Exhibit 99.5

Financial Statements and Supplementary Data (adjusted to reflect the retrospective application of FSP APB 14-1)

The Financial Statements and Supplementary Data set forth in this Exhibit 99.5 have been revised from the Financial Statements and Supplementary Data included in the Lions Gate Entertainment Corp. Annual Report on Form 10-K for the year ended March 31, 2009 (the “2009 Form 10-K”) to reflect our retrospective application of Financial Accounting Standards Board (“FASB”) Staff Position APB 14-1 (“FSP APB 14-1”), Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). The Financial Statements and Supplementary Data set forth below have not been revised to reflect events or developments subsequent to June 1, 2009, the date that we filed the 2009 Form 10-K, and do not modify or update the disclosures in the 2009 Form 10-K that may have been affected by subsequent events. For a discussion of events and developments subsequent to the filing date of the 2009 Form 10-K, please refer to the reports and other information we have filed with the Securities and Exchange Commission since that date, including our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009.

 

The Board of Directors and shareholders of

Lions Gate Entertainment Corp.

 

We have audited the accompanying consolidated balance sheets of Lions Gate Entertainment Corp. as of March 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity (deficiency), and cash flows for each of the three years in the period ended March 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lions Gate Entertainment Corp. at March 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 2009, in conformity with U.S. generally accepted accounting principles.

 

As discussed in Note 2 to the consolidated financial statements, the consolidated financial statements have been adjusted for the retrospective application of Financial Accounting Standards Board Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”, which became effective April 1, 2009.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Lions Gate Entertainment Corp.’s internal control over financial reporting as of March 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 1, 2009 expressed an unqualified opinion thereon.

 

Ernst & Young LLP

Los Angeles, California

June 1, 2009, except for Note 2,

as to which the date is October 13, 2009

Lions Gate Entertainment Corp. consolidated balance sheets

 

 

See accompanying notes.

Lions Gate Entertainment Corp. consolidated statements of operations

 

 

See accompanying notes.

 

Lions Gate Entertainment Corp. consolidated statements of shareholders’ equity

 

 

See accompanying notes.

 

Lions Gate Entertainment Corp. consolidated statements of cash flows

 

 

See accompanying notes.

Lions Gate Entertainment Corp. notes to audited consolidated financial statements

 

1. Nature of operations

 

Lions Gate Entertainment Corp.  (the “Company,” “Lionsgate,” “we,” “us” or “our”) is a filmed entertainment studio with a diversified presence in motion pictures, television programming, home entertainment, family entertainment, video-on-demand and digitally developed content.

 

2. Significant accounting policies

 

(a) Generally accepted accounting principles

 

These consolidated financial statements have been prepared in accordance with United States (the “U.S.”) generally accepted accounting principles (“GAAP”). The Canadian dollar and the U.S. dollar are the functional currencies of the Company’s Canadian and U.S. based businesses, respectively.

 

(b) Principles of consolidation

 

The accompanying consolidated financial statements of the Company include the accounts of Lionsgate and all of its majority-owned and controlled subsidiaries. The Company reviews its relationships with other entities to identify whether it is the primary beneficiary of a variable interest entity (“VIE”). If the determination is made that the Company is the primary beneficiary, then the entity is consolidated in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. (“FIN”) 46, Consolidation of Variable Interest Entities, as revised (“FIN 46(R)”).

 

Investments in which the Company exercises significant influence, but does not control, are accounted for using the equity method of accounting. Investments in which there is no significant influence are accounted for using the cost method of accounting.

 

All significant intercompany balances and transactions have been eliminated in consolidation.

