which lease expires in 2003.
The LG Studios complex is located at 555 Brooksbank Avenue, North
Vancouver, British Columbia. LG Studios' facilities occupy an approximately
14-acre site in a landscaped, park-like
20
setting. The land on which the facilities are situated is owned by LG Studios
and is subject to mortgages under five separate term loans. Loans in the amount
of approximately $7.8 million and $8.6 million mature in May 2003 and June 2003,
respectively. Two loans in the amount of approximately $2.4 million mature in
September 2005. The final term loan is in the amount of $1.7 million and matures
in May 2007. We have a five-year operating lease for 50,000 square feet with
Eagle Creek Studios in Burnaby, British Columbia expiring in 2005.
Termite Art has leased office space totalling approximately 11,000
square feet in Studio City, California which expires in 2004.
In July 2002 Mandalay moved from the Paramount Studios lot into office
space in Los Angeles.
We believe that our current facilities are adequate to conduct our
business operations for the foreseeable future. We believe that we will be able
to renew these leases on similar terms upon expiration. If we cannot renew, we
believe that we could find other suitable premises without any material adverse
impact on our operations.
ITEM 3. LEGAL PROCEEDINGS.
We know of no actual, threatened or pending legal proceedings to which
we or any of our subsidiaries is a party which are material or potentially
material, either individually or in the aggregate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2002.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Our Common Stock is listed on the Toronto Stock Exchange (the "TSE")
and the American Stock Exchange ("AMEX") and trades under the symbol "LGF."
TORONTO STOCK EXCHANGE
The following table sets forth the range of high and low closing sale
prices for our Common Stock, as reported by the TSE, for our two most recent
fiscal years:
High Low
---- ---
Year ended March 31, 2001
First Quarter $ 5.25 $ 3.05
Second Quarter 4.99 2.70
Third Quarter 4.00 2.00
Fourth Quarter 4.10 2.75
Year ended March 31, 2002
First Quarter 4.35 2.50
Second Quarter 4.24 3.25
Third Quarter 4.10 2.61
Fourth Quarter 4.05 3.20
AMERICAN STOCK EXCHANGE
The following table sets forth the range of high and low closing sale
prices for our Common Stock, as reported by AMEX in U.S. dollars, for our two
most recent fiscal years:
High Low
---- ---
Year ended March 31, 2001
First Quarter US$ 3.75 US$ 2.00
Second Quarter 3.06 2.00
Third Quarter 2.69 1.31
Fourth Quarter 2.75 1.75
Year ended March 31, 2002
First Quarter 2.90 1.59
Second Quarter 2.74 1.95
Third Quarter 2.57 1.75
Fourth Quarter 2.65 2.00
HOLDERS
As of July 2, 2002, there were 43,207,399 shares issued and outstanding
and 377 registered holders of our Common Stock as confirmed by our transfer
agent.
DIVIDEND POLICY
We have not paid any dividends on our outstanding common shares since
our inception and do not anticipate doing so in the foreseeable future. The
declaration of dividends on our common shares is within the discretion of our
Board of Directors and is restricted by the revolving credit facility and will
depend upon the assessment of, among other things, our earnings, financial
requirements and operating and financial condition. At the present time, our
22
anticipated capital requirements are such that we intend to follow a policy of
retaining earnings in order to finance further development of our business.
We are limited in our ability to pay dividends on our common shares by
limitations under the Company Act (British Columbia) relating to the sufficiency
of profits from which dividends may be paid. We are also limited in our ability
to pay cash dividends on common shares by our revolving credit facility pursuant
to a negative covenant.
The Series A preferred shares are entitled to cumulative dividends, as
and when declared by the Board of Directors at a rate of 5.25% of the offering
price per annum, payable semi-annually on the last day of March and September of
each year. At our option, the dividend may be paid in cash or additional
preferred shares. We declared, and on September 30, 2001 paid in U.S. dollars, a
cash dividend of US$817,000 or US$66.94 per share and on March 31, 2002 we
declared and paid, in kind, a dividend of US$773,600 or US$66.94 per share by
the issue of 273 preferred shares and cash payments of US$77,450 (2001 - cash
dividends of US$817,000 or US$66.94 per share were paid in US dollars on each of
September 30, 2000 and March 31, 2001).
TAXATION
The following is a general summary of certain Canadian income tax
consequences to United States Holders (who deal at arm's length with the
Company) of the purchase, ownership and disposition of Common Shares. For the
purposes of this discussion, a "U.S. Holder" means a holder of Common Shares who
(1) for the purposes of the Income Tax Act (Canada) is not, has not, and will
not be resident in Canada at any time while he or she holds Common Shares, (2)
at all relevant times is a resident of the United States under the Canada-United
States Income Tax Convention (1980) (the "Convention"), and (3) does not and
will not use or be deemed to use the Common Shares in carrying on a business in
Canada. This summary does not apply to U.S. Holders who are insurers. Such U.S.
Holders should seek tax advice from their advisors. An actual or prospective
investor that is a United States limited liability company in some circumstances
may not be considered to be a resident of the United States for the purposes of
the Convention and therefore may not be entitled to benefits thereunder.
This summary is not intended to be, and should not be construed to be,
legal or tax advice to any prospective investor and no representation with
respect to the tax consequences to any particular investor is made. The summary
does not address any aspect of any provincial, state or local tax laws or the
tax laws of any jurisdiction other than Canada or the tax considerations
applicable to non-U.S. Holders. Accordingly, prospective investors should
consult with their own tax advisors for advice with respect to the income tax
consequences to them having regard to their own particular circumstances,
including any consequences of an investment in Common Shares arising under any
provincial, state or local tax laws or the tax laws of any jurisdiction other
than Canada.
This summary is based upon the current provisions of the Income Tax Act
(Canada), the regulations thereunder and the proposed amendments thereto
publicly announced by the Department of Finance, Canada prior to the date
hereof. It does not otherwise take into account or anticipate any changes in
law, whether by legislative, governmental or judicial action.
The following summary applies only to U.S. Holders who hold their
Common Shares as capital property. In general, Common Shares will be considered
capital property of a holder where the holder is neither a trader nor dealer in
securities, does not hold the Common Shares in the course of carrying on a
business and is not engaged in an adventure in the nature of trade in respect
thereof. This summary does not apply to holders who are "financial institutions"
within the meaning of the mark-to-market rules contained in the Income Tax Act
(Canada).
23
Amounts in respect of Common Shares paid or credited or deemed to be
paid or credited as, on account or in lieu of payment of, or in satisfaction of,
dividends to a shareholder who is not a resident of Canada within the meaning of
the Income Tax Act (Canada) will generally be subject to Canadian non-resident
withholding tax. Such withholding tax is levied at a basic rate of 25% which may
be reduced pursuant to the terms of an applicable tax treaty between Canada and
the country of residence of the non-resident. Under the Convention, the rate of
Canadian non-resident withholding tax on the gross amount of dividends received
by a U.S. Holder is generally 15%. However, where such beneficial owner is a
company which owns at least 10% of the voting stock of the Company, the rate of
such withholding is 5%.
A purchase of Common Shares by the Company (other than by a purchase in
the open market in the manner in which shares are normally purchased by a member
of the public) will give rise to a deemed dividend equal to the amount paid by
the Company on the purchase in excess of the paid-up capital of such shares,
determined in accordance with the Income Tax Act (Canada). Any such dividend
deemed to have been received by a person not resident in Canada will be subject
to non-resident withholding tax as described above. The amount of any such
deemed dividend will reduce the proceeds of disposition to a holder of Common
Shares for purposes of computing the amount of the holder's capital gain or loss
arising on the disposition.
A U.S. Holder will generally not be subject to tax under the Income Tax
Act (Canada) in respect of any capital gain arising on a disposition of Common
Shares (including on a purchase by the Company) unless at the time of
disposition such shares constitute taxable Canadian property of the holder for
purposes of the Income Tax Act (Canada) and such holder is not entitled to
relief under an applicable tax treaty. If the Common Shares are listed on a
prescribed stock exchange at the time they are disposed of, they will generally
not constitute taxable Canadian property of a U.S. Holder unless, at any time
during the five year period immediately preceding the disposition of the Common
Shares, the U.S. Holder, persons with whom he or she does not deal at arm's
length, or the U.S. Holder together with non-arm's length persons, had an
interest in or option in respect of 25% or more of the issued shares of any
class of the capital stock of the Company. In any event, under the Convention,
gains derived by a U.S. Holder from the disposition of Common Shares will
generally not be subject to tax in Canada unless the value of the Company's
shares is derived principally from real or certain other immovable property
situated in Canada.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes thereto and
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations." The consolidated statements of operations data and other
operating data set forth below have been derived from and are qualified by
reference to the audited consolidated financial statements and notes thereto
included elsewhere herein. Historical results are not necessarily indicative of
the results of operations which may be expected in the future. See "Currency and
Exchange Rates" for historical exchange rate information.
The consolidated financial statements of the Company have been prepared
in accordance with Canadian generally accepted accounting principles ("GAAP")
and, except as noted, the financial data set forth below is presented in
accordance with Canadian GAAP. These principles differ in some respects from
United States GAAP. For a description of the principal differences between
Canadian GAAP and United States GAAP, see note 21, "Reconciliation to United
States GAAP" in the Notes to the Consolidated Financial Statements.
24
Fiscal Years Ended March 31,
----------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(all amounts in thousands of Canadian dollars, except per share amounts)
STATEMENTS OF OPERATIONS DATA:
In accordance with Canadian GAAP:
REVENUES $ 426,582 $ 282,226 $ 271,251 $ 118,297 $ 64,149
--------- --------- --------- --------- ---------
EXPENSES:
Direct operating 250,335 156,420 222,875 92,931 49,175
Distribution and marketing 119,362 51,776 -- -- --
General and administration 54,272 37,710 31,388 23,555 10,337
Amortization 7,129 8,565 6,875 5,279 1,781
Severance and relocation costs -- -- 1,698 -- --
--------- --------- --------- --------- ---------
Total expenses 431,098 254,471 262,836 121,765 61,293
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) (4,516) 27,755 8,415 (3,468) 2,856
--------- --------- --------- --------- ---------
OTHER EXPENSES:
Interest 15,386 11,605 4,665 3,655 951
Minority interests 1,911 881 1,308 612 1,019
Unusual losses 2,115 -- -- 1,647 --
--------- --------- --------- --------- ---------
Total other expenses 19,412 12,486 5,973 5,914 1,970
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE UNDERNOTED (23,928) 15,269 2,442 (9,382) 886
Gain on dilution of investment
in a subsidiary 3,375 -- -- 839 --
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY
INTERESTS (20,553) 15,269 2,442 (8,543) 886
Income taxes 503 (3,292) 2,000 304 1,439
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE EQUITY INTEREST (21,056) 18,561 442 (8,847) (553)
Write-down and equity interest in
Investments subject to significant influence (52,506) (9,833) (5,894) (5,449) --
Other equity interests -- -- 159 140 --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) (73,562) 8,728 (5,293) (14,156) (553)
Dividends paid on Series A preferred shares (2,492) (2,497) (591) -- --
Accretion on Series A preferred shares (3,271) (3,115) (727) -- --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS (79,325) 3,116 6,611 (14,156) (553)
--------- --------- --------- --------- ---------
BASIC AND DILUTED INCOME
(LOSS) PER COMMON SHARE (1.86) $ 0.09 $ (0.22) $ (1.05) $ (.10)
--------- --------- --------- --------- ---------
In accordance with U.S. GAAP:
Revenues $ 345,313 $ 264,047 $247,264 $ 114,377 $ 56,942
Net Loss for the Year (71,832) $ (50,217) $ (2,424) $ (25,697) $ (1,435)
Basic and Diluted Loss Per
Common Share (1.78) $ (1.50) $ (0.11) $ (1.05) $ (0.10)
25
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 42,753 36,196 30,665 24,575 28,320
OTHER OPERATING DATA:
Cash flow from (used in)
operating activities (95,012) (51,334) (42,652) (31,730) 42,040
Cash flow from (used in)
financing activities 85,810 82,436 42,079 51,303 (158,012)
Cash flow from (used in)
investing activities 11,093 (45,053) (6,398) (118,153) 125,036
BALANCE SHEET DATA:
Cash and cash equivalents 10,587 10,485 19,283 26,254 9,064
Accounts receivable 186,428 173,112 107,344 60,673 47,816
Investment in films and
television programs 288,310 224,115 128,375 88,949 56,305
Total assets 607,600 583,545 401,973 327,612 250,514
Bank loans 229,141 159,765 13,936 12,185 15,581
Production loans 38,167 24,045 41,838 48,415 30,227
Long-term debt 75,565 65,987 40,607 41,145 27,414
Shareholders' equity 120,194 196,789 206,414 166,784 143,951
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
We develop, produce and distribute a targeted range of film and
television content in North America and around the world. To reflect our core
businesses, this discussion focuses on Motion Pictures, Television, Animation
and Studio Facilities. Please also refer to the information in note 17 to the
consolidated financial statements.
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and the related notes thereto
included in this Form 10-K. The consolidated financial statements have been
prepared in accordance with Canadian Generally Accepted Accounting Principles
("GAAP"). The material differences between the accounting policies used by Lions
Gate under Canadian GAAP and U.S. GAAP are disclosed in note 21 to the
consolidated financial statements. Certain reclassifications have been made in
the fiscal 2001 and 2000 consolidated financial statements to conform to the
fiscal 2002 presentation, as described in note 2(u).
The functional currency of our business, defined as the economic
environment in which we primarily generate and expend cash, is the Canadian
dollar and U.S. dollar for the Canadian and U.S.-based businesses, respectively.
In accordance with generally accepted accounting principles in both Canada and
the U.S., the financial statements of U.S.-based subsidiaries are translated for
consolidation purposes using current exchange rates, with translation
adjustments accumulated as a separate component of shareholders' equity.
On April 1, 2001, we adopted Statement of Financial Accounting
Standards ("SFAS") 133 "Accounting for Derivative Instruments and Hedging
Activities", where the provisions of SFAS 133 are applicable under Canadian
GAAP. SFAS 133 requires that all derivative instruments be reported on the
balance sheet at fair value and establishes criteria for the designation and
effectiveness of hedging relationships. The cumulative effect of adopting SFAS
133 was not material to the consolidated financial statements.
On July 10, 2001, a subsidiary of the Company completed an equity
financing with a third party for $14.0 million. The gain on dilution of the
Company's investment was $3.4 million (net of income taxes of $nil) and resulted
in a decrease of $0.2 million in goodwill.
In November 2001, the Canadian Institute of Chartered Accountants
("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 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. The Company elected to early-adopt
CICA 3062 on April 1, 2001. Under CICA 3062, goodwill is no longer amortized but
is reviewed annually, or more frequently if impairment indicators arise, for
impairment, 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. Notes 2(c) and 6 to the
consolidated financial statements include additional information relating to the
net carrying value of goodwill and the proforma effect of the adoption of CICA
3062 on the prior years' consolidated statements of operations.
27
On December 20, 2001, we acquired the remaining 50% interest in Eaton
Entertainment LLC for $0.2 million. Additionally, we recorded an unusual loss of
$1.3 million relating to the non-continuing assets acquired in the transaction.
CinemaNow is a leader in the IP-delivered video-on-demand market. It is
licensing its proprietary Patch-Bay(TM) technology around the world, and is
growing its audience of users and subscribers. However, since it hasn't
completed its current efforts to raise capital, has experienced recurring losses
and cannot demonstrate with reasonable certainty that it has twelve months of
cash to fund operations, we are required by Canadian and U.S. GAAP to reassess
the carrying value of our investment in CinemaNow. The write-down of the
investment of $21.0 million, which had no impact on the fiscal 2002 cash flows,
was expensed, as a component of write-down and equity interests in investments
subject to significant influence, in the consolidated statement of operations.
With the authority granted by the Board of Directors, prior to the
close of the fourth quarter, management committed to a plan to divest its
ownership interest in Mandalay. The investment in Mandalay was written down to
its estimated fair value of $15.9 million at March 31, 2002. The fair value of
Mandalay takes into account the expiration and non-renewal of Mandalay's
international output agreements on December 31, 2001 and the pending expiration
of its production and distribution agreement with Paramount Pictures Corp. in
fiscal 2003, and is supported by cash expected to be received from Mandalay in
the next 12 to 24 months. The write-down of the investment of $17.0 million,
which had no impact on the fiscal 2002 cash flows, was expensed, as a component
of write-down and equity interests in investments subject to significant
influence, in the consolidated statement of operations.
OVERVIEW
It should be noted that due to the retroactive adoption without
restatement of CICA 3062 on April 1, 2001 and SoP 00-2 and CICA 3465 on April 1,
2000, all as described in note 2(c) to the consolidated financial statements,
the operating results in each year in the three-year period ended March 31, 2002
are not comparable.
Net loss as disclosed in the consolidated statements of operations for
the year ended March 31, 2002 was $73.6 million, representing a loss of $1.86
per share (after giving effect to the Series A preferred share dividends and
accretion on the Series A preferred shares) on 42.8 million weighted average
common shares outstanding compared to net income of $8.7 million or $0.09 per
share (after giving effect to the Series A preferred share dividends and
accretion on the Series A preferred shares) on 36.2 million weighted average
common shares outstanding for the year ended March 31, 2001 and a net loss of
$5.3 million or $0.22 per share (after giving effect to the Series A preferred
share dividends and accretion on the Series A preferred shares) on 30.7 million
weighted average common shares outstanding for the year ended March 31, 2000.
Before write-down and equity interests in investments subject to
significant influence (Mandalay and CinemaNow), the loss for the year ended
March 31, 2002 of $21.1 million compared to net income of $18.6 million in the
year ended March 31, 2001 and $0.4 million in the year ended March 31, 2000.
EBITDA (defined as earnings before interest, provision for income
taxes, amortization, minority interests, unusual losses, write-down and equity
interests in investments subject to significant influence) of $2.6 million for
the year ended March 31, 2002 has decreased $33.7 million or 92.8% compared to
$36.3 million for the year ended March 31, 2001, which had increased $19.3
million or 113.5% compared to $17.0 million for the year ended March 31, 2000.
28
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, net income 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.
RESULTS OF OPERATIONS
FISCAL 2002 COMPARED TO FISCAL 2001
Revenues in fiscal 2002 of $426.6 million increased $144.4 million or
51.2% compared to $282.2 million in fiscal 2001.
Revenues increased significantly in all businesses in the current year.
Motion Pictures fiscal 2002 revenue of $251.3 million increased $77.4
million or 44.5% compared to $173.9 million in fiscal 2001. The increase is due
primarily to the integration of Trimark in the current year compared to the
inclusion of Trimark's post-acquisition revenue for the period October 13, 2000
to March 31, 2001 of $50.3 million in fiscal 2001. Theatrical revenue of $43.6
million increased $23.8 million or 120.2% compared to $19.8 million in the prior
year. Significant theatrical releases in the current year included: Monster's
Ball with revenue of $11.8 million, "O", with revenue of $8.3 million and The
Wash, with revenue of $5.0 million. Other significant theatrical releases
included: Amores Perros, Les Boys 3, Lantana and Songcatcher. Video revenue of
$154.5 million increased $55.7 million or 56.4% in the current year compared to
$98.8 million in the prior year. Significant video releases in the current year
included: "O", which was released on video on February 19, 2002 and earned
revenue in excess of $22 million in the last six weeks of the current fiscal
year, The Wash with video revenue in excess of $10 million and Shadow of the
Vampire with video revenue in excess of $5 million. Video library revenue also
increased significantly year-over-year. International revenues were relatively
consistent year-over-year, while television revenue from motion pictures
decreased $5.6 million in fiscal 2002 to $12.7 million due to the timing of the
availability of the television windows.