 

(c) Revenue recognition

 

Revenue from the sale or licensing of films and television programs is recognized upon meeting all recognition requirements of Statement of Position 00-2, Accounting by Producers or Distributors of Films (“SoP 00-2”). Revenue from the theatrical release of feature films is recognized at the time of exhibition based on the Company’s participation in box office receipts. Revenue from the sale of DVDs/Blu-ray discs in the retail market, net of an allowance for estimated returns and other allowances, is recognized on the later of receipt by the customer or “street date” (when it is available for sale by the customer). Under revenue sharing arrangements, rental revenue is recognized when the Company is entitled to receipts and such receipts are determinable. Revenues from television licensing are recognized when the feature film or television program is available to the licensee for telecast. For television licenses that include separate availability “windows” during the license period, revenue is allocated over the “windows.” Revenue from sales to international territories are recognized when access to the feature film or television program has been granted or delivery has occurred, as required under the sales contract, and the right to exploit the feature film or television program has

commenced. For multiple media rights contracts with a fee for a single film or television program where the contract provides for media holdbacks (defined as contractual media release restrictions), 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.

 

Shipping and handling costs are included under distribution and marketing expenses in the consolidated statements of operations.

 

Distribution revenue from the distribution of TV Guide Entertainment, Inc. (“TV Guide”) programming (distributors generally pay a per subscriber fee for the right to distribute programming) is recognized in the month the services are provided.

 

Advertising revenue is recognized when the advertising spot is broadcast or displayed online. Advertising revenue is recorded net of agency commissions and discounts.

 

Cash payments received are recorded as deferred revenue until all the conditions of revenue recognition have been met. Long-term, non-interest bearing receivables are discounted to present value. At March 31, 2009, $48.1 million of accounts receivable are due beyond one year. The accounts receivable are due as follows: $22.0 million in fiscal 2011, $12.0 million in fiscal 2012, $9.4 million in fiscal 2013, $4.2 million in fiscal 2014, and $0.5 million thereafter.

 

(d) Cash and cash equivalents

 

Cash and cash equivalents consist of cash deposits at financial institutions and investments in money market mutual funds.

 

(e) Restricted cash

 

Restricted cash represents amounts on deposit with a financial institution that are contractually designated for certain theatrical marketing obligations and collateral required under a revolving credit facility.

 

(f) Restricted investments

 

Restricted investments represent amounts held in investments that are contractually designated as collateral for certain production obligations.

 

(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, libraries acquired as part of acquisitions of companies, films and television programs in progress and in development and home entertainment product inventory.

 

For films and television programs produced by the Company, capitalized costs include all direct production and financing costs, capitalized interest and production 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 and of acquired libraries are amortized using the individual-film-forecast method, whereby these costs are amortized and participations and residuals costs are accrued in the proportion that current year’s revenue bears to management’s estimate of ultimate revenue at the beginning of the current year expected to be recognized from the exploitation, exhibition or sale of the films or television programs.

 

Ultimate revenue includes estimates over a period not to exceed ten years following the date of initial release or from the date of delivery of the first episode for episodic television series. For titles included in acquired libraries, ultimate revenue includes estimates over a period not to exceed twenty years following the date of acquisition.

 

Investment in films and television programs is stated at the lower of amortized cost or estimated fair value. The valuation of investment in films and television programs is reviewed on a title-by-title basis, when an event or change in circumstances indicates 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 and cost 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.

 

Films and television programs in progress include the accumulated costs of productions which have not yet been completed.

 

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 they are determined not to be recoverable or when abandoned, or three years from the date of the initial investment.

 

Home entertainment product inventory consists of DVDs/Blu-ray discs and is stated at the lower of cost or market value (first-in, first-out method).

 

Costs for programs produced by the Media Networks segment are expensed upon first airing.

 

(h) Property and equipment, net

 

Property and equipment is carried at cost less accumulated depreciation. Depreciation is provided for using the following rates and methods:

 

 

The Company periodically reviews and evaluates the recoverability of property and equipment. Where applicable, estimates of net future cash flows, on an undiscounted basis, are calculated based on future revenue estimates, if appropriate and where deemed necessary, a reduction in the carrying amount is recorded.

(i) Goodwill

 

Goodwill represents the excess of acquisition costs over the tangible and intangible assets acquired and liabilities assumed in various business acquisitions by the Company. The Company has three reporting units with goodwill within its businesses: Motion Pictures, Television and Media Networks. Under Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized but is reviewed for impairment annually within each fiscal year or between the annual tests if an event occurs or circumstances change that indicate it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. The impairment test follows a two-step approach. The first step determines if the goodwill is potentially impaired, and the second step measures the amount of the impairment loss, if necessary. Under the first step, goodwill is considered potentially impaired if the fair value of the reporting unit is less than the reporting unit’s carrying amount, including goodwill. Under the second step, the impairment loss is then measured as the excess of recorded goodwill over the fair value of the goodwill, as calculated. The fair value of goodwill is calculated by allocating the fair value of the reporting unit to all the assets and liabilities of the reporting unit as if the reporting unit was purchased in a business combination and the purchase price was the fair value of the reporting unit. The Company performs its annual impairment test as of December 31 in each fiscal year. The Company performed its annual impairment test on its goodwill as of December 31, 2008. No goodwill impairment was identified in any of the Company’s reporting units.

 

(j) Other assets

 

Other assets include deferred print costs, deferred debt financing costs, equity investments, loan receivables and prepaid expenses.

 

Prints, Advertising and Marketing Expenses.  The costs of film prints are expensed upon theatrical release and are included in operating expenses. The costs of advertising and marketing expenses are expensed as incurred. Advertising expenses for the year ended March 31, 2009 were $423.7 million (2008—$398.7 million, 2007—$216.2 million) which were recorded as distribution and marketing expenses.

 

Debt Financing Costs.  Amounts incurred in connection with obtaining debt financing are deferred and amortized, as a component of interest expense, over the earlier of the date of the earliest put option or term to maturity of the related debt obligation.

 

Equity Method Investees.  The Company uses the equity method of accounting for investments in companies in which it has minority equity interest and the ability to exert significant influence over operating decisions of the companies. Other assets include companies which are accounted for using the equity method. The Company’s equity method investees are periodically reviewed to determine whether there has been a loss in value that is other than a temporary decline.

 

(k) Income taxes

 

Income taxes are accounted for using SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”). SFAS No. 109 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred assets based upon the likelihood of realization of tax benefits in future years. Under this method, deferred taxes are provided for the net tax effects of temporary differences between the

carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are established when management determines that it is more likely than not that some portion or all of the net deferred tax asset will not be realized. The financial effect of changes in tax laws or rates is accounted for in the period of enactment. The subsequent realization of net operating loss and general business credit carryforwards acquired in acquisitions accounted for using the purchase method of accounting is recorded as a reduction of goodwill.

 

(l) Government assistance

 

The Company has access to government programs that are designed to promote film and television production and distribution in Canada. The Company also has access to similar programs in certain states within the U.S. that are designed to promote film and television production in those states.

 

Tax credits earned with respect to expenditures on qualifying film and television productions are included as an offset to investment in films and television programs when the qualifying expenditures have been incurred provided that there is reasonable assurance that the credits will be realized (refer to Note 16).

 

(m) Foreign currency translation

 

Monetary assets and liabilities denominated in currencies other than the functional currency are translated at exchange rates in effect at the balance sheet date. Resulting unrealized translation gains and losses are included in the consolidated statements of operations.

 

Foreign company assets and liabilities in foreign currencies are translated into U.S. dollars at the exchange rate in effect at the balance sheet date. Foreign company revenue and expense items are translated at the average rate of exchange for the fiscal year. Gains or losses arising on the translation of the accounts of foreign companies are included in accumulated other comprehensive income (loss), a separate component of shareholders’ equity (deficiency).

 

(n) Derivative instruments and hedging activities

 

Derivative financial instruments are used by the Company in the management of its foreign currency exposures. The Company’s policy is not to use derivative financial instruments for trading or speculative purposes.