Television production revenue of $110.7 million increased by $39.2
million or 54.8% from $71.5 million in the prior year, due primarily to the
increased number of hours delivered in the current year in all television
divisions. In the current year, 48 hours of one-hour drama series were
delivered, contributing revenue of $53.5 million. Deliveries in the current year
included: 22 episodes of "Mysterious Ways" to PAXTV, NBC (eight of 22 episodes),
CTV in Canada and Columbia Tristar internationally; 14 episodes of "Tracker" to
the US syndication market, Chum TV in Canada, Telemunchen in Germany and other
international broadcasters; eight episodes of "No Boundaries" to WB Network in
the U.S., CanWest Global in Canada and international broadcasters; two episodes
of "Dead Zone" to UPN in the U.S. and Paramount internationally; and two
episodes of "Iron Chef" to UPN in the U.S., City TV and Alliance Atlantis in
Canada and international broadcasters. In the prior year, 29 hours of one-hour
drama series were delivered for revenue of $44.5 million. Television movies
contributed revenue of $31.3 million in the current year. Current year
deliveries included: "Superfire" to ABC and international broadcasters; "The
Pilot's Wife" to CBS in the U.S. and international broadcasters; and "Attack on
the Queen" to TBS in the U.S. and international broadcasters. In the prior year,
one television movie was delivered to international territories. In the current
year, Termite Art contributed revenue of $23.5 million on the delivery of 78.5
hours of non-fiction programming including 25.5 hours of "Amazing Animal Videos"
to Animal Planet, 13 hours of "Incredible Vacation Videos" to Travel Channel;
6.5 hours of "Wild Rescues" to Animal Planet and five hours of "MTV Video
29
Party". In the prior year, Termite Art delivered 68.5 hours of non-fiction
programming for revenue of $18.4 million. Under Canadian GAAP, tax credits
earned are included in revenue. Under U.S. GAAP, tax credits earned are recorded
as an offset to income tax expense. In fiscal 2002, $28.0 million of tax credits
earned were included in revenue.
In Animation, CineGroupe's revenue of $55.6 million increased $25.9
million or 87.2% compared to $29.7 million in the prior year. The increase was
primarily due to increased deliveries in the current year. In the current year,
a total of 110.5 half-hours of television programming were delivered (compared
to 81.5 half-hours in the prior year) including: 26.5 half-hours of "Sagwa, the
Chinese Siamese Cat" to PBS in the U.S. and TVO in Canada; 26 half-hours of
"What's With Andy" to ABC Family in the U.S. and Teletoon in Canada; 21
half-hours of "Big Wolf on Campus" to ABC Family in the U.S. and YTV in Canada;
12 half-hours of "Wunchpunch" to Radio Canada and Saban internationally; 12
half-hours of "Kids From Room 402" to ABC Family in the U.S. and Teletoon and
TQS in Canada; and nine half-hours of "Galidor - Defender of the Outer
Dimension" to Fox Kids and Lego in the U.S. and YTV in Canada. In addition, the
feature film Wilderness Station was delivered to distribution partners around
the world. Library revenue of $4.7 million, interactive revenue of $1.0 million
and service and other revenue of $0.1 million were earned in the current year,
compared to $1.2 million, $0.8 million and $1.3 million respectively in the
prior year.
Studio Facilities revenue of $6.6 million increased $1.1 million or
20.0% compared to $5.5 million in the prior year due primarily to an improvement
in occupancy levels and revenues generated from additional services now offered
at the studios including lighting, equipment and furniture rentals. Stage and
office occupancy levels averaged 96% and 94% respectively for the year compared
to 94% and 85% respectively in the prior year.
CineGate earned commission revenue of $2.3 million in the current year
on approximately $270.0 million of production financing arranged through the
Cinegate joint venture compared to revenue of $1.6 million earned in the prior
year. CineGate ceased operations in fiscal 2002 upon the rescission of the tax
shelter business by the Canadian government.
Direct operating expenses of $250.3 million for the year ended March
31, 2002 were 58.7% of revenue, compared to direct operating expenses of $156.4
million, which were 55.4% of revenue in the prior year. Direct operating
expenses as a percentage of revenue increased in the current year primarily due
to the loss recognized on the delivery of the 14 episodes of "Tracker", the
impact of the significant theatrical and video revenues on "O" - a distribution
service deal with 15% fees, and the softening of the European marketplace, which
has resulted in increased provisions for bad debts. In the current year, we
increased our provision for doubtful accounts by $11.8 million (including $2.5
million relating to KirchMedia) and wrote off or cancelled contracts directly
against revenue totaling $3.0 million. Excluding tax credits receivable, the
provision for doubtful accounts at March 31, 2002 represents 10.3% of accounts
receivable, compared to 4.5% at March 31, 2001.
Distribution and marketing costs (also known as "P&A") of $119.4
million more than doubled, increasing $67.6 million or 130.5% compared to $51.8
million in the prior year. P&A increased year-over-year primarily due to the
advertising expenditures on the more significant theatrical and video releases
in the current year. Theatrical P&A in the current year of $53.1 million
compares to $32.8 million in the prior year. Video P&A of $64.7 million compared
to $17.4 million in the prior year due to the significant increase in video
activity and video releases being brought "in-house". Revenues earned on videos
released through our Universal output deal, which expires on August 31, 2002,
are recorded net of distribution and marketing expenses.
30
In the current year, our most significant video releases, "O" and The Wash, were
released directly by Lions Gate, outside of the Universal output deal.
General and administrative expenses of $54.3 million increased $16.6
million or 44.0% compared to $37.7 million in the prior year. In Motion
Pictures, general and administrative expenses increased $7.9 million or 34.3% to
$30.9 million from $23.0 million in the prior year primarily as a result of a
full year of combined operations with Trimark and the growth of the production
and theatrical and video distribution businesses. Television general and
administrative expenses of $5.4 million were virtually unchanged year-over-year.
Animation general and administrative expenses increased $1.3 million or 46.4% to
$4.1 million from $2.8 million in the prior year due to the creation of an
international sales department and increased head count at the corporate head
office. General and administrative expenses in corporate of $13.6 million
increased $7.4 million or 119.4% from $6.2 million primarily due to increased
headcount as a result of growth in corporate administration and support
functions.
Amortization of $7.1 million decreased $1.5 million or 17.4% from $8.6
million in the prior year due primarily to a decrease in goodwill amortization
of $2.7 million year-over-year as a result of the adoption of CICA 3062
partially offset by increased amortization of capital assets of $1.6 million,
primarily in Animation, pertaining to the acquisition of animation and technical
services equipment financed through capital leases.
Year-over-year interest expense of $15.4 million increased by $3.8
million or 32.8% from $11.6 million in the prior year due to borrowings related
to the purchase of Trimark and increased production and acquisition activity and
bank charges related to bank facilities, partially offset by decreased interest
rates.
Unusual losses of $2.1 million recorded in the current year related to
a $1.3 million loss recorded on the acquisition of the remaining 50% of Eaton
Entertainment, LLC, a $0.6 million loss on disposal related to the demolition of
an existing structure to provide room to build a new 20,500 square foot sound
stage at Lions Gate Studios and the write-off of capital assets relating to the
downsizing of certain offices.
The fiscal 2002 provision for income taxes of $0.5 million consists of
a $2.0 million provision for income taxes, partially offset by the recognition
of the benefits of income tax losses of $1.5 million. At March 31, 2002, we have
Canadian non-capital losses of approximately $45.4 million available to reduce
Canadian income taxes carried forward for seven years and US$38.1 million
(Cdn$60.7 million) for U.S. income tax losses carried forward for fifteen to
twenty years.
In July 2001, Mandalay theatrically released its third feature film,
The Score, a US$83 million-budgeted action suspense thriller, starring Robert
DeNiro, Edward Norton, Marlon Brando and Angela Bassett and directed by Frank
Oz. The worldwide box office on The Score was approximately US$115 million
(Cdn$180 million). Serving Sara, a US$40 million-budgeted romantic comedy
starring Matthew Perry and Elizabeth Hurley is expected to be released in
August, 2002. Principal photography was recently completed on the US$90
million-budgeted Beyond Borders, starring Angelina Jolie and Clive Owen,
directed by Martin Campbell. Beyond Borders is expected to be released in early
2003. In the current year we received cash of $8.4 million from Mandalay as a
return on our investment which was recorded as an offset to investments subject
to significant influence on our consolidated balance sheet. The $28.0 million
write-down in Mandalay, recorded in the fourth quarter, was included in
write-down and equity interest in investments subject to significant influence.
The $1.8 million equity interest in the loss of CinemaNow represents
63% of the operating losses of CinemaNow for the nine months ended December 31,
2001 compared to $1.5
31
million in the year ended March 31, 2001. The $21.0 million write-down in
CinemaNow, recorded in the fourth quarter, was included in write-down and equity
interest in investments subject to significant influence.
Our consolidated financial statements have been prepared in accordance
with Canadian GAAP. The material differences between the accounting policies
used by us under Canadian GAAP and U.S. GAAP are disclosed in note 21 to the
consolidated financial statements.
Under U.S. GAAP the net loss for the year ended March 31, 2002 was
$71.8 million. The loss under U.S. GAAP is less than under Canadian GAAP due
primarily to the add back of the amortization of pre-operating costs relating to
Mandalay and our television one-hour series business, as described in notes
21(a) and 21(b).
FISCAL 2001 COMPARED TO FISCAL 2000
Revenue in fiscal 2001 of $282.2 million increased $10.9 million or
4.0% compared to $271.3 million in fiscal 2000.
Revenue in fiscal 2001 increased significantly in Motion Pictures and
was down slightly in Television and Animation due to the timing of deliveries.
Motion Pictures revenue in fiscal 2001 of $173.9 million increased
$27.0 million or 18.4% compared to $146.9 million in fiscal 2000. The increase
was due primarily to the inclusion of Trimark's post-acquisition revenue for the
period October 13, 2000 to March 31, 2001 of $50.3 million, partially offset by
decreased revenue in Lions Gate Films of $23.3 million year-over-year. In Lions
Gate Films, the majority of the year-over-year decrease was in theatrical
distribution. In fiscal 2000, Dogma (a theatrical distribution service deal)
contributed theatrical revenue of close to $20.0 million and to a large extent
explains the decrease in fiscal 2001. The Dogma service deal generated fees of
15%, which increased the fiscal 2000 direct operating expenses as a percentage
of revenue. Significant theatrical releases in fiscal 2001 included: American
Psycho; Shadow of the Vampire; and Big Kahuna. Significant video releases in
fiscal 2001 included: American Psycho; Big Kahuna; and Million Dollar Hotel.
Television and international revenues were relatively consistent year-over year.
Trimark contributed video revenue of approximately $30.0 million, international
sales revenue of approximately $14.0 million and television revenue of
approximately $7.0 million in fiscal 2001. Significant revenue generators for
Trimark included Shriek, Saturday Night Live "Best of" comedy series, and Held
Up.
Television production revenue in fiscal 2001 of $71.5 million decreased
by $10.3 million or 12.6% from $81.8 million in fiscal 2000, due primarily to
fewer television movie deliveries partially offset by increased deliveries in
Termite Art. Trimark contributed Television revenue of $3.7 million. In fiscal
2001, the one-hour drama series business contributed revenue of $44.5 million.
Deliveries in fiscal 2001 included: 22 episodes of "Mysterious Ways" to PAXTV,
NBC (13 of 22 episodes), CTV and Columbia Tristar; and seven episodes of "Higher
Ground" to Fox Family, WIC and Paramount. In fiscal 2000, 37 hours of one-hour
drama series were delivered for revenue of $46.0 million. Termite Art
contributed revenue of $18.4 million in fiscal 2001 on the delivery of 68.5
hours of non-fiction programming including: 6.5 hours of "Incredible Vacation
Videos" to Travel Channel; 6.5 hours of "After Midnight" to Discovery; six hours
of VH1 Confidential" to VH1; five hours of "MTV Video Party"; and four hours of
"Great Streets" to PBS. In addition, producer fees were earned on the delivery
of 19 episodes of "Ripley's Believe It Or Not" to UPN. In fiscal 2001, Termite
Art delivered 35 hours of proprietary programming and 12 hours of Ripley's
Believe It or Not for total revenue of $11.3 million. The first Avalanche
project, The Void, was delivered to international territories in fiscal 2001 and
32
producer fees were earned on four productions. In fiscal 2000, four television
movies were delivered for revenue of $24.3 million. In fiscal 2001, $18.2
million of tax credits earned were included in revenue.
In Animation, CineGroupe's fiscal 2001 revenue of $29.7 million
decreased $5.9 million or 16.6% compared to $35.6 million in fiscal 2000. The
decrease was due to the timing of deliveries - several episodes were not
available for delivery at March 31, 2001 and were subsequently delivered in the
first quarter of fiscal 2002. In fiscal 2001 a total of 81.5 half-hours of
television programming were delivered including: 40 half-hours of "Wunchpunch"
to Radio Canada and Saban; 18 half-hours of "Kids From Room 402" to TQS and Fox
Family; 13.5 half-hours of "Sagwa, the Chinese Siamese Cat" to PBS and TVO; and
seven half-hours of "Mega Babies" to Teletoon and Fox, as well as the television
movie "Lion of Oz" to Disney Channel and TMN. Library revenue of $1.2 million,
interactive revenue of $0.8 million and service and other revenue of $1.3
million were earned in fiscal 2001.
Studio Facilities fiscal 2001 revenue of $5.5 million decreased $1.5
million or 21.4% compared to fiscal 2000 revenue of $7.0 million due to the
elimination on financial statement consolidation of $1.5 million of intercompany
revenue earned from Lions Gate productions filmed at the Studio Facilities.
Stage and office occupancy levels averaged 94% and 85% respectively in fiscal
2001 compared to 96% and 92% respectively in fiscal 2002.
Since commencing CineGate operations in September 2000, Lions Gate
earned commission revenue of $1.6 million on approximately $270.0 million of
production financing arranged through the Cinegate joint venture to March 31,
2001.
Direct operating expenses of $156.4 million in fiscal 2001 were 55.4%
of revenue, compared to direct operating expenses of $222.9 million in fiscal
2000, which were 82.2% of revenue. The primary reason for the decrease
year-over-year is due to the adoption of SoP 00-2 at the beginning of fiscal
2001. Commencing in fiscal 2001, distribution and marketing expense was
disclosed separately rather than as a component of direct operating expenses in
fiscal 2000.
Fiscal 2001 general and administrative expenses of $37.7 million
increased $6.3 million or 20.0% compared to fiscal 2000 general and
administrative expenses of $31.4 million. In Motion Pictures, general and
administrative expenses increased $6.8 million or 42.0% to $23.0 million from
$16.2 million in the prior year primarily as a result of combining operations
with Trimark in fiscal 2001 and the growth of the production and video
distribution businesses in that year. General and administrative expenses in
corporate increased primarily due to increased salaries and benefits expenses.
General and administrative expenses decreased in Television as a result of cost
savings initiatives and remained relatively consistent year-over-year in
Animation and Studio Facilities.
Year-over-year interest expense increased by $6.9 million due to
borrowings related to the purchase of Trimark and increased production and
acquisition activity and bank charges related to bank facilities.
Goodwill arising on the Trimark acquisition contributed to an increase
in amortization in fiscal 2001 of $1.7 million.
The fiscal 2001 equity interest in Mandalay consisted of operating
losses of $6.4 million and amortization of previously deferred pre-operating
costs of $1.9 million.
The fiscal 2001 equity interest in CinemaNow consisted primarily of our
66.9% of operating losses of $1.2 million and amortization of goodwill of $0.3
million.
33
In fiscal 2001, we recognized the benefit of previously unrecognized
income tax loss carry-forwards of approximately $5.5 million. At March 31, 2001,
we had Canadian non-capital losses of approximately $52.8 million available to
reduce Canadian income taxes carried forward for seven years and US$21.3 million
for U.S. income tax losses carried forward for twenty years.
Under U.S. GAAP the net loss was $50.2 million. In the year ended March
31, 2001 the earnings under U.S. GAAP were lower than under Canadian GAAP due
primarily to the recognition of the opening SoP 00-2 adjustment as a reduction
in net income under U.S. GAAP.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used in operating activities in the year ended March 31, 2002
were $95.0 million compared to cash flows used in operating activities of $51.3
million in the year ended March 31, 2001 and $42.7 million in the year ended
March 31, 2000, all primarily due to the net increase in investment in films and
television programs in fiscal 2002 (increased $69.0 million net in fiscal 2002,
$54.8 million net in fiscal 2001 and $40.5 million net in fiscal 2000). Cash
flows from financing activities in the year ended March 31, 2002 were $85.8
million compared to cash flows from financing activities of $82.4 million in the
year ended March 31, 2001 and $42.1 million in the year ended March 31, 2000,
due primarily to the increase in bank loans and net proceeds from production and
distribution loans. Cash flows from investing activities of $11.1 million in the
current year is due to the $14.0 million third party investment in a subsidiary
and $8.4 million received from Mandalay partially offset by additions to
animation and studios property and equipment of $12.0 million. In fiscal 2001,
the majority of the $45.1 million use of cash in investing activities was due to
the acquisition of Trimark and in fiscal 2000 the entire $6.4 million use of
cash was due to the purchase of property and equipment.
Our liquidity and capital resources were provided during the year ended
March 31, 2002 principally through cash generated from operations, a US$200
million (Cdn$318.8 million) "borrowing base" revolving credit facility with J.P.
Morgan Securities which closed in September 2000, and German tax shelter
financing, which has been made available to us on several productions including
Frailty, Cat's Meow, Liberty Stands Still and I Fought the Law, which were all
delivered in fiscal 2002. The credit facility is limited by our borrowing base,
which includes certain accounts receivable and "library" credits. Management
projects that the difference between the borrowing base and the amount borrowed
over the next four quarters will be positive resulting in excess borrowing
capacity. In December 2001, the third party valuation of our borrowing base
films and television programs library was updated as at September 30, 2001. In
accordance with the valuation methods used, the borrowing base excludes
unreleased theatrical projects at September 30, 2001 such as Monster's Ball, The
Wash and Frailty. At March 31, 2002, the borrowing base assets totaled US$152.1
million (Cdn$242.5 million).
The nature of our business is such that significant initial
expenditures are required to produce and acquire films and television programs,
while revenues from these films and television programs are earned over an
extended period of time after their completion 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 and tax shelter financing
available will be adequate to meet known operational cash requirements for the
foreseeable future, including the funding of future film and television
production, film rights acquisitions, and theatrical and video release
schedules. We monitor our cash flow, interest coverage, liquidity, capital base
and debt-to-total capital ratios with the long-term goal of maintaining our
creditworthiness.
34
Our current financing strategy is to finance substantially with equity
at the corporate level and to leverage investment in film and television
programs through operating credit facilities and single-purpose production
financing. We usually obtain financing commitments, including, in some cases,
funds from government incentive programs and foreign distribution commitments to
cover, on average, at least 70% of the budgeted third-party costs of a project
before commencing production.
Our 5.25% convertible, non-voting redeemable Series A Preferred Shares
are entitled to cumulative dividends, as and when declared by the Board of
Directors, payable semi-annually on the last day of March and September of each
year. We have the option of paying such dividends either in cash or additional
preferred shares. We paid the March 31, 2002 dividend in additional 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, giving
consideration to our business strategy and investment opportunities. We believe
it to be in the best interest of shareholders to invest all available cash in
the expansion of our business.
CRITICAL ACCOUNTING POLICIES
We believe that 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 consolidated financial statements.
We accrue for video returns and allowances in the financial statements
based on previous returns and 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.
We capitalize costs of production, including financing costs, and
distribution to investment in films and television programs. These costs are
amortized to direct operating expenses in accordance with SoP 00-2. These costs
are stated at the lower of unamortized film or television program costs or fair
value. These costs for an individual film 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 film or
television program over a period not to exceed ten years from the date of
delivery. As a result, if revenue estimates change with respect to a film or
television program, we may be required to write down all or a portion of the
unamortized costs of such film or television program. No assurance can be given
that unfavorable changes to revenue estimates will not occur, which may result
in significant write-downs affecting our results of operations and financial
condition.
Revenue is driven by audience acceptance of a film or television
program, which represents a response not only to artistic merits but also to
critics' reviews, marketing and the competitive market for entertainment,
general economic conditions, and other intangible factors, all of which can
change rapidly. Actual production costs may exceed budgets. Risk of labour
disputes, disability of a star performer, rapid changes in production
technology, shortage of necessary equipment and locations or adverse weather
conditions may cause cost overruns. We generally maintain insurance policies
("completion bonds" and "essential elements insurance" on key talent),
mitigating certain of these risks.
CURRENCY RISK MANAGEMENT
Additionally, as part of our overall risk management program, we
evaluate and manage our exposure to changes in interest rates and currency
exchange risks on an ongoing basis. In the current year we entered into foreign
currency contracts to hedge foreign currency risk on one
35
television production. These forward exchange contracts do not subject us to
risk from exchange rate movements because gains and losses on the contracts
offset losses and gains on the transactions being hedged. No collateral or other
security was pledged as security to support these financial instruments. Other
hedges and derivative financial instruments will be used in the future, within
guidelines approved or to be approved by the Board of Directors for counterparty
exposure, limits and hedging practices, in order to manage our interest rate and
currency exposure. We have no intention of entering into financial derivative
contracts, other than to hedge a specific financial risk.
Our principal currency exposure is between Canadian and U.S. dollars,
although this exposure has been significantly mitigated through the structuring
of the US$200 million revolving credit facility as a US$25 million Canadian
dollar facility and a US$175 million U.S. dollar credit facility. Each facility
is borrowed and repaid in the respective country of origin, in local currency.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risks relating to our operations result primarily from changes
in interest rates and changes in foreign currency exchange rates. Our exposure
to interest rate risk results from the financial debt instruments that arise
from transactions entered into during the normal course of business.
Debt. We are exposed to cash flow risk due to changes in market
interest rates related to our outstanding debt. For example, our credit
facilities and some of our long-term debt bears interest on borrowings
outstanding at various time intervals and at market rates based on either the
Canadian prime rate or the U.S. prime rate, plus a margin ranging from 0.47% to
4.0%. Our principal risk with respect to our long-term debt is changes in these
market rates.
The table below presents principal debt repayments and related weighted
average interest rates for our credit facilities and long-term debt obligations
at March 31, 2002 by expected maturity date.
Expected Maturity Date
----------------------
Year ending March 31,
---------------------
2003 2004 2005 2006 2007
---- ---- ---- ---- ----
(amounts in thousands)
BANK LOANS:
Variable (1) -- -- -- $222,961 --
Variable (2) $ 6,180 -- -- -- --
LONG-TERM DEBT:
Fixed (3) $ 1,160 $ 32,257 $ 146 $ 2,052 --
Fixed (4) -- $ 31,628 -- -- --
Fixed (5) $ 1,894 $ 1,852 $ 924 -- --
Variable (6) $ 30,384 $ 9,250 $ 456 -- --
- --------------
(1) Revolving credit facilities which expire September 25, 2005. Average
variable interest rate on principal of $37,103 equal to Canadian prime plus
1.5% and average variable interest rate on principal of $185,858 equal to
U.S. prime plus 1.5%.
(2) Line of credit due July 31, 2002 at Canadian prime plus 1% and demand loans
at Canadian prime plus 0% - 4%.
36
(3) Fixed interest rate equal to 6.43%.
(4) Non interest-bearing. US$19.8 million.
(5) Fixed interest rate equal to 10.8%.
(6) Average variable interest rate equal to Canadian prime plus 1.4%.
Commitments. The table below presents future commitments under
contractual obligations and commercial commitments at March 31, 2002 by expected
maturity date.
Expected Maturity Date
----------------------
Year ending
March 31, 2003 2004 2005 2006 2007
- --------- ---- ---- ---- ---- ----
(Amounts in thousands)
Operating Leases $ 4,481 $3,864 $3,365 $2,411 $1,780
Employment Contracts $ 6,284 $3,611 -- -- --
Unconditional
purchase obligations $26,805 $5,117 -- -- --
Distribution and
marketing commitments $ 7,793 -- -- -- --
Production guarantee $ 159 -- -- -- --
Corporate guarantee $ 500 -- -- -- --
Foreign Currency. We incur certain operating and production costs in
foreign currencies and are subject to market risks resulting from fluctuations
in foreign currency exchange rates. In certain instances, we enter into foreign
currency exchange contracts in order to reduce exposure to changes in foreign
currency exchange rates that affect the value of our firm commitments and
certain anticipated foreign currency cash flows. We currently intend to continue
to enter into such contracts to hedge against future material foreign currency
exchange rate risks.
We have entered into foreign exchange contracts to hedge future
production expenses denominated in Canadian, Australian and New Zealand dollars.
Gains and losses on the foreign exchange contracts are capitalized and recorded
as production costs when the gains and losses are realized. At March 31, 2002,
we had contracts to sell US$10.1 million in exchange for Cdn$16.3 million over a
period of nine months at a weighted average exchange rate of 1.5952. During the
year, we completed foreign exchange contracts denominated in Australian and New
Zealand dollars. The net loss resulting from the completed contracts amount to
$nil. These contracts are entered into with a major financial institution. We
are exposed to credit loss in the event of nonperformance by the counterparty,
which is limited to the cost of replacing the contracts, at current market
rates. We do not require collateral or other security to support these
contracts. Unrecognized gains at March 31, 2002 amounted to Cdn$0.5 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Auditors' Report and our Consolidated Financial Statements and
Notes thereto appear in a separate section of this report (beginning on page 44
following Part IV). The index to our Consolidated Financial Statements is
included in Item 14.
37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
PricewaterhouseCoopers LLP ("PwC") were our auditors for the fiscal
year ended March 31, 2001 and had been our auditors since November 1997. On July
29, 2001, the Board of Directors, upon the recommendation of the Audit Committee
and the Company's senior management, requested the resignation of PwC as the
Company's auditors effective as of July 24, 2001.
PwC's reports on the consolidated financial statements for fiscal years
ended March 31, 2001 and 2000 did not contain an adverse opinion, disclaimer of
opinion, or qualification or modification as to uncertainty, audit scope or
accounting principles. In addition, there were no disagreements within the
meaning of Item 304(a)(1)(iv) of the Securities and Exchange Commission
Regulation S-K for the fiscal years ended March 31, 2001 and 2000 and the
interim period ending July 29, 2001.
PwC has advised the Company and the Audit Committee of the following
matters under Item 304(a)(1)(v):
1. The Company does not presently have procedures that are effective in
ensuring that the information relevant to international sales revenue
recognition is collected and reported to ensure that the timing of certain
revenue recognition is appropriate.
2. A number of material adjustments recorded by management were
identified by the auditors during the audit. The auditors advised that while
internal controls over systems were adequate, lack of timely monitoring controls
over systems output and accounting entries, such as reconciliations of account
balances, analysis and review of transactions, balances and adjustments, may
have contributed to the number of adjustments. The auditors have advised that
they were not able to determine whether the matters raised were related solely
to significant events that occurred during the year ended March 31, 2001 as the
auditors were dismissed upon completion of the audit for the year ended March
31, 2001.
3. The Company should undertake additional training and support of its
accounting employees and management to ensure employees and management are able
to fulfill their assigned functions.
In response to PwC's comment 1, the Company continues to monitor its
international sales revenue recognition practices in light of the Company's
ongoing development.
In response to PwC's comment 2, the Company notes again that PwC
advised the Audit Committee at the conclusion of its audit that the internal
controls at the Company were adequate, however, management acknowledges that
certain processes could be improved upon. The Company is committed to a strong
internal control environment and related processes.
In response to PwC's comment 3, the Company notes that in fiscal 2001
it had grown substantially and as the Company continues to grow, it will
continue to hire and train staff to support the accounting function.
The Company has filed PwC's letter to the SEC and Canadian commissions
as an Exhibit to its Report on Form 8-K/A filed September 4, 2001.
38
The Board of Directors hired Ernst & Young LLP to replace PwC as the
Company's independent auditors effective August 18, 2001.
PwC has reissued for inclusion in this report their audit report on our
consolidated financial statements as of March 31, 2001 and for each of the two
years in the period then ended. In connection with providing that updated
report, we have agreed to indemnify PwC for the payment of all unrecovered third
party legal costs and expenses incurred in PwC's successful defense of any legal
action or proceeding that arises as a result of PwC's previous audit report on
our past financial statements in the filing of this report with the SEC.
However, this indemnification provision will be void, and any advanced funds
will be returned to us, if a court, after adjudication, finds PwC liable for
professional malpractice.
Insofar as indemnification for liabilities arising under the U.S.
federal securities laws may be permitted to PwC, we have been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in U.S. federal securities laws and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by us of expenses incurred or paid by PwC in the successful defense
of any action, suit or proceeding) is asserted by PwC, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in the U.S. federal
securities laws and will be governed by the final adjudication of such issue.
PART III
The information required by Items 10, 11, 12 and 13 of Part III of this
annual report on Form 10-K is incorporated by reference from and will be
contained in our definitive proxy statement for our annual meeting of
stockholders to be filed with the SEC by July 29, 2002 except as set forth under
Item 12 below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Equity Compensation Plan Information
As of March 31, 2002
Plan Category Number of securities to be Weighted-average exercise Number of securities remaining
issued upon exercise of price of outstanding available for future issuance
outstanding options, options, warrants and under equity compensation
warrants and rights rights plans (excluding securities
reflected in column (a))
------------- -------------------------- ------------------------- ------------------------------
(a) (b) (c)
-------------------------- ------------------------- ------------------------------
Equity compensation plans
approved by shareholders 6,768,162 $4.44 1,163,088
-------------------------- ------------------------- ------------------------------
Equity compensation plans not
approved by shareholders - - -
-------------------------- ------------------------- ------------------------------
Total 6,768,162 - 1,163,088
-------------------------- ------------------------- ------------------------------
39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
The financial statements listed on the accompanying Index to
Financial Statements are filed as part of this report at pages 44
to 91.
2. Exhibits
The exhibits listed on the accompanying Index to Exhibits are
filed as part of this report at pages 92 to 94.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended March
31, 2002.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LIONS GATE ENTERTAINMENT CORP.
DATE: July 15, 2002 By: /s/ FRANK GIUSTRA
----------------------------------
Frank Giustra
Chairman and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
We the undersigned directors and officers of Lions Gate Entertainment
Corp. hereby constitute and appoint Frank Giustra and Jon Feltheimer, or either
of them, our true and lawful attorneys and agents, with full power of
substitution and resubstitution, to do any and all acts and things in our name
and behalf in our capacities as directors and officers and to execute any and
all instruments for us and in our names in the capacities indicated below, that
said attorneys and agents, or either of them, may deem necessary or advisable to
enable said corporation to comply with the Securities and Exchange Act of 1934,
as amended, any rules, regulations, and requirements of the Securities and
Exchange Commission, in connection with this report, including specifically, but
not limited to, power and authority to sign for us or any of us in our names and
in the capacities indicated below, any and all amendments and supplements to
this report, and we hereby ratify and confirm all that the said attorneys and
agents, or any of them, shall do or cause to be done by virtue hereof.
Signatures Title Date
---------- ----- ----
/s/ MARK AMIN Vice Chairman and Director July 15, 2002
- ------------------------------
Mark Amin
/s/ THOMAS AUGSBERGER Director July 15, 2002
- ------------------------------
Thomas Augsberger
/s/ MICHAEL BURNS Vice Chairman and Director July 15, 2002
- ------------------------------
Michael Burns
/s/ DREW CRAIG Director July 15, 2002
- ------------------------------
Drew Craig
/s/ ARTHUR EVRENSEL Director July 15, 2002
- ------------------------------
Arthur Evrensel
/s/ JON FELTHEIMER Chief Executive Officer and Director July 15, 2002
- ------------------------------ (Principal Executive Officer)
Jon Feltheimer
41
/s/ DOUGLAS M. HOLTBY Director July 15, 2002
- ------------------------------
Douglas M. Holtby
/s/ JOE HOUSSIAN Director July 15, 2002
- ------------------------------
Joe Houssian
/s/ GORDON KEEP Senior Vice President, Secretary and July 15, 2002
- ------------------------------ Director
Gordon Keep
/s/ HOWARD KNIGHT Director July 15, 2002
- ------------------------------
Howard Knight
/s/ MORLEY KOFFMAN Director July 15, 2002
- ------------------------------
Morley Koffman
/s/ PATRICK LAVELLE Director July 15, 2002
- ------------------------------
Patrick Lavelle
/s/ ANDRE LINK President and Director July 15, 2002
- ------------------------------
Andre Link
/s/ HARALD LUDWIG Director July 15, 2002
- ------------------------------
Harald Ludwig
/s/ G. SCOTT PATERSON Director July 15, 2002
- ------------------------------
G. Scott Paterson
/s/ E. DUFF SCOTT Director July 15, 2002
- ------------------------------
E. Duff Scott
/s/ HARRY SLOAN Director July 15, 2002
- ------------------------------
Harry Sloan
/s/ MARNI WIESHOFER Chief Financial Officer July 15, 2002
- ------------------------------ (Principal Accounting and Financial
Marni Wieshofer Officer)
42
INDEX TO FINANCIAL STATEMENTS
Page
Description of Financial Statement Number
- ---------------------------------- ------
Report of Independent Auditors..................................................... 44
Lions Gate Entertainment Corp. Consolidated Balance Sheets......................... 45
Lions Gate Entertainment Corp. Consolidated Statements of Operations............... 46
Lions Gate Entertainment Corp. Consolidated Statements of Shareholders' Equity..... 47
Lions Gate Entertainment Corp. Consolidated Statements of Cash Flows............... 48
Lions Gate Entertainment Corp. Notes to the Consolidated Financial Statements...... 49-79
Report of Independent Auditors..................................................... 80
Mandalay Pictures, LLC Consolidated Balance Sheets................................. 81
Mandalay Pictures, LLC Consolidated Statements of Operations....................... 82
Mandalay Pictures, LLC Consolidated Statement of Changes in Members' Equity........ 83
Mandalay Pictures, LLC Consolidated Statements of Cash Flows....................... 84
Mandalay Pictures, LLC Notes to Consolidated Financial Statements.................. 85-91
43
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of Lions Gate Entertainment Corp.
We have audited the accompanying consolidated balance sheet of Lions
Gate Entertainment Corp. as of March 31, 2002 and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. We did not audit the financial statements of
CineGroupe Corporation, a consolidated subsidiary (see note 21 (m)) which
statements reflect total assets of $84.4 million as of March 31, 2002, and total
revenues of $55.5 million for the year then ended. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to data included for CineGroupe Corporation, is based
solely on the report of the other auditors. The financial statements of Lions
Gate Entertainment Corp. for the years ended March 31, 2001 and 2000 were
audited by other auditors, whose report dated June 22, 2001 expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Lions Gate Entertainment Corp.
at March 31, 2002, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
Canada.
/s/ERNST & YOUNG LLP
Los Angeles, California
July 1, 2002
44
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
MARCH 31, 2002 March 31, 2001
ASSETS
Restricted cash $ 1,125 $ --
Cash and cash equivalents 10,587 10,485
Accounts receivable, net of reserve for video returns of $9,387
(2001 - $10,675) and provision for doubtful accounts of $17,931
(2001 - $6,141) 186,428 173,112
Investment in films and television programs 288,310 224,115
Investments subject to significant influence 15,942 77,230
Property and equipment 50,582 44,212
Goodwill, net of accumulated amortization of $8,093
(2001 - $8,184) 38,816 34,924
Other assets 15,067 19,467
Future income taxes 743 --
--------- ---------
$ 607,600 $ 583,545
========= =========
LIABILITIES
Bank loans $ 229,141 $ 159,765
Accounts payable and accrued liabilities 82,224 76,297
Accrued participations and residuals costs 26,760 36,398
Production loans 38,167 24,045
Long-term debt 75,565 65,987
Deferred revenue 22,029 22,283
Future income taxes -- 757
Minority interests 13,520 1,224
--------- ---------
487,406 386,756
========= =========
Commitments and Contingencies
SHAREHOLDERS' EQUITY
Preferred shares, 200,000,000 shares authorized, issued in
series, including 1,000,000 series A (11,830 and 12,205
shares issued and outstanding) and 10 series B (10 and 10
shares issued and outstanding) (liquidation preference $30,167) 45,002 43,538
Common stock, no par value, 500,000,000 shares authorized,
43,231,921 and 42,296,838 issued and outstanding 226,130 222,985
Deficit (159,225) (79,900)
Cumulative translation adjustments 8,287 10,166
--------- ---------
120,194 196,789
--------- ---------
$ 607,600 $ 583,545
========= =========
SEE ACCOMPANYING NOTES.
45
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED Year Ended Year Ended
MARCH 31, 2002 March 31, 2001 March 31, 2000
REVENUES $ 426,582 $ 282,226 $ 271,251
--------- --------- ---------
EXPENSES:
Direct operating 250,335 156,420 222,875
Distribution and marketing 119,362 51,776 --
General and administration 54,272 37,710 31,388
Amortization 7,129 8,565 6,875
Severance and relocation costs -- -- 1,698
--------- --------- ---------
Total expenses 431,098 254,471 262,836
--------- --------- ---------
OPERATING INCOME (LOSS) (4,516) 27,755 8,415
--------- --------- ---------
OTHER EXPENSES:
Interest on debt initially incurred for a term of
more than one year (net of interest income of $0.4
million (2001-$0.6 million; 2000 - $0.5 million) 15,386 11,605 4,665
Minority interests 1,911 881 1,308
Unusual losses 2,115 -- --
--------- --------- ---------
Total other expenses 19,412 12,486 5,973
--------- --------- ---------
INCOME (LOSS) BEFORE UNDERNOTED (23,928) 15,269 2,442
Gain on dilution of investment in a
subsidiary 3,375 -- --
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY INTERESTS (20,553) 15,269 2,442
Income taxes 503 (3,292) 2,000
--------- --------- ---------
INCOME (LOSS) BEFORE EQUITY INTERESTS (21,056) 18,561 442
Write-down and equity interest in investments subject
to significant influence (52,506) (9,833) (5,894)
Other equity interests -- -- 159
--------- --------- ---------
NET INCOME (LOSS) (73,562) 8,728 (5,293)
Dividends on Series A preferred shares (2,492) (2,497) (591)
Accretion on Series A preferred shares (3,271) (3,115) (727)
--------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (79,325) $ 3,116 $ (6,611)
========= ========= =========
BASIC AND DILUTED INCOME (LOSS)
PER COMMON SHARE $ (1.86) $ 0.09 $ (0.22)
========= ========= =========
SEE ACCOMPANYING NOTES.
46
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
CUMULATIVE
SERIES A PREFERRED SERIES B PREFERRED TRANSLATION
COMMON STOCK SHARES SHARES DEFICIT ADJUSTMENTS TOTAL
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
Balance at March 31,
1999 30,607,418 $ 177,068 -- $ -- -- $ -- $ (14,709) $ 4,425 $ 166,784
Public offering 13,000 42,711 42,711
5,525,000 warrants
issued in
conjunction with
public offering -- 5,659 5,659
Conversion of Series
A preferred shares 795,000 2,446 (795) (2,446) --
Exercise of stock
options 58,333 239 239
Net income (loss)
available to common
shareholders (6,611) (6,611)
Accretion of Series
A preferred shares -- 613 613
Series B preferred
shares 10 -- --
Foreign currency
translation
adjustment (2,981) (2,981)
---------- --------- ------ -------- -------- -------- ---------- -------- ---------
Balance at March 31,
2000 31,460,751 185,412 12,205 40,878 10 -- (21,320) 1,444 206,414
Effect of adoption
of accounting
pronouncements (61,696) (61,696)
Issued upon
acquisition of
subsidiary 10,229,837 34,976 34,976
Issued pursuant to a
settlement agreement
with employee 600,000 2,250 2,250
Exercise of stock
options 6,250 14 14
Stock options
granted in
conjunction with
acquisition of a
subsidiary -- 333 333
Net income (loss)
available to common
shareholders 3,116 3,116
Accretion of Series
A preferred shares -- 2,660 2,660
Foreign currency
translation
adjustment 8,722 8,722
---------- --------- ------ -------- -------- -------- ---------- -------- ---------
Balance at March 31,
2001 42,296,838 222,985 12,205 43,538 10 -- (79,900) 10,166 196,789
Conversion of Series
A preferred shares 648,000 2,398 (648) (2,398) --
Exercise of stock
options 87,083 214 214
Issued pursuant to
share bonus plan 200,000 533 533
Stock dividends 273 1,110 1,110
Net income (loss)
available to common
shareholders (79,325) (79,325)
Accretion of Series
A preferred shares -- 2,752 2,752
Foreign currency
translation
adjustments (1,879) (1,879)
---------- --------- ------ -------- -------- -------- ---------- -------- ---------
Balance March 31,
2002 43,231,921 $ 226,130 11,830 $ 45,002 10 $ -- $ (159,225) $ 8,287 $ 120,194
========== ========= ====== ======== ======== ======== ========== ======== =========
SEE ACCOMPANYING NOTES.
47
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
YEAR ENDED Year Ended Year Ended
MARCH 31, 2002 March 31, 2001 March 31, 2000
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (73,562) $ 8,728 $ (5,293)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Amortization of property and equipment 4,873 3,309 2,584
Amortization of goodwill -- 2,708 2,473
Write-off of projects in development 1,294 1,586 856
Amortization of pre-operating costs 962 962 962
Amortization of deferred financing costs 1,842 1,322 199
Amortization of films and television programs 247,618 153,797 220,423
Gain on dilution of investment in a subsidiary (3,375) -- --
Unusual losses 2,115 -- --
Minority interests 1,911 881 1,308
Write-down and equity interest in investments subject to
significant influence 52,506 9,833 5,894
Other equity interest -- -- (159)
Changes in operating assets and liabilities, excluding the effects of
acquisitions:
Accounts receivable (5,314) (15,412) (46,671)
Increase in investment in films and television programs (316,591) (208,586) (260,905)
Other assets 673 (8,046) (3,272)
Future income taxes (1,266) (4,708) 163
Accounts payable and accrued liabilities 1,251 (7,279) 14,888
Accrued participations and residuals costs (9,638) 8,289 15,409
Deferred revenue (311) 1,282 8,489
------------ ------------ ------------
(95,012) (51,334) (42,652)
------------ ------------ ------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Issuance of capital stock 215 14 48,495
Dividends paid on Series A preferred shares (1,382) (2,497) (591)
Financing fees (1,976) (6,876) (461)
Increase in bank loans 66,870 86,368 2,200
Increase in restricted cash (1,125) -- --
Proceeds from production and distribution loans 44,228 13,880 35,900
Repayment of production and distribution loans (30,202) (32,661) (42,477)
Proceeds from long-term debt 14,116 26,792 3,162
Repayment of long-term debt (4,934) (2,584) (4,149)
------------ ------------ ------------
85,810 82,436 42,079
------------ ------------ ------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Minority investment in subsidiary 14,000 -- --
Cash received from investment in Mandalay Pictures, LLC 8,394 -- --
Acquisition of Eaton Entertainment, LLC, net of cash acquired 745 -- --
Acquisition of Sterling Home Entertainment, LLC, net of cash
acquired -- (3,168) --
Acquisition of Trimark Holdings Inc. -- (39,370) --
Purchase of property and equipment (12,046) (2,515) (6,398)
------------ ------------ ------------
11,093 (45,053) (6,398)
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,891 (13,951) (6,971)
FOREIGN EXCHANGE EFFECT ON CASH (1,789) 5,153 --
CASH AND CASH EQUIVALENTS-BEGINNING OF YEAR 10,485 19,283 26,254
------------ ------------ ------------
CASH AND CASH EQUIVALENTS-END OF YEAR $ 10,587 $ 10,485 $ 19,283
============ ============ ============
SEE ACCOMPANYING NOTES.
48
1. NATURE OF OPERATIONS
Lions Gate Entertainment Corp. ("the Company" or "Lions Gate") is a fully
integrated entertainment company engaged in the development, production and
distribution of feature films, television series, television movies and
mini-series, non-fiction programming and animated programming, as well as
the management of Canadian-based studio facilities and management services
provided to Canadian limited partnerships. As an independent distribution
company, the Company also acquires distribution rights from a wide variety
of studios, production companies and independent producers.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in Canada ("Canadian GAAP")
which conforms, in all material respects, with the accounting principles
generally accepted in the United States ("U.S. GAAP"), except as described
in note 21. The Canadian dollar and the U.S. dollar are the functional
currencies of the Company's Canadian and U.S. based businesses,
respectively. These consolidated financial statements are expressed in
Canadian dollars, with the translation of financial statements of
individual entities in accordance with note 2(o).
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of Lions Gate
Entertainment Corp. ("the Company" or "Lions Gate") 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.
(c) ACCOUNTING CHANGES
GOODWILL-
On November 1, 2001, the Canadian Institute of Chartered Accountants
("CICA") released Section 3062, "Goodwill and Other Intangible Assets", to
be applied by companies for fiscal years beginning on or after January 1,
2002. Early adoption 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. The Company elected to
early-adopt CICA 3062 on April 1, 2001. Under CICA 3062, goodwill is no
longer amortized but is reviewed annually, or more frequently if impairment
indicators arise, for impairment, unless certain criteria have been met,
and is similar, in many respects, to Statement of Financial Accounting
Standards ("SFAS") 142, "Goodwill and Other Intangible Assets", under U.S.
GAAP. In accordance with the adoption provisions of CICA 3062, goodwill is
required to be tested for impairment on the date of adoption. Under SFAS
142 goodwill is required to be tested for impairment within six months of
adoption, as of the beginning of the year. At April 1, 2001 and September
30, 2001, it was determined that the fair value of each of the reporting
units was in excess of its carrying value including goodwill and,
therefore, no further work was required and an impairment loss was not
required. Goodwill is required to be tested for impairment between the
annual tests if an event occurs or circumstances change that
more-likely-than-not reduce the fair value of a reporting unit below its
carrying value. The amortization provisions of CICA 3062 apply to goodwill
and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, the
amortization and impairment provisions of CICA 3062 are effective upon
adoption of CICA 3062. (Refer to note 1(k) for additional information.)
49
ACCOUNTING FOR FILMS AND TELEVISION PROGRAMS-
In June 2000, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 00-2
"Accounting by Producers or Distributors of Films" ("SoP 00-2"). SoP 00-2
establishes new accounting standards for producers or distributors of
films, including changes in revenue recognition, capitalization and
amortization of costs of acquiring films and television programs and
accounting for exploitation costs, including advertising and marketing
expenses. The Company elected early adoption of SoP 00-2 and retroactively
adopted SoP 00-2 effective as of April 1, 2000. The Company 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 reduced to
reflect the cumulative effect of the accounting change in the amount of
$58.9 million (net of income taxes of $2.2 million). The principal changes
as a result of applying SoP 00-2 are as follows:
Advertising and marketing costs, which were previously capitalized to
investment in films and television programs and amortized using the
individual film forecasts 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.
The effect of the change on the income statement for the year ended March
31, 2001 was an increase in net income of approximately $5.4 million. The
effect of the change on the balance sheet accounts at March 31, 2000 was to
reduce investment in films and television programs relating to advertising
costs, the capitalization of production costs for episodic television
series and media holdbacks by $19.9 million, $34.8 million and $6.4
million, respectively.
ACCOUNTING FOR INCOME TAXES-
In December 1997, the CICA released Section 3465, "Income Taxes", to be
applied by companies for fiscal years beginning on or after January 1,
2000. The standard requires recognition of future income tax assets and
liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns, and is similar,
in many respects, to SFAS 109, "Accounting for Income Taxes" under U.S.
GAAP. Future income taxes are provided for using the liability method. The
Company retroactively adopted Section 3465 effective as of April 1, 2000,
without restatement of prior years' financial statements. Prior to adopting
the new standard, the Company used the deferral method of accounting for
income taxes. The application of Section 3465 resulted in increasing future
income tax liabilities by $2.7 million as at April 1, 2000 with an
equivalent charge to accumulated deficit. The effect of the change on the
income statement for the year ended March 31, 2001 was an increase in the
tax recovery of $5.5 million due to the benefit recognized of previously
unrecognized income tax assets, where realization is judged
"more-likely-than-not" in accordance with Section 3465 whereas previously
realization had to be based on the concept of "virtual certainty."
EARNINGS PER SHARE-
In December 2000, the Canadian Institute of Chartered Accountants released
revised Section 3500, "Earnings per share". The revised standard requires
the use of the treasury stock method for calculating diluted earnings per
share, consistent with US GAAP. Previously, fully diluted earnings per
share were calculated using the imputed interest method. The Company
adopted the new standard for its fiscal 2001 financial statements. The
revised
50
section did not impact previously reported losses per share, as there were
no significant potentially dilutive common share equivalents outstanding.
(d) REVENUE RECOGNITION
Revenue from the sale or licensing of films and television programs is
recognized upon meeting all recognition requirements of SoP 00-2. Revenue
from the theatrical release of motion pictures is recognized at the time of
exhibition based on the Company's participation in box office receipts.
Revenue from the sale of videocassettes and digital video disks ("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 the Company is entitled to receipts. For
multiple media rights contracts with a fee for a single film or television
program where the contract provides for media holdbacks, the fee is
allocated to the various media based on management's assessment of the
relative fair value of the rights to exploit each media and is recognized
as each holdback is released. For multiple-title contracts with a fee, the
fee is allocated on a title-by-title basis, based on management's
assessment of the relative fair value of each title.
Revenues from television licensing are recognized when the feature film or
television program is available to the licensee for telecast.
Rental revenue from short-term operating leases of studio facilities is
recognized over the term of the lease.
The Company earns fees from management services provided to Canadian
limited partnerships, whose purpose is to assist in the financing of films
produced in Canada, which are recognized as revenue when the financing is
completed.
Cash payments received are recorded as deferred revenue until all the
conditions of revenue recognition have been met.
(e) RESTRICTED CASH
Restricted cash represents an amount on deposit with a financial
institution that is contractually designated for the repayment of a
specific bank loan.
(f) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid debt investments
with original maturities of ninety days or less when purchased.
(g) INVESTMENT IN FILMS AND TELEVISION PROGRAMS
Investment in films and television programs includes the unamortized costs
of completed films and television programs which have been produced by the
Company or for which the Company has acquired distribution rights, an
acquired library, films and television programs in progress and projects in
development. For films and television programs produced by the Company,
these capitalized costs include all production and financing costs,
capitalized interest and overhead. For acquired films and television
programs, these capitalized costs consist of minimum guarantee payments to
acquire the distribution rights.
Costs of acquiring and producing films and television programs are
capitalized and amortized using the individual-film-forecast-computation
method, whereby capitalized costs are amortized and ultimate participation
and residual costs are accrued in the proportion that current revenue bears
to management's estimate of ultimate revenue expected to be
51
recognized from the exploitation, exhibition or sale of the films or
television programs. The acquired film library is being amortized over a
period of twenty years.
Investment in films and television programs is stated at the lower of
amortized cost or estimated fair value on an individual film basis. The
valuation of investment in films and television programs is reviewed on a
title-by-title basis, when an event or change in circumstances indicate
that the fair value of a film or television program is less than its
unamortized cost. The fair value of the film or television program is
determined using management's future revenue estimates and a discounted
cash flow approach. Additional amortization is recorded in the amount by
which the unamortized costs exceed the estimated fair value of the film or
television program. Estimates of future revenue involve measurement
uncertainty and it is therefore possible that reductions in the carrying
value of investment in films and television programs may be required as a
consequence of changes in management's future revenue estimates. The
potential effect of future changes in management's future revenue estimates
on net income has not been disclosed in these consolidated financial
statements as the amount is not readily determinable.
Films and television programs in development include costs of acquiring
film rights to books, stage plays or original screenplays and costs to
adapt such projects. Such costs are capitalized and, upon commencement of
production, are transferred to production costs. Projects in development
are written off at the earlier of the date determined not to be recoverable
or when projects under development are abandoned, or three years from the
date of the initial investment.
(h) PRINTS, ADVERTISING AND MARKETING EXPENSES
The cost of film prints is included in investment in films and television
programs and charged to expense on a straight-line basis over the period of
theatrical release.
The costs of advertising and marketing expenses are expensed the first time
the advertising takes place. At March 31, 2002, $2.7 million of capitalized
advertising and marketing costs were included in other assets.
(i) INVESTMENTS SUBJECT TO SIGNIFICANT INFLUENCE
Investments in companies over which the Company can exercise significant
influence are accounted for using the equity method. The Company's
investments subject to significant influence are periodically reviewed to
determine whether there has been a loss in value that is other than a
temporary decline. Estimates of net future cash flows on an undiscounted
basis are used to assess whether there is a loss in value.
(j) PROPERTY AND EQUIPMENT
Property and equipment is carried at cost less accumulated amortization.
Amortization is provided for using the following rates and methods:
Buildings 25 years straight-line
Computer equipment and software 2-4 years straight-line and 30% declining balance
Automobiles 30% declining balance
Furniture and equipment 10 years straight-line and 20%-30% declining balance
Leasehold improvements Over the lease term or the useful life, whichever is shorter
Equipment under capital lease is amortized using the above rates.
The Company periodically reviews and evaluates the recoverability of
property and equipment. Where applicable, estimates of net future cash
flows, on an undiscounted basis,
52
are calculated based on future revenue estimates, if appropriate and where
deemed necessary, a reduction in the carrying amount is recorded.
(k) GOODWILL
Goodwill is assessed for impairment at least annually or if an event occurs
or circumstances change that more-likely-than-not reduce the fair value of
a reporting unit below its carrying value. The Company completed impairment
tests required under CICA 3062 at April 1, 2001 and under SFAS 142 at
September 30, 2001 and determined that the recognition of impairment losses
was not necessary, as described in note 6.
(l) PRE-OPERATING PERIOD COSTS
Pre-operating period costs related to the period before commencement of
commercial operations of new businesses are deferred and amortized on a
straight-line basis over a period not to exceed five years commencing once
the pre-operating period has ended.
(m) INCOME TAXES
The Company recognizes future income tax assets and liabilities for the
expected future income tax consequences of transactions that have been
included in the financial statements or income tax returns. Future income
taxes are provided for using the liability method. Under the liability
method, future income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities.
Future income tax assets, after deducting valuation allowances, are
recognized to the extent that it is more-likely-than-not that they will be
realized in the foreseeable future. Future income tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
at the date of substantive enactment.
(n) GOVERNMENT ASSISTANCE
The Company has access to several government programs that are designed to
assist film and television production and distribution in Canada.
Federal and provincial refundable income tax credits earned with respect to
production expenditures are included in revenue in accordance with the
Company's revenue recognition policy for completed films and television
programs. Federal and provincial refundable income tax credits are
considered earned when the qualifying expenditures have been incurred
provided that there is reasonable assurance that the credits will be
realized (see note 16).
Amounts received with respect to the acquisition of distribution rights are
recorded as a reduction of investment in films and television programs.
Amounts received are repayable on a title-by-title basis once the title has
achieved cash break-even to the extent of profit earned on that title.
There are no fixed repayment terms, no interest payments and no claims on
any assets of the Company or for the recovery of the amount invested, other
than those that might be repayable out of future distribution revenue
attached to the film rights. To the extent an individual film does not
perform to pre-agreed levels, no amounts are repayable by the Company.
Government assistance toward distribution and marketing expenses is
recorded as a reduction of those expenses.
53
(o) FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities denominated in currencies other than
Canadian dollars are translated at exchange rates in effect at the balance
sheet date. Resulting translation gains and losses are included in the
determination of earnings.
Foreign subsidiary assets and liabilities in foreign currencies are
translated into Canadian dollars at the exchange rate in effect at the
balance sheet date. Foreign subsidiary revenue and expense items are
translated at the average rate of exchange for the year. Gains or losses
arising on the translation of the accounts of foreign subsidiaries are
included in cumulative translation adjustments, a separate component of
shareholders' equity.
Effective April 1, 2000 the Company classified its U.S. operations as
self-sustaining following a significant change in the economic status of
these operations, including a restructuring of certain operating entities
and the ability to self-finance certain operations.
(p) DEBT FINANCING COSTS
Amounts incurred in connection with obtaining debt financing are deferred
and amortized, as a component of interest expense, over the term to
maturity of the related debt obligation.
(q) RESEARCH AND DEVELOPMENT
Research and development expenses incurred relating to multimedia products
and other interactive software are expensed until all of the following
criteria are met: the product is clearly defined and the costs attributable
thereto can be identified; the technical feasibility of the product as
demonstrated by a working model has been established; a decision has been
made to produce and market, or use, the product; the future market for the
product is clearly defined; and adequate resources exist, or are expected
to be available, to complete the project. All expenses incurred after
technological feasibility is established are capitalized to investment in
film and will be amortized against future revenues generated from the sale
of the resulting products; such capitalized amounts are not significant.
(r) STOCK-BASED COMPENSATION PLAN
The Company has a stock-based compensation plan, which is described in note
11(c). No compensation expense is recognized for this plan when stock or
stock options are issued to employees of the Company, its subsidiaries and
equity investees. Consideration paid by employees on exercise of stock
options or purchase of stock is credited to share capital.
(s) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses
during the reporting period. The most significant estimates made by
management in the preparation of the financial statements relate to
ultimate revenue and costs for investment in films and television programs.
Future results could differ from such estimates.
(t) RECENT ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES-
On April 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities", as amended in June 2000 by SFAS 138
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities", where the provisions of SFAS 133 were applicable under
Canadian GAAP, which requires companies to recognize all derivatives as
either assets or liabilities in the balance sheet and measure such
instruments at
54
fair value. The adoption of these standards did not have a material impact
on the Company's consolidated financial statements.
(u) RECLASSIFICATIONS
Certain amounts presented in prior years have been reclassified to conform
to the current year's presentation.
3. INVESTMENT IN FILMS AND TELEVISION PROGRAMS
MARCH 31, March 31,
2002 2001
FILMS
Released, net of accumulated amortization $107,041 $ 68,706
Completed and not released 15,381 --
Acquired library, net of accumulated amortization 61,225 63,265
In progress 8,617 30,690
In development 3,066 4,972
-------- --------
195,330 167,633
-------- --------
TELEVISION PROGRAMS
Released, net of accumulated amortization 60,727 24,343
Completed and not released 2,938 --
In progress 24,763 27,221
In development 4,552 4,918
-------- --------
92,980 56,482
-------- --------
$288,310 $224,115
======== ========
The Company earns revenue from certain productions that have been fully
amortized and are not reflected on the balance sheet.
The Company expects approximately 48% of completed and released films and
television programs, net of accumulated amortization will be amortized
during the one year period ending March 31, 2003, and approximately 55% of
accrued participants' share will be paid during the one year period ending
March 31, 2003.
Additionally, the Company expects approximately 85% of completed and
released films and television programs, net of accumulated amortization
will be amortized during the three year period ending March 31, 2005.
The remaining life of the acquired film library as at March 31, 2002 is
18.5 years.
Interest capitalized relating to productions during the year ended March
31, 2002 amounted to $4.6 million (2001 - $2.2 million; 2000 - $3.6
million).
4. INVESTMENTS SUBJECT TO SIGNIFICANT INFLUENCE
MANDALAY PICTURES, LLC ("MANDALAY")-
With the authority granted by the Board of Directors, prior to the close of
the fourth quarter of fiscal 2002, management committed to a plan to divest
its ownership interest in Mandalay. Mandalay was written down to its
estimated fair value at March 31, 2002 of $15.9 million taking into account
the expiration and non-renewal of Mandalay's international output
agreements on December 31, 2001 and the pending expiration of its
production and distribution agreement with Paramount Pictures Corp. in
fiscal 2003. Such estimated fair
55
value is supported by cash expected to be received from Mandalay in the
next one or two fiscal periods. The resulting write-down of $17.0 million
is included as a component of write-down and equity interest in investments
subject to significant influence. The Company's investment in Mandalay is
comprised of a 45% common stock interest, and a 100% interest in preferred
stock with a stated value of US$50.0 million. Lions Gate recorded 100% of
the operating losses of Mandalay to March 31, 2002, as it was the sole
funder of Mandalay. The Company received US$2.5 million (Cdn$4.0 million)
on December 19, 2001, and US$2.9 million (Cdn$4.6 million) on March 19,
2002 from Mandalay, which amounts were recorded as reductions in the
Company's investment in Mandalay. Pre-operating costs, incurred in fiscal
1998 and fiscal 1999, were being amortized on a straight-line basis of $0.5
million per quarter, and amortization of $1.9 million to March 31, 2002
(2001 - $1.9 million) is also included in the write-down and equity
interest in investments subject to significant influence.
Summarized financial information of Mandalay is as follows (all amounts in
thousands of Canadian dollars):
MARCH 31, March 31,
2002 2001
ASSETS
Restricted cash $ 21,757 $ 33,336
Cash and cash equivalents 7,719 25,399
Accounts receivable 25,850 45,879
Other receivables -- 24,000
Film inventory 138,290 209,849
Due from (to) affiliates 68 (52)
Other assets 62 180
-------- ---------
193,746 338,591
-------- ---------
LIABILITIES
Accounts payable and accrued expenses 6,983 1,380
Accrued participations and residuals 22,108 15,522
Production and bank loans 75,613 151,659
Contractual obligations 10,914 57,653
Deferred revenue 49,973 65,032
-------- ---------
165,591 291,246
-------- ---------
NET ASSETS $ 28,155 $ 47,345
======== =========
YEAR ENDED Year ended Year ended
MARCH 31, March 31, March 31,
2002 2001 2000
Revenue $ 124,727 $ 64,179 $ 128,053
Operating expenses $(131,998) $(64,536) $(129,458)
General and administration expenses $(6,294) $(8,677) $(6,128)
Net loss $(10,941) $(6,312) $(3,988)
56
Mandalay is considered a partnership for income tax purposes and
contractually, Lions Gate is entitled to access the tax losses of Mandalay.
Accordingly, the tax effects attributable to the operating losses of
Mandalay are included in the Company's tax provision.
Mandalay adopted, on a retroactive basis, SoP 00-2 effective as of April 1,
2000 on a basis consistent with the Company's adoption of accounting
changes as explained in note 2(c). The cumulative adjustment made to the
net equity of Mandalay on April 1, 2000 was $5.5 million, net of the
benefit of income tax losses attributable to the Company of $nil.
CINEMANOW, INC. ("CINEMANOW")-
During the quarter ended March 31, 2002, CinemaNow advised the Company of
its inability to generate sufficient cash flows from operations to sustain
its operations over the next twelve months, without raising additional
capital. Given the uncertain economic climate and CinemaNow's recurring
losses there can be no assurance that further financing will be forthcoming
and as a result, the Company wrote down its investment in CinemaNow to
$nil. The write-off of the investment in CinemaNow of $21.0 million is
disclosed in the statement of operations as a component of write-down and
equity interest in investments subject to significant influence. The
Company's investment in CinemaNow is comprised of a 90.1% common stock
interest, representing 63% voting and economic interests after taking into
account the voting rights held by the holders of preferred shares. The
investment in CinemaNow was accounted for using the equity method as the
Company did not have the ability to control the strategic operating,
investing and financing decisions of CinemaNow as a consequence of the
Company's inability to elect the majority of the board of directors of
CinemaNow.
Prior to the write-off, the Company's investment in CinemaNow consisted of
its 63% share of the economic and voting interests, recorded at the
estimated fair value at the time of the Trimark acquisition of $23.6
million, net of the losses of CinemaNow incurred between October 13, 2000
and December 31, 2001. The difference between the net carrying amount of
the assets and liabilities of CinemaNow at the date of acquisition and the
fair value of the investment had been allocated as follows:
Investment in films and television programs $ 3,496
Property and equipment 14,682
Goodwill 5,366
Other assets 7
-------
$23,551
=======
57
5. PROPERTY AND EQUIPMENT
MARCH 31, March 31,
2002 2001
ACCUMULATED Accumulated
COST AMORTIZATION Cost Amortization
Land held for leasing purposes $ 14,500 $ -- $ 14,500 $ --
Buildings held for leasing purposes 24,033 2,992 22,692 2,418
Leasehold improvements 1,527 513 1,301 474
Furniture and equipment 6,369 3,458 5,892 2,733
Automobiles 49 36 38 35
Computer equipment and software 10,031 3,895 7,138 2,510
Equipment under capital leases 6,612 1,645 1,197 376
--------- ----------- --------- -----------
$ 63,121 12,539 $ 52,758 8,546
--------- ----------- --------- -----------
NET BOOK VALUE $ 50,582 $ 44,212
========= =========== ========= ===========
6. GOODWILL
The net carrying value of goodwill recorded through acquisitions is $38.8
million as at March 31, 2002. Effective April 1, 2001, the Company adopted
CICA 3062, which is similar, in many respects, to SFAS 142. This asset will
be assessed for impairment at least annually or upon an adverse change in
operations. Prior to the adoption of CICA 3062 the assets were amortized
using the straight-line method over periods ranging from five to twenty
years. The following is the pro forma effect had the years ended March 31,
2001 and 2000 been subject to CICA 3062:
YEAR ENDED Year ended Year ended
MARCH 31, 2002 March 31, 2001 March 31, 2000
Reported net income (loss) $ (73,562) $ 8,728 $ (5,293)
Amortization -- 2,708 2,473
---------- ---------- ----------
Adjusted net income (loss) $ (73,562) $ 11,436 $ (2,820)
========== ========== ==========
Reported net income (loss)
per share $ (1.86) $ 0.09 $ (0.22)
Amortization per share $ 0.00 $ 0.07 $ 0.08
---------- ---------- ----------
Adjusted net income (loss)
per share $ (1.86) $ 0.16 $ (0.14)
========== ========== ==========
7. JOINT VENTURES
EATON HOME ENTERTAINMENT, LLC ("EATON") -
On September 30, 1999 the Company acquired an additional 16.67% interest
bringing its total ownership in Eaton at that date to 50%, and resulting in
Eaton becoming a jointly controlled company. Under the agreement the
partner's cumulative share of earnings up to September 30, 1999 was paid
out in cash. This amounted to $0.2 million and was paid directly from
Eaton. Between September 30, 1999 and December 20, 2001 the Company
accounted for its
58
investment in Eaton using the proportionate consolidation method. Prior to
September 30, 1999, the Company held a 33.33% interest in Eaton and
accounted for the investment using the equity method.
On December 20, 2001 the Company acquired the remaining 50% interest in
Eaton for total consideration of $0.2 million, and discontinued the
separate operations of Eaton. The Company recorded an unusual loss of $1.3
million relating to the non-continuing assets acquired in the transaction.
STERLING HOME ENTERTAINMENT, LLC ("STERLING") -
On November 27, 2000, the Company acquired the remaining 50% interest in
Sterling for total consideration of US$2.8 million (Cdn$4.2 million). The
acquisition was accounted for as a purchase, with the incremental 50% of
the results of the acquired company consolidated from November 27, 2000
onwards. Goodwill arising on the acquisition amounted to $0.1 million.
Prior to November 27, 2000 the Company had accounted for its investment in
Sterling using the proportionate consolidation method.
The Company's share of the assets, liabilities, revenues, expenses, net
income and cash flows of the joint ventures has not been disclosed as the
amounts are not significant.
8. BANK LOANS
The Company has a US$175 million (Cdn $279.0 million) (2001 - US$175
million (Cdn $275.9 million)) U.S. dollar-denominated revolving credit
facility, a US$25 million (Cdn$39.4 million) (2001 - US$25 million (Cdn
$39.4 million)) Canadian dollar-denominated revolving credit facility, a
$2.0 million (2001 - $2 million) operating line of credit and $5.0 million
(2001 $4.5 million) in demand loans.
As at March 31, 2002, a total of US$139.9 million (Cdn$222.9 million) (2001
- US$97.4 million (Cdn $153.5 million)) was drawn on the revolving credit
facilities. The revolving credit facilities expire on September 25, 2005.
The U.S. dollar-denominated revolving credit facility bears interest at
U.S. prime (4.75 % at March 31, 2002) plus 1.5% or LIBOR (weighted average
of 1.86 % at March 31, 2002) plus 2.5% and the Canadian dollar-denominated
revolving credit facility bears interest at Canadian prime (3.75% at March
31, 2002) plus 1.5% or Bankers Acceptances (weighted average of 2.12 % at
March 31, 2002) plus 2.5%. 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 March 31, 2002 totaled
US$152.1 million (Cdn$242.5 million) (2001 - US$ 120.1 million (Cdn $189.3
million)). The Company is required to pay a monthly commitment fee of
0.375% on the total revolving credit facilities of US$200.0 million less
the total amount drawn. Right, title and interest in and to all personal
property of Lions Gate Entertainment Corp. and Lions Gate Entertainment
Inc. is being pledged as security for the revolving credit facilities. The
revolving credit facilities restrict the Company from paying cash dividends
on its common shares.
The operating line of credit of a subsidiary expires on July 31, 2002 and
bears interest at Canadian prime plus 1%. Management of the subsidiary
expects the facility to be extended. As at March 31, 2002, $1.2 million
(2001 - $1.7 million) was drawn on the operating line of credit. The
carrying value of certain accounts receivable, investment in films and
television programs and capital assets totaling $3.0 million at March 31,
2002 (2001 - $5.8 million) is being pledged as security for the operating
line of credit.
59
Demand loans in the amount of $1.1 million bear interest at Canadian prime,
$0.3 million bear interest at Canadian prime plus 2% and $3.6 million bear
interest at Canadian prime plus 4%. Certain accounts receivable, guarantees
from shareholders of a subsidiary in the amount of $1.6 million, a
corporate guarantee provided by Lions Gate Entertainment Corp. in the
amount of $0.5 million (2001 - $1.5 million), and restricted cash in the
amount of $1.1 million are provided as security for the demand loans.
The weighted average interest rate on bank loans at March 31, 2002 was
5.18% (2001 - 8.06%; 2000 - 9.02%).
9. PRODUCTION LOANS
Production loans consist of bank demand loans bearing interest at various
rates between Canadian prime and 9.25%. Rights to certain films and
television programs, a floating charge on certain book debts, certain film
rights, and certain tangible assets and an assignment of all expected
future revenue from exploitation of certain films and television programs
have been provided as collateral. The carrying value of investment in films
and television programs relating to these motion pictures was $49.6 million
at March 31, 2002 (2001 - $22.3 million). Federal and provincial film tax
credits receivable with a carrying value of $15.7 million at March 31, 2002
(2001 - $25.0 million), accounts receivable in the amount of $2.1 million
at March 31, 2002 (2001 - $nil), guarantees from SODEC (Societe de
Developpement des Enterprises Culturelles), and general security agreements
are also provided as collateral for certain of the loans. Of the
outstanding amount, US$11.1 million (Cdn$17.7 million) (2001 - US$2.9
million (Cdn$4.6 million)) is repayable in U.S. dollars.
The weighted average interest rate on production loans at March 31, 2002
was 5.37% (2001 - 8.18%; 2000 - 8.34%).
60
10. LONG-TERM DEBT
MARCH 31, March 31,
2002 2001
Obligations under capital leases, bearing interest at 8.47% to 20.69%, $ 4,670 $ 491
due fiscal 2003, 2004 and 2005, with certain equipment provided as
collateral.
Loans bearing interest at 5.75% to Canadian prime plus 2%, due in 1,005 1,613
fiscal 2003 and 2005, with certain equipment provided as
collateral.
Promissory notes, bearing interest at 6.0%, due July 31, 2003. The 16,487 16,487
outstanding principal is convertible at the option of the holder
into common shares of the Company at $8.10 per share.
Loans bearing interest at Canadian prime plus 1.75%, due in 2003, and 21 33
2004, with guarantees from SDI (Societe de Developpement
Industriel de Quebec).
Loans bearing interest at 6.47% to 7.51%, due in fiscal 2004, 2005 and 20,857 20,205
2008, with property, building and equipment with carrying values
of approximately $36.0 million provided as collateral.
Loans bearing interest at Canadian prime plus 1%, repayable on demand 897 1,057
and due fiscal 2003 and fiscal 2005, with income tax credits
receivable up to $1.3 million provided as collateral.
Non-interest bearing convertible promissory note issued on the -- 541
acquisition of a subsidiary.
Non-interest bearing sales guarantees, repayable as US$19.8 million 31,628 25,560
(2001 US$16.2 million), due fiscal 2004 and 2005.
------- -------
$75,565 $65,987
======= =======
Non interest-bearing sales guarantees represent amounts due under
production financing arrangements whereby the Company has contracted with a
third party and the third party has financed 100% of the production budgets
for certain films, and in turn the Company retains the worldwide
distribution rights for a period of at least twenty-five years. The Company
has guaranteed to repay minimum amounts at the dates indicated. Under the
terms of the arrangement, the third party is entitled to participate in
future net revenue after deduction of certain specified items including,
without limitation, distribution fees payable to the Company and
distribution expenses paid by the Company. A subsidiary of the Company was
out of compliance with one financial covenant under each of the $4.7
million obligations under capital leases and $0.9 million loans at March
31, 2002, for which waivers have been received.
11. CAPITAL STOCK
(a) SERIES A PREFERRED SHARES AND SHARE WARRANTS
On December 21, 1999, the Company issued 13,000 units at a price of
US$2,550 per unit. Each unit consisted of one 5.25% convertible, non-voting
(except for the right to elect between one and three directors, depending
on the number of preferred shares outstanding) redeemable Series A
preferred share and 425 detachable common share purchase warrants (for a
total of 5,525,000 common share purchase warrants). The proceeds received
on the offering were allocated as follows: common share purchase warrants
were valued at fair
61
value, using the Black-Scholes option pricing model, of US$0.706 per
warrant or US$3.9 million (Cdn$5.7 million) (which have been included in
common stock in the consolidated statements of equity); conversion features
were valued at fair value, using the Black-Scholes option pricing model, of
US$3.4 million (Cdn$4.9 million); and the basic preferred shares were
valued at the residual value of US$25.9 million (Cdn$37.5 million). The
basic preferred shares and the conversion option are presented on a
combined basis in the consolidated statements of equity. The preferred
shares are entitled to cumulative dividends, as and when declared by the
Board, payable semi-annually on the last day of March and September of each
year. The Company may pay the dividends in cash or additional preferred
shares. On September 30, 2001, the Company declared and paid cash dividends
of US$0.8 million or US$66.94 per share (Cdn$1.3 million or Cdn$103.10 per
share). On March 31, 2002 the Company declared dividends of US$0.8 million
or US$66.94 per share (Cdn$1.2 million or Cdn$106.72 per share) , which
were paid in cash and additional preferred shares. The Company issued 273
preferred shares with a value of US$0.7 million. The number of shares to be
issued was calculated by using the semi-annual dividend rate of 2.625%
multiplied by the number of outstanding preferred shares at March 31, 2002,
less applicable withholding taxes. The withholding taxes and fractional
shares were paid in cash of US$0.1 million. The preferred shares have a
liquidation preference entitling each holder to receive an amount equal to
US$2,550 per share plus the cumulative amount of all dividends accrued and
unpaid. Each holder of the preferred shares may convert all, but not less
than all, of the preferred shares at any time into common shares at a rate
of 1,000 common shares for each preferred share, subject to certain
anti-dilution adjustments. During the years ended March 31, 2002, and 2000,
648 and 795 preferred shares were converted, respectively. On or after
January 1, 2003, the Company may convert the preferred shares, in whole or
in part, to common shares on the same terms as the holders, subject to
certain conditions.
The Company may redeem the preferred shares, in whole or part, on or after
January 1, 2005 for a cash payment of 105% of the stated value of US$2,550
per share plus accrued and unpaid dividends up to the date of redemption. A
holder has a right to require redemption of all, but not less than all, of
the preferred shares, for a cash payment of 100% of the stated value of
US$2,550 per share in the event that the composition of the Board of
Directors ceases to be in compliance with certain provisions relating to
the nomination and election of up to three directors. Management believes
the occurrence of such an event is remote.
The difference between the initial carrying value of the preferred shares
of US$25.9 million (Cdn$37.5 million) and the redemption price of US$34.8
million (Cdn$50.5 million) is being accreted as a charge to accumulated
deficit over the five-year period from the date of issuance to the first
available redemption date.
The Company's Series A preferred shares have been included in shareholders'
equity as the terms of the instrument do not provide a probable contractual
obligation under which the Company would be required to transfer cash or
other financial instruments to the holders under terms that would be
potentially unfavourable to the Company.
Each share purchase warrant entitles the holder to purchase one common
share at a price of US$5.00. The warrants expire on January 1, 2004, and
are not transferable except with the consent of the Company.
(b) SERIES B PREFERRED SHARES
As a condition of the purchase of a subsidiary, on October 13, 2000, the
Company issued ten shares at US$10 per share to the principal shareholder
of Trimark. The shares are nontransferable and are not entitled to
dividends. The shares are nonvoting except that the holder, who was a
principal of the subsidiary acquired, has the right to elect himself to the
62
Board of Directors. The shares are redeemable by the Company if certain
events occur. The shares have a liquidation preference equal to the stated
value of US$10 per share.
(c) STOCK-BASED COMPENSATION PLAN
The shareholders have approved an Employees' and Directors' Equity
Incentive Plan (the "Plan") that provides for the issue of up to 8.0
million common shares of the Company to eligible employees, directors and
service providers of the Company and its affiliates. Of the 8.0 million
common shares allocated for issuance, up to a maximum of 250,000 common
shares may be issued as discretionary bonuses in accordance with the terms
of a share bonus plan. As of March 31, 2002, no shares have been issued
under the share bonus plan. The Board of Directors approved an additional
1.4 million options to be issued outside of the Plan to a certain principal
of a subsidiary upon acquisition of that subsidiary. These shares were
issued in fiscal 2001 and are included in the total number of share options
granted and outstanding at March 31, 2002.
The Plan authorizes the granting of options to purchase shares of the
Company's common stock at an option price at least equal to the weighted
average price of the shares for the five trading days prior to the grant.
The options generally vest with the recipient within three years of grant,
and have a maximum term of five years.
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 US$5.00 multiplied by
the number of options exercised. These revised options are not considered
part of the Plan.
Changes in share options granted and outstanding for fiscal 2000, 2001 and
2002 were as follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
Outstanding at March 31, 1999 3,412,790 $ 5.51
Granted 1,157,500 5.81
Exercised (58,333) 4.09
Forfeited (575,213) 6.64
Expired (167,081) 5.39
--------- ----------
Outstanding at March 31, 2000 3,769,663 5.46
Granted 5,887,334 4.35
Exercised (6,250) 2.30
Forfeited (149,501) 4.69
Expired (605,829) 5.08
--------- ----------
Outstanding at March 31, 2001 8,895,417 4.82
Granted 1,000,498 4.36
Exercised (87,083) 2.41
Forfeited (979,839) 7.28
Expired (660,831) 5.22
--------- ----------
Outstanding at March 31, 2002 8,168,162 $ 4.50
========= ==========
63
Outstanding and exercisable options at March 31, 2002 were as follows:
WEIGHTED AVERAGE
REMAINING CONTRACTUAL
LIFE OF OUTSTANDING
PRICE RANGE OPTIONS OUTSTANDING EXERCISABLE
$2.30 2.34 Years 120,000 79,998
$4.00 to $5.50 2.80 Years 7,648,162 2,965,644
$6.38 3.19 Years 400,000 -
---------- --------- ---------
2.81 Years 8,168,162 3,045,642
========== ========= =========
12. ACQUISITIONS
TRIMARK HOLDINGS INC. (TRIMARK") -
On October 13, 2000, the Company acquired the shares of Trimark for total
consideration of US$49.6 million (Cdn$75.1 million) consisting of US$22.0
million (Cdn$33.3 million) cash, 10,229,837 common shares with a fair value
of US$23.6 million (Cdn$35.7 million) and acquisition costs of US$4.0
million (Cdn$6.1 million). At March 31, 2002 the remaining liabilities
under the restructuring costs totaled $1.0 million. The acquisition was
accounted for as a purchase, with the results of operations of the acquired
company consolidated from October 13, 2000 onwards. Goodwill arising on the
acquisition amounted to US $8.5 million (Cdn$12.7 million). In fiscal 2002
the allocation of the fair value of the consideration was amended resulting
in a decrease in investment in films and television programs, an increase
in goodwill and a decrease in accounts payable and accrued liabilities of
$5.4 million, $2.4 million and $3.3 million respectively.
Identifiable assets acquired:
Accounts receivable $ 31,115
Investment in films and television programs 81,696
Investment in CinemaNow 23,551
Property and equipment 400
Other assets 1,383
--------
138,145
--------
Liabilities assumed: 57,127
Bank loans 57,127
Accounts payable 19,999
Deferred revenue 613
Future income taxes 1,170
--------
78,909
--------
Net assets acquired: 59,236
Previously unrecognized income tax assets of
the Company 4,600
--------
$ 63,836
--------
The supplemental unaudited consolidated statement of operations presented
below illustrates the results of operations of the Company assuming the
acquisition of Trimark had occurred at the beginning of the period ended March
31, 2000:
64
March 31, March 31,
2001 2000
Unaudited Unaudited
REVENUE $ 349,807 $ 407,960
EXPENSES:
Direct operating 214,187 338,301
Distribution and marketing 55,462 --
General and administration 54,288 49,656
Amortization 10,060 7,388
--------- ---------
Total expenses 333,997 395,345
--------- ---------
OPERATING INCOME 15,810 12,615
--------- ---------
OTHER EXPENSES:
Interest 14,726 7,229
Minority interests 881 1,308
Unusual losses -- 1,698
--------- ---------
Total other expenses 15,607 10,235
--------- ---------
INCOME BEFORE INCOME TAXES AND EQUITY 203 2,380
Income taxes (2,190) 866
--------- ---------
INCOME BEFORE EQUITY INTERESTS 2,393 1,514
Equity interest in Mandalay 8,298 5,894
Equity interest in CinemaNow 2,006 --
Other equity interests -- (159)
--------- ---------
NET LOSS $ (7,911) $ (4,221)
========= =========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.37) $ (0.18)
========= =========
13. GAIN
On July 10, 2001, a third party invested $14.0 million in a subsidiary of
the Company to obtain a 35% interest. The gain on dilution of the Company's
investment was $3.4 million (net of income taxes of $nil) and resulted in a
decrease of $0.2 million in goodwill.
14. INCOME TAXES
Income before income taxes and equity interests by tax jurisdiction is as
follows:
YEAR ENDED Year ended Year ended
MARCH 31, 2002 March 31, 2001 March 31, 2000
Canada $ 15,681 $ 5,356 $ 6,587
United States (36,234) 9,913 (4,145)
--------- --------- ---------
$ (20,553) $ 15,269 $ 2,442
========= ========= =========
65
The provision for (recovery of) income taxes is as follows:
YEAR ENDED Year ended Year ended
MARCH 31, 2002 March 31, 2001 March 31, 2000
Current $ 2,003 $ 2,239 $1,510
Future (1,500) -- 490
Adjustments to opening future income tax
valuation allowances following change in
circumstances -- (5,531) --
------- ------- ------
$ 503 $(3,292) $2,000
======= ======= ======
CANADA
Current $ 2,003 $ 1,412 $1,510
Future -- -- 490
------- ------- ------
2,003 1,412 2,000
------- ------- ------
UNITED STATES
Current -- 827 --
Future (1,500) (5,531) --
------- ------- ------
(1,500) (4,704) --
------- ------- ------
Total $ 503 $(3,292) $2,000
======= ======= ======
The Company's provision for income tax expense differs from the provision
computed at statutory rates as follows:
YEAR ENDED Year ended Year ended
MARCH 31, 2002 March 31, 2001 March 31, 2000
Income tax expense (recovery) computed at
Canadian combined federal and provincial
statutory rates $(31,686) $ 6,928 $ 1,088
Foreign and provincial operations subject
to different income tax rates 2,492 (606) (64)
Expenses not deductible for income tax
purposes 346 1,217 862
Write-off of investments subject to
significant influence 15,898 -- --
Tax benefits received from Mandalay -- (6,041) --
13,441
Increase (decrease) of valuation allowances 3,495 (5,531) (636)
Minority interests 753 317 584
Other (741) 424 166
-------- ------- --------
$ 503 $(3,292) $ 2,000
======== ======= ========
66
The Company has certain income tax loss carry-forwards, the benefits of
which have not yet been recognized and an estimated evaluation allowance
has been provided for in the financial statements. These income tax loss
carry-forwards amount to approximately $45.4 million for Canadian income
tax purposes, and US$38.1 million (Cdn$60.7 million) for U.S. income tax
purposes. The expiration dates of these losses, which are available to
reduce future taxable income in each country, are as follows:
CANADA UNITED STATES
US$
Year ending March 31, 2003 $ 1,469 $ --
2004 2,486 300
2005 294 --
2006 4,776 --
2007 4,186 --
2008 26,445 --
2009 5,742
2019 -- 7,900
2020 -- 11,600
2021 -- 1,500
2022 16,831
------- -------
$45,398 $38,131
======= =======
Following are the components of the Company's future income tax assets at
March 31:
MARCH 31, March 31,
2002 2001
CANADA
Assets
Net operating losses $ 16,495 $ 18,100
Accounts payable 304 304
Other assets 281 745
Valuation allowance (12,566) (15,353)
-------- --------
4,514 3,796
Liabilities
Investment in films and television programs (3,046) (1,719)
Property and equipment (1,468) (2,077)
-------- --------
Net Canada -- --
-------- --------
67
UNITED STATES
Assets
Net operating losses $ 13,666 $ 7,304
Accounts payable 6,087 6,647
Other assets 1,613 1,479
Investment in Mandalay 14,617 10,544
Valuation allowance (23,643) (6,441)
-------- --------
12,345 19,533
Liabilities
Investment in films and television programs (2,497) (11,190)
Investment in CinemaNow (9,100) (9,100)
-------- --------
Net United States 743 (757)
-------- --------
Total $ 743 $ (757)
======== ========
The Company has recorded a partial valuation allowance against its Canadian
future tax assets based on the extent to which it is not
more-likely-than-not that sufficient taxable income will be realized during
the carry-forward periods to utilize all the future tax assets. The
valuation allowances recorded against Canadian and United States future
income tax assets decreased by $2.8 million and increased by $17.2 million,
respectively, during fiscal 2002. Realization of the future tax benefit is
based on the Company's ability to generate taxable income in the applicable
jurisdictions within a one year period. It is reasonably possible that
changes in circumstances could occur in the future requiring a significant
adjustment to the amount of the valuation allowances against future income
tax assets.
The amount of unrecognized future income tax liability for temporary
differences related to the Company investments in United States
subsidiaries and its equity investee Mandalay, which are not expected to
reverse in the foreseeable future, is $4.1 million (2001 - $4.0 million).
15. INCOME (LOSS) PER COMMON SHARE
YEAR ENDED Year ended Year ended
MARCH 31, 2002 March 31, 2001 March 31, 2000
Basic income (loss) per common share is
calculated as follows:
Numerator:
Net income (loss) available to common
shareholders $(79,325) $ 3,116 $ (6,611)
======== ======== ========
Denominator:
Weighted average common shares outstanding
(number/'000s) 42,753 36,196 30,665
======== ======== ========
Basic and diluted income (loss) per common share $ (1.86) $ 0.09 $ (0.22)
======== ======== ========
68
Options to purchase 8,168,162 common shares (2001 - 8,895,417 common
shares, 2000 - 3,769,663 common shares) at an average price of $4.50 (2001
- $4.82, 2000 - $5.46) and share purchase warrants to purchase 5,525,000
common shares (2001 - 5,525,000 common shares, 2000 - 5,525,000 common
shares) at an exercise price of US$5.00 (2001 - US$5.00, 2000 - US$5.00)
were outstanding during the year. 11,830 Series A preferred share units
which are each convertible into 1,000 common shares for no additional
consideration were outstanding at March 31, 2002 (2001 - 12,205 units).
Additionally, convertible promissory notes with a principal amount of $16.5
million were outstanding at March 31, 2002 (2001 - $16.5 million; 2000 -
$16.5 million). These notes are convertible into common shares at a price
of $8.10 per share. Under the "if converted" method of calculating diluted
earnings per share, the share purchase options, the share purchase
warrants, the Series A preferred shares and the convertible promissory
notes were anti-dilutive in each of the years presented and were not
reflected in diluted earnings per share.
16. GOVERNMENT ASSISTANCE
Revenue includes tax credits earned totaling approximately $25.7 million
(2001 - $18.2 million; 2000 - $24.0 million). Accounts receivable at March
31, 2002 includes $37.4 million with respect to government assistance (2001
- $35.9 million).
Investment in films and television programs as at March 31, 2002 includes a
reduction of $3.7 million with respect to government assistance for
acquisition of certain programs, which represents management's estimate of
the future liability relating to government assistance, taking into
consideration future revenue estimates, net of repaid amounts. This
government assistance is repayable in whole or in part based on profits
generated by certain individual film and television programs, and is
forgivable in the event that the individual film and television programs do
ultimately not generate sufficient profits.
Distribution and marketing expenses include a reduction of $1.3 million
(2001 - $1.0 million; 2000 - $0.6) with respect to government assistance
towards print and advertising expenses.
The Company is subject to routine inquiries and review by Regulatory
authorities of its various incentive claims which have been received or are
receivable. Adjustments of claims, if any, as a result of such inquiries or
reviews, will be recorded at the time of such determination.
17. SEGMENT INFORMATION
The Company has five reportable business segments: Motion Pictures;
Television; Animation; Studio Facilities; and CineGate. 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 feature
films, acquisition of North American and worldwide distribution rights,
North American theatrical, video and television distribution of feature
films produced and acquired and worldwide licensing of distribution rights
to feature films produced and acquired.
Television consists of the development, production and worldwide
distribution of television productions including television series,
television movies and mini-series and non-fiction programming.
Animation consists of the development, production and worldwide
distribution of animated and live action television series, television
movies and feature films.
69
Studio Facilities consists of management of an eight-soundstage studio
facility in Vancouver, Canada. Rental revenue is earned from soundstages,
office and other services such as furniture, telephones and lighting
equipment to tenants that produce or support the production of feature
films, television series, movies and commercials. Tenancies vary from a few
days to five years depending on the nature of the project and the tenant.
CineGate provides management services to Canadian limited partnerships,
including accessing tax credits to finance production in Canada. CineGate
ceased operations in fiscal 2002 upon the recision of the tax shelter
business by the Canadian government.
Segmented information by business is as follows:
YEAR ENDED Year ended Year ended
MARCH 31, 2002 March 31, 2001 March 31, 2000
Revenues
Motion Pictures $251,346 $173,941 $146,910
Television 110,696 71,452 81,758
Animation 55,552 29,658 35,620
Studio Facilities 6,642 5,532 6,963
CineGate 2,346 1,643 --
-------- -------- --------
$426,582 $282,226 $271,251
======== ======== ========
Direct operating expenses
Motion Pictures $103,287 $ 73,621 $119,435
Television 101,072 58,954 74,249
Animation 43,259 21,222 26,739
Studio Facilities 2,717 2,623 2,452
CineGate -- -- --
-------- -------- --------
$250,335 $156,420 $222,875
======== ======== ========
Distribution and marketing
expenses
Motion Pictures $118,025 $ 51,512 $-
Television 948 264 --
Animation 389 -- --
Studio Facilities -- -- --
CineGate -- -- --
-------- -------- --------
$119,362 $ 51,776 $-
======== ======== =
General and administration expenses
Motion Pictures $ 30,859 $ 23,034 $ 16,184
Television 5,361 5,393 8,018
Animation 4,124 2,778 2,595
Studio Facilities 344 281 273
Corporate 13,584 6,224 4,318
-------- -------- --------
$ 54,272 $ 37,710 $ 31,388
======== ======== ========
70
Revenue by geographic location, based on the location of the customers, is
as follows:
YEAR ENDED Year ended Year ended
MARCH 31, 2002 March 31, 2001 March 31, 2000
Canada $ 79,701 $ 57,223 $ 70,050
United States 282,675 177,287 131,433
Other foreign 64,206 47,716 69,768
-------- -------- --------
$426,582 $282,226 $271,251
======== ======== ========
Assets by geographic location are as follows:
MARCH 31, March 31,
2002 2001
Canada $186,216 $334,713
United States 421,384 248,832
-------- --------
$607,600 $583,545
======== ========
18. COMMITMENTS AND CONTINGENCIES
(a) Future minimum annual commitments under contractual obligations
and commercial commitments as of March 31, 2002 are as follows:
2003 2004 2005 2006 2007 Thereafter Total
CONTRACTUAL
OBLIGATIONS:
Long-term debt $ 4,025 $66,233 $1,526 $2,052 $ -- $ 1,729 $ 75,565
Operating leases 4,481 3,864 3,365 2,411 1,780 2,549 18,450
Employment contracts 6,284 3,611 -- -- -- -- 9,895
Unconditional
purchase obligations 26,805 5,117 -- -- -- -- 31,922
Distribution and
marketing
commitments 7,793 -- -- -- -- -- 7,793
------- ------- ------ ------ ------ -------- --------
49,388 78,825 4,891 4,463 1,780 4,278 143,625
OTHER COMMERCIAL
COMMITMENTS:
Production guarantee 159 -- -- -- -- -- 159
Corporate guarantee 500 -- -- -- -- -- 500
------- ------- ------ ------ ------ -------- --------
$50,047 $78,825 $4,891 $4,463 $1,780 $ 4,278 $144,284
======= ======= ====== ====== ====== ======== ========
Unconditional purchase obligations relate to the purchase of film rights
for future delivery and advances to producers.
71
Production guarantees relate to guarantees for bank loans used to finance
production costs of unrelated production companies, which have been
provided by a subsidiary of the Company in the normal course of business.
Corporate guarantee relates to a guarantee the Company has provided for a
demand loan to a subsidiary up to $500,000.
(b) 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.
(c) The Company incurred rental expense of $4.1 million during the year
ended March 31, 2002 (2001- $3.0 million, 2000 - $1.9 million).
(d) The Company subleases two locations, which expire on January 31, 2003
and November 30, 2003. Sublease revenue of $1.4 million is expected to be
earned in fiscal 2003 and $0.4 million is expected to be earned in fiscal
2004.
19. FINANCIAL INSTRUMENTS
(a) CREDIT RISK
Accounts receivable includes amounts receivable from Canadian governmental
agencies in connection with government assistance for productions as well
as amounts due from customers. Amounts receivable from governmental
agencies amounted to 20.0 % of total accounts receivable at March 31, 2002
(2001 - 19.0%). Concentration of credit risk with the Company's customers
is limited due to the Company's customer base and the diversity of its
sales throughout the world. The Company performs ongoing credit evaluations
and maintains a provision for potential credit losses. The Company
generally does not require collateral for its trade accounts receivable.
(b) FORWARD CONTRACTS
The Company has entered into foreign exchange contracts to hedge future
production expenses denominated in Canadian, Australian and New Zealand
dollars. Gains and losses on the foreign exchange contracts are capitalized
and recorded as production costs when the gains and losses are realized. As
at March 31, 2002, the Company had contracts to sell US$10.1 million in
exchange for Cdn$16.3 million over a period of nine months at a weighted
average exchange rate of Cdn$1.5952. During the year, the Company completed
foreign exchange contracts denominated in Australian and New Zealand
dollars. The net loss resulting from the completed contracts amounted to
$nil. These contracts are entered into with a major financial institution
as counterparty. The Company is exposed to credit loss in the event of
nonperformance by the counterparty, which is limited to the cost of
replacing the contracts, at current market rates. The Company does not
require collateral or other security to support these contracts.
Unrecognized gains as at March 31, 2002 amounted to Cdn$0.5 million.
20. SUPPLEMENTARY CASH FLOW STATEMENT INFORMATION
(a) Common shares issued in fiscal 2001 in conjunction with a business
combination in the amount of $35.0 million are on a non-cash basis and are,
therefore, excluded from the consolidated statement of cash flows.
(b) Interest paid during the year ended March 31, 2002 amounted to $18.8
million (2001 - $10.4 million; 2000 - $7.0 million).
72
(c) Income taxes paid during the year ended March 31, 2002 amounted to $1.4
million (2001 - $2.5 million; 2000 - $0.5 million).
21. RECONCILIATION TO UNITED STATES GAAP
The consolidated financial statements of the Company have been prepared in
accordance with Canadian GAAP. The material differences between the
accounting policies used by the Company under Canadian GAAP and U.S. GAAP
are disclosed below in accordance with the provisions of the Securities and
Exchange Commission.
Under U.S. GAAP, the net loss and loss per share figures for the years
ended March 31, 2002, 2001 and 2000, and the shareholders' equity as at
March 31, 2002 and 2001 are as follows:
73
NET INCOME (LOSS) SHAREHOLDERS' EQUITY
---------------------------------------- --------------------
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, March 31,
2002 2001 2000 2002 2001
AS REPORTED UNDER CANADIAN
GAAP $(73,562) $ 8,728 $(5,293) $ 120,194 $ 196,789
Equity interest in loss of
Mandalay (a) 1,150 1,150 1,907 (3,419) (4,569)
Adjustment for capitalized
pre-operating costs (b) 580 580 962 (2,675) (3,255)
Restructuring costs (c) -- (1,733) -- (1,733) (1,733)
Accounting for income taxes(d) -- -- -- 2,754 2,754
Presentation of Series A
preferred Shares outside
shareholders equity (e) -- -- -- (40,387) (38,986)
-------- -------- ------- --------- ---------
NET INCOME (LOSS) BEFORE
ACCOUNTING CHANGE/
SHAREHOLDERS' EQUITY
UNDER U.S. GAAP (71,832) 8,725 (2,424) 74,734 151,000
Cumulative effect of
accounting changes, net
of income taxes (f) -- (58,942) -- -- --
-------- -------- ------- --------- ---------
NET LOSS/SHAREHOLDERS' EQUITY
UNDER U.S. GAAP (71,832) (50,217) (2,424) 74,734 151,000
Adjustment to cumulative
translation adjustments
account (net of tax of
$nil) (g) (1,879) 8,722 (2,981) -- --
Other comprehensive loss (net
of tax of $nil)(g) (405) -- -- (405) --
-------- -------- ------- --------- ---------
COMPREHENSIVE LOSS
ATTRIBUTABLE TO COMMON
SHAREHOLDERS UNDER U.S.
GAAP $(74,116) $(41,495) $(5,405) $ 74,329 $ 151,000
======== ======== ======= ========= =========
BASIC AND DILUTED INCOME
(LOSS) PER COMMON SHARE
UNDER U.S. GAAP BEFORE
ACCOUNTING CHANGE $ (1.78) $ 0.13 $ (0.11)
BASIC AND DILUTED LOSS PER
COMMON SHARE UNDER U.S.
GAAP $ (1.78) $ (1.50) $ (0.11)
======== ======== =======
74
Reconciliation of movement in Shareholders' Equity under U.S. GAAP:
MARCH 31, March 31, March 31,
2002 2001 2000
BALANCE AT BEGINNING OF THE YEAR $ 151,000 $ 158,974 $ 154,361
Increase in capital stock 1,857 37,573 11,055
Dividends paid on preferred shares (2,492) (2,497) (591)
Accretion on preferred shares (e) (1,920) (1,555) (446)
Net loss under U.S. GAAP (71,832) (50,217) (2,424)
Adjustment to cumulative translation adjustments
account (1,879) 8,722 (2,981)
Other comprehensive loss (405) -- --
--------- --------- ---------
BALANCE - END OF THE YEAR $ 74,329 $ 151,000 $ 158,974
========= ========= =========
(a) EQUITY INTEREST IN LOSS OF MANDALAY
The Company accounts for Mandalay using the equity method. As described in
note 4, under Canadian GAAP, pre-operating costs incurred by Mandalay were
deferred and were amortized to income to December 31, 2001. Under U.S.
GAAP, all start-up costs are required to be expensed as incurred. The
amounts are presented net of income taxes of $0.8 million (2001 - $0.8
million; 2000 - $nil).
(b) ACCOUNTING FOR CAPITALIZED PRE-OPERATING PERIOD COSTS
Under Canadian GAAP, the Company deferred certain pre-operating costs
related to the launch of the television one-hour series business amounting
to $4.8 million. This amount is being amortized over five years commencing
in the year ended March 31, 2000. Under U.S. GAAP, all start-up costs are
to be expensed as incurred. The amounts are presented net of income taxes
of $0.4 million (2001 - $0.4 million; 2000 - $nil).
(c) 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 $2.1 million of such costs
in the purchase price for a subsidiary. Under U.S. GAAP, costs related to
the acquiring Company must be expensed as incurred. The amount is presented
net of income taxes of $0.4 million.
(d) 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 $0.3 million (2001 - $2.3 million),
with a corresponding increase in valuation allowances by $0.3 million (2001
- $2.3 million).
75
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 $2.8 million as at March 31, 2002 (March 31, 2001 - $2.8
million).
(e) ACCRETION ON PREFERRED SHARES
Under Canadian GAAP, the Company's preferred shares have been included in
shareholders' equity as the Company considers the likelihood of redemption
by the holders to be remote. Under U.S. GAAP, the preferred shares would be
presented outside of shareholders equity.
As explained in note 11(b), 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 at the date of the offering of $40.0 million is the
residual value arrived at by taking the $48.0 million proceeds less the
fair value of the share purchase warrants of $5.7 million less share issue
costs of $2.4 million.
Under Canadian GAAP, the difference between the carrying amount and the
redemption value of $50.5 million is being accreted as a charge to
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.
(f) ACCOUNTING CHANGES
In the year ended March 31, 2001, the Company elected early adoption of SoP
00-2. Under Canadian GAAP, the one-time after-tax adjustment for the
initial adoption of SoP 00-2 was made to opening accumulated deficit. Under
SoP 00-2, the cumulative effect of changes in accounting principles caused
by adopting the provisions of SoP 00-2 should be included in the
determination of net earnings for GAAP purposes. The cumulative effect of
the adjustment comprises $58.9 million net of income taxes of $2.2 million
for the Company and its subsidiaries as well as $5.5 million, net of income
taxes of $nil for the Company's equity investee Mandalay.
(g) COMPREHENSIVE LOSS
Comprehensive loss consists of net income (loss) and other gains and losses
affecting shareholders' equity that, under U.S. GAAP are excluded from 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 March 31, 2002 net of
income taxes of $nil (2001 - $nil).
(h) ACCOUNTING FOR TAX CREDITS
Under Canadian GAAP, federal and provincial tax credits earned with respect
to production costs may be included in revenue. Accounting Principles Board
Opinion No. 4, "Accounting for the Investment Credit," requires tax credits
to be presented as reduction of income tax expense. The corresponding
impact would be a reduction of revenue and credit to income tax expense of
$25.7 million (2001 - $18.2 million; 2000 - $24.0 million).
76
(i) ACCOUNTING FOR STOCK BASED COMPENSATION
Under U.S. GAAP the Company has elected to use the intrinsic value method
in accounting for stock based compensation. In accordance with SFAS No. 123
accounting for stock based compensation the following disclosures are
provided about the costs of stock based compensation awards using the fair
value method.
The weighted average estimated fair value of each stock option granted in
the year ended March 31, 2002 was $1.36 (2001 - $1.64; 2000 - $1.76). On
December 14, 1998 the Company modified the terms of 2,676,414 options
outstanding on that date, reducing the exercise price from $8.10 to $5.25,
with the effect that it effectively issued new options with an exercise
price of $5.25. The vesting period and remaining contractual term were
unchanged. For proforma purposes, the Company has recognized additional
compensation cost for the excess of the fair value of the modified options
issued over the value of the original options at the date of the exchange
measured using the Black-Scholes option pricing model, with the following
assumptions: $4.75 market common share price, $5.25 exercise price, 6.0%
risk-free interest rate, 35% volatility, and a 0% dividend yield. The total
excess fair value of the stock options affected was estimated to be $1.4
million and is being recognized over the remaining vesting period of the
options. The total stock compensation expense in the year ended March 31,
2002 would be $3.9 million (2001 - $5.4 million; 2000 - $4.0 million).
For disclosure purposes fair value of each stock option grant was estimated
on the date of grant using the Black-Scholes option pricing model with the
following assumptions used for stock options granted: a dividend yield of
0%, expected volatility of 50% (2001 - 50%; 2000 - $35%), risk-free
interest rate of 2.0% (2001 - 5.5%; 2000 - 6.0%) and expected life of five
years.
The resulting pro forma U.S. GAAP loss and loss per share for the year
ended March 31, 2002 before the effect of adoption of new accounting
pronouncements was $75.8 million and $1.88 respectively (2001 - net income
of $3.3 million and loss per share of $0.02; 2000 - loss and loss per
share $6.4 million and $0.24 respectively).
The resulting pro forma U.S. GAAP net loss and loss per share for the year
ended March 31, 2002 was $75.8 million and $1.88 respectively (2001 - loss
and loss per share of $55.6 million and $1.54 respectively; 2000 - loss and
loss per share $6.4 million and $0.24 respectively).
77
(j) INCOME (LOSS) PER SHARE
Basic income (loss) per share under U.S. GAAP is calculated as follows:
YEAR ENDED Year ended Year ended
MARCH 31, March 31, March 31,
2002 2001 2000
Numerator:
Net income (loss) (before accounting change $(71,832) $ 8,725 $ (2,424)
in 2001)
Less:
Series A preferred share dividends (2,492) (2,497) (591)
Accretion on Series A preferred shares (1,920) (1,555) (1,008)
-------- -------- --------
Income (loss) available to common shareholders $(76,244) $ 4,673 $ (4,023)
======== ======== ========
Denominator:
Weighted average common shares outstanding
(number/'000s) 42,753 36,196 30,665
======== ======== ========
Basic and diluted income (loss) per share $ (1.78) $ 0.13 $ (0.11)
======== ======== ========
(k) PROPORTIONATE CONSOLIDATION
The accounts of all jointly controlled companies are proportionately
consolidated according to the Company's ownership interest. Under U.S.
GAAP, proportionate consolidation is not permitted for jointly controlled
companies and the cost, equity or full consolidation methods of accounting
must be followed, as appropriate. As permitted by the United States
Securities and Exchange Commission, the effect of this difference in
accounting principles is not reflected above.
(l) CONSOLIDATED STATEMENTS OF CASH FLOWS
The Company's cash flow statement prepared in accordance with Canadian GAAP
complies with U.S. GAAP.
(m) CONSOLIDATED FINANCIAL STATEMENTS
Under Canadian GAAP, the Company consolidates the financial statements of
CineGroupe Corporation ("CineGroupe"). On July 10, 2001, as a condition of
a $14.0 million equity financing with a third party, CineGroupe'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 now precluded from consolidating CineGroupe and
will account for CineGroupe, commencing April 1, 2001, using the equity
method.
The impact of accounting for CineGroupe using the equity method under U.S.
GAAP, would be a reduction in fiscal 2002 revenue to $371.0 million, direct
operating expenses to $207.0 million, distribution and marketing costs to
$119.0 million and general and administration expenses to $50.2 million.
The impact of using the equity method under U.S. GAAP on the consolidated
balance sheet at March 31, 2002 would be a reduction in total assets to
$536.3 million and a reduction in debt (including bank loans, production
and distribution loans, and long-term debt) to $300.7 million.
78
22. RECENT PRONOUNCEMENTS
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS-
In August 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144
will be effective for financial statements issued for fiscal years
beginning after December 15, 2001. SFAS 144 supersedes SFAS 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of", however, it retains the fundamental provisions of that
statement related to the recognition and measurement of the impairment of
long-lived assets to be "held and used". In addition, SFAS 144 provides
more guidance on estimating cash flows when performing a recoverability
test, requires that long-lived assets to be disposed of other than by sale
to be classified as "held and used" until it is disposed of, and
establishes more restrictive criteria to classify an asset as "held for
sale". The new standard is not expected to have any affect on the Company.
STOCK-BASED COMPENSATION-
In January 2002, the CICA released Section 3870, "Stock-Based Compensation
and Other Stock-Based Payments", to be applied by companies for fiscal
years beginning on or after January 1, 2002 and applied to awards granted
on or after the date of adoption. Section 3870 establishes standards for
the recognition, measurement and disclosure of stock-based compensation and
other stock-based payments made in exchange for goods and services, and is
similar, in many respects to APB 25. The new standard is not expected to
have any affect on the Company.
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
Certain quarterly information is presented below (all amounts in thousands
of Canadian dollars, except per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
2002
Revenues $ 69,549 $ 92,309 $ 111,062 $ 153,662
Direct operating costs $ 38,262 $ 49,759 $ 63,988 $ 98,326
Income (loss) before write-down and equity
interest in investments subject to significant
influence $ 1,515 $ 525 $ (3,804) $ (19,292)
Net income (loss) $ (517) $ 220 $ (4,993) $ (68,272)
Basic and diluted loss per share $ (0.05) $ (0.03) $ (0.15) $ (1.63)
79
Report of Independent Auditors
The Members
Mandalay Pictures, LLC
We have audited the balance sheet of Mandalay Pictures, LLC as of March 31,
2002, and the related statements of operations, changes in members' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements of Mandalay Pictures, LLC for the year ended March 31, 2001 were
audited by other auditors, whose report dated June 22, 2001, expressed an
unqualified opinion on those statements and included an explanatory paragraph
that disclosed the change in the Company's method of film accounting discussed
in Note 1 to these financial statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 2002 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mandalay
Pictures, LLC at March 31, 2002, and the consolidated results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that Mandalay Pictures, LLC will continue as a going concern. As more fully
described in Note 1, the Company has incurred recurring operating losses and
requires additional financing in order to produce future films. Additionally,
the Company has not successfully negotiated distribution arrangements for future
films. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ERNST & YOUNG LLP
Los Angeles, California
May 17, 2002
80
Mandalay Pictures, LLC
Consolidated Balance Sheets
(All amounts in US dollars)
MARCH 31
2002 2001
---- ----
ASSETS
Cash and cash equivalents $ 4,841,984 $ 16,113,095
Restricted cash 13,647,669 21,147,617
Accounts receivable 16,214,580 29,105,253
Other receivables -- 15,225,000
Film inventory 86,746,444 133,127,349
Due from (to) affiliates 42,592 (32,806)
Other assets 38,621 113,815
------------- -------------
Total assets $ 121,531,890 $ 214,799,323
============= =============
LIABILITIES
Accounts payable and accrued expenses $ 4,380,559 $ 875,163
Accrued participations and residuals 13,867,670 9,847,001
Bank loan -- 3,085,380
Production loans 47,430,000 93,126,648
Contractual obligations 6,846,491 36,574,600
Deferred revenue 31,347,078 41,256,404
------------- -------------
Total liabilities 103,871,798 184,765,196
Commitments and contingencies
Members' equity:
Contributions from members 44,639,000 50,001,000
Accumulated deficit (26,978,908) (19,966,873)
------------- -------------
Total members' equity 17,660,092 30,034,127
------------- -------------
Total liabilities and members' equity $ 121,531,890 $ 214,799,323
============= =============
See accompanying notes.
81
Mandalay Pictures, LLC
Consolidated Statements of Operations
(All amounts in US dollars)
YEAR ENDED MARCH 31
2002 2001
---- ----
Revenues $ 79,672,559 $ 42,671,932
Operating expenses:
Amortization of film costs (79,944,752) (42,448,780)
Write-off of abandoned film projects (4,371,778) (341,090)
General and administration (4,020,597) (5,769,015)
Depreciation (39,315) (92,262)
------------ ------------
(88,376,442) (48,651,147)
------------ ------------
Loss from operations (8,703,883) (5,979,215)
Other income (expense):
Interest income 1,197,223 1,972,026
Interest expense (524,227) (191,000)
Gain on contractual settlement 1,042,515 --
------------ ------------
1,715,511 1,781,026
------------ ------------
Loss before provision for income taxes and cumulative change in
accounting principle (6,988,372) (4,198,189)
Provision for income taxes (23,663) (22,318)
------------ ------------
Loss before cumulative effect of change in accounting principle (7,012,035) (4,220,507)
Cumulative effect of change in accounting principle -- (3,784,000)
------------ ------------
Net loss $ (7,012,035) $ (8,004,507)
============ ============
See accompanying notes.
82
Mandalay Pictures, LLC
Consolidated Statements of Changes in Members' Equity
(All amounts in US dollars)
Tigerstripes, LG Pictures,
LLC Inc. Total
--- ---- -----
Balance at March 31, 2000 $ 550 $ 38,038,084 $ 38,038,634
Net loss -- (8,004,507) (8,004,507)
---------- ------------ ------------
Balance at March 31, 2001 550 30,033,577 30,034,127
Return of capital -- (5,362,000) (5,362,000)
Net loss -- (7,012,035) (7,012,035)
---------- ------------ ------------
Balance at March 31, 2002 $ 550 $ 17,659,542 $ 17,660,092
========== ============ ============
See accompanying notes.
83
Mandalay Pictures, LLC
Consolidated Statements of Cash Flows
(All amounts in US dollars)
YEAR ENDED MARCH 31
2002 2001
---- ----
OPERATING ACTIVITIES
Net loss $ (7,012,035) $ (8,004,507)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Cumulative effect of a change in accounting principle -- 3,784,000
Gain on contractual settlement (1,042,515) --
Depreciation 39,315 92,262
Write-off of abandoned film projects 4,371,778 341,090
Amortization of film costs 79,944,752 42,448,780
Changes in operating assets and liabilities:
Restricted cash 7,499,948 10,865,134
Accounts receivable 12,480,450 (25,542,114)
Other receivables -- (11,400,966)
Film inventory (86,040,522) (129,299,198)
Due to/from affiliates, net (75,398) 276,986
Other assets 35,879 320,321
Accounts payable and accrued expenses 426,778 (6,630,295)
Accrued participations and residuals 13,840,676 6,647,001
Contractual obligations 596,491 20,402,652
Deferred revenue (211,894) 36,150,110
------------ -------------
31,865,738 (51,544,237)
------------ -------------
Net cash provided by (used in) operating activities 24,853,703 (59,548,744)
FINANCING ACTIVITIES
Proceeds (repayments) from bank loan, net 53,465 284,196
Repayments on production loans (85,176,648) (21,614,163)
Proceeds from production loans 39,480,000 84,183,584
Proceeds from other financing arrangements 13,295,708 (433,352)
Return of members' capital contributions (5,362,000) --
Proceeds from contractual settlement 1,584,661 --
------------ -------------
Net cash (used in) provided by financing activities (36,124,814) 62,420,265
------------ -------------
Net (decrease) increase in cash and cash equivalents (11,271,111) 2,871,521
Cash and cash equivalents, beginning of year 16,113,095 13,241,574
------------ -------------
Cash and cash equivalents, end of year $ 4,841,984 $ 16,113,095
============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 2,095,347 $ 5,926,277
Income taxes paid $ 23,663 $ 22,318
See accompanying notes.
84
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS AND BASIS OF PRESENTATION
Mandalay Pictures, LLC (the Company) was incorporated on March 1, 1998 as a
Delaware limited liability company. The Company develops, finances, produces and
distributes major motion pictures.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated.
The accompanying financial statements have been prepared on the basis that the
Company will continue as a going concern. The Company's ability to continue as a
going concern is dependent upon its ability to produce and distribute films. As
of March 31, 2002, the Company has arranged financing and distribution for two
films that are currently in production. However, the Company has incurred
recurring operating losses, and has not arranged financing for production of any
future films. In addition, although distribution arrangements are in place for
films currently in production, the Company's current distribution arrangements
have been terminated or have expired and the Company has not successfully
negotiated other distribution arrangements for future films. If the Company
cannot produce future films, the Company will not be able to continue as a going
concern.
Management is actively pursuing other film financing and distribution options.
However, there can be no assurance that the Company will be successful in its
efforts to identify additional financing or distribution arrangements on terms
acceptable to the Company. The financial statements do not include any
adjustments relating to the recoverability of the carrying amount of the
recorded assets or the amount of liabilities that might result from the outcome
of the Company's inability to produce future films.
CHANGE IN ACCOUNTING PRINCIPLE
In June 2000, the American Institute of Certified Public Accountants issued
Statement of Position 00-2, "Accounting by Producers or Distributors of Films"
(the SOP). The SOP established new accounting standards for producers and
distributors of films, including changes in revenue recognition concepts and
accounting for exploitation, development. The SOP requires that advertising
costs be expensed in accordance with SOP 93-7, "Reporting on Advertising Costs,"
while all other exploitation costs are to be expensed as incurred. In addition,
the SOP provided that development costs for abandoned projects and indirect
overhead costs are to be charged to expense instead of being capitalized to film
costs.
The Company adopted the SOP effective April 1, 2000 and recorded a charge for
the initial adoption of $3,784,000, which has been reflected as a cumulative
effect of a change in accounting principle in the accompanying consolidated
statements of operations. Also as a result of the adoption, the Company
recognized approximately $18,748,000 of revenue in fiscal year 2001, which was
recognized in prior years. The effect on net loss of recognizing these revenues
was not material.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the year.
Actual results could differ from those estimates.
85
SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended March 31, 2002, the Company entered into an agreement to
settle various amounts owed between the Company and third-party investors in
certain films produced by the Company. As a result, contractual obligations of
$16,767,000 were offset against film costs of $16,002,000, other receivables of
$723,000 and accounts payable of $42,000. In addition, accrued participation of
$4,286,000, contractual obligations of $3,000,000 and film costs of $2,759,000
were offset against other receivables of $10,045,000.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity of three months or less and investments in money market funds to be
cash equivalents. At times, cash balances held at financial institutions are in
excess of the Federal Deposit Insurance Corporation's limits.
RESTRICTED CASH
Restricted cash represents amounts on deposit with financial institutions as
collateral for certain distribution agreements and for the payment of interest
and bank fees associated with loans made for the production of certain films. At
March 31, 2002 and 2001, the amount of restricted cash on deposit was
$13,647,669 and $21,147,617, respectively. These deposits require third party
approvals prior to the disbursement of any funds. Any unused funds will be
returned to the Company upon repayment of the underlying loan.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, accounts receivable, other assets,
accounts payable and accrued expenses, bank and production loans, contractual
obligations, accrued participations and residuals, and amounts due from
affiliates as reflected in the financial statements approximate their carrying
value at March 31, 2002 and 2001, respectively.
FILM COSTS
FILM INVENTORY
Film inventory represents the unamortized cost of films which have been
developed and produced by the Company or for which the Company has acquired
distribution rights. Such costs include all production costs, including an
allocation of direct overhead and financing costs. Included in film inventory
costs are development costs representing expenditures directly attributable to
projects which are incurred prior to their production. Such inventory items are
capitalized and, upon commencement of production, are charged to the production.
Development costs not charged to a production are written off when the project
is abandoned or when more than three years has passed from the first
expenditure.
86
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FILM COSTS (CONTINUED)
FILM INVENTORY (CONTINUED)
Film inventory is stated at the lower of cost, net of amortization, or fair
value. Film inventory costs are amortized against revenues generated by the
delivery and subsequent exploitation of the film. Amortization is determined
using the individual film forecast method, whereby costs accumulated in the
development and production of a film are amortized in the proportion that
current gross revenues bear to management's estimate of the total gross revenues
expected to be received from all sources within ten years of release. Where
applicable, unamortized inventory is written down to fair value using a
discounted cash flow model based on this appraisal.
Participations and Residuals
Estimated liabilities for participations and residuals are amortized in the same
manner as film inventory costs.
Based on management's estimates, approximately $6,934,000 of the balance of
accrued participations and residuals at March 31, 2002 will be paid during the
year ending March 31, 2003.
REVENUE RECOGNITION
Revenue is recognized in accordance with the provisions of the SOP. The Company
licenses certain film rights through international distribution agreements that
provide for the payment of minimum guaranteed license fees (MGs), usually
payable on delivery of the respective completed film, that are subject to
further increase based on the actual distribution results in the respective
territory. MGs related to contracts which contain holdback provisions,
precluding the distributor from exploiting secondary markets until certain time
periods have lapsed, are allocated across those markets and recognized as
revenue when each holdback provision expires and the film is available for
exploitation by the distributor.
Revenue allocated to the primary market, usually the theatrical market, is
recognized as revenue on the date the completed film is available for
exploitation in the related territory and certain other conditions of sale have
been met pursuant to criteria specified by the SOP.
In March 1998, the Company entered into a financing and distribution agreement
(the Paramount Agreement) with Paramount Pictures Corporation (Paramount) that
gave Paramount the option to acquire the distribution rights in all territories
other than those covered by the various international distribution agreements.
Any amounts received from Paramount at the commencement of the license period
are treated as MGs with revenue being recognized in a manner similar to the
international distribution agreements discussed above. See Note 6.
DEFERRED REVENUE
Deferred revenue represents MGs received from distributors for which holdback
provisions have not yet lapsed, thus precluding the distributor from exploiting
the film in markets covered by the holdback provisions. Revenue is recognized by
the Company when the holdback has lapsed and the film is available for
exploitation by the distributor.
87
INCOME TAXES
For federal income tax purposes, profits and losses are passed through to the
members. Accordingly, no provision has been made in these financial statements
for federal income taxes. For the years ended March 31, 2002 and 2001, the
Company recorded a provision related to California limited liability company
taxes of $23,663 and $22,318, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 requires companies to
record derivatives on their balance sheets as assets or liabilities, measured at
fair value. Under FAS 133, gains or losses resulting from changes in the values
of derivatives are to be reported in the statement of operations or as a
deferred item, depending on the use of the derivatives and whether they qualify
for hedge accounting. The Company adopted FAS 133 on April 1, 2001. The impact
on the financial statements of adopting this standard was not material.
2. FILM INVENTORY
Film inventory consists of the following at March 31:
2002 2001
---- ----
Projects released, net of amortization $ 34,711,370 $ 56,885,456
Projects in production 50,310,244 64,948,138
Projects in development/pre-production 1,724,830 11,293,755
------------ ------------
$ 86,746,444 $133,127,349
============ ============
The Company estimates that approximately 29% and 80% of its unamortized released
film costs at March 31, 2002 will be amortized within the next one and three
year periods, respectively.
During the years ended March 31, 2002 and 2001, the Company capitalized to film
inventory interest of $1,759,453 and $5,200,602, respectively, and production
overhead of $6,003,815 and $7,000,000, respectively.
3. BANK LOAN
On February 12, 1999, the Company entered into a credit facility, which provided
a line of credit bearing interest at the rate of LIBOR plus 1.75%. Borrowings
under this credit facility were guaranteed by a group of insurance companies,
were non-recourse to the Company and were collateralized by certain revenues and
copyrights. The Company had $3,085,380 outstanding under this facility at March
31, 2001. In fiscal year 2002, in conjunction with a settlement with Paramount
(see Note 6), the Company repaid all amounts owed under this credit facility and
negotiated with the insurers for a refund of a portion of the premiums paid. As
a result of these negotiated settlements, the Company recorded a gain of
approximately $1,043,000.
4. PRODUCTION LOANS
In order to finance the production of its films, the Company has entered into
various non-recourse production loans with its lenders. The credit facilities
each provide a line of credit up to an amount approximating the total budgeted
costs of the underlying film and bear interest at the rate of LIBOR, plus
88
1.5%. Borrowings under the production loans are collateralized by, and will be
repaid from, contractual MGs due on certain contracts entered into with foreign
distributors for the distribution of the underlying film. The production loans
are cancelled upon repayment. The Company has entered into the following
production loan arrangements:
2002 2001
---- ----
Production loan dated December 3, 2001, due February 3, 2004 $27,030,000 $ --
Production loan dated December 15, 2000, due January 7, 2003 20,400,000 12,200,000
Production loan dated May 19, 2000, due July 3, 2002 -- 53,191,730
Production loan dated October 15, 1999, due February 27, 2002 -- 27,734,918
----------- -----------
$47,430,000 $93,126,648
=========== ===========
For each of the production loans discussed above, the bank has required the
Company to enter into foreign exchange options to hedge the Japanese yen
translation fluctuation applicable to the distribution contracts entered into
with the Japanese distributor. These options, which are exercisable during 2002,
had a fair value of $26,300 and $113,800 at March 31, 2002 and 2001,
respectively.
5. FILM FINANCING TRANSACTIONS
In addition to the production loans described in Note 4, the Company has entered
into arrangements with a third party (the Film Investor), whereby the Film
Investor contributed a portion of the budgeted costs of certain films in
exchange for a share of all distribution proceeds, as defined, generated by the
underlying film. The proceeds of these transactions represent equity investments
in the underlying film and were recorded as a reduction to the costs of the
film. During the years ended March 31, 2002 and 2001, the Company received
approximately $9,400,000 and $28,500,000, respectively, from the Film Investor
pursuant to these arrangements.
In addition, during the year ended March 31, 2001, the Film Investor paid to the
Company $9,250,000 toward the costs of a film, which amount is collateralized by
a subordinated security interest in the underlying film. The amount is
guaranteed to be returned to the Film Investor no later than July 2004, together
with interest at LIBOR plus 0.4%. During the year ended March 31, 2002, the
Company repaid $3,000,000 to the Film Investor. The remaining obligation
included in contractual obligations in the accompanying consolidated balance
sheet.
The Company entered into arrangements with third parties whereby the Company
sold its rights to certain films and immediately leased back the attendant
distribution rights for a specified term. Under the terms of these arrangements,
the Company has agreed to make certain fixed annual payments to the purchasers
over the length of the term. These payments have been legally assumed by various
banks, in exchange for the Company depositing a certain amount in cash, and the
purchasers have relinquished any claim against the Company for the payments.
Upon the payment of the final amount, all rights previously sold revert back to
the Company. The deposits and corresponding fixed payment obligations are not
presented in the financial statements, as they are no longer the property nor
the responsibility of the Company. During the years ended March 31, 2002 and
2001, the Company received approximately $2,300,000 and $3,000,000,
respectively, which were recorded as reductions to film costs. In addition,
during the year ended March 31, 2001, $10,558,000 was received by the Company
and reflected as a contractual obligation
89
since the film project to which it related had not yet commenced production and
certain refund provisions applied under these circumstances. During the year
ended March 31, 2002, the underlying film commenced production and, accordingly,
the contractual obligation was offset against film costs.
The Company avails itself of government programs that are designed to assist
film and television production and distribution in Canada. During the years
ended March 31, 2002 and 2001, the Company received approximately $1,000,000 and
$500,000, respectively, from these government programs. Such amounts were
recorded as reductions to film costs.
6. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company employs certain of its executives (who are also members of
Tigerstripes, LLC) under formal employment agreements. In January 2001, the
executives and the parent company of LG Pictures, Inc., Lions Gate Entertainment
Corp. (Lions Gate), entered into an agreement whereby the executives agreed to
defer a portion of their salaries. In November 2001, pursuant to the
Reorganization Agreement (see Note 7), the terms of these employment agreements
were extended through December 31, 2004, subject to earlier termination under
certain circumstances. The Reorganization Agreement also provided for payment of
a portion of the salaries that had been previously deferred. The employment
agreements provide for minimum annual base compensation of $4,280,000, of which
$238,500 was deferred at March 31, 2002.
DISTRIBUTION AGREEMENTS
The Paramount Agreement (see Note 1) provided for a term of the shorter of five
years, or commencement of production of 20 motion pictures, subject to earlier
termination under certain circumstances. Pursuant to the Paramount Agreement,
Paramount made annual contributions to the overhead expenses of the Company.
These overhead contributions totaled $1,500,000 and $2,000,000 for the years
ended March 31, 2002 and 2001, respectively, and are presented as reductions to
general and administration expenses in the accompanying consolidated statements
of operations.
In December 2001, the parties agreed to terminate the Paramount Agreement. The
termination of the Paramount Agreement will have no impact on its obligations
with respect to the Company's released films, nor with the two films currently
in post-production.
Under the Paramount Agreement, the Company assumed responsibility for certain
amounts payable to unions and actors based on the performance in certain
territories of one of its motion pictures. Paramount was the primary obligor of
these obligations. In May 2001, in conjunction with repayment of the underlying
credit facility (see Note 3), the Company negotiated a settlement of this
arrangement with Paramount, which resulted in the Company transferring its
rights in the motion picture to Paramount, in exchange for Paramount's
assumption of all obligations to unions and actors.
7. MEMBERS' EQUITY
Mandalay is governed by an operating agreement (the Operating Agreement),
between LG Pictures, Inc. and Tigerstripes, LLC (the Members). As a limited
liability company, the Members of Mandalay are not liable for debts or other
obligations of Mandalay. The LLC Agreement governs the relative rights and
duties of the Members.
90
The ownership interests of the Members in Mandalay consist of 44,638,000 Class A
Preferred Units, 450 Class B Common Units and 550 Class C Common Units.
Pursuant to the Operating Agreement, LG Pictures, Inc. shares in 100% of
Mandalay's losses and 100% of its earning until LG Pictures, Inc. recovers its
original $50,000,000 investment. Thereafter, Tigerstripes and LG Pictures, Inc.
are entitled to 55% and 45%, respectively, of the earnings of Mandalay.
In November 2001, Mandalay and Lions Gate entered into an agreement to
reorganize Mandalay (the Reorganization Agreement). Pursuant to the
Reorganization Agreement, certain restrictions were placed on the amounts
Mandalay can spend for overhead and development expenses. In addition, the
Reorganization Agreement modified the employment agreements of certain
executives of Mandalay (see Note 6) and provided for returns of capital to Lions
Gate under certain circumstances. As security for the payment of all amounts
owed to Lions Gate provided for in the Reorganization Agreement, Mandalay agreed
to grant to Lions Gate a security interest in all of its assets, including its
films and all proceeds from the production or exploitation thereof. During the
year ended March 31, 2002, Mandalay returned capital of $5,362,000 to Lions Gate
pursuant to the Reorganization Agreement.
The Reorganization Agreement also provides that under certain circumstances (as
specified in the Reorganization Agreement), Lions Gate will have the right to
terminate the Reorganization Agreement and wind down the operations of Mandalay
at December 31, 2003.
8. RELATED PARTIES
Due (to) from affiliates consists of the following at March 31:
2002 2001
---- ----
Lions Gate $ 5,258 $(84,468)
Other Mandalay companies* 37,334 51,662
-------- --------
$ 42,592 $(32,806)
======== ========
* Includes various Mandalay named companies in which members of the Company have
significant interest.
LG Pictures, Inc. was required to compensate the Company for any interest income
foregone on a required equity contribution that was replaced by the
establishment of the bank loan (see Note 3). During the year ended March 31,
2001, the Company received $190,000 under this agreement, which amount was
included in interest income.
91
INDEX TO EXHIBITS
Exhibit
Number Description of Documents
------ ------------------------
3.1(1) Articles of Incorporation
3.2(3) Amendment to Articles of Incorporation to Provide Terms of the
Series A Preferred Shares dated as of December 20, 1999
3.3(5) Amendment to Articles of Incorporation to Provide Terms of the
Series B Preferred Shares dated as of September 26, 2000
3.4(6) 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(3) Warrant Indenture between the Company and CIBC Mellon Trust
Company dated as of December 30, 1999
10.1(8) Amended Employees' and Directors' Equity Incentive Plan
10.2(1) Incentive Plan Stock Option Agreement No. 1
10.3(1) Incentive Plan Stock Option Agreement No. 2
10.4(1)+ Memorandum of Understanding among the Company, LG Pictures Inc.,
Tigerstripes, Peter Guber, Paul Schaeffer and Adam Platnick dated
March 6, 1998
10.5(1) Amendment to Memorandum of Understanding among the Company, LG
Pictures Inc., Tigerstripes, Peter Guber, Paul Schaeffer and Adam
Platnick dated December 29, 1998
10.6(1) Amendment to Memorandum of Understanding among the Company, LG
Pictures Inc., Tigerstripes, Peter Guber, Paul Schaeffer and Adam
Platnick dated December 30, 1998
10.7(4) Agreement and Plan of Merger among the Company, LGE Merger Sub and
Trimark dated June 6, 2000
10.8(4) Registration Rights Agreement dated as of June 6, 2000, by and
among the Company, Mark Amin and Reza Amin
10.9 Amended and Restated Unanimous Shareholders Agreement of
Corporation CineGroupe dated as of July 10, 2001
10.10(4) Employment Agreement dated as of June 6, 2000, between the Company
and Mark Amin
10.11(5) Employment Agreement between the Company and Marni Wieshofer dated
August 26, 2000
10.12(5) Employment Agreement between the Company and Jon Feltheimer dated
February 27, 2001
10.13(5) Employment Agreement between the Company and John Dellaverson
dated April 1, 2001
10.14(5) Ignite, LLC and Lions Gate Films Inc. deal memo dated February 15,
2001
10.15 Amendment #2 dated May 13, 2002 to Ignite, LLC and Lions Gate
Films Inc. deal memo dated February 15, 2001
92
Exhibit
Number Description of Documents
------ ------------------------
10.16(7) Credit, Security, Guaranty and Pledge Agreement by and among Lions
Gate Entertainment Corp., Lions Gate Entertainment Inc., the
Guarantors referred to therein, the Lenders referred to therein,
The Chase Manhattan Bank, National Bank of Canada, and Dresdner
Bank AG, New York and Grand Cayman Branches dated as of September
25, 2000
10.17(7) First Amendment dated as of April 4, 2001 to the Credit, Security,
Guaranty and Pledge Agreement by and among Lions Gate
Entertainment Corp., Lions Gate Entertainment Inc., the Guarantors
referred to therein, the Lenders referred to therein, The Chase
Manhattan Bank, National Bank of Canada, and Dresdner Bank AG, New
York and Grand Cayman Branches dated as of September 25, 2000
10.18(7) Second Amendment dated as of May 30, 2001 to the Credit, Security,
Guaranty and Pledge Agreement by and among Lions Gate
Entertainment Corp., Lions Gate Entertainment Inc., the Guarantors
referred to therein, the Lenders referred to therein, The Chase
Manhattan Bank, National Bank of Canada, and Dresdner Bank AG, New
York and Grand Cayman Branches dated as of September 25, 2000
10.19(7) Third Amendment dated as of July 31, 2001 to the Credit, Security,
Guaranty and Pledge Agreement by and among Lions Gate
Entertainment Corp., Lions Gate Entertainment Inc., the Guarantors
referred to therein, the Lenders referred to therein, The Chase
Manhattan Bank, National Bank of Canada, and Dresdner Bank AG, New
York and Grand Cayman Branches dated as of September 25, 2000
10.20 Fourth Amendment dated as of February 6, 2002 to the Credit,
Security, Guaranty and Pledge Agreement by and among Lions Gate
Entertainment Corp., Lions Gate Entertainment Inc., the Guarantors
referred to therein, the Lenders referred to therein, The Chase
Manhattan Bank, National Bank of Canada, and Dresdner Bank AG, New
York and Grand Cayman Branches dated as of September 25, 2000
21.1 List of Subsidiaries
23.1 Consent of Independent Accountant
23.2 Consent of Independent Accountant
23.3 Consent of Independent Accountant
23.4 Consent of Independent Accountant
24.1 Power of Attorney (Contained on Signature Page)
- ------------
(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, 1999 (File No. 000-27730).
(3) 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).
93
(4) Incorporated by reference to the Company's Form F-4 Registration Statement
under the Securities Act of 1933 dated August 2000.
(5) 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).
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period year ended September 30, 2001 (File No. 1-14880).
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period year ended December 31, 2001 (File No. 1-14880).
(8) Incorporated by reference to the Company's Definition Proxy Statement dated
August 13, 2001 (File No. 1-14880)
+ Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.
94