 

The Company enters into forward foreign exchange contracts to hedge its foreign currency exposures on future production expenses denominated in Canadian dollars. The Company evaluates whether the foreign exchange contracts qualify for hedge accounting at the inception of the contract. The fair value of the forward exchange contracts are recorded on the consolidated balance sheets. Changes in the fair value of the foreign exchange contracts that are effective hedges are reflected in accumulated other comprehensive income (loss), a separate component of shareholders’ equity (deficiency), and changes in the fair value of foreign exchange contracts that are ineffective hedges are reflected in the consolidated statements of operations. Gains and losses realized upon settlement of the foreign exchange contracts are amortized to the consolidated statements of operations on the same basis as the production expenses being hedged.

(o) Stock-based compensation

 

Effective April 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123(R)”) using the modified-prospective transition method. Under such transition method, compensation cost recognized in the years ended March 31, 2009, 2008 and 2007 includes: (a) compensation cost for all stock options granted prior to, but not yet vested as of, April 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123; and (b) compensation cost for all share-based payments granted on or after April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). See Note 12 for further discussion of the Company’s stock-based compensation in accordance with SFAS No. 123(R).

 

(p) Net income (loss) per share

 

The Company calculates net income (loss) per share in accordance with SFAS No. 128, Earnings Per Share. Basic net income (loss) per share is calculated based on the weighted average common shares outstanding for the period. Basic net income (loss) per share for the years ended March 31, 2009, 2008 and 2007 is presented below:

 

 

Diluted net income (loss) per common share reflects the potential dilutive effect, if any, of the conversion of the 4.875% convertible senior subordinated notes sold by the Company in December 2003 and converted on December 15, 2006 (the “4.875% Notes”), the 2.9375% convertible senior subordinated notes sold by the Company in October 2004 (the “2.9375% Notes”), and the 3.625% convertible senior subordinated notes sold by the Company in February 2005 (the “3.625% Notes”), under the “if converted” method. Diluted net income (loss) per common share also reflects share purchase options and restricted share units using the treasury stock method when dilutive, and any contingently issuable shares when dilutive.

Diluted net income (loss) per common share for the years ended March 31, 2009, 2008 and 2007 is presented below:

 

 

For the years ended March 31, 2009, 2008, and 2007, the weighted average common shares calculated under the “if converted” and treasury stock method presented below were excluded from diluted net income (loss) per common share for the periods because their inclusion would have had an anti-dilutive effect.

 

 

(q) Use of estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The most significant estimates made by management in the preparation of the financial statements relate to ultimate revenue and costs for investment in films and television programs; estimates of sales

returns and other allowances, provision for doubtful accounts; fair value of assets and liabilities for allocation of the purchase price of companies acquired; income taxes and accruals for contingent liabilities; and impairment assessments for investment in films and television programs, property and equipment, goodwill and intangible assets. Actual results could differ from such estimates.

 

(r) Reclassifications

 

Certain amounts presented in prior years have been reclassified to conform to the current year’s presentation.

 

(s) Recent accounting pronouncements

 

FASB Staff Position APB 14-1. On April 1, 2009, the Company adopted FSP APB 14-1 which requires retrospective adjustments to its previously issued financial statements as of March 31, 2009 and 2008, and for the years ended March 31, 2009, 2008 and 2007 as if FSP APB 14-1 was effective from the date the applicable notes were issued. FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate on the instrument’s issuance date when interest cost is recognized. Accordingly, a portion of the proceeds received is recorded as a liability and a portion is recorded as an addition to shareholders’ equity reflecting the equity component (ie. conversion feature). The difference between the principal amount and the amount recorded as the liability component represents the debt discount. The carrying amount of the liability is accreted up to the principal amount through the amortization of the discount, using the effective interest method, to interest expense over the expected life of the note. The Company applied the provisions of FSP APB 14-1 retrospectively to all periods presented. Accordingly, the financial statements have been retrospectively adjusted as if FSP APB 14-1 was effective at the time the convertible debt instruments were issued. The 2.9375% and 3.625% Convertible Senior Subordinated Notes, issued in October 2004 and February 2005, respectively were adjusted to adopt FSP APB 14-1. FSP APB 14-1 did not apply to the 4.875% Convertible Senior Subordinated Notes issued December 2003 and converted into common shares units in December 2006.

 

The adoption of FSP APB 14-1 had the following effect on the Company’s Consolidated Statements of Operations for fiscal years 2009, 2008 and 2007:

 

The adoption of FSP APB 14-1 had the following effect on the Company’s Consolidated Balance Sheets for fiscal years 2009 and 2008:

 

 

See Note 10 to the Consolidated Financial Statements for further discussion of the implementation of FSP APB 14-1.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) significantly changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, transaction costs, in-process research and development and restructuring costs. In addition, under SFAS No. 141(R), changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. We will adopt SFAS No. 141(R) beginning in the first quarter of fiscal 2010, which will change our accounting treatment for business combinations on a prospective basis.

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. We will adopt SFAS No. 160 beginning in the first quarter of fiscal 2010. We are evaluating the impact that the adoption of SFAS No. 160 will have on our consolidated financial position and results of operations.

 

3. Restricted cash and restricted investments

 

Restricted Cash. Restricted cash represents amounts on deposit with financial institutions that are contractually designated for certain theatrical marketing obligations and collateral required under our revolving credit facility as a result of a borrowing under our funding agreement with the State of Pennsylvania (see Note 9).

 

Restricted Investments. Restricted investments represent amounts held in investments that are contractually designated as collateral for certain production obligations. At March 31, 2009, the Company held $7.0 million of restricted investments in United States Treasury Bills bearing an interest rate of 0.39%, maturing September 3, 2009. These investments are held as collateral for a production obligation pursuant to an escrow agreement.

 

At March 31, 2008, the Company held $7.0 million of a triple A rated taxable Student Auction Rate Security (“ARS”), at par value, issued by the Panhandle-Plains Higher Education Authority. These ARS were sold back to the issuer at par value resulting in no gain or loss.

Restricted investments as of March 31, 2009 and 2008 are set forth below:

 

 

 

At March 31, 2007, equity securities were comprised of 592,156 common shares of Magna Pacific (Holdings) Limited (“Magna”), an independent DVD distributor in Australia and New Zealand, purchased at an average cost of $0.21 per share. During the year ended March 31, 2008, the Company purchased an additional 15,989,994 common shares of Magna for approximately $4.7 million in connection with its efforts to acquire Magna. Such efforts were later abandoned, at which time, the Company sold all if its shares in Magna for approximately $7.5 million and recognized a gain on the sale of approximately $2.9 million.

 

The following table illustrates the impact in other comprehensive income (loss) of realized and unrealized gains of investments available-for-sale during the years ended March 31, 2009, 2008 and 2007:

 

 

4. Investment in films and television programs

 

 

The following table sets forth acquired libraries that represent titles released three years prior to the date of acquisition, and amortized over their expected revenue stream from acquisition date up to 20 years:

 

 

The Company expects approximately 45% of completed films and television programs, net of accumulated amortization will be amortized during the one-year period ending March 31, 2010. Additionally, the Company expects approximately 80% of completed and released films and television programs, net of accumulated amortization and excluding acquired libraries, will be amortized during the three-year period ending March 31, 2012. The decrease in the Trimark Library is partially due to a write-down of $3.1 million as a result of a decrease in the fair value of the library.

 

5. Property and equipment

 

 

6. Goodwill

 

The changes in the carrying amount of goodwill by reporting segment in the years ended March 31, 2009 and 2008 were as follows:

 

 

The allocation of the purchase price to identified tangible and intangible assets and liabilities assumed is preliminary and is subject to adjustment. Accordingly, the amount of goodwill attributed to the Media Networks segment is preliminary (see Note 13).

 

7. Finite-lived intangible assets and other assets

 

Finite-lived intangible assets

 

Finite-lived intangible assets consist primarily of customer relationships and trademarks. The composition of the Company’s finite-lived intangible assets and the associated accumulated amortization is as follows as of March 31, 2009 and March 31, 2008: