Attached files
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EX-3.2 - EX-3.2 - LIONS GATE ENTERTAINMENT CORP /CN/ | v54257exv3w2.htm |
EX-32.1 - EX-32.1 - LIONS GATE ENTERTAINMENT CORP /CN/ | v54257exv32w1.htm |
EX-31.2 - EX-31.2 - LIONS GATE ENTERTAINMENT CORP /CN/ | v54257exv31w2.htm |
EX-31.1 - EX-31.1 - LIONS GATE ENTERTAINMENT CORP /CN/ | v54257exv31w1.htm |
EX-10.70 - EX-10.70 - LIONS GATE ENTERTAINMENT CORP /CN/ | v54257exv10w70.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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 | N/A | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1055 West Hastings Street, Suite 2200
Vancouver, British Columbia V6E 2E9
and
2700 Colorado Avenue, Suite 200
Santa Monica, California 90404
(Address of principal executive offices)
Vancouver, British Columbia V6E 2E9
and
2700 Colorado Avenue, Suite 200
Santa Monica, California 90404
(Address of principal executive offices)
(877) 848-3866
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the registrants classes of common stock,
as of the latest practicable date.
Title of Each Class | Outstanding at November 1, 2009 | |
Common Shares, no par value per share | 117,660,274 shares |
TABLE OF CONTENTS
2
Table of Contents
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terms
such as may, intend, will, could, would, expect, anticipate, potential, believe,
estimate, or the negative of these terms, and similar expressions intended to identify
forward-looking statements.
These forward-looking statements reflect Lions Gate Entertainment Corp.s 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.
Actual results in the future could differ materially and adversely from those described in the
forward-looking statements as a result of various important factors, including, but not limited to,
the substantial investment of capital required to produce and market films and television series,
increased costs for producing and marketing feature films, budget overruns, limitations imposed by
our credit facilities, unpredictability of the commercial success of our motion pictures and
television programming, the cost of defending our intellectual property, difficulties in
integrating acquired businesses, technological changes and other trends affecting the entertainment
industry, and the risk factors found herein and under the heading Risk Factors in our Annual
Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the SEC) on June 1,
2009, and in Exhibit 99.1 to our Current Report on Form 8-K filed with the SEC on October
13, 2009, which risk factors are incorporated herein by reference.
Unless otherwise indicated, all references to the Company, Lionsgate, we, us, and
our include reference to our subsidiaries as well.
3
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | March 31, | |||||||
2009 | 2009 | |||||||
(Amounts in thousands, | ||||||||
except share amounts) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 112,652 | $ | 138,475 | ||||
Restricted cash |
9,896 | 10,056 | ||||||
Restricted investments |
6,999 | 6,987 | ||||||
Accounts receivable, net of reserve for returns and allowances of $89,645
(March 31, 2009
$98,947) and provision for doubtful accounts of $8,667
(March 31, 2009 $9,847) |
231,975 | 227,010 | ||||||
Investment in films and television programs, net |
749,283 | 702,767 | ||||||
Property and equipment, net |
38,034 | 42,415 | ||||||
Finite-lived intangible assets, net |
75,368 | 78,904 | ||||||
Goodwill |
379,353 | 379,402 | ||||||
Other assets |
86,113 | 81,234 | ||||||
Total assets |
$ | 1,689,673 | $ | 1,667,250 | ||||
LIABILITIES |
||||||||
Borrowings under bank line of credit |
$ | 255,000 | $ | 255,000 | ||||
Accounts payable and accrued liabilities |
176,268 | 270,561 | ||||||
Participations and residuals |
304,271 | 371,857 | ||||||
Film and production obligations |
293,714 | 304,525 | ||||||
Subordinated notes and other financing obligations |
266,358 | 281,521 | ||||||
Mandatorily redeemable preferred stock units held by noncontrolling interest |
88,431 | | ||||||
Deferred revenue |
134,911 | 142,093 | ||||||
Total liabilities |
1,518,953 | 1,625,557 | ||||||
Commitments and contingencies |
||||||||
SHAREHOLDERS EQUITY |
||||||||
Lions Gate Entertainment Corp. shareholders equity: |
||||||||
Common shares, no par value, 500,000,000 shares authorized, 117,618,718 and
116,950,512 shares issued at September 30, 2009 and March 31, 2009, respectively |
515,944 | 494,724 | ||||||
Accumulated deficit |
(373,088 | ) | (441,153 | ) | ||||
Accumulated other comprehensive loss |
(5,974 | ) | (11,878 | ) | ||||
Total Lions Gate Entertainment Corp. shareholders equity |
136,882 | 41,693 | ||||||
Noncontrolling interest |
33,838 | | ||||||
Total equity |
170,720 | 41,693 | ||||||
Total liabilities and equity |
$ | 1,689,673 | $ | 1,667,250 | ||||
See accompanying notes.
4
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Amounts in thousands, except per share amounts) | ||||||||||||||||
Revenues |
$ | 393,677 | $ | 380,718 | $ | 781,384 | $ | 679,177 | ||||||||
Expenses: |
||||||||||||||||
Direct operating |
198,047 | 199,626 | 411,106 | 347,310 | ||||||||||||
Distribution and marketing |
102,245 | 189,407 | 187,228 | 288,382 | ||||||||||||
General and administration |
42,452 | 30,600 | 83,571 | 68,908 | ||||||||||||
Depreciation and amortization |
6,207 | 1,415 | 14,402 | 2,801 | ||||||||||||
Total expenses |
348,951 | 421,048 | 696,307 | 707,401 | ||||||||||||
Operating income (loss) |
44,726 | (40,330 | ) | 85,077 | (28,224 | ) | ||||||||||
Other expenses (income): |
||||||||||||||||
Interest expense |
||||||||||||||||
Contractual cash based interest |
5,392 | 3,531 | 10,385 | 6,909 | ||||||||||||
Amortization of debt discount, deferred financing costs
and accretion of redeemable preferred stock units |
7,905 | 5,378 | 13,621 | 9,887 | ||||||||||||
Total interest expense |
13,297 | 8,909 | 24,006 | 16,796 | ||||||||||||
Interest and other income |
(382 | ) | (2,047 | ) | (808 | ) | (4,202 | ) | ||||||||
Gain on extinguishment of debt |
| | (7,458 | ) | | |||||||||||
Total other expenses, net |
12,915 | 6,862 | 15,740 | 12,594 | ||||||||||||
Income (loss) before equity interests and income taxes |
31,811 | (47,192 | ) | 69,337 | (40,818 | ) | ||||||||||
Equity interests loss |
(1,928 | ) | (1,960 | ) | (3,645 | ) | (4,146 | ) | ||||||||
Income (loss) before income taxes |
29,883 | (49,152 | ) | 65,692 | (44,964 | ) | ||||||||||
Income tax provision |
674 | 2,662 | 2,011 | 3,331 | ||||||||||||
Net income (loss) |
29,209 | (51,814 | ) | 63,681 | (48,295 | ) | ||||||||||
Add: Net loss attributable to noncontrolling interest |
2,507 | | 4,384 | | ||||||||||||
Net income (loss) attributable to
Lions Gate Entertainment Corp. Shareholders |
$ | 31,716 | $ | (51,814 | ) | $ | 68,065 | $ | (48,295 | ) | ||||||
Basic Net Income (Loss) Per Common Share |
$ | 0.27 | $ | (0.44 | ) | $ | 0.58 | $ | (0.41 | ) | ||||||
Diluted Net Income (Loss) Per Common Share |
$ | 0.26 | $ | (0.44 | ) | $ | 0.56 | $ | (0.41 | ) | ||||||
Weighted average number of common shares outstanding: |
||||||||||||||||
Basic |
117,322 | 116,861 | 117,199 | 117,647 | ||||||||||||
Diluted |
138,732 | 116,861 | 137,671 | 117,647 |
See accompanying notes.
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Table of Contents
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Lions Gate Entertainment Corp. Shareholders | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||
Common Shares | Accumulated | Comprehensive | Noncontrolling | Comprehensive | ||||||||||||||||||||||||
Number | Amount | Deficit | Income (Loss) | Interest | Income | Total | ||||||||||||||||||||||
(Amounts in thousands, except share amounts) | ||||||||||||||||||||||||||||
Balance at March 31, 2009, as adjusted (see Note 8) |
116,950,512 | $ | 494,724 | $ | (441,153 | ) | $ | (11,878 | ) | $ | | $ | 41,693 | |||||||||||||||
Stock based compensation, net of
withholding tax obligations of $1,343 |
614,268 | 6,345 | 6,345 | |||||||||||||||||||||||||
Issuance of common shares
to directors for services |
53,938 | 281 | 281 | |||||||||||||||||||||||||
Sale of TV Guide Network common stock units to noncontrolling interest |
(167 | ) | 38,222 | 38,055 | ||||||||||||||||||||||||
Equity component of April 2009 3.625%
Notes, net of $3.9 million reduction for
February 2005 3.625% Notes extinguished
in the exchange transaction (Note 8) |
14,761 | 14,761 | ||||||||||||||||||||||||||
Comprehensive income |
||||||||||||||||||||||||||||
Net income (loss) |
68,065 | (4,384 | ) | $ | 63,681 | 63,681 | ||||||||||||||||||||||
Foreign currency translation
adjustments |
5,887 | 5,887 | 5,887 | |||||||||||||||||||||||||
Net unrealized gain on foreign
exchange contracts |
17 | 17 | 17 | |||||||||||||||||||||||||
Comprehensive income |
$ | 69,585 | ||||||||||||||||||||||||||
Balance at September 30, 2009 |
117,618,718 | $ | 515,944 | $ | (373,088 | ) | $ | (5,974 | ) | $ | 33,838 | $ | 170,720 | |||||||||||||||
See accompanying notes.
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Table of Contents
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months | Six Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
(Amounts in thousands) | ||||||||
Operating Activities: |
||||||||
Net income (loss) attributable to Lions Gate Entertainment
Corp. shareholders |
$ | 68,065 | $ | (48,295 | ) | |||
Net loss attributable to noncontrolling interest |
(4,384 | ) | | |||||
Net income (loss) |
63,681 | (48,295 | ) | |||||
Adjustments to reconcile net income (loss) to
net cash used in operating activities: |
||||||||
Depreciation of property and equipment |
7,952 | 2,242 | ||||||
Amortization of films and television programs |
287,303 | 186,743 | ||||||
Amortization of debt discount, deferred financing costs
and accretion of redeemable preferred stock units |
13,621 | 9,887 | ||||||
Amortization of intangible assets |
6,450 | 559 | ||||||
Non-cash stock-based compensation |
7,686 | 7,516 | ||||||
Gain on extinguishment of debt |
(7,458 | ) | | |||||
Equity interests loss |
3,645 | 4,146 | ||||||
Changes in operating assets and liabilities: |
||||||||
Restricted cash |
160 | (11,935 | ) | |||||
Accounts receivable, net |
(301 | ) | 56,667 | |||||
Investment in films and television programs |
(333,476 | ) | (325,176 | ) | ||||
Other assets |
(4,381 | ) | (9,438 | ) | ||||
Accounts payable and accrued liabilities |
(96,247 | ) | 3,077 | |||||
Participations and residuals |
(68,116 | ) | 65,271 | |||||
Film obligations |
(36,901 | ) | (4,325 | ) | ||||
Deferred revenue |
(7,469 | ) | 23,337 | |||||
Net Cash Flows Used In Operating Activities |
(163,851 | ) | (39,724 | ) | ||||
Investing Activities: |
||||||||
Purchases of restricted investments |
(6,999 | ) | | |||||
Proceeds from the sale of restricted investments |
6,987 | 125 | ||||||
Investment in equity method investees |
(14,924 | ) | (11,099 | ) | ||||
(Increase) decrease in loans receivable |
8,333 | (28,427 | ) | |||||
Purchases of property and equipment |
(3,690 | ) | (5,743 | ) | ||||
Net Cash Flows Used In Investing Activities |
(10,293 | ) | (45,144 | ) | ||||
Financing Activities: |
||||||||
Exercise of stock options |
| 2,894 | ||||||
Tax withholding requirements on equity awards |
(1,343 | ) | (2,941 | ) | ||||
Repurchase and cancellation of common shares |
| (44,737 | ) | |||||
Proceeds from the sale of 49% interest in TV Guide |
122,355 | | ||||||
Borrowings
under bank line of credit |
70,000 | | ||||||
Repayments
of borrowings under bank line of credit |
(70,000 | ) | | |||||
Increase in production obligations |
128,094 | 113,320 | ||||||
Repayment of production obligations |
(102,490 | ) | (104,216 | ) | ||||
Repayment of other financing obligations |
(406 | ) | | |||||
Net Cash Flows Provided By (Used In) Financing Activities |
146,210 | (35,680 | ) | |||||
Net Change In Cash And Cash Equivalents |
(27,934 | ) | (120,548 | ) | ||||
Foreign Exchange Effects on Cash |
2,111 | (2,136 | ) | |||||
Cash and Cash Equivalents Beginning Of Period |
138,475 | 371,589 | ||||||
Cash and Cash Equivalents End Of Period |
$ | 112,652 | $ | 248,905 | ||||
See accompanying notes.
7
Table of Contents
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
Nature of Operations
Lions Gate Entertainment Corp. (the Company, Lionsgate, we, us or our) is the
leading next generation studio with a diversified presence in the production and distribution of
motion pictures, television programming, home entertainment, family entertainment, video-on-demand
and digitally delivered content.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of
Lionsgate and all of its majority- owned and controlled subsidiaries.
The unaudited condensed consolidated financial statements have been prepared in accordance
with United States (the U.S.) accounting principles generally accepted (GAAP) for interim
financial information and the instructions to Form 10-Q under the Securities Exchange Act of 1934,
as amended (the Exchange Act), and Article 10 of Regulation S-X under the Exchange Act.
Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. In the opinion of the Companys management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a fair presentation have
been reflected in these unaudited condensed consolidated financial statements. Operating results
for the three and six months ended September 30, 2009 are not necessarily indicative of the results
that may be expected for the fiscal year ended March 31, 2010. The balance sheet at March 31, 2009
has been derived from the audited financial statements at that date, but does not include all the
information and footnotes required by U.S. GAAP for complete financial statements. The accompanying
unaudited condensed consolidated financial statements should be read together with the consolidated
financial statements and related notes included in Exhibit 99.5 to our Current Report on Form 8-K
filed with the SEC on October 13, 2009.
Certain amounts presented for fiscal 2009 have been reclassified to conform to the fiscal 2010
presentation.
Net Loss Attributable to Noncontrolling interest
As discussed in Note 10, the net loss attributable to noncontrolling interest in the
consolidated statements of operations and shareholders equity represents the noncontrolling
interests 49% share of the net loss incurred by TV Guide Network for the period from May 28, 2009
through September 30, 2009.
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 and provisions 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.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 168, The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (SFAS No.
168). This statement modifies the GAAP hierarchy by establishing only two levels of GAAP,
authoritative and nonauthoritative accounting literature. Effective July 2009, the FASB Accounting
Standards Codification (ASC), also known collectively as the Codification, is considered the
single source of authoritative U.S. accounting and reporting standards, except for additional
authoritative rules and interpretive releases issued by the SEC. Nonauthoritative
8
Table of Contents
guidance and literature would include, among other things, FASB Concepts Statements, American
Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting
textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users
can more easily access authoritative accounting guidance. It is organized by topic, subtopic,
section, and paragraph, each of which is identified by a numerical designation. The Company has
adopted SFAS No. 168 prospectively beginning in the second quarter of fiscal 2010, resulting in no
impact on the Companys consolidated financial statements.
Accounting for noncontrolling interest in consolidated subsidiaries. The Company adopted new
accounting guidance that changes the accounting and reporting for minority interests, which are
recharacterized as noncontrolling interests and classified as a component of equity. This new
consolidation method changes the accounting for transactions with noncontrolling interest holders.
We adopted this standard beginning in the first quarter of fiscal 2010 (see Note 10).
Accounting for certain convertible debt instruments. The Company adopted new accounting
guidance that specifies that issuers of convertible debt instruments that may be settled in cash
upon either mandatory or optional conversion (including partial cash settlement) should separately
account for the liability and equity components in a manner that will reflect the entitys
nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The
Company adopted this standard beginning in the first quarter of fiscal 2010 (see Note 8).
Subsequent events. The Company adopted new accounting guidance related to the accounting for
and disclosure of subsequent events that occur after the balance
sheet date. Entities are also required
to disclose the date through which subsequent events have been evaluated and the basis for that
date. The Company adopted this standard beginning in the first quarter of fiscal 2010 and has
evaluated subsequent events through the date of issuance, November 9, 2009, resulting in no impact
on the Companys consolidated financial statements.
Consolidation accounting for variable interest entities. This new accounting guidance modifies
the previous guidance in relation to the identification of controlling financial interests in a
variable interest entity (VIE). This analysis identifies the primary beneficiary of a VIE as the
enterprise that has both of the following characteristics, among others: (a) the power to direct
the activities of a VIE that most significantly impact the entitys economic performance; and (b)
the obligation to absorb losses of the entity, or the right to receive benefits from the entity,
that could potentially be significant to the VIE. If an enterprise determines that power is shared
among multiple unrelated parties such that no one party has the power to direct the activities of a
VIE that most significantly impact the VIEs economic performance, then no party is the primary
beneficiary. Power is shared if each of the parties sharing power are required to consent to the
decisions relating to the activities that most significantly impact the VIEs performance. The
provisions of this standard will become effective for the Company beginning in fiscal 2011. The
Company is currently evaluating the impact of this standard on the Companys VIEs. Based upon the
Companys initial review and its current business and ownership structure of one of its VIEs, TV
Guide Network, the Company may no longer be required to consolidate TV Guide Network, effective
April 1, 2010.
2. 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 7).
Restricted Investments. Restricted investments, which measured at fair value, represent
amounts held in investments that are contractually designated as collateral for certain production
obligations. The carrying amounts of these restricted investments are equal to their respective
fair values as of September 30, 2009 and March 31, 2009. At September 30, 2009 and March 31, 2009,
the Company held $7.0 million of restricted investments in United States Treasury Bills bearing an
interest rate of 0.05%, maturing November 12, 2009. These investments are held as collateral for a
production obligation pursuant to an escrow agreement.
9
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3. Investment in Films and Television Programs
September 30, | March 31, | |||||||
2009 | 2009 | |||||||
(Amounts in thousands) | ||||||||
Motion Picture Segment Theatrical and Non-Theatrical Films |
||||||||
Released, net of accumulated amortization |
$ | 231,234 | $ | 262,067 | ||||
Acquired libraries, net of accumulated amortization |
51,700 | 56,898 | ||||||
Completed and not released |
58,907 | 55,494 | ||||||
In progress |
215,557 | 149,402 | ||||||
In development |
9,865 | 6,732 | ||||||
Product inventory |
35,925 | 40,392 | ||||||
603,188 | 570,985 | |||||||
Television Segment Direct-to-Television Programs |
||||||||
Released, net of accumulated amortization |
85,888 | 77,973 | ||||||
Completed and not released |
1,350 | | ||||||
In progress |
56,440 | 51,619 | ||||||
In development |
1,767 | 1,445 | ||||||
145,445 | 131,037 | |||||||
Media Networks |
||||||||
Released, net of accumulated amortization |
209 | | ||||||
In progress |
441 | 745 | ||||||
650 | 745 | |||||||
$ | 749,283 | $ | 702,767 | |||||
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:
Total | Remaining | Unamortized Costs | Unamortized Costs | |||||||||||||||
Acquired | Amortization | Amortization | September 30, | March 31, | ||||||||||||||
Library | Acquisition Date | Period | Period | 2009 | 2009 | |||||||||||||
(In years) | (Amounts in thousands) | |||||||||||||||||
Trimark |
October 2000 | 20.00 | 11.00 | $ | 5,553 | $ | 6,280 | |||||||||||
Artisan |
December 2003 | 20.00 | 14.25 | 43,439 | 47,255 | |||||||||||||
Modern |
August 2005 | 20.00 | 15.75 | 1,788 | 2,462 | |||||||||||||
Lionsgate UK |
October 2005 | 20.00 | 16.00 | 920 | 901 | |||||||||||||
Total
Acquired
Libraries |
$ | 51,700 | $ | 56,898 | ||||||||||||||
The Company expects approximately 43% of completed films and television programs, net of
accumulated amortization, will be amortized during the one-year period ending September 30, 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 September 30, 2012.
4. Goodwill
The changes in the carrying amount of goodwill by reporting segment were as follows in the six
months ended September 30, 2009:
Motion | Media | |||||||||||||||
Pictures | Television | Networks | Total | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Balance as of March 31, 2009 |
$ | 210,293 | $ | 13,961 | $ | 155,148 | $ | 379,402 | ||||||||
TV Guide Network |
| | (49 | ) | (49 | ) | ||||||||||
Balance as of September 30, 2009 |
$ | 210,293 | $ | 13,961 | $ | 155,099 | $ | 379,353 | ||||||||
During the six months ended September 30, 2009, goodwill decreased by less than $0.1 million
due to changes to the allocation of the purchase price to identified tangible and intangible assets
and liabilities assumed from the acquisition of the TV Guide Network.
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5. 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 Companys finite-lived intangible assets and
the associated accumulated amortization is as follows as of September 30, 2009 and March 31, 2009:
Weighted | Range | |||||||||||||||||||||||||||||||
average | of | September 30, 2009 | March 31, 2009 | |||||||||||||||||||||||||||||
remaining | remaining | Gross | Net | Gross | Net | |||||||||||||||||||||||||||
life in | life in | Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | |||||||||||||||||||||||||
years | years | Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||||||
Finite-lived intangible assets: |
||||||||||||||||||||||||||||||||
Customer relationships |
10 | 5 - 11 | $ | 64,330 | $ | 3,710 | $ | 60,620 | $ | 64,330 | $ | 530 | $ | 63,800 | ||||||||||||||||||
Trademarks |
16 | 2 - 20 | 11,330 | 1,371 | 9,959 | 11,330 | 627 | 10,703 | ||||||||||||||||||||||||
Developed technology and
patents |
2 | 2 - 6 | 3,740 | 1,032 | 2,708 | 3,740 | 147 | 3,593 | ||||||||||||||||||||||||
Distribution agreements |
3 | 2 - 4 | 4,014 | 1,933 | 2,081 | 1,598 | 790 | 808 | ||||||||||||||||||||||||
Total finite-lived intangible
assets |
$ | 83,414 | $ | 8,046 | $ | 75,368 | $ | 80,998 | $ | 2,094 | $ | 78,904 | ||||||||||||||||||||
The aggregate amount of amortization expense associated with the Companys intangible assets
for the three months ended September 30, 2009 and 2008 were $2.6 million and $0.3 million,
respectively. The aggregate amount of amortization expense associated with the Companys intangible
assets for the six-month periods ended September 30, 2009 and 2008 were $6.5 million and $0.6
million, respectively. The estimated aggregate amortization expense, based on the preliminary
allocation of the purchase price related to the acquisition of TV Guide Network, for the six-months
ended March 31, 2010 and for each of the years ending March 31, 2011 through 2014 is approximately
$5.3 million, $10.3 million, $7.6 million, $7.2 million, and $6.8 million, respectively.
Other Assets. Other assets consist primarily of equity method investments and loans
receivable. The composition of the Companys other assets is as follows as of September 30, 2009
and March 31, 2009:
September 30, | March 31, | |||||||
2009 | 2009 | |||||||
(Amounts in thousands) | ||||||||
Deferred financing costs, net of accumulated amortization |
$ | 12,397 | $ | 10,184 | ||||
Prepaid expenses and other |
6,239 | 6,025 | ||||||
Loans receivable |
24,236 | 33,065 | ||||||
Equity method investments |
43,241 | 31,960 | ||||||
$ | 86,113 | $ | 81,234 | |||||
Deferred Financing Costs
Deferred financing costs primarily include costs incurred in connection with (1) an amended
credit facility (see Note 6), (2) the issuance of the 10.25% Senior Secured Second-Priority Notes
(see Note 18) and (3) the issuance of the October 2004 2.9375% Notes, the February 2005 3.625%
Notes and the April 2009 3.625% Notes (see Note 8) that are deferred and amortized to interest
expense using the effective interest method.
Prepaid Expenses and Other
Prepaid expenses and other primarily include prepaid expenses and security deposits.
Loans Receivable
Loans receivable at September 30, 2009 consist of a $16.7 million collateralized note
receivable plus $0.2 million of accrued interest from a third party producer, and $6.8 million of
notes receivable and $0.6 million of accrued interest from NextPoint, Inc. (Break.com), an equity
method investee, as described below. At March 31, 2009, loans receivable consisted of a $25.0
million collateralized note receivable plus $0.8 million of accrued interest from a third party
producer, and $6.8 million of notes receivable and $0.3 million of accrued interest from Break.com.
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Equity Method Investments
The carrying amount of significant equity method investments at September 30, 2009 and March
31, 2009 were as follows:
September 30, | March 31, | |||||||
2009 | 2009 | |||||||
(Amounts in thousands) | ||||||||
Horror Entertainment, LLC (FEARnet) |
$ | 804 | $ | 845 | ||||
NextPoint, Inc. (Break.com) |
16,912 | 17,542 | ||||||
Roadside Attractions, LLC |
1,965 | 2,062 | ||||||
Studio 3 Partners, LLC (EPIX) |
23,560 | 11,511 | ||||||
$ | 43,241 | $ | 31,960 | |||||
Equity interests in equity method investments in our unaudited condensed consolidated
statements of operations represent our portion of the income or loss of our equity method investee
based on our percentage ownership. Equity interests in equity method investments for the three and
six months ended September 30, 2009 and 2008 were as follows (income (loss)):
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Horror Entertainment, LLC (FEARnet) |
$ | (262 | ) | $ | (1,344 | ) | $ | (395 | ) | $ | (2,410 | ) | ||||
NextPoint, Inc. (Break.com) |
(270 | ) | (320 | ) | (631 | ) | (1,146 | ) | ||||||||
Roadside Attractions, LLC |
11 | (84 | ) | (97 | ) | (378 | ) | |||||||||
Studio 3 Partners, LLC (EPIX) |
(1,407 | ) | (212 | ) | (2,522 | ) | (212 | ) | ||||||||
$ | (1,928 | ) | $ | (1,960 | ) | $ | (3,645 | ) | $ | (4,146 | ) | |||||
Horror Entertainment, LLC. Represents the Companys 33.33% interest in Horror Entertainment,
LLC (FEARnet), a multiplatform programming and content service provider of horror genre films
operating under the branding of FEARnet. The Company entered into a five-year license agreement
with FEARnet for U.S. territories and possessions whereby the Company will license content to
FEARnet for video-on-demand and broadband exhibition. The Company made capital contributions to
FEARnet of $0.3 million in April 2009. The Company is recording its share of the FEARnet results on
a one quarter lag and, accordingly, during the six months ended September 30, 2009, the Company
recorded 33.33% of the loss incurred by FEARnet through June 30, 2009.
NextPoint, Inc. Represents the Companys 42% equity interest or 21,000,000 shares of the
Series B Preferred Stock of NextPoint, Inc. (Break.com), an online home entertainment service
provider operating under the branding of Break.com. The interest was acquired on June 29, 2007
for an aggregate purchase price of $21.4 million which included $0.5 million of transaction costs,
by issuing 1,890,189 of the Companys common shares. The value assigned to the shares for purposes
of recording the investment of $20.9 million was based on the average price of the Companys common
shares a few days prior and subsequent to the date of the closing of the acquisition. The Company
has a call option which is exercisable at any time from June 29, 2007 until the earlier of (i) 30
months after June 29, 2007 or (ii) one year after a change of control, as narrowly defined, to
purchase all of the remaining 58% equity interests (excluding any subsequent dilutive events) of
Break.com, including in-the-money stock options, warrants and other rights of Break.com for $58.0
million in cash or common stock, at the Companys option. The carrying value of the call option
which was de minimus at September 30, 2009 is included in the investment balance. The Company is
recording its share of the Break.com results on a one quarter lag and, accordingly, during the six
months ended September 30, 2009, the Company recorded 42% of the loss incurred by Break.com through
June 30, 2009.
Roadside Attractions, LLC. Represents the Companys 43% equity interest acquired on July 26,
2007 in Roadside Attractions, LLC (Roadside), an independent theatrical releasing company. The
Company has a call option which is exercisable for a period of 90 days commencing on the receipt of
certain audited financial statements for the three years ended July 26, 2010, to purchase all of
the remaining 57% equity interests of Roadside, at a price representative of the then fair value of
the remaining interest. The estimated
initial cost of the call option was de minimus since the option price is designed to be
representative of the then fair value and is included within the investment balance. The Company is
recording its share of the Roadside results on a one quarter lag and, accordingly, during the six
months ended September 30, 2009, the Company recorded 43% of the loss incurred by Roadside through
June 30, 2009.
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Studio 3 Partners, LLC (EPIX). In April 2008, the Company formed a joint venture with
Viacom Inc. (Viacom), its Paramount Pictures unit (Paramount Pictures) and Metro-Goldwyn-Mayer
Studios Inc. (MGM) to create a premium television channel and subscription video-on-demand
service named EPIX. The new venture will have access to the Companys titles released
theatrically on or after January 1, 2009. Viacom provides operational support to the venture,
including marketing and affiliate services through its MTV Networks division. The joint venture
will provide the Company with an additional platform to distribute its library of motion picture
titles and television episodes and programs. The Company has a 28.57% interest in EPIX. The Company
had invested $27.0 million as of September 30, 2009 and
funded an additional $14.2 million
subsequent to September 30, 2009 and may fund additional amounts in the future. The Company is
recording its share of the joint venture results on a one quarter lag and, accordingly, during the
six months ended September 30, 2009, the Company recorded 28.57% of the loss incurred by the joint
venture through June 30, 2009.
6.
Borrowings Under Bank Line of Credit
On September 30, 2009, the Company amended its credit facility which allowed for the Company to
issue the senior secured second-priority notes and expand acceptable obligors included in the
borrowing base calculation. The amendment resulted in an increase of the interest rate of 0.25%,
and an additional financial covenant was added among other changes.
At September 30, 2009, the Company had borrowings of $255 million (March 31, 2009 $255 million)
under its credit facility. The availability of funds under its credit facility is limited by a
borrowing base and also reduced by outstanding letters of credit which amounted to $22.7 million at
September 30, 2009 (March 31, 2009 $46.7 million). At September 30, 2009, there was $62.3
million available under the credit facility (March 31, 2009 $38.3 million). The Company is
required to pay a quarterly commitment fee based upon 0.375% per annum on the total credit facility
of $340 million less the amount drawn. The credit facility expires July 25, 2013 and bore interest
at 2.25% over the Adjusted LIBOR rate through September 29, 2009 (effective interest rate of
2.50% and 2.75% as of September 29, 2009 and March 31, 2009, respectively).
Obligations
under the credit facility are secured by collateral (as defined in the credit agreement) granted by
the Company and certain subsidiaries of the Company, as well as a pledge of equity interests in
certain of the Companys subsidiaries. The credit facility contains a number of affirmative and
negative covenants that, among other things, require the Company to satisfy certain financial
covenants and restrict the ability of the Company to incur additional debt, pay dividends and make
distributions, make certain investments and acquisitions, repurchase its stock and prepay certain
indebtedness, create liens, enter into agreements with affiliates, modify the nature of its
business, enter into sale-leaseback transactions, transfer and sell material assets and merge or
consolidate. Under the credit facility, the Company may also be subject to an event of default upon
a change in control (as defined in the credit facility) which, among other things, includes a
person or group acquiring ownership or control in excess of 20% of our common stock.
7. Film and Production Obligations and Participations and Residuals
September 30, | March 31, | |||||||
2009 | 2009 | |||||||
(Amounts in thousands) | ||||||||
Film obligations (1) |
$ | 52,374 | $ | 88,814 | ||||
Production obligations (2) |
241,340 | 215,711 | ||||||
Total film and production obligations |
293,714 | 304,525 | ||||||
Less film and production obligations expected to be paid within one year |
(64,607 | ) | (185,647 | ) | ||||
Film and production obligations expected to be paid after one year |
$ | 229,107 | $ | 118,878 | ||||
Participations and residuals |
$ | 304,271 | $ | 371,857 | ||||
(1) | Film obligations include minimum guarantees, which represent amounts payable for film rights that the Company has acquired and theatrical marketing obligations, which represent amounts that are contractually committed for theatrical marketing expenditures associated with specific titles. | |
(2) | Production obligations represent amounts payable for the cost incurred for the production of film and television programs that the Company produces. Production obligations have contractual repayment dates either at or near the expected completion date, with the exception of certain obligations containing repayment dates on a longer term basis. Production obligations of $161.9 million |
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incur interest at rates ranging from 1.89% to 4.04%, and approximately $70.7 million of production obligations are non-interest bearing. Also included in production obligations is $8.7 million in long term production obligations with an interest rate of 1.0% that is part of a $66.0 million funding agreement with the State of Pennsylvania, as more fully described below. | ||
On April 9, 2008, the Company entered into a loan agreement with the Pennsylvania Regional Center, which provides for the availability of production loans up to $66,000,000 on a five year term for use in film and television productions in the State of Pennsylvania. The amount that can be borrowed is generally limited to approximately one half of the qualified production costs incurred in the State of Pennsylvania through the two year period ended April 2010, and is subject to certain other limitations. Under the terms of the loan, for every dollar borrowed, the Companys production companies are required (within a two year period) to either create a specified number of jobs, or spend a specified amount in certain geographic regions in the State of Pennsylvania. Amounts borrowed under the agreement carry an interest rate of 1.0%, which is payable semi-annually, and the principal amount is due on the five-year anniversary date of the first borrowing under the agreement (i.e., April 2013). The loan is secured by a first priority security interest in the Companys film library pursuant to an intercreditor agreement with the Companys senior lender under the Companys revolving credit facility. Pursuant to the terms of the Companys credit facility, the Company is required to maintain a balance equal to the loans outstanding plus 5% under this facility in a bank account with the Companys senior lender under the Companys credit facility. Accordingly, included in restricted cash is $9.2 million (on deposit with our senior lenders), related to amounts received under the Pennsylvania agreement. |
The Company expects approximately 77% of accrued participations and residuals will be paid
during the one-year period ending September 30, 2010.
Theatrical Slate Participation
On May 25, 2007, the Company closed a theatrical slate participation arrangement, as amended
on January 30, 2008. Under this arrangement, Pride Pictures, LLC (Pride), an unrelated entity,
was to contribute, in general, 50% of the Companys production, acquisition, marketing and
distribution costs of theatrical feature films up to an aggregate of approximately $196 million,
net of transaction costs. The funds available from Pride were generated from the issuance of
subordinated debt instruments, equity and a senior revolving credit facility, which was subject to
a borrowing base. The borrowing base calculation was generally based on 90% of the estimated
ultimate amounts due to Pride on previously released films, as defined in the applicable
agreements. The Company was not a party to the Pride debt obligations or their senior credit
facility, and provided no guarantee of repayment of these obligations. The percentage of the
contribution could vary on certain pictures. Pride participated in a pro rata portion of the
pictures net profits or losses similar to a co-production arrangement based on the portion of
costs funded. The Company distributed the pictures covered by the arrangement with a portion of net
profits after all costs and the Companys distribution fee being distributed to Pride based on
their pro rata contribution to the applicable costs similar to a back-end participation on a film.
Amounts provided from Pride are reflected as a participation liability. The difference between
the ultimate participation expected to be paid to Pride and the amount provided by Pride is
amortized as a charge to or a reduction of participation expense under the individual-film-forecast
method.
In late 2008, the administrative agent for the senior lenders under Prides senior credit
facility took the position, among others, that the senior lenders did not have an obligation to
continue to fund under the senior credit facility because the conditions precedent to funding set
forth in the senior credit facility could not be satisfied. The Company was not a party to the
credit facility. Consequently, Pride did not purchase the pictures The Spirit, My Bloody Valentine
3-D and Madea Goes To Jail. Thereafter, on April 20, 2009, after failed attempts by the Company to
facilitate a resolution, the Company gave LG Film Finance I, LLC (FilmCo) and Pride notice that
FilmCo, through Prides failure to make certain capital contributions, was in default of the Master
Picture Purchase Agreement. On May 5, 2009, the representative for the Pride equity and the Pride
mezzanine investor responded that the required amount was fully funded and that it had no further
obligations to make any additional capital contributions. Consequently, on May 29, 2009, the
Company terminated our theatrical slate participation arrangement with Pride. Since May 29, 2009,
there have been no developments with respect to the arrangement.
At September 30, 2009, $35.3 million (March 31, 2009, $83.8 million) was payable to Pride and
is included in participations and residuals liability in the unaudited condensed consolidated
balance sheets.
Société Générale de Financement du Québec Filmed Entertainment Participation
On July 30, 2007, the Company entered into a four-year filmed entertainment slate
participation agreement with Société Générale de Financement du Québec (SGF), the Québec
provincial governments investment arm. SGF will provide up to 35% of production costs of
television and feature film productions produced in Québec for a four-year period for an aggregate
participation of up to
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$140 million, and the Company will advance all amounts necessary to fund the remaining budgeted
costs. The maximum aggregate of budgeted costs over the four-year period will be $400 million,
including the Companys portion, but no more than $100 million per year. In connection with this
agreement, the Company and SGF will proportionally share in the proceeds derived from the
productions after the Company deducts a distribution fee, recoups all distribution expenses and
releasing costs, and pays all applicable third party participations and residuals.
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Amounts provided from SGF are reflected as a participation liability. The difference between
the ultimate participation expected to be paid to SGF and the amount provided by SGF is amortized
as a charge to or a reduction of participation expense under the individual film forecast method.
At September 30, 2009, $7.5 million (March 31, 2009, $3.2 million) was payable to SGF and is
included in the participations and residuals liability in the unaudited condensed consolidated
balance sheet. Under the terms of the arrangement $35 million is available through July 30, 2010
and $35 million is available during the twelve-month period ending July 30, 2011 to be provided by
SGF.
8. Subordinated Notes and Other Financing Obligations
The following table sets forth the subordinated notes and other financing obligations
outstanding at September 30, 2009 and March 31, 2009:
September 30, | March 31, | |||||||
2009 | 2009 | |||||||
(Amounts in thousands) | ||||||||
October 2004 2.9375% Convertible Senior Subordinated Notes |
$ | 131,297 | $ | 127,253 | ||||
February 2005 3.625% Convertible Senior Subordinated Notes |
85,452 | 138,552 | ||||||
April 2009 3.625% Convertible Senior Subordinated Notes |
34,299 | | ||||||
Other financing obligations |
15,310 | 15,716 | ||||||
$ | 266,358 | $ | 281,521 | |||||
Subordinated Notes
On April 1, 2009, the Company adopted a new accounting standard that specifies that issuers of
convertible debt instruments that may be settled in cash upon conversion (including partial cash
settlement) should separately account for the liability and equity components in a manner that will
reflect the entitys nonconvertible debt borrowing rate on the instruments 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 (i.e., 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 this standard retrospectively to all periods presented resulting in an
increase to interest expense of $3.7 million, an increase to net loss of $3.7 million and an
increase in basic and diluted loss per share of $0.03 for the three months ended September 30,
2008. For the six months ended September 30, 2008, the application of the provisions of the new
accounting standard resulted in an increase to interest expense of $7.3 million, an increase to net
loss of $7.3 million and an increase in basic and diluted loss per share of $0.06. Shareholders
equity at March 31, 2009 was increased by $49.9 million consisting of the increase in the
accumulated deficit of $54.5 million resulting from the cumulative change in interest expense from
the date the notes were issued and changes in the previously reported gains on extinguishment of
debt, net of the increase in common shareholders equity of $104.4 million representing the
carrying amount of the equity component of the notes.
October 2004 2.9375% Notes. In October 2004, Lions Gate Entertainment Inc., the Companys
wholly-owned subsidiary (LGEI), sold $150.0 million of 2.9375% Convertible Senior Subordinated
Notes (the October 2004 2.9375% Notes). The Company received $146.0 million of net proceeds after
paying placement agents fees from the sale of $150.0 million of the October 2004 2.9375% Notes.
Interest on the October 2004 2.9375% Notes is payable semi-annually on April 15 and October 15. The
October 2004 2.9375% Notes mature on October 15, 2024. From October 15, 2009 to October 14, 2010,
LGEI may redeem the October 2004 2.9375% Notes at 100.839%; from October 15, 2010 to October 14,
2011, LGEI may redeem the October 2004 2.9375% Notes at 100.420%; and thereafter, LGEI may redeem
the October 2004 2.9375% Notes at 100%.
The holder may require LGEI to repurchase the October 2004 2.9375% Notes on October 15, 2011,
2014 and 2019 or upon a change in control at a price equal to 100% of the principal amount,
together with accrued and unpaid interest through the date of repurchase. Under certain
circumstances, if the holder requires LGEI to repurchase all or a portion of their notes upon a
change in control, they will be entitled to receive a make whole premium. The amount of the make
whole premium, if any, will be based on the price of the Companys common shares on the effective
date of the change in control. No make whole premium will be paid if the price of the Companys
common shares at such time is less than $8.79 per share or exceeds $50.00 per share.
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The holder may convert the October 2004 2.9375% Notes into the Companys common shares prior
to maturity only if the price of the Companys common shares issuable upon conversion of a note
reaches a specified threshold over a specified period, the trading price of the notes falls below
certain thresholds, the notes have been called for redemption, a change in control occurs or
certain other corporate transactions occur. In addition, under certain circumstances, if the holder
converts their notes upon a change in control, they will be entitled to receive a make whole
premium. Before the close of business on or prior to the trading day immediately before the
maturity date, if the notes have not been previously redeemed or repurchased, the holder may
convert the notes into the Companys common shares at a conversion rate equal to 86.9565 shares per
$1,000 principal amount of the October 2004 2.9375% Notes, subject to adjustment in certain
circumstances, which represents a conversion price of approximately $11.50 per share. Upon
conversion of the October 2004 2.9375% Notes, the Company has the option to deliver, in lieu of
common shares, cash or a combination of cash and common shares of the Company.
February 2005 3.625% Notes. In February 2005, LGEI sold $175.0 million of 3.625% Convertible
Senior Subordinated Notes (February 2005 3.625% Notes). The Company received $170.2 million of
net proceeds after paying placement agents fees from the sale of $175.0 million of the February
2005 3.625% Notes. Interest on the February 2005 3.625% Notes is payable at 3.625% per annum
semi-annually on March 15 and September 15 until March 15, 2012 and at 3.125% per annum thereafter
until maturity on March 15, 2025. LGEI may redeem all or a portion of the February 2005 3.625%
Notes at its option on or after March 15, 2012 at 100% of their principal amount, together with
accrued and unpaid interest through the date of redemption.
The holder may require LGEI to repurchase the February 2005 3.625% Notes on March 15, 2012,
2015 and 2020 or upon a change in control at a price equal to 100% of the principal amount,
together with accrued and unpaid interest through the date of repurchase. Under certain
circumstances, if the holder requires LGEI to repurchase all or a portion of their notes upon a
change in control, they will be entitled to receive a make whole premium. The amount of the make
whole premium, if any, will be based on the price of the Companys common shares on the effective
date of the change in control. No make whole premium will be paid if the price of the Companys
common shares at such time is less than $10.35 per share or exceeds $75.00 per share.
The February 2005 3.625% Notes are convertible, at the option of the holder, at any time
before the maturity date, if the notes have not been previously redeemed or repurchased, at a
conversion rate equal to 70.0133 shares per $1,000 principal amount of the February 2005 3.625%
Notes, subject to adjustment in certain circumstances, which represents a conversion price of
approximately $14.28 per share. Upon conversion of the February 2005 3.625% Notes, the Company has
the option to deliver, in lieu of common shares, cash or a combination of cash and common shares of
the Company.
In December 2008, LGEI extinguished $9.0 million of the February 2005 3.625% Notes and
originally recorded a gain on extinguishment of $3.5 million. The adoption of a new accounting
standard described above decreased the gain on extinguishment for fiscal 2009 to $3.0 million to
account for the unamortized portion of the discounts associated with the repurchased notes. The
gain represented the difference between the fair value of the liability component of the February
2005 3.625% Notes and their carrying value with the excess of the amount paid to extinguish the
February 2005 3.625% Notes over the fair value of the February 2005 3.625% Notes recorded as a
reduction of shareholders equity reflecting the repurchase of the equity component of the February
2005 3.625% Notes.
On April 20, 2009, LGEI entered into Refinancing Exchange Agreements with certain existing
holders of the February 2005 3.625% Notes. Pursuant to the terms of the Refinancing Exchange
Agreements, holders of the February 2005 3.625% Notes exchanged approximately $66.6 million
aggregate principal amount of the February 2005 3.625% Notes for new 3.625% convertible senior
subordinated notes (April 2009 3.625% Notes) in the same aggregate principal amount under a new
indenture entered into by LGEI, the Company, as guarantor, and an indenture trustee thereunder. As
a result of the exchange transaction, the Company recorded a gain on extinguishment of debt of $7.5
million. The gain represented the difference between the fair value of the liability component of
the February 2005 3.625% Notes and their carrying value. The excess of the fair value of both the
equity and liability component of the April 2009 3.625% Notes over the fair value of the February
2005 3.625% Notes of $3.9 million was recorded as a reduction of shareholders equity reflecting the
repurchase of the equity component of the February 2005 3.625% Notes.
April 2009 3.625% Notes. As discussed above, in April 2009, LGEI issued approximately $66.6
million of 3.625% Convertible Senior Subordinated Notes (the April 2009 3.625% Notes). Interest
on the April 2009 3.625% Notes is payable on March 15 and September 15 of each year. The April 2009
3.625% Notes will mature on March 15, 2025. On or after March 15, 2015, the Company may redeem the
April 2009 3.625% Notes, in whole or in part, at a price equal to 100% of the principal amount of
the April 2009 3.625% Notes to be redeemed, plus accrued and unpaid interest through the date of
redemption.
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The holder may require LGEI to repurchase the April 2009 3.625% Notes on March 15, 2015, 2018
and 2023 or upon a designated event, at a price equal to 100% of the principal amount of the
April 2009 3.625% Notes to be repurchased plus accrued and unpaid interest. Under certain
circumstances, if the holder requires LGEI to repurchase all or a portion of their notes upon a
change in control, they will be entitled to receive a make whole premium. The amount of the make
whole premium, if any, will be based on the price of the Companys common shares on the effective
date of the change in control. No make whole premium will be paid if the price of the Companys
common shares at such time is less than $5.36 per share or exceeds $50.00 per share.
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The April 2009 3.625% Notes may be converted into common shares of the Company at any time
before maturity, redemption or repurchase. The initial conversion rate of the April 2009 3.625%
Notes is 121.2121 common shares per $1,000 principal amount of the April 2009 3.625% Notes, subject
to adjustment in certain circumstances, which represents a conversion price of approximately $8.25
per share. Upon conversion of the April 2009 3.625% Notes, the Company has the option to deliver,
in lieu of common shares, cash or a combination of cash and common shares of the Company.
The following table sets forth the equity and liability components of the 3.625% Notes and
2.9375% Notes outstanding as of September 30, 2009 and March 31, 2009:
September 30, | March 31, | |||||||
2009 | 2009 | |||||||
(Amounts in thousands) | ||||||||
October 2004 2.9375% Convertible Senior Subordinated Notes: |
||||||||
Carrying amount of equity component |
$ | 50,074 | $ | 50,074 | ||||
Carrying amount of liability component |
||||||||
Principal amount of 2.9375% Notes |
$ | 150,000 | $ | 150,000 | ||||
Unamortized discount (remaining period of 2.3 and 2.8 years, respectively) |
(18,703 | ) | (22,747 | ) | ||||
Net carrying amount of October 2004 2.9375% Notes |
$ | 131,297 | $ | 127,253 | ||||
February 2005 3.625% Convertible Senior Subordinated Notes: |
||||||||
Carrying amount of equity component |
$ | 53,032 | $ | 54,355 | ||||
Carrying amount of liability component |
||||||||
Principal amount of February 3.625% Notes |
$ | 99,419 | $ | 166,000 | ||||
Unamortized discount (remaining period of 2.5 and 3.0 years, respectively) |
(13,967 | ) | (27,448 | ) | ||||
Net carrying amount of February 2005 3.625% Notes |
$ | 85,452 | $ | 138,552 | ||||
April 2009 3.625% Convertible Senior Subordinated Notes: |
||||||||
Carrying amount of equity component |
$ | 16,085 | N/A | |||||
Carrying amount of liability component |
||||||||
Principal amount of April 2009 3.625% Notes |
$ | 66,581 | N/A | |||||
Unamortized discount (remaining period of 5.5 years) |
(32,282 | ) | N/A | |||||
Net carrying amount of April 2009 3.625% Notes |
$ | 34,299 | N/A | |||||
The effective interest rate on the liability component and the amount of interest
expense, which includes both the contractual interest coupon and amortization of the discount on
the liability component, for the three and six months ended September 30, 2009 and 2008 are
presented below.
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Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
October 2004 2.9375% Convertible Senior Subordinated Notes: |
||||||||||||||||
Effective interest rate of liability component (9.65%) |
||||||||||||||||
Interest Expense |
||||||||||||||||
Contractual interest coupon |
$ | 1,102 | $ | 1,102 | $ | 2,203 | $ | 2,203 | ||||||||
Amortization of discount on liability component |
2,064 | 1,875 | 4,049 | 3,677 | ||||||||||||
Amortization of debt issuance costs |
134 | 112 | 261 | 217 | ||||||||||||
$ | 3,300 | $ | 3,089 | $ | 6,513 | $ | 6,097 | |||||||||
February 2005 3.625% Convertible Senior Subordinated Notes: |
||||||||||||||||
Effective interest rate of liability component (10.03%) |
||||||||||||||||
Interest Expense |
||||||||||||||||
Contractual interest coupon |
$ | 901 | $ | 1,586 | $ | 1,929 | $ | 3,172 | ||||||||
Amortization of discount on liability component |
1,490 | 1,974 | 2,911 | 3,887 | ||||||||||||
Amortization of debt issuance costs |
81 | 122 | 171 | 238 | ||||||||||||
$ | 2,472 | $ | 3,682 | $ | 5,011 | $ | 7,297 | |||||||||
April 2009 3.625% Convertible Senior Subordinated Notes: |
||||||||||||||||
Effective interest rate of liability component (17.26%) |
||||||||||||||||
Interest Expense |
||||||||||||||||
Contractual interest coupon |
$ | 603 | N/A | $ | 1,079 | N/A | ||||||||||
Amortization of discount on liability component |
766 | N/A | 1,403 | N/A | ||||||||||||
Amortization of debt issuance costs |
3 | N/A | 3 | N/A | ||||||||||||
$ | 1,372 | N/A | $ | 2,485 | N/A | |||||||||||
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Other Financing Obligations
On June 1, 2007, the Company entered into a bank financing agreement for $3.7 million to fund
the acquisition of certain capital assets. Interest is payable in monthly payments totaling $0.3
million per year for five years at an interest rate of 8.02%, with the entire principal due June
2012.
In association with the February 28, 2009 acquisition of TV Guide Network, the Company assumed
a $12.1 million capital lease obligation for a satellite transponder lease. At September 30, 2009
the balance of the capital lease obligation was $11.6 million. The monthly payments total $1.6
million per year through August 2019, with an imputed interest rate of 6.65%.
9. Fair Value Measurements
Fair Value
Accounting guidance and standards about fair value define fair value as the price that would
be received from selling an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
Fair Value Hierarchy
Accounting guidance and standards about fair value establish a fair value hierarchy that
requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. A financial instruments categorization within the fair value
hierarchy is based upon the lowest level of input that is significant to the fair value
measurement. The accounting guidance and standards establish three levels of inputs that may be
used to measure fair value:
| Level 1 Quoted prices in active markets for identical assets or liabilities. | ||
| Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 liabilities that are measured at fair value on a recurring basis include the Companys credit facility and convertible senior subordinated notes, both priced using discounted cash flow techniques that use observable market inputs, such as LIBOR-based yield curves, three- and seven-year swap rates, and credit ratings. | ||
| Level 3 Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. |
The following table sets forth the carrying values and fair values (all determined using Level 2
inputs defined above) of the Companys outstanding debt at September 30, 2009:
Carrying | ||||||||
Value | Fair Value | |||||||
(Level 2) | ||||||||
(Amounts in thousands) | ||||||||
Borrowings under bank line of credit |
$ | 255,000 | $ | 271,681 | ||||
October 2004 2.9375% Convertible Senior Subordinated Notes |
131,297 | 129,234 | ||||||
February 2005 3.625% Convertible Senior Subordinated Notes |
85,452 | 83,855 | ||||||
April 2009 3.625% Convertible Senior Subordinated Notes |
34,299 | 33,820 | ||||||
$ | 506,048 | $ | 518,590 | |||||
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10. Acquisitions and Divestitures
TV Guide Network
Acquisition of TV Guide Network. On February 28, 2009, the Company purchased all of the
issued and outstanding equity interests of TV Guide Network and TV Guide.com (collectively TV
Guide Network), a network and online provider of entertainment and television guidance-related
programming, as well as localized program listings and descriptions primarily in the U.S. The
Company paid approximately $241.6 million for all of the equity interest of TV Guide Network,
assumed a capital lease obligation of $12.1 million and incurred approximately $1.5 million in
direct transaction costs (paid to lawyers, accountants and other consultants).
The acquisition was accounted for as a purchase, with the results of operations of TV Guide
Network included in the Companys consolidated results from February 28, 2009. The acquisition
goodwill represents the significant opportunity for the Company to expand the existing television
channel and online media platforms. Goodwill of $155.1 million
represents the excess of the purchase
price over the preliminary estimate of the fair value of the tangible and intangible assets
acquired and liabilities assumed. Although the goodwill will not be amortized for financial
reporting purposes, it is anticipated that substantially all of the goodwill will be deductible for
federal tax purposes over the statutory period of 15 years. The preliminary allocation of the
purchase price to the assets acquired and liabilities assumed based on their estimated fair values
was as follows:
Preliminary | ||||
Allocation | ||||
(Amounts in | ||||
thousands) | ||||
Accounts receivable, net |
$ | 14,505 | ||
Property and equipment |
26,649 | |||
Other assets acquired |
1,831 | |||
Finite-lived intangible assets: |
||||
Customer relationships |
64,330 | |||
Trademarks/trade names |
9,730 | |||
Internal Use Software |
2,230 | |||
Prepaid Patent License Agreements |
1,510 | |||
Goodwill |
155,099 | |||
Other liabilities assumed |
(32,775 | ) | ||
Total preliminary estimated purchase price including estimated transaction costs |
$ | 243,109 | ||
Sale of Noncontrolling Interest in TV Guide Network. On May 28, 2009, the Company
entered into a Purchase Agreement (the Purchase Agreement) with One Equity Partners (OEP), the
global private equity investment arm of JPMorgan Chase, pursuant to which OEP purchased 49% of the
Companys interest in TV Guide Network for approximately $122.4 million in cash. In addition, OEP
reserved the option of buying another 1% of TV Guide Network under certain circumstances. The
arrangement contains joint control rights, as evidenced in an operating agreement as well as
certain transfer restrictions and exit rights.
In exchange for the cash consideration, OEP received mandatorily redeemable preferred stock
units and common stock units representing its 49% noncontrolling interest in TV Guide Network. The
Company also received mandatorily redeemable preferred stock units and common stock units
representing its 51% ownership share. The mandatorily redeemable preferred stock carries a dividend
rate of 10% compounded annually and is mandatorily redeemable ten years from the closing at the
stated value plus the dividend return and any additional capital contributions less previous
distributions.
After the sale of the Companys 49% interest in TV Guide Network to OEP, the Company has
continued to consolidate TV Guide Network. TV Guide Network is a variable interest entity that is
currently required to be consolidated since the Company is the primary beneficiary pursuant to its
business and ownership structure. The net loss attributable to noncontrolling interest in the
consolidated statement of operations represents the noncontrolling interests 49% share of the net
loss incurred by TV Guide Network for the period from May 28, 2009 through September 30, 2009.
As a result of the sale transaction, the difference between the cash received and 49% of the
carrying value of TV Guide Network acquired by OEP was recorded as an adjustment to shareholders
equity attributable to the Companys shareholders. The mandatorily redeemable preferred stock units
attributable to the noncontrolling interest were initially recorded based on their estimated fair
value, as determined using an option pricing model methodology, as a liability in our consolidated
balance sheet. The carrying value of the 49% interest in TV Guide Network, less the amount recorded
for the mandatorily redeemable preferred stock units, representing the
22
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common stock units held by the minority holders, was recorded as equity attributable to
noncontrolling interest in our consolidated statement of shareholders equity.
23
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The portion of the mandatorily redeemable preferred and common stock units held by the Company
and associated non-cash interest representing the Companys 51% ownership interest is eliminated in
consolidation. The mandatorily redeemable preferred stock held by the noncontrolling interest and
the 10% dividend is being accreted, through a non-cash charge to interest expense, up to its
redemption amount over the ten-year period to the redemption date. The redemption amount of the
noncontrolling interests share of the mandatorily redeemable preferred stock as of September 30,
2009 which includes capital contributions and dividend accretion through September 30, 2009 was
$129.3 million.
The following unaudited pro forma condensed consolidated statement of operations presented
below illustrate the results of operations of the Company as if the acquisition of TV Guide Network
on February 28, 2009 had occurred at April 1, 2008 and also presents the pro forma adjustments and
results of operations as if the sale of the Companys interest in TV Guide Network as described
above occurred at April 1, 2008:
Six Months | Six Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
(Amounts in thousands, except per share amounts) | ||||||||
Revenues |
$ | 781,384 | $ | 750,193 | ||||
Operating
income (loss) |
$ | 85,077 | $ | (32,488 | ) | |||
Net
income (loss) |
$ | 66,378 | $ | (52,519 | ) | |||
Basic Net
(Loss) Income Per Common Share |
$ | 0.57 | $ | (0.45 | ) | |||
Diluted
Net Income (Loss) Per Common Share |
$ | 0.54 | $ | (0.45 | ) | |||
Weighted average number of common shares outstanding Basic |
117,199 | 117,647 | ||||||
Weighted average number of common shares outstanding Diluted |
137,671 | 117,647 |
The following table sets forth the carrying amounts of the assets and liabilities of the
TV Guide Network included in the consolidated balance sheet as of September 30, 2009:
September 30, | ||||
2009 | ||||
(Amounts in | ||||
thousands) | ||||
Cash and cash equivalents |
$ | 16,286 | ||
Accounts receivable, net |
16,439 | |||
Investment in films and television programs, net |
650 | |||
Property and equipment, net |
24,517 | |||
Finite-lived intangible assets, net |
72,378 | |||
Goodwill |
155,099 | |||
Other assets |
1,199 | |||
Total Assets |
286,568 | |||
Accounts payable and accrued liabilities |
16,921 | |||
Other financing obligations |
11,592 | |||
Mandatorily redeemable preferred stock units held by noncontrolling interest |
88,431 | |||
Other liabilities |
7,737 | |||
Total Liabilities |
124,681 | |||
Noncontrolling interest |
33,838 | |||
Net assets held by Lions Gate Entertainment Corp. |
$ | 128,049 | ||
Acquisition of Mandate Pictures, LLC
On September 10, 2007, the Company purchased all of the membership interests in Mandate
Pictures, LLC, a Delaware limited liability company (Mandate). Mandate is a worldwide independent
film producer and distributor. The Mandate acquisition brings to
24
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the Company additional experienced management personnel working within the motion picture
business segment. In addition, the Mandate acquisition adds an independent film and distribution
business to the Companys motion picture business. The aggregate cost of the acquisition was
approximately $128.8 million including liabilities assumed of $70.2 million with amounts paid to
the selling shareholders of approximately $58.6 million, comprised of $46.8 million in cash and
1,282,999 of the Companys common shares. The value assigned to the shares for purposes of
recording the acquisition was $11.8 million and was based on the average price of the Companys
common shares a few days prior and subsequent to the date of the closing of the acquisition, which
is when it was publicly announced.
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In addition, the Company may be obligated to pay additional amounts pursuant to the
purchase agreement should certain films or derivative works meet certain target performance
thresholds. Such amounts, to the extent they relate to films or derivative works of films
identified at the acquisition date will be charged to goodwill if the target thresholds are
achieved, and such amounts, to the extent they relate to other qualifying films produced in the
future, will be accounted for similar to other film participation arrangements. The amount to be
paid is the excess of the sum of the following amounts over the performance threshold (i.e. the
Hurdle Amount):
| 80% of the earnings of certain films for the longer of 5 years from the closing or 5 years from the release of the pictures, plus | ||
| 20% of the earnings of certain pictures which commence principal photography within 5 years from the closing date for a period up to 10 years, plus | ||
| certain fees designated for derivative works which commence principal photography within 7 years of the initial release of the original picture. |
The Hurdle Amount is the purchase price of approximately $56 million plus an interest cost
accruing until such hurdle is reached, and certain other costs the Company agreed to pay in
connection with the acquisition. Accordingly, the additional consideration is the total of the
above in excess of the Hurdle Amount. As of September 30, 2009, the total earnings and fees from
identified projects in process are not projected to reach the Hurdle Amount. However, as additional
projects are identified in the future and the current projects are released in the market place the
total projected earnings and fees from these projects could increase causing additional payments to
the sellers to become payable.
Acquisition of Debmar-Mercury LLC
On July 3, 2006, the Company acquired all of the capital stock of Debmar-Mercury, LLC
(Debmar-Mercury), a leading syndicator of film and television packages. Consideration for the
Debmar-Mercury acquisition was $27.0 million, comprised of a combination of $24.5 million in cash
paid on July 3, 2006 and $2.5 million in common shares of the Company issued in January 2008, and
assumed liabilities of $10.5 million. Goodwill of $8.7 million represents the excess of the
purchase price over the fair value of the net identifiable tangible and intangible assets acquired.
Pursuant to the purchase agreement, if the aggregate earnings before interest, taxes,
depreciation and amortization adjusted to add back 20% of the overhead expense (Adjusted EBITDA)
of Debmar-Mercury for the five-year period ending after the closing date exceeds the target amount,
then up to 40% of the excess Adjusted EBITDA over the target amount is payable as additional
consideration. The percentage of the excess Adjusted EBITDA over the target amount ranges from 20%
of such excess up to an excess of $3 million, 25% of such excess over $3 million and less than $6
million, 30% of such excess over $6 million and less than $10 million and 40% of such excess over
$10 million. The target amount is $32.2 million plus adjustments for interest on certain funding
provided by the Company and adjustments for certain overhead and other items.
In addition, up to 40% (percentage is determined based on how much the cumulative Adjusted
EBITDA exceeds the target amount) of Adjusted EBITDA of Debmar-Mercury generated subsequent to the
five-year period from the assets existing as of the fifth anniversary date of the close is also
payable as additional consideration on a quarterly basis (i.e., the Continuing Earnout Payment)
unless the substitute earn out option is exercised by either the seller or the Company. The
substitute earn out option is only available if the aggregate Adjusted EBITDA for the five-year
period ending after the closing date exceeds the target amount. Under the substitute earn out
option, the seller can elect to receive an amount equal to $2.5 million in lieu of the Continuing
Earnout Payments and the Company can elect to pay an amount equal to $15 million in lieu of the
Continuing Earnout Payments.
Amounts paid, if any, under the above additional consideration provisions will be recorded as
additional goodwill.
11. Direct Operating Expenses
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Amortization of films and television programs |
$ | 133,361 | $ | 117,696 | $ | 287,303 | $ | 186,743 | ||||||||
Participations and residual expense |
65,333 | 80,895 | 122,249 | 159,007 | ||||||||||||
Other expenses: |
||||||||||||||||
Provision
(benefit) for doubtful accounts |
(410 | ) | 12 | 1,591 | 222 | |||||||||||
Foreign exchange losses (gains) |
(237 | ) | 1,023 | (37 | ) | 1,338 | ||||||||||
$ | 198,047 | $ | 199,626 | $ | 411,106 | $ | 347,310 | |||||||||
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12. Comprehensive Income (Loss)
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Net income (loss) attributable to
Lions Gate Entertainment Corp. shareholders |
$ | 31,716 | $ | (51,814 | ) | $ | 68,065 | $ | (48,295 | ) | ||||||
Add (Deduct): Foreign currency translation adjustments |
878 | (4,049 | ) | 5,887 | (3,880 | ) | ||||||||||
Add: Net unrealized gain on foreign exchange contracts |
46 | 3 | 17 | 12 | ||||||||||||
Add: Unrealized gain on investments available for sale |
| 91 | | 73 | ||||||||||||
Comprehensive income (loss) attributable to Lions Gate Entertainment Corp. |
$ | 32,640 | $ | (55,769 | ) | $ | 73,969 | $ | (52,090 | ) | ||||||
Comprehensive loss attributable to noncontrolling interest |
(2,507 | ) | | (4,384 | ) | | ||||||||||
Comprehensive income (loss) |
$ | 30,133 | $ | (55,769 | ) | $ | 69,585 | $ | (52,090 | ) | ||||||
13.
Net Income (Loss) 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 three and six months ended September
30, 2009 and 2008 is presented below:
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Basic Net Income (Loss) Per Common Share: |
||||||||||||||||
Numerator: |
||||||||||||||||
Net income (loss) attributable to Lions Gate Entertainment Corp. shareholders |
$ | 31,716 | $ | (51,814 | ) | $ | 68,065 | $ | (48,295 | ) | ||||||
Denominator: |
||||||||||||||||
Weighted average common shares outstanding |
117,322 | 116,861 | 117,199 | 117,647 | ||||||||||||
Basic Net Income (Loss) Per Common Share |
$ | 0.27 | $ | (0.44 | ) | $ | 0.58 | $ | (0.41 | ) | ||||||
Diluted net income (loss) per common share reflects the potential dilutive effect, if any,
of the conversion of the October 2004 2.9375% Notes, the February 2005 3.625% Notes and the April
2009 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 three and six months ended September 30, 2009 and 2008 is presented below:
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Diluted Net Income (Loss) Per Common Share: |
||||||||||||||||
Numerator: |
||||||||||||||||
Net income (loss) attributable to Lions Gate Entertainment Corp. shareholders |
$ | 31,716 | $ | (51,814 | ) | $ | 68,065 | $ | (48,295 | ) | ||||||
Add: |
||||||||||||||||
Interest on convertible Notes, net of tax |
4,256 | | 8,199 | | ||||||||||||
Amortization of deferred financing costs, net of tax |
129 | | 248 | | ||||||||||||
Numerator for Diluted Net Income (Loss) Per Common Share |
$ | 36,101 | $ | (51,814 | ) | $ | 76,512 | $ | (48,295 | ) | ||||||
Denominator: |
||||||||||||||||
Weighted average common shares outstanding |
117,322 | 116,861 | 117,199 | 117,647 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Conversion of Notes |
21,113 | | 20,276 | | ||||||||||||
Restricted share units |
297 | | 196 | | ||||||||||||
Adjusted weighted average common shares outstanding |
138,732 | 116,861 | 137,671 | 117,647 | ||||||||||||
Diluted Net Income (Loss) Per Common Share |
$ | 0.26 | $ | (0.44 | ) | $ | 0.56 | $ | (0.41 | ) | ||||||
27
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For the three and six months ended September 30, 2009 and 2008, 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.
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Conversion of Notes |
6,961 | 25,295 | 7,445 | 25,295 | ||||||||||||
Share purchase options |
3,745 | 3,582 | 3,847 | 3,528 | ||||||||||||
Restricted share units |
968 | 337 | 1,283 | 176 | ||||||||||||
Total weighted average common shares excluded from Diluted Net
Income (Loss) Per Common Share |
11,674 | 29,214 | 12,575 | 28,999 | ||||||||||||
The Company had 500,000,000 authorized common shares at September 30, 2009 and March 31,
2009. The table below outlines common shares reserved for future issuance:
September 30, | March 31, | |||||||
2009 | 2009 | |||||||
(Amounts in thousands) | ||||||||
Stock options outstanding |
3,635 | 3,899 | ||||||
Restricted share units unvested |
2,848 | 2,566 | ||||||
Share purchase options and restricted share units available for future issuance |
4,607 | 5,120 | ||||||
Shares issuable upon conversion of October 2004 2.9375% Notes at conversion price of $11.50 per share |
13,043 | 13,043 | ||||||
Shares issuable upon conversion of February 2005 3.625% Notes at conversion price of $11.04 per share |
6,961 | 11,622 | ||||||
Shares issuable upon conversion of April 2009 3.625% Notes at conversion price of $8.25 per share |
8,070 | | ||||||
Shares reserved for future issuance |
39,164 | 36,250 | ||||||
The Companys Board of Directors has authorized the repurchase of up to $150 million of
the Companys common shares, with the timing, price, quantity, and manner of the purchases to be
made at the discretion of management, depending upon market conditions. During the period from the
authorization date through September 30, 2009, 6,787,310 shares have been repurchased pursuant to
the plan at a cost of approximately $65.2 million, including commission costs. No shares were
repurchased during the three and six months ended September 30, 2009. The share repurchase program
has no expiration date.
14. Accounting for Stock-Based Compensation
Share-Based Compensation
Relevant accounting guidance and standards require the measurement of all stock-based awards
using a fair value method and the recognition of the related stock-based compensation expense in
the consolidated financial statements over the requisite service period. Further, as required the
Company estimates forfeitures for share-based awards that are not expected to vest. As stock-based
compensation expense recognized in the Companys consolidated financial statements is based on
awards ultimately expected to vest, it has been reduced for estimated forfeitures.
The fair value of each option award is estimated on the date of grant using a closed-form
option valuation model (Black-Scholes) based on the assumptions noted in the following table.
Expected volatilities are based on implied volatilities from traded options on the Companys stock,
historical volatility of the Companys stock and other factors. The expected term of options
granted represents the period of time that options granted are expected to be outstanding. The
weighted-average grant-date fair values for options granted during the six months ended September
30, 2009 and 2008 was $3.01 and $3.06, respectively. The following table represents the assumptions
used in the Black-Scholes option-pricing model for stock options granted during the six months
ended September 30, 2009 and 2008:
28
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Six Months | Six Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
Risk-free interest rate |
2.6 | % | 2.7 | % | ||||
Expected option lives (in years) |
10 years | 5 years | ||||||
Expected volatility for options |
45 | % | 31 | % | ||||
Expected dividend yield |
0 | % | 0 | % |
29
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The Company recognized the following share-based compensation expense (benefit) during
the three and six months ended September 30, 2009 and 2008:
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Compensation Expense (Benefit): |
||||||||||||||||
Stock Options |
$ | 815 | $ | 802 | $ | 1,620 | $ | 1,599 | ||||||||
Restricted Share Units and
Other Share-based Compensation |
3,142 | 3,295 | 6,066 | 5,917 | ||||||||||||
Stock Appreciation Rights |
336 | (1,112 | ) | 602 | (646 | ) | ||||||||||
Total |
$ | 4,293 | $ | 2,985 | $ | 8,288 | $ | 6,870 | ||||||||
There was no income tax benefit recognized in the statements of operations for
share-based compensation arrangements during the three and six months ended September 30, 2009 and
2008.
Stock Options
A summary of option activity as of September 30, 2009 and changes during the six months then
ended is presented below:
Weighted | Aggregate | |||||||||||||||||||||||
Weighted- | Average | Intrinsic | ||||||||||||||||||||||
Total | Average | Remaining | Value as of | |||||||||||||||||||||
Number of | Number of | Number of | Exercise | Contractual | September 30, | |||||||||||||||||||
Options: | Shares (1) | Shares (2) | Shares | Price | Term In Years | 2009 | ||||||||||||||||||
Outstanding at March 31, 2009 |
3,299,166 | 600,000 | 3,899,166 | $ | 9.75 | |||||||||||||||||||
Granted |
60,000 | | 60,000 | 5.17 | ||||||||||||||||||||
Exercised |
| | | | ||||||||||||||||||||
Forfeited or expired |
(112,333 | ) | | (112,333 | ) | 7.68 | ||||||||||||||||||
Outstanding at June 30, 2009 |
3,246,833 | 600,000 | 3,846,833 | $ | 9.73 | |||||||||||||||||||
Granted |
| | | | ||||||||||||||||||||
Exercised |
| | | | ||||||||||||||||||||
Forfeited or expired |
(212,000 | ) | | (212,000 | ) | 7.68 | ||||||||||||||||||
Outstanding at September 30, 2009 |
3,034,833 | 600,000 | 3,634,833 | $ | 9.85 | 6.57 | $ | 59,400 | ||||||||||||||||
Outstanding as of September 30,
2009, vested
or expected to vest in the future |
3,030,833 | 600,000 | 3,630,833 | $ | 9.86 | 6.56 | $ | 56,430 | ||||||||||||||||
Exercisable at September 30, 2009 |
2,209,001 | 200,000 | 2,409,001 | $ | 9.94 | 6.08 | $ | | ||||||||||||||||
(1) | Issued under our long-term incentive plans | |
(2) | On September 10, 2007, in connection with the acquisition of Mandate Pictures (see Note 10), two executives entered into employment agreements with Lions Gate Films, Inc. (LGF), the Companys wholly-owned subsidiary. Pursuant to the employment agreements, the executives were granted an aggregate of 600,000 stock options, 200,000 options of which vested, and 600,000 options of which will vest over a two- to three-year period. | |
The options were granted outside of our long-term incentive plans. |
The total intrinsic value of options exercised as of each exercise date during the three
and six months ended September 30, 2009 were nil (2008 $6.6 million and $7.1 million,
respectively).
Restricted Share Units
Effective June 27, 2005, the Company, pursuant to the 2004 Plan, began granting restricted
share units to certain employees, directors and consultants.
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A summary of the status of the Companys restricted share units as of September 30, 2009 and
changes during the six months then ended is presented below:
Total | Weighted Average | |||||||||||||||
Number of | Number of | Number of | Grant Date Fair | |||||||||||||
Restricted Share Units: | Shares (1) | Shares (2) | Shares | Value | ||||||||||||
Outstanding at March 31, 2009 |
2,181,501 | 384,167 | 2,565,668 | $ | 9.27 | |||||||||||
Granted |
498,209 | | 498,209 | 5.25 | ||||||||||||
Vested |
(185,248 | ) | | (185,248 | ) | 10.63 | ||||||||||
Forfeited |
(4,292 | ) | | (4,292 | ) | 8.75 | ||||||||||
Outstanding at June 30, 2009 |
2,490,170 | 384,167 | 2,874,337 | $ | 8.49 | |||||||||||
Granted |
485,517 | 52,500 | 538,017 | 6.27 | ||||||||||||
Vested |
(447,177 | ) | (113,334 | ) | (560,511 | ) | 9.09 | |||||||||
Forfeited |
(4,123 | ) | | (4,123 | ) | 10.35 | ||||||||||
Outstanding at September 30, 2009 |
2,524,387 | 323,333 | 2,847,720 | $ | 7.95 | |||||||||||
(1) | Issued under our long-term incentive plans | |
(2) | On September 10, 2007, in connection with the acquisition of Mandate Pictures (see Note 10), two executives entered into employment agreements with LGF. Pursuant to the employment agreements, the executives were granted an aggregate of 445,000 restricted share units, which vest over a three- to five-year period. The restricted share units were granted outside of our long-term incentive plans. |
The fair values of restricted share units are determined based on the market value of the
shares on the date of grant.
The following table summarizes the total remaining unrecognized compensation cost as of
September 30, 2009 related to non-vested stock options and restricted share units and the weighted
average remaining years over which the cost will be recognized:
Total | Weighted | |||||||
Unrecognized | Average | |||||||
Compensation | Remaining | |||||||
Cost | Years | |||||||
(Amounts in thousands) | ||||||||
Stock Options |
$ | 4,219 | 1.4 | |||||
Restricted Share Units |
14,619 | 1.8 | ||||||
Total |
$ | 18,838 | ||||||
Under the Companys two stock option and long term incentive plans, the Company withholds
shares to satisfy minimum statutory federal, state and local tax withholding obligations arising
from the vesting of restricted share units. During the six months ended September 30, 2009, 182,496
shares were withheld upon the vesting of restricted share units.
The Company becomes entitled to an income tax deduction in an amount equal to the taxable
income reported by the holders of the stock options and restricted share units when vesting or
exercise occurs, the restrictions are released and the shares are issued. Restricted share units
are forfeited if the employees terminate prior to vesting.
Stock Appreciation Rights
On February 5, 2009, an officer was granted 850,000 stock appreciation rights (SARs) with an
exercise price of $5.45, which entitles the officer to receive cash equal to the amount by which
the trading price of common shares on the exercise notice date exceeds the SARs price of $5.45
multiplied by the number of SARs exercised, in consideration of a one-year extension of his
employment agreement. The SARs vest over three years and expire after five years. These SARs were
granted under the 2004 Plan. The Company measures compensation expense based on the fair value of
the SARs, which is determined by using the Black-Scholes option-pricing model at each reporting
date. At September 30, 2009, the following assumptions were used in the Black-Scholes
option-pricing model: Volatility of 45%, Risk Free Rate of 1.9%, Expected Term of 4.4 years, and
Dividend of 0%. At September 30, 2009, the market price of the Companys common shares was $6.16
and the weighted average fair value of the SARs was $2.63. The compensation expense of $0.4 million
in the period is calculated by using the fair value of the SARs, multiplied by the 850,000 SARs,
amortized over the vesting period. At September 30, 2009, the Company has a stock-based
compensation liability accrual in the
31
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amount of $0.5 million (March 31, 2009 $0.1 million)
included in accounts payable and accrued liabilities on the unaudited condensed consolidated
balance sheets relating to these SARs.
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During the year ended March 31, 2009, a non-employee was granted 250,000 SARs with an exercise
price of $11.16, which entitles the non-employee to receive cash equal to the amount by which the
trading price of common shares on the exercise notice date exceeds the SARs price of $11.16
multiplied by the number of SARs exercised. The SARs vest over a four-year period. The Company
measures compensation cost based on the fair value of the SARs, which is determined by using the
Black-Scholes option-pricing model at each reporting date. At September 30, 2009, the following
assumptions were used in the Black-Scholes option-pricing model: Volatility of 45%, Risk Free Rate
of 1.45%, Expected Remaining Term of 2.7 years, and Dividend of 0%. At September 30, 2009, the
market price of the Companys common shares was $6.16 and the weighted average fair value of the
SARs was $0.76. In connection with these SARs, the Company recorded a stock-based compensation
benefit in the amount of less than $0.1 million, included in direct operating expenses in the
unaudited condensed consolidated statements of operations for the three and six months ended
September 30, 2009. At September 30, 2009, the Company has a stock-based compensation liability
accrual in the amount of $0.2 million (March 31, 2009 $0.2 million) included in accounts payable
and accrued liabilities on the unaudited condensed consolidated balance sheets relating to these
SARs.
During the year ended March 31, 2009, a non-employee was granted 750,000 SARs with an exercise
price of $9.56, which entitles the non-employee to receive cash equal to the amount by which the
trading price of common shares on the exercise notice date exceeds the SARs price of $9.56
multiplied by the number of SARs exercised. The SARs vest over a three-year period based on the
commencement of principal photography of certain production of motion pictures. The Company
measures compensation cost based on the fair value of the SARs, which is determined by using the
Black-Scholes option-pricing model at each reporting date. At September 30, 2009, the following
assumptions were used in the Black-Scholes option-pricing model: Volatility of 45%, Risk Free Rate
of 1.88%, Expected Remaining Term of 3.8 years, and Dividend of 0%. At September 30, 2009, the
market price of the Companys common shares was $6.16, the weighted average fair value of the SARs
was $1.38. In March 2009, 250,000 of the SARs vested upon commencement of principal photography on
a certain film. The weighted average fair value of these SARs on the date of vesting was $1.33. The
fair value of the 250,000 vested SARs as of September 30, 2009 remained the same as their
respective fair value as of March 31, 2009, resulting in no net impact to direct operating expenses
in the unaudited condensed consolidated statements of operations for the six-months ended September
30, 2009. The Company recorded a portion of the fair value of the remaining SARs, which represents
the progress towards commencement of principal photography of the second production, of $0.2
million in investment in films and television programs on the unaudited condensed consolidated
balance sheets. At September 30, 2009, the Company has a stock-based compensation liability accrual
in the amount of $0.5 million (March 31, 2009 $0.4 million) included in accounts payable and
accrued liabilities on the unaudited condensed consolidated balance sheets relating to these SARs.
On April 6, 2009, an officer was granted 700,000 SARs with an exercise price of $5.17, which
entitles the officer to receive cash equal to the amount by which the trading price of common
shares on the exercise notice date exceeds the SARs price of $5.17 multiplied by the number of
SARs exercised, in consideration of a four-year extension of his employment agreement. The SARs
vest over four years and expire after five years, with 50% of the SARs to vest in four equal annual
installments after the grant date and 50% of the SARs to vest over a four-year period, subject to
performance-based vesting requirements as established by the Companys Chief Executive Officer and
approved by the Compensation Committee of the Board of Directors. These SARs were granted under the
2004 Plan. The Company measures compensation expense based on the fair value of the SARs, which is
determined by using the Black-Scholes option-pricing model at each reporting date. At September 30,
2009, the following assumptions were used in the Black-Scholes option-pricing model: Volatility of
45%, Risk Free Rate of 2.3%, Expected Term of 4.5 years, and Dividend of 0%. At September 30, 2009,
the market price of the Companys common shares was $6.16 and the weighted average fair value of
the SARs was $2.82. The compensation expense of $0.2 million in the period is calculated by using
the fair value of the SARs, multiplied by the 700,000 SARs, amortized over the vesting period. At
September 30, 2009, the Company has a stock-based compensation liability accrual in the amount of
$0.2 million (March 31, 2009 nil) included in accounts payable and accrued liabilities on the
unaudited condensed consolidated balance sheets relating to these SARs.
Other Share-Based Compensation
Pursuant to a certain employment agreement, the Company grants the equivalent of $0.3 million
in common shares to a certain officer on a quarterly basis through the term of his employment
contract. For the three and six months ended September 30, 2009, the Company issued 23,364 and
50,301 shares, respectively, net of shares withheld to satisfy minimum tax withholding obligations.
The issuance of shares under this arrangement commenced in fiscal 2010. The Company recorded
stock-based compensation expense related to this arrangement in the amount of $0.3 million and $0.5
million, respectively, for the three and six months ended September 30, 2009 (three and six months
ended September 30, 2008 nil).
33
Table of Contents
15. Segment Information
Certain accounting guidance and standards require the Company to make certain disclosures
about each reportable segment. The Companys reportable segments are determined based on the
distinct nature of their operations and each segment is a strategic business unit that offers
different products and services and is managed separately. The Company evaluates performance of
each segment using segment profit (loss) as defined below. The Company has three reportable
business segments: Motion Pictures, Television Production, and Media Networks.
Motion Pictures consists of the development and production of feature films, acquisition of
North American and worldwide distribution rights, North American theatrical, home entertainment and
television distribution of feature films produced and acquired, and worldwide licensing of
distribution rights to feature films produced and acquired.
Television Production consists of the development, production and worldwide distribution of
television productions including television series, television movies and mini-series and
non-fiction programming.
Media Networks consists of TV Guide Network, one of the 30 most widely distributed general
entertainment cable networks in the U.S., including TV Guide Network On Demand and TV Guide Online
(www.tvguide.com), an online navigational tool and provider of television listings and video and
other entertainment content (acquired in February 2009). The Media Networks segment includes
distribution revenue from multi-system cable operators and digital broadcast satellite providers
(distributors generally pay a per subscriber fee for the right to distribute programming) and
advertising revenue from the sale of advertising on its television channel and related online media
platforms.
Segmented information by business unit is as follows:
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2009 | 2008 | 2009 | 2000 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Segment revenues |
||||||||||||||||
Motion Pictures |
$ | 277,123 | $ | 312,162 | $ | 549,850 | $ | 569,530 | ||||||||
Television Production |
88,898 | 68,556 | 176,120 | 109,647 | ||||||||||||
Media Networks |
27,656 | | 55,414 | | ||||||||||||
$ | 393,677 | $ | 380,718 | $ | 781,384 | $ | 679,177 | |||||||||
Direct operating expenses |
||||||||||||||||
Motion Pictures |
$ | 122,434 | $ | 143,619 | $ | 254,444 | $ | 257,950 | ||||||||
Television Production |
67,040 | 56,007 | 138,166 | 89,360 | ||||||||||||
Media Networks |
8,573 | | 18,496 | | ||||||||||||
$ | 198,047 | $ | 199,626 | $ | 411,106 | $ | 347,310 | |||||||||
Distribution and marketing |
||||||||||||||||
Motion Pictures |
$ | 91,532 | $ | 183,051 | $ | 166,385 | $ | 276,896 | ||||||||
Television Production |
7,354 | 6,356 | 14,484 | 11,486 | ||||||||||||
Media Networks |
3,359 | | 6,359 | | ||||||||||||
$ | 102,245 | $ | 189,407 | $ | 187,228 | $ | 288,382 | |||||||||
General and administration |
||||||||||||||||
Motion Pictures |
$ | 11,276 | $ | 11,758 | $ | 22,758 | $ | 24,876 | ||||||||
Television Production |
1,958 | 2,671 | 4,083 | 5,328 | ||||||||||||
Media Networks |
11,508 | | 22,215 | | ||||||||||||
$ | 24,742 | $ | 14,429 | $ | 49,056 | $ | 30,204 | |||||||||
Segment profit (loss) |
||||||||||||||||
Motion Pictures |
$ | 51,881 | $ | (26,266 | ) | $ | 106,263 | $ | 9,808 | |||||||
Television Production |
12,546 | 3,522 | 19,387 | 3,473 | ||||||||||||
Media Networks |
4,216 | | 8,344 | | ||||||||||||
$ | 68,643 | $ | (22,744 | ) | $ | 133,994 | $ | 13,281 | ||||||||
Acquisition of investment in films and television programs |
||||||||||||||||
Motion Pictures |
$ | 49,437 | $ | 55,651 | $ | 200,586 | $ | 201,760 | ||||||||
Television Production |
59,413 | 68,628 | 115,468 | 123,416 | ||||||||||||
Media Networks |
8,334 | | 17,422 | | ||||||||||||
$ | 117,184 | $ | 124,279 | $ | 333,476 | $ | 325,176 | |||||||||
Purchases of property and equipment amounted to $0.7 million and $3.7 million for the
three and six months ended September 30, 2009, respectively, all primarily pertaining to purchases
for the Companys corporate headquarters and Media Networks segment. For
34
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the three and six months
ended September 30, 2008, purchases of property and equipment amounted to $3.4 million and $5.7
million, respectively, all primarily pertaining to purchases for the Companys corporate
headquarters.
Segment profit (loss) is defined as segment revenue less segment direct operating,
distribution and marketing, and general and administration expenses. The reconciliation of total
segment profit (loss) to the Companys income (loss) before income taxes is as follows:
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Companys total segment profit (loss) |
$ | 68,643 | $ | (22,744 | ) | $ | 133,994 | $ | 13,281 | |||||||
Less: |
||||||||||||||||
Corporate general and administration |
(17,710 | ) | (16,171 | ) | (34,515 | ) | (38,704 | ) | ||||||||
Depreciation and amortization |
(6,207 | ) | (1,415 | ) | (14,402 | ) | (2,801 | ) | ||||||||
Interest expense |
(13,297 | ) | (8,909 | ) | (24,006 | ) | (16,796 | ) | ||||||||
Interest and other income |
382 | 2,047 | 808 | 4,202 | ||||||||||||
Gain on extinguishment of debt |
| | 7,458 | | ||||||||||||
Equity interests loss |
(1,928 | ) | (1,960 | ) | (3,645 | ) | (4,146 | ) | ||||||||
Income (loss) before income taxes |
$ | 29,883 | $ | (49,152 | ) | $ | 65,692 | $ | (44,964 | ) | ||||||
The following table sets forth significant assets as broken down by segment and other
unallocated assets as of September 30, 2009 and March 31, 2009:
September 30, 2009 | March 31, 2009 | |||||||||||||||||||||||||||||||
Motion | Television | Media | Motion | Television | Media | |||||||||||||||||||||||||||
Pictures | Production | Networks | Total | Pictures | Production | Networks | Total | |||||||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||||||||||
Significant assets by segment |
||||||||||||||||||||||||||||||||
Accounts receivable |
$ | 116,411 | $ | 99,125 | $ | 16,439 | $ | 231,975 | $ | 148,625 | $ | 61,652 | $ | 16,733 | $ | 227,010 | ||||||||||||||||
Investment in films
and television programs, net |
603,188 | 145,445 | 650 | 749,283 | 570,985 | 131,037 | 745 | 702,767 | ||||||||||||||||||||||||
Goodwill |
210,293 | 13,961 | 155,099 | 379,353 | 210,293 | 13,961 | 155,148 | 379,402 | ||||||||||||||||||||||||
$ | 929,892 | $ | 258,531 | $ | 172,188 | $ | 1,360,611 | $ | 929,903 | $ | 206,650 | $ | 172,626 | $ | 1,309,179 | |||||||||||||||||
Other unallocated assets
(primarily cash, restricted
investments, other assets,
and finite-lived
intangible assets) |
329,062 | 358,071 | ||||||||||||||||||||||||||||||
Total assets |
$ | 1,689,673 | $ | 1,667,250 | ||||||||||||||||||||||||||||
16. Contingencies
The Company is, from time to time, involved in various claims, legal proceedings and
complaints arising in the ordinary course of business. The Company does not believe that adverse
decisions in any such 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.
17. Consolidating Financial Information
In October 2004, the Company sold $150.0 million of the October 2004 2.9375% Notes through
LGEI. The October 2004 2.9375% Notes, by their terms, are fully and unconditionally guaranteed by
the Company.
In February 2005, the Company sold $175.0 million of the February 2005 3.625% Notes through
LGEI. The February 2005 3.625% Notes, by their terms, are fully and unconditionally guaranteed by
the Company.
35
Table of Contents
In April 2009, LGEI entered into Refinancing Exchange Agreements with certain existing
holders of the February 2005 3.625% Notes. Pursuant to the terms of the Refinancing Exchange
Agreements, holders of the February 2005 3.625% Notes exchanged approximately $66.6 million
aggregate principal amount of the February 2005 3.625% Notes for the new April 2009 3.625% Notes in
the same aggregate principal amount under a new indenture entered into by LGEI. The April 2009
3.625% Notes, by their terms, are fully and unconditionally guaranteed by the Company.
The following tables present unaudited condensed consolidating financial information as of
September 30, 2009 and March 31, 2009, and for the six months ended September 30, 2009 and 2008 for
(1) the Company, on a stand-alone basis, (2) LGEI, on a stand-alone basis, (3) the non-guarantor
subsidiaries of the Company (including the subsidiaries of LGEI), on a combined basis
(collectively, the Other Subsidiaries) and (4) the Company, on a consolidated basis.
As of September 30, 2009 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
BALANCE SHEET |
||||||||||||||||||||
Assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 543 | $ | 24,399 | $ | 87,710 | $ | | $ | 112,652 | ||||||||||
Restricted cash |
| 9,896 | | | 9,896 | |||||||||||||||
Restricted investments |
| 6,999 | | | 6,999 | |||||||||||||||
Accounts receivable, net |
151 | 1,032 | 230,792 | | 231,975 | |||||||||||||||
Investment in films and television
programs, net |
2 | 6,391 | 743,841 | (951 | ) | 749,283 | ||||||||||||||
Property and equipment, net |
| 12,662 | 25,372 | | 38,034 | |||||||||||||||
Finite-lived intangible assets, net |
| | 75,368 | | 75,368 | |||||||||||||||
Goodwill |
10,173 | | 369,180 | | 379,353 | |||||||||||||||
Other assets |
408 | 40,060 | 45,645 | | 86,113 | |||||||||||||||
Subsidiary investments and advances |
160,728 | 113,924 | (194,756 | ) | (79,896 | ) | | |||||||||||||
$ | 172,005 | $ | 215,363 | $ | 1,383,152 | $ | (80,847 | ) | $ | 1,689,673 | ||||||||||
Liabilities and Shareholders
Equity (Deficiency) |
||||||||||||||||||||
Borrowings under bank line of credit |
$ | | $ | 255,000 | $ | | $ | | $ | 255,000 | ||||||||||
Accounts payable and accrued liabilities |
1,031 | 17,911 | 158,420 | (1,094 | ) | 176,268 | ||||||||||||||
Participations and residuals |
179 | 2,108 | 301,997 | (13 | ) | 304,271 | ||||||||||||||
Film and production obligations |
75 | | 293,639 | | 293,714 | |||||||||||||||
Subordinated notes and other financing
obligations |
| 251,048 | 15,310 | | 266,358 | |||||||||||||||
Mandatorily redeemable preferred stock
units held
by noncontrolling interest |
| | 180,472 | (92,041 | ) | 88,431 | ||||||||||||||
Deferred revenue |
| 294 | 134,617 | | 134,911 | |||||||||||||||
Shareholders equity (deficiency) |
170,720 | (310,998 | ) | 298,697 | 12,301 | 170,720 | ||||||||||||||
$ | 172,005 | $ | 215,363 | $ | 1,383,152 | $ | (80,847 | ) | $ | 1,689,673 | ||||||||||
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Table of Contents
Six Months Ended September 30, 2009 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
STATEMENT OF OPERATIONS |
||||||||||||||||||||
Revenues |
$ | | $ | 22,181 | $ | 776,110 | $ | (16,907 | ) | $ | 781,384 | |||||||||
EXPENSES: |
||||||||||||||||||||
Direct operating |
| 369 | 423,166 | (12,429 | ) | 411,106 | ||||||||||||||
Distribution and marketing |
| 1,934 | 186,034 | (740 | ) | 187,228 | ||||||||||||||
General and administration |
658 | 33,820 | 49,240 | (147 | ) | 83,571 | ||||||||||||||
Depreciation and amortization |
| 2,788 | 11,614 | | 14,402 | |||||||||||||||
Total expenses |
658 | 38,911 | 670,054 | (13,316 | ) | 696,307 | ||||||||||||||
OPERATING INCOME (LOSS) |
(658 | ) | (16,730 | ) | 106,056 | (3,591 | ) | 85,077 | ||||||||||||
Other expenses (income): |
||||||||||||||||||||
Interest expense |
| 18,729 | 9,843 | (4,566 | ) | 24,006 | ||||||||||||||
Interest and other income |
(63 | ) | (859 | ) | (353 | ) | 467 | (808 | ) | |||||||||||
Gain on extinguishment of debt |
| (7,458 | ) | | | (7,458 | ) | |||||||||||||
Total other expenses (income) |
(63 | ) | 10,412 | 9,490 | (4,099 | ) | 15,740 | |||||||||||||
INCOME (LOSS) BEFORE EQUITY
INTERESTS AND INCOME
TAXES |
(595 | ) | (27,142 | ) | 96,566 | 508 | 69,337 | |||||||||||||
Equity interests income (loss) |
64,287 | 93,189 | (2,917 | ) | (158,204 | ) | (3,645 | ) | ||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES |
63,692 | 66,047 | 93,649 | (157,696 | ) | 65,692 | ||||||||||||||
Income tax provision (benefit) |
11 | 272 | 1,728 | | 2,011 | |||||||||||||||
NET INCOME (LOSS) |
63,681 | 65,775 | 91,921 | (157,696 | ) | 63,681 | ||||||||||||||
Add: Net loss
attributable to noncontrolling
interest |
4,384 | | | | 4,384 | |||||||||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO
LIONS GATE ENTERTAINMENT CORP.
SHAREHOLDERS |
$ | 68,065 | $ | 65,775 | $ | 91,921 | $ | (157,696 | ) | $ | 68,065 | |||||||||
37
Table of Contents
Six Months Ended September 30, 2009 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
STATEMENT OF CASH FLOWS |
||||||||||||||||||||
NET CASH FLOWS PROVIDED BY
(USED IN) OPERATING
ACTIVITIES |
$ | (12,906 | ) | $ | (185,619 | ) | $ | 34,674 | $ | | $ | (163,851 | ) | |||||||
INVESTING ACTIVITIES: |
||||||||||||||||||||
Purchases of restricted investments |
| (6,999 | ) | | | (6,999 | ) | |||||||||||||
Proceeds from the sale of restricted
investments |
| 6,987 | | | 6,987 | |||||||||||||||
Investment in equity method investees |
| | (14,924 | ) | | (14,924 | ) | |||||||||||||
Decrease in loan receivables |
| 8,333 | | 8,333 | ||||||||||||||||
Purchases of property and equipment |
| (691 | ) | (2,999 | ) | | (3,690 | ) | ||||||||||||
NET CASH FLOWS PROVIDED BY
(USED IN) INVESTING
ACTIVITIES |
| 7,630 | (17,923 | ) | | (10,293 | ) | |||||||||||||
FINANCING ACTIVITIES: |
||||||||||||||||||||
Tax withholding requirements
on equity awards |
(1,343 | ) | | | | (1,343 | ) | |||||||||||||
Proceeds from the sale of 49% interest
in TV Guide |
| 113,426 | 8,929 | | 122,355 | |||||||||||||||
Borrowings under bank line of credit |
70,000 | 70,000 | ||||||||||||||||||
Repayments of borrowings under bank line of credit |
| (70,000 | ) | (70,000 | ) | |||||||||||||||
Increase in production obligations |
| | 128,094 | 128,094 | ||||||||||||||||
Repayment of production obligations |
| | (102,490 | ) | (102,490 | ) | ||||||||||||||
Repayment of other financing obligations |
| (406 | ) | (406 | ) | |||||||||||||||
NET CASH FLOWS PROVIDED BY
(USED IN) FINANCING
ACTIVITIES |
(1,343 | ) | 113,426 | 34,127 | | 146,210 | ||||||||||||||
NET CHANGE IN CASH AND CASH
EQUIVALENTS |
(14,249 | ) | (64,563 | ) | 50,878 | | (27,934 | ) | ||||||||||||
FOREIGN EXCHANGE EFFECTS ON
CASH |
1,539 | | 572 | | 2,111 | |||||||||||||||
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD |
13,253 | 88,962 | 36,260 | | 138,475 | |||||||||||||||
CASH AND CASH EQUIVALENTS
END OF PERIOD |
$ | 543 | $ | 24,399 | $ | 87,710 | $ | | $ | 112,652 | ||||||||||
38
Table of Contents
As of March 31, 2009 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
BALANCE SHEET |
||||||||||||||||||||
Assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 13,253 | $ | 88,962 | $ | 36,260 | $ | | $ | 138,475 | ||||||||||
Restricted cash |
| 10,056 | | | 10,056 | |||||||||||||||
Restricted investments |
| 6,987 | | | 6,987 | |||||||||||||||
Accounts receivable, net |
113 | 3,737 | 223,289 | (129 | ) | 227,010 | ||||||||||||||
Investment in films and television
programs, net |
2 | 6,761 | 695,781 | 223 | 702,767 | |||||||||||||||
Property and equipment, net |
| 15,014 | 27,401 | | 42,415 | |||||||||||||||
Finite-lived intangible assets, net |
| | 78,904 | | 78,904 | |||||||||||||||
Goodwill |
10,173 | | 369,229 | | 379,402 | |||||||||||||||
Other assets |
| 37,636 | 43,598 | | 81,234 | |||||||||||||||
Subsidiary investments and advances |
19,188 | (1,103 | ) | (52,438 | ) | 34,353 | | |||||||||||||
$ | 42,729 | $ | 168,050 | $ | 1,422,024 | $ | 34,447 | $ | 1,667,250 | |||||||||||
Liabilities and Shareholders
Equity (Deficiency) |
||||||||||||||||||||
Borrowings under bank line of credit |
$ | | $ | 255,000 | $ | | $ | | $ | 255,000 | ||||||||||
Accounts payable and accrued liabilities |
821 | 12,289 | 257,866 | (415 | ) | 270,561 | ||||||||||||||
Participations and residuals |
152 | 472 | 371,234 | (1 | ) | 371,857 | ||||||||||||||
Film and production obligations |
63 | | 304,590 | (128 | ) | 304,525 | ||||||||||||||
Subordinated notes and other financing
obligations |
| 265,805 | 15,716 | | 281,521 | |||||||||||||||
Deferred revenue |
| 385 | 141,708 | | 142,093 | |||||||||||||||
Shareholders equity (deficiency) |
41,693 | (365,901 | ) | 330,910 | 34,991 | 41,693 | ||||||||||||||
$ | 42,729 | $ | 168,050 | $ | 1,422,024 | $ | 34,447 | $ | 1,667,250 | |||||||||||
39
Table of Contents
Six Months Ended September 30, 2008 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
STATEMENT OF OPERATIONS |
||||||||||||||||||||
Revenues |
$ | 513 | $ | 11,061 | $ | 684,217 | $ | (16,614 | ) | $ | 679,177 | |||||||||
EXPENSES: |
||||||||||||||||||||
Direct operating |
513 | 123 | 348,252 | (1,578 | ) | 347,310 | ||||||||||||||
Distribution and marketing |
| 85 | 288,287 | 10 | 288,382 | |||||||||||||||
General and administration |
577 | 38,202 | 30,128 | 1 | 68,908 | |||||||||||||||
Depreciation and amortization |
| 1,824 | 977 | | 2,801 | |||||||||||||||
Total expenses |
1,090 | 40,234 | 667,644 | (1,567 | ) | 707,401 | ||||||||||||||
OPERATING INCOME (LOSS) |
(577 | ) | (29,173 | ) | 16,573 | (15,047 | ) | (28,224 | ) | |||||||||||
Other expenses (income): |
||||||||||||||||||||
Interest expense |
16 | 16,082 | 698 | | 16,796 | |||||||||||||||
Interest and other income |
(105 | ) | (3,137 | ) | (960 | ) | | (4,202 | ) | |||||||||||
Total other expenses (income) |
(89 | ) | 12,945 | (262 | ) | | 12,594 | |||||||||||||
INCOME (LOSS) BEFORE EQUITY
INTERESTS AND INCOME
TAXES |
(488 | ) | (42,118 | ) | 16,835 | (15,047 | ) | (40,818 | ) | |||||||||||
Equity interests income (loss) |
(47,796 | ) | (13,620 | ) | (2,410 | ) | 59,680 | (4,146 | ) | |||||||||||
INCOME (LOSS) BEFORE INCOME
TAXES |
(48,284 | ) | (55,738 | ) | 14,425 | 44,633 | (44,964 | ) | ||||||||||||
Income tax provision (benefit) |
11 | 680 | 2,642 | (2 | ) | 3,331 | ||||||||||||||
NET INCOME (LOSS) |
$ | (48,295 | ) | $ | (56,418 | ) | $ | 11,783 | $ | 44,635 | $ | (48,295 | ) | |||||||
40
Table of Contents
Six Months Ended September 30, 2008 | ||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||
Entertainment | Entertainment | Other | Consolidating | Lions Gate | ||||||||||||||||
Corp. | Inc. | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
STATEMENT OF CASH FLOWS |
||||||||||||||||||||
NET CASH FLOWS PROVIDED BY
(USED IN) OPERATING
ACTIVITIES |
$ | 46,358 | $ | (149,460 | ) | $ | 63,378 | $ | | $ | (39,724 | ) | ||||||||
INVESTING ACTIVITIES: |
||||||||||||||||||||
Proceeds from the sale of restricted
investments |
| 125 | | 125 | ||||||||||||||||
Investment in equity method investees |
| | (11,099 | ) | | (11,099 | ) | |||||||||||||
Increase in loan receivables |
| (3,427 | ) | (25,000 | ) | | (28,427 | ) | ||||||||||||
Purchases of property and equipment |
| (5,551 | ) | (192 | ) | | (5,743 | ) | ||||||||||||
NET CASH FLOWS PROVIDED BY
(USED IN) INVESTING
ACTIVITIES |
| (8,853 | ) | (36,291 | ) | | (45,144 | ) | ||||||||||||
FINANCING ACTIVITIES: |
||||||||||||||||||||
Exercise of stock options |
2,894 | | | | 2,894 | |||||||||||||||
Tax withholding requirements on
equity awards |
(2,941 | ) | | | | (2,941 | ) | |||||||||||||
Repurchases of common shares |
(44,737 | ) | | | | (44,737 | ) | |||||||||||||
Increase in production obligations |
| | 113,320 | | 113,320 | |||||||||||||||
Repayment of production obligations |
| | (104,216 | ) | | (104,216 | ) | |||||||||||||
NET CASH FLOWS PROVIDED BY
(USED IN) FINANCING
ACTIVITIES |
(44,784 | ) | | 9,104 | | (35,680 | ) | |||||||||||||
NET CHANGE IN CASH AND CASH
EQUIVALENTS |
1,574 | (158,313 | ) | 36,191 | | (120,548 | ) | |||||||||||||
FOREIGN EXCHANGE EFFECTS ON
CASH |
(216 | ) | | (1,920 | ) | | (2,136 | ) | ||||||||||||
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD |
4,474 | 350,581 | 16,534 | | 371,589 | |||||||||||||||
CASH AND CASH EQUIVALENTS
END OF PERIOD |
$ | 5,832 | $ | 192,268 | $ | 50,805 | $ | | $ | 248,905 | ||||||||||
18. Subsequent Events (Unaudited)
Film Credit Facility
On October 6, 2009, the Company, entered into a revolving film credit facility agreement
(Film Credit Facility) which provides for borrowings for the acquisition or production of motion
pictures. Currently, the Film Credit Facility provides for total borrowings up to $120 million and
can be increased to $200 million if additional lenders or financial institutions become a party to
and provide a commitment under the facility. The Film Credit Facility has a maturity date of April
6, 2013 and generally bears an interest rate of 3.25% over the LIBO rate (as defined in the
credit agreement). The Company is required to pay a quarterly commitment fee of 0.75% per annum on
the unused commitment under the Film Credit Facility. Borrowings under the Film Credit Facility are
due the earlier of (a) nine months after delivery of each motion picture or (b) April 6, 2013.
Borrowings under the Film Credit Facility are subject to a borrowing base calculation and are
secured by interests in the related motion pictures, together with certain other receivables from
other motion picture and television productions pledged by the Company including a minimum pledge
of such receivables of $25 million. Receivables pledged to the Film Credit Facility must be
excluded from the borrowing base calculation under the Companys credit facility as described in
Note 6.
10.25% Senior Secured Second-Priority Notes
On October 21, 2009, LGEI issued approximately $236.0 million aggregate principal amount of
senior secured second-priority notes due 2016 (the Notes) in a private offering conducted
pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the
Securities Act).
The Notes will pay interest semi-annually on May 1 and November 1 of each year at a rate of
10.25% per year and will mature on November 1, 2016.
41
Table of Contents
The Notes are guaranteed on a senior secured basis by the Company, and certain
wholly-owned subsidiaries of both LGEC and LGEI.
The Notes were issued by LGEI at an initial price of 95.222% of the principal amount and,
after deducting discounts and the underwriting fee the net proceeds from the sale of the Notes was
approximately $219.4 million, of which $218.0 million was used by LGEI to repay a portion of its
outstanding debt under its credit facility. The Company expects the total net proceeds after all
transaction costs (including legal, accounting and other professional fees) to be approximately
$215.1 million.
The Company has agreed to make available to the trustee and the holders of the Notes the
following tables which present unaudited condensed consolidating financial information as of
September 30, 2009 and March 31, 2009, and for the six months ended September 30, 2009 and 2008 for
(1) the Company, on a stand-alone basis, (2) LGEI, on a stand-alone basis, (3) the guarantor
subsidiaries of the Company (including the subsidiaries of LGEI), on a combined basis (4) the
non-guarantor subsidiaries of the Company (including the subsidiaries of LGEI), on a combined basis
and (5) the Company, on a consolidated basis.
As of September 30, 2009 | ||||||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||||||
Entertainment | Entertainment | Other Subsidiaries | Consolidating | Lions Gate | ||||||||||||||||||||
Corp. | Inc. | Guarantors | Non-guarantors | Adjustments | Consolidated | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
BALANCE SHEET |
||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 543 | $ | 24,399 | $ | 3,907 | $ | 83,803 | $ | | $ | 112,652 | ||||||||||||
Restricted cash |
| 9.896 | | | | 9,896 | ||||||||||||||||||
Restricted investments |
| 6,999 | | | | 6,999 | ||||||||||||||||||
Accounts receivable, net |
151 | 1,032 | 183,782 | 47,419 | (409 | ) | 231,975 | |||||||||||||||||
Investment in films and television programs, net |
2 | 6,391 | 637,248 | 107,201 | (1,559 | ) | 749,283 | |||||||||||||||||
Property and equipment, net |
| 12,662 | 472 | 24,900 | | 38,034 | ||||||||||||||||||
Finite-lived intangible assets, net |
| | 2,346 | 73,022 | | 75,368 | ||||||||||||||||||
Goodwill |
10,173 | | 183,883 | 185,297 | | 379,353 | ||||||||||||||||||
Other assets |
408 | 40,060 | 43,388 | 2,257 | | 86,113 | ||||||||||||||||||
Subsidiary investments and advances |
160,728 | 113,924 | (156,367 | ) | (66,075 | ) | (52,210 | ) | | |||||||||||||||
$ | 172,005 | $ | 215,363 | $ | 898,659 | $ | 457,824 | $ | (54,178 | ) | $ | 1,689,673 | ||||||||||||
Liabilities and Shareholders
Equity (Deficiency) |
||||||||||||||||||||||||
Borrowings under bank line of credit |
$ | | $ | 255,000 | $ | | $ | | $ | | $ | 255,000 | ||||||||||||
Accounts payable and accrued liabilities |
1,031 | 17,911 | 120,986 | 37,368 | (1,028 | ) | 176,268 | |||||||||||||||||
Participations and residuals |
179 | 2,108 | 253,039 | 48,958 | (13 | ) | 304,271 | |||||||||||||||||
Film and production obligations |
75 | | 279,584 | 14,055 | | 293,714 | ||||||||||||||||||
Subordinated notes and other financing obligations |
| 251,048 | 3,718 | 11,592 | | 266,358 | ||||||||||||||||||
Mandatorily redeemable preferred stock units held
by noncontrolling interest |
| | | 180,472 | (92,041 | ) | 88,431 | |||||||||||||||||
Deferred revenue |
| 294 | 113,344 | 21,881 | (608 | ) | 134,911 | |||||||||||||||||
Shareholders equity (deficiency) |
170,720 | (310,998 | ) | 127,988 | 143,498 | 39,512 | 170,720 | |||||||||||||||||
$ | 172,005 | $ | 215,363 | $ | 898,659 | $ | 457,824 | $ | (54,178 | ) | $ | 1,689,673 | ||||||||||||
42
Table of Contents
Six Months Ended September 30, 2009 | ||||||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||||||
Entertainment | Entertainment | Other Subsidiaries | Consolidating | Lions Gate | ||||||||||||||||||||
Corp. | Inc. | Guarantors | Non-guarantors | Adjustments | Consolidated | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
STATEMENT OF OPERATIONS |
||||||||||||||||||||||||
Revenues |
$ | | $ | 22,181 | $ | 590,615 | $ | 189,723 | $ | (21,135 | ) | $ | 781,384 | |||||||||||
EXPENSES: |
||||||||||||||||||||||||
Direct operating |
| 369 | 319,517 | 108,985 | (17,765 | ) | 411,106 | |||||||||||||||||
Distribution and marketing |
| 1,934 | 153,157 | 32,877 | (740 | ) | 187,228 | |||||||||||||||||
General and administration |
658 | 33,820 | 20,035 | 29,211 | (153 | ) | 83,571 | |||||||||||||||||
Depreciation and amortization |
| 2,788 | 1,934 | 9,680 | | 14,402 | ||||||||||||||||||
Total expenses |
658 | 38,911 | 494,643 | 180,753 | (18,658 | ) | 696,307 | |||||||||||||||||
OPERATING INCOME (LOSS) |
(658 | ) | (16,730 | ) | 95,972 | 8,970 | (2,477 | ) | 85,077 | |||||||||||||||
Other expenses (income): |
||||||||||||||||||||||||
Interest expense |
| 18,729 | 788 | 9,055 | (4,566 | ) | 24,006 | |||||||||||||||||
Interest and other income |
(63 | ) | (859 | ) | (306 | ) | (47 | ) | 467 | (808 | ) | |||||||||||||
Gain on extinguishment of debt |
| (7,458 | ) | | | | (7,458 | ) | ||||||||||||||||
Total other expenses (income) |
(63 | ) | 10,412 | 482 | 9,008 | (4,099 | ) | 15,740 | ||||||||||||||||
INCOME (LOSS) BEFORE EQUITY
INTERESTS AND INCOME
TAXES |
(595 | ) | (27,142 | ) | 95,490 | (38 | ) | 1,622 | 69,337 | |||||||||||||||
Equity interests income (loss) |
64,287 | 93,189 | (2,917 | ) | | (158,204 | ) | (3,645 | ) | |||||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES |
63,692 | 66,047 | 92,573 | (38 | ) | (156,582 | ) | 65,692 | ||||||||||||||||
Income tax provision (benefit) |
11 | 272 | 657 | 1,071 | | 2,011 | ||||||||||||||||||
NET INCOME (LOSS) |
63,681 | 65,775 | 91,916 | (1,109 | ) | (156,582 | ) | 63,681 | ||||||||||||||||
Add: Net loss attributable to noncontrolling interest |
4,384 | | | | | 4,384 | ||||||||||||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO
LIONS GATE ENTERTAINMENT CORP. SHAREHOLDERS |
$ | 68,065 | $ | 65,775 | $ | 91,916 | $ | (1,109 | ) | $ | (156,582 | ) | $ | 68,065 | ||||||||||
As of March 31, 2009 | ||||||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||||||
Entertainment | Entertainment | Other Subsidiaries | Consolidating | Lions Gate | ||||||||||||||||||||
Corp. | Inc. | Guarantors | Non-guarantors | Adjustments | Consolidated | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
BALANCE SHEET |
||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 13,253 | $ | 88,962 | $ | 10,424 | $ | 25,836 | $ | | $ | 138,475 | ||||||||||||
Restricted cash |
| 10,056 | | | | 10,056 | ||||||||||||||||||
Restricted investments |
| 6,987 | | | | 6,987 | ||||||||||||||||||
Accounts receivable, net |
113 | 3,737 | 168,479 | 54,810 | (129 | ) | 227,010 | |||||||||||||||||
Investment in films and television programs, net |
2 | 6,761 | 515,278 | 180,909 | (183 | ) | 702,767 | |||||||||||||||||
Property and equipment, net |
| 15,014 | 558 | 26,843 | | 42,415 | ||||||||||||||||||
Finite-lived intangible assets, net |
| | 1,070 | 77,834 | | 78,904 | ||||||||||||||||||
Goodwill |
10,173 | | 183,883 | 185,346 | | 379,402 | ||||||||||||||||||
Other assets |
| 37,636 | 40,427 | 3,171 | | 81,234 | ||||||||||||||||||
Subsidiary investments and advances |
19,188 | (1,103 | ) | 13,718 | (33,545 | ) | 1,742 | | ||||||||||||||||
$ | 42,729 | $ | 168,050 | $ | 933,837 | $ | 521,204 | $ | 1,430 | $ | 1,667,250 | |||||||||||||
Liabilities and Shareholders
Equity (Deficiency) |
||||||||||||||||||||||||
Borrowings under bank line of credit |
$ | | $ | 255,000 | $ | | $ | | $ | | $ | 255,000 | ||||||||||||
Accounts payable and accrued liabilities |
821 | 12,289 | 216,725 | 40,301 | 425 | 270,561 | ||||||||||||||||||
Participations and residuals |
152 | 472 | 280,070 | 91,118 | 45 | 371,857 | ||||||||||||||||||
Film and production obligations |
63 | | 258,597 | 45,993 | (128 | ) | 304,525 | |||||||||||||||||
Subordinated notes and other financing obligations |
| 265,805 | 3,718 | 11,998 | | 281,521 | ||||||||||||||||||
Deferred revenue |
| 385 | 110,652 | 31,056 | | 142,093 | ||||||||||||||||||
Shareholders equity (deficiency) |
41,693 | (365,901 | ) | 64,075 | 300,738 | 1,088 | 41,693 | |||||||||||||||||
$ | 42,729 | $ | 168,050 | $ | 933,837 | $ | 521,204 | $ | 1,430 | $ | 1,667,250 | |||||||||||||
43
Table of Contents
Six Months Ended September 30, 2008 | ||||||||||||||||||||||||
Lions Gate | Lions Gate | |||||||||||||||||||||||
Entertainment | Entertainment | Other Subsidiaries | Consolidating | Lions Gate | ||||||||||||||||||||
Corp. | Inc. | Guarantors | Non-guarantors | Adjustments | Consolidated | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
STATEMENT OF OPERATIONS |
||||||||||||||||||||||||
Revenues |
$ | 513 | $ | 11,061 | $ | 605,421 | $ | 80,040 | $ | (17,858 | ) | $ | 679,177 | |||||||||||
EXPENSES: |
||||||||||||||||||||||||
Direct operating |
513 | 123 | 330,498 | 36,215 | (20,039 | ) | 347,310 | |||||||||||||||||
Distribution and marketing |
| 85 | 252,084 | 36,235 | (22 | ) | 288,382 | |||||||||||||||||
General and administration |
577 | 38,202 | 21,919 | 8,210 | | 68,908 | ||||||||||||||||||
Depreciation and amortization |
| 1,824 | 824 | 153 | | 2,801 | ||||||||||||||||||
Total expenses |
1,090 | 40,234 | 605,325 | 80,813 | (20,061 | ) | 707,401 | |||||||||||||||||
OPERATING INCOME (LOSS) |
(577 | ) | (29,173 | ) | 96 | (773 | ) | 2,203 | (28,224 | ) | ||||||||||||||
Other expenses (income): |
||||||||||||||||||||||||
Interest expense |
16 | 16,082 | 499 | 591 | (392 | ) | 16,796 | |||||||||||||||||
Interest and other income |
(105 | ) | (3,137 | ) | (917 | ) | (433 | ) | 390 | (4,202 | ) | |||||||||||||
Total other expenses (income) |
(89 | ) | 12,945 | (418 | ) | 158 | (2 | ) | 12,594 | |||||||||||||||
INCOME (LOSS) BEFORE EQUITY
INTERESTS AND INCOME
TAXES |
(488 | ) | (42,118 | ) | 514 | (931 | ) | 2,205 | (40,818 | ) | ||||||||||||||
Equity interests income (loss) |
(47,796 | ) | (13,620 | ) | (2,410 | ) | | 59,680 | (4,146 | ) | ||||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES |
(48,284 | ) | (55,738 | ) | (1,896 | ) | (931 | ) | 61,885 | (44,964 | ) | |||||||||||||
Income tax provision (benefit) |
11 | 680 | 2,703 | (61 | ) | (2 | ) | 3,331 | ||||||||||||||||
NET INCOME (LOSS) attributable to Lions Gate Entertainment Corp. Shareholders |
$ | (48,295 | ) | $ | (56,418 | ) | $ | (4,599 | ) | $ | (870 | ) | $ | 61,887 | $ | (48,295 | ) | |||||||
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Lions Gate Entertainment Corp. (Lionsgate, the Company, we, us or our) is the
leading next generation studio with a diversified presence in the production and distribution of
motion pictures, television programming, home entertainment, family entertainment, video-on-demand
and digitally delivered content.
Our revenues are derived from the following business segments:
| Motion Pictures, which includes Theatrical, Home Entertainment, Television, International, and Mandate Pictures. |
Theatrical revenues are derived from the theatrical release of motion pictures in the U.S. and Canada which are distributed to theatrical exhibitors on a picture by picture basis. The financial terms that we negotiate with our theatrical exhibitors generally provide that we receive a percentage of the box office results and are negotiated on a picture by picture basis. | |||
Home Entertainment revenues consist of the sale or rental of packaged media (i.e., DVD and Blu-ray) and electronic media (i.e., electronic-sell through or EST) of our own productions and acquired films, including theatrical releases and direct-to-video releases, to retail stores and through digital media platforms. In addition, we have revenue sharing arrangements with certain rental stores which generally provide that in exchange for a nominal or no upfront sales price we share in the rental revenues generated by each such store on a title by title basis. | |||
Television revenues are primarily derived from the licensing of our productions and acquired films to the domestic cable, free and pay television markets. | |||
International revenues include revenues from our international subsidiaries from the licensing and sale of our productions, acquired films, our catalog product or libraries of acquired titles and revenues from our distribution to international sub-distributors, on a territory-by-territory basis. Our revenues are derived from the U.S., Canada, the United Kingdom, Australia and other foreign countries; none of the foreign countries individually comprised greater than 10% of total revenues. | |||
Mandate Pictures revenues include revenues from the sales and licensing of domestic and worldwide rights of titles developed or acquired by Mandate Pictures to third-party distributors as well as certain titles sold by Mandate International, LLC, one of the Companys international divisions, to international sub-distributors. |
| Television Production, which includes the licensing and syndication to domestic and international markets of one-hour and half-hour drama series, television movies and mini-series and non-fiction programming, and Home Entertainment revenues consisting of television production movies or series. | ||
| Media Networks, which consists of TV Guide Network, one of the 30 most widely distributed general entertainment cable networks in the U.S., including TV Guide Network On Demand, and TV Guide Online (www.tvguide.com), an online navigational tool and provider of television listings and video and other entertainment content (which we acquired in February 2009 and of which we sold a 49% interest in May 2009). Media Networks includes distribution revenue from multi-system cable operators and digital broadcast satellite providers (distributors generally pay a per subscriber fee for the right to distribute programming) and advertising revenue from the sale of advertising on its television channel and related online media platforms. |
Our primary operating expenses include the following:
| Direct Operating Expenses, which include amortization of film and television production or acquisition costs, participation and residual expenses and provision for doubtful accounts. Participation costs represent contingent consideration payable based on the performance of the film to parties associated with the film, including producers, writers, directors or actors, etc. Residuals represent amounts payable to various unions or guilds such as the Screen Actors Guild, Directors Guild of America, and Writers Guild of America, based on the performance of the film in certain ancillary markets or based on the individuals (i.e., actor, director, writer) salary level in the television market. |
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| Distribution and Marketing Expenses, which primarily include the costs of theatrical prints and advertising (P&A) and of DVD/Blu-ray duplication and marketing. Theatrical P&A represents the costs of the theatrical prints delivered to theatrical exhibitors and advertising includes the advertising and marketing cost associated with the theatrical release of the picture. DVD/Blu-ray duplication represents the cost of the DVD/Blu-ray product and the manufacturing costs associated with creating the physical products. DVD/Blu-ray marketing costs represent the cost of advertising the product at or near the time of its release or special promotional advertising. | ||
| General and Administration Expenses, which include salaries and other overhead. |
Recent Developments
10.25% Senior Secured Second-Priority Notes. On October 21, 2009, our wholly-owned subsidiary
Lions Gate Entertainment Inc. (LGEI), issued approximately $236.0 million aggregate principal
amount of senior secured second-priority notes due 2016 (the Notes) in a private offering
conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the
Securities Act).
The Notes will pay interest semi-annually on May 1 and November 1 of each year at a rate of
10.25% per year and will mature on November 1, 2016.
The Notes are guaranteed on a senior secured basis by our parent Lions Gate Entertainment
Corp. (LGEC), and certain wholly-owned subsidiaries of both LGEC and LGEI.
The Notes were issued by LGEI at an initial price of 95.222% of the principal amount and,
after deducting discounts and the underwriting fee the net proceeds from the sale of the Notes was
approximately $219.4 million, of which $218.0 million was used by LGEI to repay a portion of its
outstanding debt under its credit facility. We expect the total net proceeds after all transaction
costs (including legal, accounting and other professional fees) to be approximately $215.1 million.
Film Credit Facility. On October 6, 2009, we entered into a revolving film credit facility
agreement (Film Credit Facility) which provides for borrowings for the acquisition or production
of motion pictures. Currently, the Film Credit Facility provides for total borrowings up to $120
million and can be increased to $200 million if additional lenders or financial institutions become
a party to and provide a commitment under the facility. The Film Credit Facility has a maturity
date of April 6, 2013 and generally bears an interest rate of 3.25% over the LIBO rate (as
defined in the credit agreement). We are required to pay a quarterly commitment fee of 0.75% per
annum on the unused commitment under the Film Credit Facility. Borrowings under the Film Credit
Facility are due the earlier of (a) nine months after delivery of each motion picture or (b) April
6, 2013. Borrowings under the Film Credit Facility are subject to a borrowing base calculation and
are secured by interests in the related motion pictures, together with certain other receivables
from other motion picture and television productions pledged by us including a minimum pledge of
such receivables of $25 million. Receivables pledged to the Film Credit Facility must be excluded
from the borrowing base calculation under our credit facility.
Theatrical Slate Participation. On May 29, 2009, we terminated our theatrical slate participation
arrangement with Pride Pictures, LLC (Pride), an unrelated entity. Under the arrangement, Pride
contributed, in general, 50% of our production, acquisition, marketing and distribution costs of
theatrical feature films and participated in a pro rata portion of the pictures net profits or
losses similar to a co-production arrangement based on the portion of costs funded. Amounts
provided from Pride were reflected as a participation liability. In late 2008, the administrative
agent for the senior lenders under Prides senior credit facility took the position, among others,
that the senior lenders did not have an obligation to continue to fund under the senior credit
facility because the conditions precedent to funding set forth in the senior credit facility could
not be satisfied. The Company was not a party to the credit facility. Consequently, Pride did not
purchase the pictures The Spirit, My Bloody Valentine 3-D and Madea Goes To Jail. Thereafter, on
April 20, 2009, after failed attempts to facilitate a resolution, we gave LG Film Finance I, LLC
(FilmCo) and Pride notice that FilmCo, through Prides failure to make certain capital
contributions, was in default of the Master Picture Purchase Agreement. On May 5, 2009, the
representative for the Pride equity and the Pride mezzanine investor responded that the required
amount was fully funded and that it had no further obligations to make any additional capital
contributions. Consequently, on May 29, 2009, we gave notice of termination of the Master Picture
Purchase Agreement. Since May 29, 2009, there have been no developments with respect
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to the arrangement. Although we will no longer receive financing as provided from the participation
of Pride in our films, we do not believe this will have a material adverse effect to our business.
See discussion of our sources of cash at Managements discussion and analysis of financial
condition and results of operationsLiquidity and capital resourcesAnticipated Cash
Requirements.
Refinancing Exchange. On April 20, 2009, LGEI entered into Refinancing Exchange Agreements
(the Refinancing Exchange Agreements) with certain existing holders of the February 2005 3.625%
Notes. Pursuant to the terms of the Refinancing Exchange Agreements, holders of the February 2005
3.625% Notes exchanged approximately $66.6 million aggregate principal amount of the February 2005
3.625% Notes for new 3.625% convertible senior subordinated notes (April 2009 3.625% Notes) in
the same aggregate principal amount under a new indenture entered into by LGEI, the Company, as
guarantor, and an indenture trustee thereunder.
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TV Guide Network Acquisition. In January 2009, the Company entered into an Equity Purchase
Agreement (the Equity Purchase Agreement) with Gemstar-TV Guide International, Inc. (Gemstar),
TV Guide Entertainment Group, Inc. (TVGE), its parent company, UV Corporation and Macrovision
Solutions Corporation (Macrovision), the ultimate parent company of Gemstar, TVGE and UV
Corporation, for the purchase by the Company from UV Corporation of all of the issued and
outstanding equity interests of TVGE. In connection with the transaction, Gemstar and its
subsidiaries transferred, assigned and licensed to the Company certain assets related to TV Guide
Network, one of the 30 most widely distributed general entertainment cable networks in the U.S.,
and related assets, including TV Guide Network On Demand, and TV Guide Online (www.tvguide.com), a
leading online navigational tool and provider of television listings and video and other
entertainment content. The acquisition closed February 28, 2009. The Company paid approximately
$241.6 million for all of the equity interest of TV Guide Network, assumed a capital lease
obligation of $12.1 million in liabilities and incurred approximately $1.5 million in direct
transaction costs (paid to lawyers, accountants and other consultants).
The acquisition was accounted for as a purchase, with the results of operations of TV Guide
Network consolidated from February 28, 2009. Goodwill of $155.1 million represents the excess of
purchase price over the preliminary estimate of fair value of the tangible and intangible assets
acquired and liabilities assumed.
Sale of Noncontrolling Interest in TV Guide Network. On May 28, 2009, the Company entered
into a Purchase Agreement (the Purchase Agreement) with One Equity Partners (OEP), the global
private equity investment arm of JPMorgan Chase, pursuant to which OEP purchased 49% of the
Companys interest in TV Guide Network and TV Guide.com (collectively TV Guide Network) for
approximately $122.4 million in cash. In addition, OEP reserved the option of buying another 1% of
TV Guide Network under certain circumstances. The arrangement contains joint control rights, as
evidenced in an operating agreement as well as certain transfer restrictions and exit rights.
CRITICAL ACCOUNTING POLICIES
The application of the following accounting policies, which are important to our financial
position and results of operations, requires significant judgments and estimates on the part of
management. As described more fully below, these estimates bear the risk of change due to the
inherent uncertainty attached to the estimate. For example, accounting for films and television
programs requires the Company to estimate future revenue and expense amounts which, due to the
inherent uncertainties involved in making such estimates, are likely to differ to some extent from
actual results. For a summary of all of our accounting policies, including the accounting policies
discussed below, see Note 2 to our audited consolidated financial statements in Exhibit 99.5 to our
Current Report on Form 8-K filed with the SEC on October 13, 2009.
Generally Accepted Accounting Principles (GAAP). Our consolidated financial statements have
been prepared in accordance with U.S. GAAP.
Accounting for Films and Television Programs. We capitalize costs of production and
acquisition, including financing costs and production overhead, to investment in films and
television programs. These costs for an individual film or television program are amortized and
participation and residual costs are accrued to direct operating expenses in the proportion that
current years revenues bear to managements estimates of the ultimate revenue at the beginning of
the year expected to be recognized from exploitation, exhibition or sale of such film or television
program over a period not to exceed ten years from the date of initial release. For previously
released film or television programs acquired as part of a library, ultimate revenue includes
estimates over a period not to exceed 20 years from the date of acquisition.
The Companys management regularly reviews and revises when necessary its ultimate revenue and
cost estimates, which may result in a change in the rate of amortization of film costs and
participations and residuals and/or write-down of all or a portion of the unamortized costs of the
film or television program to its estimated fair value. The Companys management estimates the
ultimate revenue based on experience with similar titles or title genre, the general public appeal
of the cast, actual performance (when available) at the box office or in markets currently being
exploited, and other factors such as the quality and acceptance of motion pictures or programs that
our competitors release into the marketplace at or near the same time, critical reviews, general
economic conditions and other tangible and intangible factors, many of which we do not control and
which may change. In the normal course of our business, some films and titles are more successful
than anticipated and some are less successful. Accordingly, we update our estimates of ultimate
revenue and participation costs based upon the actual results achieved or new information as to
anticipated revenue performance such as (for home entertainment revenues) initial orders and demand
from retail stores when it becomes available. An increase in the ultimate revenue will generally
result in a lower amortization rate while a decrease in the ultimate revenue will generally result
in a higher amortization rate and periodically results in an impairment requiring a write down of
the film cost to the titles fair value. These write downs are included in amortization expense
within direct operating expenses in our consolidated statements of operations.
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Revenue Recognition. Revenue from the theatrical release of feature films is recognized at
the time of exhibition based on our 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 we are 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 our
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 our assessment of the relative fair value of each title.
Distribution revenue from the distribution of TV Guide Network 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.
Reserves. Revenues are recorded net of estimated returns and other allowances. We estimate
reserves for DVD/Blu-ray returns based on previous returns and our estimated expected future
returns related to current period sales on a title-by-title basis in each of the DVD/Blu-ray
businesses. Factors affecting actual returns include, among other factors, limited retail shelf
space at various times of the year, success of advertising or other sales promotions, and the near
term release of competing titles. We believe that our estimates have been materially accurate in
the past; however, due to the judgment involved in establishing reserves, we may have adjustments
to our historical estimates in the future.
We estimate provisions for accounts receivable based on historical experience and relevant
facts and information regarding the collectability of the accounts receivable. In performing this
evaluation, significant judgments and estimates are involved, including an analysis of specific
risks on a customer-by-customer basis for our larger customers and an analysis of the length of
time receivables have been past due. The financial condition of a given customer and its ability to
pay may change over time and could result in an increase or decrease to our allowance for doubtful
accounts, which, when the impact of such change is material, is disclosed in our discussion on
direct operating expenses elsewhere in Managements Discussion and Analysis of Financial Condition
and Results of Operations.
Income Taxes. We are subject to federal and state income taxes in the U.S., and in several
foreign jurisdictions. We record deferred tax assets, net of applicable reserves, related to net
operating loss carryforwards and certain temporary differences. We recognize a future tax benefit
to the extent that realization of such benefit is more likely than not or a valuation allowance is
applied. Because of our historical operating losses, we have provided a full valuation allowance
against our net deferred tax assets. When we have a history of profitable operations sufficient to
demonstrate that it is more likely than not that our deferred tax assets will be realized, the
valuation allowance will be reversed. However, this assessment of our planned use of our deferred
tax assets is an estimate which could change in the future depending upon the generation of taxable
income in amounts sufficient to realize our deferred tax assets.
Goodwill. Goodwill is reviewed annually for impairment 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. We perform our annual
impairment test as of December 31 in each fiscal year. We performed our last annual impairment test
on our goodwill as of December 31, 2008. No goodwill impairment was identified in any of our
reporting units. Determining the fair value of reporting units requires various assumptions and
estimates. The estimates of fair value include consideration of the future projected operating
results and cash flows of the reporting unit. Such projections could be different than actual
results. Should actual results be significantly less than estimates, the value of our goodwill
could be impaired in the future.
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Business Acquisitions. The Company accounts for its business acquisitions as a purchase,
whereby the purchase price is allocated to the assets acquired and liabilities assumed based on
their estimated fair value. The excess of the purchase price over estimated fair value of the net
identifiable assets is allocated to goodwill. Determining the fair value of assets and liabilities
requires various assumptions and estimates. These estimates and assumptions are refined with
adjustments recorded to goodwill as information is gathered and final appraisals are completed over
a one-year allocation period. The changes in these estimates could impact the amount of assets,
including goodwill and liabilities, ultimately recorded in our balance sheet and could impact our
operating results subsequent to such acquisition. We believe that our estimates have been
materially accurate in the past.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 168, The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (SFAS No.
168). This statement modifies the GAAP hierarchy by establishing only two levels of GAAP,
authoritative and nonauthoritative accounting literature. Effective July 2009, the FASB Accounting
Standards Codification (ASC), also known collectively as the Codification, is considered the
single source of authoritative U.S. accounting and reporting standards, except for additional
authoritative rules and interpretive releases issued by the SEC. Nonauthoritative guidance and
literature would include, among other things, FASB Concepts Statements, American Institute of
Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The
Codification was developed to organize GAAP pronouncements by topic so that users can more easily
access authoritative accounting guidance. It is organized by topic, subtopic, section, and
paragraph, each of which is identified by a numerical designation. We adopted SFAS No. 168
prospectively beginning in the second quarter of fiscal 2010, resulting in no impact on the
Companys consolidated financial statements.
Accounting for noncontrolling interest in consolidated subsidiaries. We adopted new accounting
guidance that changes the accounting and reporting for minority interests, which are
recharacterized as noncontrolling interests and classified as a component of equity. This new
consolidation method changes the accounting for transactions with noncontrolling interest holders.
We adopted this standard beginning in the first quarter of fiscal 2010 (see Note 10).
Accounting for certain convertible debt instruments. We adopted new accounting guidance that
specifies that issuers of convertible debt instruments that may be settled in cash upon either
mandatory or optional conversion (including partial cash settlement) should separately account for
the liability and equity components in a manner that will reflect the entitys nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. We adopted this standard
beginning in the first quarter of fiscal 2010 (see Note 8).
Subsequent events. We adopted new accounting guidance related to the accounting for and
disclosure of subsequent events that occur after the balance sheet date. Entities are required to
disclose the date through which subsequent events have been evaluated and the basis for that date.
We adopted this standard beginning in the first quarter of fiscal 2010 and have evaluated
subsequent events through the date of issuance, November 9, 2009, resulting in no impact on the
Companys consolidated financial statements.
Consolidation accounting for variable interest entities. This new accounting guidance modifies
the previous guidance in relation to the identification of controlling financial interests in a
variable interest entity (VIE). This analysis identifies the primary beneficiary of a VIE as the
enterprise that has both of the following characteristics, among others: (a) the power to direct
the activities of a VIE that most significantly impact the entitys economic performance; and (b)
the obligation to absorb losses of the entity, or the right to receive benefits from the entity,
that could potentially be significant to the VIE. If an enterprise determines that power is shared
among multiple unrelated parties such that no one party has the power to direct the activities of a
VIE that most significantly impact the VIEs economic performance, then no party is the primary
beneficiary. Power is shared if each of the parties sharing power are required to consent to the
decisions relating to the activities that most significantly impact the VIEs performance. The
provisions of this standard will become effective for us beginning in fiscal 2011. We are currently
evaluating the impact this standard will have on our VIEs. Based upon our initial review and our
current business and ownership structure of one our VIEs, TV Guide Network, we may no longer be
required to consolidate TV Guide Network, effective April 1, 2010.
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Results of Operations
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
Consolidated revenues this quarter of $393.7 million increased $13.0 million, or 3.4%,
compared to $380.7 million in the prior years quarter. Motion pictures revenue of $277.1 million
this quarter decreased $35.1 million, or 11.2%, compared to $312.2 million in the prior years
quarter. We expect a reduction in the number of our theatrical releases for fiscal 2010, as
compared to fiscal 2009. As a result, we currently expect that our motion picture segment revenue
for fiscal 2010 will not exceed our fiscal 2009 motion picture segment revenue. However, actual
motion picture revenue will depend on the performance of our film and video titles across all media
and territories and can vary materially from expectations.
Television production revenues of $88.9 million this quarter increased $20.4 million, or 29.8%,
compared to $68.5 million in the prior years quarter. Based on the television shows currently
expected to be delivered in fiscal 2010, we currently anticipate that our television production
segment revenue in fiscal 2010 will exceed our fiscal 2009 television production segment revenue.
However, actual revenues will depend on actual deliveries and can vary materially from
expectations.
Media Networks revenue was $27.7 million for the current quarter, as compared to nil in the
prior years quarter. Our revenues for the remainder of the fiscal year could be negatively
impacted if, among other factors, we lose certain affiliation agreements or we have reduced
viewership of the TV Guide Network. See our discussion of the risk factors relating to our revenues
and TV Guide Network in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange
Commission (the SEC) on June 1, 2009, and in Exhibit 99.1 to our Current Report on Form 8-K filed
with the SEC on October 13, 2009.
Our largest component of revenue comes from home entertainment. The following table sets forth
total home entertainment revenue for both the Motion Pictures and Television Production reporting
segments for the three months ended September 30, 2009 and 2008:
Three Months | Three Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | Increase (Decrease) | ||||||||||||||
2009 | 2008 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
Home Entertainment Revenue |
||||||||||||||||
Motion Pictures |
$ | 123.4 | $ | 164.4 | $ | (41.0 | ) | (24.9 | %) | |||||||
Television Production |
14.9 | 13.9 | 1.0 | 7.2 | % | |||||||||||
$ | 138.3 | $ | 178.3 | $ | (40.0 | ) | (22.4 | %) | ||||||||
Motion Pictures Revenue
The following table sets forth the components of revenue and the changes in these components
for the motion pictures reporting segment for the three-month periods ended September 30, 2009 and
2008:
Three Months | Three Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | Increase (Decrease) | ||||||||||||||
2009 | 2008 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
Motion Pictures |
||||||||||||||||
Theatrical |
$ | 30.3 | $ | 34.0 | $ | (3.7 | ) | (10.9 | %) | |||||||
Home Entertainment |
123.4 | 164.4 | (41.0 | ) | (24.9 | %) | ||||||||||
Television |
68.2 | 61.9 | 6.3 | 10.2 | % | |||||||||||
International |
27.5 | 28.5 | (1.0 | ) | (3.5 | %) | ||||||||||
Mandate Pictures |
25.7 | 21.2 | 4.5 | 21.2 | % | |||||||||||
Other |
2.0 | 2.2 | (0.2 | ) | (9.1 | %) | ||||||||||
$ | 277.1 | $ | 312.2 | $ | (35.1 | ) | (11.2 | %) | ||||||||
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The following table sets forth the titles contributing significant motion pictures
revenue for the three-month periods ended September 30, 2009 and 2008:
Three Months Ended September 30, | ||||||
2009 | 2008 | |||||
Theatrical and DVD | Theatrical and DVD | |||||
Title | Release Date | Title | Release Date | |||
Theatrical:
|
Theatrical: | |||||
Gamer
|
September 2009 | Bangkok Dangerous
|
September 2008 | |||
I Can Do Bad All By Myself
|
September 2009 | My Best Friends Girl
|
September 2008 | |||
The Family That Preys
|
September 2008 | |||||
Disaster Movie
|
August 2008 | |||||
Home Entertainment:
|
Home Entertainment: | |||||
Crank: High Voltage
|
September 2009 | The Forbidden Kingdom
|
September 2008 | |||
Horsemen
|
July 2009 | Meet The Browns
|
July 2008 | |||
The Haunting in Connecticut
|
July 2009 | The Bank Job
|
July 2008 | |||
Madea Goes to Jail
|
June 2009 | Rambo
|
May 2008 | |||
New In Town
|
May 2009 |
Television: | Television: | |
Bangkok Dangerous | 3:10 to Yuma | |
Disaster Movie | Good Luck Chuck | |
My Best Friends Girl | Saw IV | |
Religulous | War | |
Saw V | Why Did I Get Married Feature | |
The Family That Preys | ||
Transporter 3 | ||
W. | ||
International: | International: | |
Diary of a Mad Black Woman | 3:10 to Yuma | |
My Best Friends Girl | Employee of the Month | |
My Bloody Valentine 3-D | My Best Friends Girl | |
Repo! The Genetic Opera | Saw IV | |
The Midnight Meat Train | War | |
Mandate Pictures: | Mandate Pictures: | |
Horsemen | 30 Days of Night | |
Passengers | Juno | |
Whip It | Nick and Norahs Infinite Playlist | |
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Theatrical revenue of $30.3 million decreased $3.7 million, or 10.9%, in this quarter as
compared to the prior years quarter due to fewer wide theatrical releases in the current quarter
as compared to the prior years quarter. In this quarter, the titles listed in the above table as
contributing significant theatrical revenue represented individually between 28% and 68% of total
theatrical revenue and, in the aggregate, approximately 97%, or $29.3 million of total theatrical
revenue. In the prior years quarter, the titles listed in the above table as contributing
significant theatrical revenue represented individually between 16% and 44% of total theatrical
revenue and, in the aggregate, approximately 99%, or $33.6 million of total theatrical revenue.
Home entertainment revenue of $123.4 million decreased $41.0 million, or 24.9%, in this
quarter as compared to the prior years quarter. Approximately $31.0 million of the decrease is due
to lower revenue generated from the titles listed in the above table in the current quarter as
compared to the revenue generated from the titles in the above table for the prior years quarter.
The titles listed above as contributing significant home entertainment revenue in the current
quarter represented individually between 2% to 18% of total home entertainment revenue and, in the
aggregate, 40%, or $48.9 million of total home entertainment revenue for the quarter. In the prior
years quarter, the titles listed above as contributing significant home entertainment revenue
represented individually between 4% to 16% of total home entertainment revenue and, in the
aggregate, 49%, or $79.9 million of total home entertainment revenue for the quarter. In the
current quarter $74.5 million, or 60%, of total home entertainment revenue was contributed by
titles that individually make up less than 2% of total home entertainment revenue, and in the prior
years quarter this amounted to $84.5 million, or 51%, of total home entertainment revenue.
Television revenue included in motion pictures revenue of $68.2 million in this quarter
increased $6.3 million, or 10.2%, compared to the prior years quarter. In this quarter, the titles
listed above as contributing significant television revenue represented individually between 5% to
15% of total television revenue and, in the aggregate, 73% or $49.9 million of total television
revenue for the quarter. In the prior years quarter the titles listed above as contributing
significant television revenue represented individually between 9% to 18% of total television
revenue and, in the aggregate, 74%, or $45.8 million of total television revenue for the quarter.
In the current quarter, $18.3 million, or 27%, of total television revenue was contributed by
titles that individually make up less than 5% of total television revenue, and in the prior years
quarter, this amounted to $16.1 million, or 26%, of total television revenue for the year.
International revenue of $27.5 million decreased $1.0 million, or 3.5%, in this quarter as
compared to the prior years quarter. Lionsgate UK contributed $13.4 million, or 48.7% of
international revenue in the current quarter, which included revenues from Crank: High Voltage,
Employee of the Month, and Saw 3, compared to $11.6 million, or 40.7%, of total international
revenue in the prior years quarter. In this quarter, the titles listed in the table above as
contributing significant international revenue, excluding revenue generated from these titles by
Lionsgate UK, represented individually between 2% to 4% of total international revenue and, in the
aggregate, 15%, or $4.2 million, of total international revenue for the quarter. In the prior
years quarter the titles listed in the table above as contributing significant revenue represented
individually between 4% to 8% of total international revenue and, in the aggregate, 28%, or $8.0
million, of total international revenue for the quarter.
Mandate Pictures revenue includes revenue from the sales and licensing of domestic and
worldwide rights of titles developed or acquired by Mandate Pictures to third-party distributors or
international sub-distributors. International revenue, other than international revenue from
Lionsgate UK, from Mandate Pictures titles is included in the Mandate Pictures revenue in the table
above. In the current quarter, Mandate Pictures revenue amounted to $25.7 million, as compared to
$21.2 million in the prior years quarter. The increase in Mandate Pictures revenue in the current
quarter is mainly due to stronger performance by the titles not listed above compared to the prior
years quarter. In this quarter, the titles listed in the table above as contributing significant
Mandate Pictures revenue represented individually between 13% and 41% of total Mandate Pictures
revenue and, in the aggregate, 84%, or $21.6 million of total Mandate Pictures revenue for the
year. In the prior years quarter, the titles listed in the table above as contributing significant
Mandate Pictures revenue represented individually between 12% and 61% of total Mandate Pictures
revenue and, in the aggregate, 94%, or $19.9 million of total Mandate Pictures revenue for the
quarter.
Television Production Revenue
The following table sets forth the components and the changes in the components of revenue
that make up television production revenue for the three-month periods ended September 30, 2009 and
2008:
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Three Months | Three Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | Increase (Decrease) | ||||||||||||||
2009 | 2008 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
Television Production |
||||||||||||||||
Domestic series licensing |
$ | 64.9 | $ | 49.2 | $ | 15.7 | 31.9 | % | ||||||||
International |
9.0 | 5.0 | 4.0 | 80.0 | % | |||||||||||
Home entertainment releases of television production |
14.9 | 13.9 | 1.0 | 7.2 | % | |||||||||||
Other |
0.1 | 0.4 | (0.3 | ) | (75.0 | )% | ||||||||||
$ | 88.9 | $ | 68.5 | $ | 20.4 | 29.8 | % | |||||||||
The following table sets forth the components of revenue that make up domestic series
licensing revenue for the three-month periods ended September 30, 2009 and 2008:
Three Months | Three Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | Increase (Decrease) | ||||||||||||||
2009 | 2008 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
Domestic series licensing |
||||||||||||||||
Lionsgate Television |
$ | 39.9 | $ | 35.0 | $ | 4.9 | 14.0 | % | ||||||||
Debmar-Mercury |
21.2 | 12.4 | 8.8 | 71.0 | % | |||||||||||
Ish Entertainment |
3.8 | 1.8 | 2.0 | 111.1 | % | |||||||||||
$ | 64.9 | $ | 49.2 | $ | 15.7 | 31.9 | % | |||||||||
Revenues included in domestic series licensing from Lionsgate Television of $39.9 million
increased by $4.9 million, or 14.0%, in this quarter compared to $35.0 million in the prior years
quarter. The following table sets forth the number of television episodes and hours delivered by
Lionsgate Television in the three months ended September 30, 2009 and 2008, respectively:
Three Months Ended | ||||||||||||
September 30, 2009 | ||||||||||||
Episodes | Hours | |||||||||||
Weeds Season 5 |
1/2hr | 7 | 3.5 | |||||||||
Crash TV Series Season 2 |
1hr | 5 | 5.0 | |||||||||
Mad Men Season 3 |
1hr | 8 | 8.0 | |||||||||
20 | 16.5 | |||||||||||
Three Months Ended | ||||||||||||
September 30, 2008 | ||||||||||||
Episodes | Hours | |||||||||||
Fear Itself |
1hr | 8 | 8.0 | |||||||||
Mad Men Season 2 |
1hr | 8 | 8.0 | |||||||||
Weeds Season 4 |
1/2hr | 9 | 4.5 | |||||||||
25 | 20.5 | |||||||||||
Revenues included in domestic series licensing from Debmar-Mercury increased $8.8 million to
$21.2 million in the current quarter, from $12.4 million in the prior years quarter, primarily due
to increased revenue from the television series House of Payne, Meet the Browns and The Wendy
Williams Show.
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Revenues included in domestic series licensing from the Companys reality television venture
with Ish, of $3.8 million in the current quarter resulted from the production of the domestic
series Paris Hiltons My New BFF, as compared to $1.8 million in the prior years quarter.
International revenue of $9.0 million increased by $4.0 million in the current quarter mainly
due to international revenue from Crash TV Series Season 1, Dead Zone, Mad Men Season 2, and
Paris Hiltons My New BFF Season 2,
compared to international revenue of $5.0 million in the prior years quarter from Mad Men Season
1, Weeds Season 3, and Wildfire Season 4.
The increase in revenue from home entertainment releases of television production is primarily
driven by DVD/Blu-Ray revenue from Mad Men Season 2.
Media Networks Revenue
Media Networks revenue for the three months ended September 30, 2009 and 2008 are $27.7
million and nil, respectively. The acquisition of TV Guide Network occurred on February 28, 2009.
Direct Operating Expenses
The following table sets forth direct operating expenses by segment for the three months ended
September 30, 2009 and 2008:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||||||||||||||
Motion | Television | Media | Motion | Television | ||||||||||||||||||||||||
Pictures | Production | Networks | Total | Pictures | Production | Total | ||||||||||||||||||||||
(Amounts in millions) | ||||||||||||||||||||||||||||
Direct operating expenses |
||||||||||||||||||||||||||||
Amortization of films
and television programs |
$ | 75.9 | $ | 48.9 | $ | 8.6 | $ | 133.4 | $ | 73.2 | $ | 44.5 | $ | 117.7 | ||||||||||||||
Participation and residual
expense |
47.5 | 17.8 | | 65.3 | 69.8 | 11.1 | 80.9 | |||||||||||||||||||||
Other expenses |
(1.0 | ) | 0.3 | | (0.7 | ) | 0.7 | 0.4 | 1.1 | |||||||||||||||||||
$ | 122.4 | $ | 67.0 | $ | 8.6 | $ | 198.0 | $ | 143.7 | $ | 56.0 | $ | 199.7 | |||||||||||||||
Direct operating expenses as a
percentage of segment revenues |
44.2 | % | 75.4 | % | 31.0 | % | 50.3 | % | 46.0 | % | 81.8 | % | 52.5 | % |
Direct operating expenses of the motion pictures segment of $122.4 million for this quarter
were 44.2% of motion pictures revenue, compared to $143.7 million, or 46.0% of motion pictures
revenue for the prior years quarter. The decrease in direct operating expense of the motion
pictures segment in the current quarter as a percent of revenue is primarily due to the change in
the mix of titles generating revenue compared to the prior quarter. Investment in film write-downs
of the motion picture segment totaled approximately $2.5 million for the current quarter, compared
to $1.6 million for the prior years quarter. In the current quarter, approximately $2.5 million of
the write down related to the change in domestic release strategy of one motion picture. In the
prior years quarter, there were no write-downs that individually exceeded $1.0 million. Other
expenses consist of the provision (benefit) for doubtful accounts and foreign exchange losses (gains). Our
direct operating expenses generally fluctuate with changes in our revenue. Because of our current
expectations on motion picture revenue for fiscal 2010, we believe that our direct operating
expenses of our motion picture segment for fiscal 2010 will not exceed our fiscal 2009 motion
picture segment direct operating expenses. However, a number of factors could impact the level of
direct operating expenses, including, but not limited to, the actual and anticipated performance of
our films, possible write downs of our film costs, foreign exchange rate changes, and bad debt
expense.
Direct operating expenses of the television production segment of $67.0 million for this
quarter were 75.4% of television production revenue, compared to $56.0 million, or 81.8% of
television production revenue for the prior years quarter. The decrease in
direct operating expense of the television production segment in the current quarter as a
percent of revenue is due to the continued performance of titles such as the Mad Men Series Season
3 and Weeds Series Season 5, particularly for home entertainment sales. In the current quarter,
$0.7 million of charges for write-downs of television film costs were included in the amortization
of television programs, compared to $0.8 million in the prior years quarter. Because we anticipate
our television production segment revenues to increase in fiscal 2010, as compared to fiscal 2009,
we also expect that our direct operating expenses of our television production
55
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segment will
increase in fiscal 2010, as compared to fiscal 2009. However, a number of factors could impact the
level of direct operating expenses, including, but not limited to, the actual and anticipated
performance of our television programs, possible write downs of our television program costs,
foreign exchange rate changes, and bad debt expense.
Direct operating expenses of the media networks segment of $8.6 million for the current
quarter consists primarily of programming expenses associated with the production of such programs
as Hollywood 411 and the 2009 Emmy Awards coverage.
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Distribution and Marketing Expenses
The following table sets forth distribution and marketing expenses by segment for the three
months ended September 30, 2009 and 2008:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||||||||||||||
Motion | Television | Media | Motion | Television | ||||||||||||||||||||||||
Pictures | Production | Networks | Total | Pictures | Production | Total | ||||||||||||||||||||||
(Amounts in millions) | ||||||||||||||||||||||||||||
Distribution and
marketing expenses |
||||||||||||||||||||||||||||
Theatrical |
$ | 37.6 | $ | | $ | | $ | 37.6 | $ | 109.7 | $ | | $ | 109.7 | ||||||||||||||
Home Entertainment |
46.6 | 4.3 | | 50.9 | 62.9 | 3.6 | 66.5 | |||||||||||||||||||||
Television |
1.0 | 2.1 | | 3.1 | 1.6 | 1.9 | 3.5 | |||||||||||||||||||||
International |
5.7 | 1.0 | | 6.7 | 8.5 | 0.7 | 9.2 | |||||||||||||||||||||
Media Networks |
| | 3.4 | 3.4 | | | | |||||||||||||||||||||
Other |
0.5 | | | 0.5 | 0.3 | 0.2 | 0.5 | |||||||||||||||||||||
$ | 91.4 | $ | 7.4 | $ | 3.4 | $ | 102.2 | $ | 183.0 | $ | 6.4 | $ | 189.4 | |||||||||||||||
The majority of distribution and marketing expenses relate to the motion pictures segment.
Theatrical prints and advertising (P&A) in the motion pictures segment in the current quarter of
$37.6 million decreased $72.1 million, or 65.7%, compared to $109.7 million in the prior years
quarter. Domestic theatrical P&A from the motion pictures segment in this quarter included P&A
incurred on the release of Gamer, and I Can Do Bad All By Myself, and P&A incurred in advance of
the release of Saw VI, which individually represented between 11% and 45% of total theatrical P&A
and in the aggregate accounted for 86% of the total theatrical P&A. Domestic theatrical P&A from
the motion pictures segment in the prior years quarter included P&A incurred on the release of
Bangkok Dangerous, Disaster Movie, My Best Friends Girl, and The Family That Preys, which
individually represented between 16% and 24% of total theatrical P&A and in the aggregate accounted
for 83% of the total theatrical P&A.
Theatrical distribution and marketing expenses generally depend on the number of theatrical
motion pictures we release and the release plan of those motion pictures in a given year. As a
result, we do not currently believe that total theatrical distribution and marketing expenses for
fiscal 2010 will exceed that of fiscal 2009 levels because the number of pictures that we expect to
release in fiscal 2010 will be less than the number released last fiscal year.
Home entertainment distribution and marketing costs on motion pictures and television product
in this quarter of $50.9 million decreased $15.6 million, or 23.5%, compared to $66.5 million in
the prior years quarter. The decrease in home entertainment distribution and marketing costs is
mainly due to the decrease in revenue in the current quarter as compared to the prior years
quarter, respectively. Home entertainment distribution and marketing costs as a percentage of home
entertainment revenues was 36.8% and 37.3% in the current quarter and prior years quarter,
respectively.
International distribution and marketing expenses in this quarter includes $4.7 million of
distribution and marketing costs from Lionsgate UK, compared to $7.6 million in the prior years
quarter.
Media Networks includes transmission and marketing and promotion expenses.
General and Administrative Expenses
The following table sets forth general and administrative expenses by segment for the three
months ended September 30, 2009 and 2008:
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Three Months | Three Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | Increase (Decrease) | ||||||||||||||
2009 | 2008 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
General and Administrative Expenses |
||||||||||||||||
Motion Pictures |
$ | 11.3 | $ | 11.8 | $ | (0.5 | ) | (4.2 | %) | |||||||
Television Production |
2.0 | 2.6 | (0.6 | ) | (23.1 | %) | ||||||||||
Media Networks |
11.5 | | 11.5 | 100.0 | % | |||||||||||
Corporate |
17.7 | 16.2 | 1.5 | 9.3 | % | |||||||||||
$ | 42.5 | $ | 30.6 | $ | 11.9 | 38.9 | % | |||||||||
General and administrative expenses as a
percentage of revenue |
10.8 | % | 8.0 | % |
General and administrative expenses increased by $11.9 million or 39% mainly due to the
general and administrative expenses associated with the Media Networks segment, which was acquired
in February 2009, of $11.5 million and due to a slight increase in our corporate segment offset by
small decreases in Motion Pictures and Television Production. General and administrative expenses
of the Media Networks segment are primarily related to salaries and related expenses.
The following table sets forth stock-based compensation expense (benefit) included in our
corporate segment for the three months ended September 30, 2009 and 2008:
Three Months | Three Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | Increase (Decrease) | ||||||||||||||
2009 | 2008 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
Stock-Based Compensation Expense (Benefit): |
||||||||||||||||
Stock options |
$ | 0.8 | $ | 0.8 | $ | | 0.0 | % | ||||||||
Restricted share units |
3.1 | 3.3 | (0.2 | ) | (6.1 | %) | ||||||||||
Stock appreciation rights |
0.3 | (1.1 | ) | 1.4 | (127.3 | %) | ||||||||||
$ | 4.2 | $ | 3.0 | $ | 1.2 | 40.0 | % | |||||||||
At September 30, 2009, as disclosed in Note 14 to the unaudited condensed consolidated
financial statements, there was unrecognized compensation costs of approximately $18.8 million
related to stock options and restricted share units previously granted, including annual
installments of share grants that were subject to performance targets, which will be expensed over
the remaining vesting periods. At September 30, 2009, 741,875 shares of restricted share units have
been awarded to four key executive officers, the vesting of which will be subject to performance
targets to be set annually by the Compensation Committee of the Board of Directors of the Company.
These restricted share units will vest in three, four, and five annual installments assuming annual
performance targets have been met. The fair value of the 741,875 shares whose future annual
performance targets have not been set was $4.6 million, based on the market price of the Companys
common shares as of September 30, 2009. The market value will be remeasured when the annual
performance criteria are set and the value will be expensed over the remaining vesting periods once
it becomes probable that the performance targets will be satisfied.
Depreciation, Amortization and Other Expenses (Income)
Depreciation and amortization of $6.2 million this quarter increased $4.8 million from $1.4
million in the prior years quarter. The increase is primarily due to depreciation of tangible
assets and amortization of intangible assets acquired in connection with the purchase of TV Guide
Network. Estimated amortization expense, based on the preliminary allocation of the purchase price
related to the acquisition of TV Guide Network, for the six-months ended March 31, 2010 and for each of the years ending March 31, 2011 through
2014 is approximately $5.3 million, $10.3 million, $7.6 million, $7.2 million, and $6.8 million,
respectively.
Interest expense of $13.3 million this quarter increased $4.4 million, or 49.4%, from the
prior years quarter of $8.9 million. The following table sets forth the components of interest
expense for the three months ended September 30, 2009 and 2008:
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Three Months | Three Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
(Amounts in millions) | ||||||||
Interest Expense |
||||||||
Cash Based: |
||||||||
Interest cost associated with credit facility |
$ | 2.1 | $ | 0.5 | ||||
Contractual coupon rate on senior subordinated debentures |
2.6 | 2.7 | ||||||
Other |
0.7 | 0.3 | ||||||
5.4 | 3.5 | |||||||
Non-Cash Based: |
||||||||
Amortization of discount on liability component of
senior subordinated debentures |
4.3 | 3.8 | ||||||
Amortization of deferred financing costs |
0.7 | 1.6 | ||||||
Accretion of mandatorily redeemable preferred stock units
and 10% non-cash dividend |
2.9 | | ||||||
7.9 | 5.4 | |||||||
$ | 13.3 | $ | 8.9 | |||||
We expect that our interest expense will increase through the end of our fiscal year 2010
because of additional interest expense related to the notes issued on October 21, 2009 (see description of notes in
Recent Developments) and higher average
outstanding balances under our senior secured credit facility, as compared to the average
outstanding balance of the prior year.
Interest and other income was $0.4 million for the quarter ended September 30, 2009, compared
to $2.0 million in the prior years quarter. Interest and other income this quarter was earned on
the lower average cash balances and restricted investments held during the three months ended
September 30, 2009 as compared to 2008.
The Companys equity interests in this quarter included a $0.3 million loss from the Companys
33.33% equity interest in FEARnet, a loss of $0.3 million from the Companys 42% equity interest in
Break.com, income of less than $0.1 million from the Companys 43% equity interest in Roadside, and
a $1.4 million loss from our 28.57% equity interest in EPIX. For the three months ended September
30, 2008, equity interests included a $1.3 million loss from the Companys 33.33% equity interest
in FEARnet, a loss of $0.3 million from the Companys 42% equity interest in Break.com, a $0.1
million loss from the Companys 43% equity interest in Roadside, and a $0.2 million loss from our
28.57% equity interest in EPIX.
We had income tax expense of $0.7 million, or 2.1% of income before income taxes in the three
months ended September 30, 2009, compared to an expense of $2.7 million, or (5.4%) of loss before
income taxes in the three months ended September 30, 2008. The tax expense reflected in the current
quarter is primarily attributable to U.S. and Canadian income taxes and foreign withholding taxes.
Our actual annual effective tax rate will differ from the statutory federal rate as a result of
several factors, including changes in the valuation allowance against net deferred tax assets,
non-temporary differences, foreign income taxed at different rates, and state and local income
taxes. Income tax loss carryforwards, subject to certain limitations that may prevent us from fully
utilizing them, amount to approximately $133.2 million for U.S. federal income tax purposes
available to reduce income taxes over twenty years, $147.3 million for U.S. state income tax
purposes available to reduce income taxes over future years with varying expirations, $18.9 million
for Canadian income tax purposes available to reduce income taxes over 20 years with varying
expirations, $20.9 million for UK
income tax purposes available indefinitely to reduce future income taxes and $2.4 million of
Hong Kong loss carryforwards available indefinitely to reduce future income taxes.
At March 31, 2009, the Company had U.S. Alternative Minimum Tax (AMT) credit carryforwards
of approximately $2.0 million available to reduce future federal income tax, which begin to expire
in 2011.
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Net income for the three months ended September 30, 2009 was $29.2 million, compared to net
loss for the three months ended September 30, 2008 of $51.8 million.
Net loss attributable to noncontrolling interest for the three months ended September 30, 2009
was $2.5 million, compared to nil for the three months ended September 30, 2008.
Net income attributable to our shareholders for the three months ended September 30, 2009 was
$31.7 million, or basic net income per common share of $0.27 on 117.3 million weighted average
common shares outstanding. Diluted net income per common share for the three months ended September
30, 2009 was $0.26 on 138.7 million weighted average common shares outstanding. This compares to
net loss attributable to our shareholders for the three months ended September 30, 2008 of $51.8
million, or basic and diluted net loss per common share of $0.44 on 116.9 million weighted average
common shares outstanding.
Six Months Ended September 30, 2009 Compared to Six Months Ended September 30, 2008
Consolidated revenues for the six months ended September 30, 2009 of $781.4 million increased
$102.2 million, or 15.0%, compared to $679.2 million in the six months ended September 30, 2008.
Motion pictures revenue of $549.9 million for the current six-month period decreased $19.6 million,
or 3.4%, compared to $569.5 million in the prior years period. We expect a reduction in the number
of our theatrical releases for fiscal 2010, as compared to fiscal 2009. As a result, we currently
expect that our motion picture segment revenue for fiscal 2010 will not exceed our fiscal 2009
motion picture segment revenue. However, actual motion picture revenue will depend on the
performance of our film and video titles across all media and territories and can vary materially
from expectations.
Television production revenues of $176.1 million this period increased $66.4 million, or
60.5%, compared to $109.7 million in the prior years period. Based on the television shows
currently expected to be delivered in fiscal 2010, we currently anticipate that our television
production segment revenue in fiscal 2010 will exceed our fiscal 2009 television production segment
revenue. However, actual revenues will depend on actual deliveries and can vary materially from
expectations.
Media Networks revenue was $55.4 million for the current period, as compared to nil in the
prior years period. Our revenues for the remainder of the fiscal year could be negatively impacted
if, among other factors, we lose certain affiliation agreements or we have reduced viewership of
the TV Guide Network. See our discussion of the risk factors relating to our revenues and TV Guide
Network in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission
(the SEC) on June 1, 2009, and in Exhibit 99.1 to our Current Report on Form 8-K filed with the
SEC on October 13, 2009.
Our largest component of revenue comes from home entertainment. The following table sets forth
total home entertainment revenue for both the Motion Pictures and Television Production reporting
segments for the six-month periods ended September 30, 2009 and 2008:
Six Months | Six Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | Increase (Decrease) | ||||||||||||||
2009 | 2008 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
Home Entertainment Revenue |
||||||||||||||||
Motion Pictures |
$ | 264.6 | $ | 316.5 | $ | (51.9 | ) | (16.4 | %) | |||||||
Television Production |
24.7 | 22.1 | 2.6 | 11.8 | % | |||||||||||
$ | 289.3 | $ | 338.6 | $ | (49.3 | ) | (14.6 | %) | ||||||||
Motion Pictures Revenue
The following table sets forth the components of revenue and the changes in these components
for the motion pictures reporting segment for the six-month periods ended September 30, 2009 and
2008:
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Six Months | Six Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | Increase (Decrease) | ||||||||||||||
2009 | 2008 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
Motion Pictures |
||||||||||||||||
Theatrical |
$ | 53.0 | $ | 64.6 | $ | (11.6 | ) | (18.0 | %) | |||||||
Home Entertainment |
264.6 | 316.5 | (51.9 | ) | (16.4 | %) | ||||||||||
Television |
88.8 | 90.8 | (2.0 | ) | (2.2 | %) | ||||||||||
International |
60.0 | 62.8 | (2.8 | ) | (4.5 | %) | ||||||||||
Mandate Pictures |
78.9 | 29.6 | 49.3 | 166.6 | % | |||||||||||
Other |
4.6 | 5.2 | (0.6 | ) | (11.5 | %) | ||||||||||
$ | 549.9 | $ | 569.5 | $ | (19.6 | ) | (3.4 | %) | ||||||||
The following table sets forth the titles contributing significant motion pictures
revenue for the six-month periods ended September 30, 2009 and 2008:
Six Months Ended September 30, | ||||||
2009 | 2008 | |||||
Theatrical and DVD | Theatrical and DVD | |||||
Title | Release Date | Title | Release Date | |||
Theatrical:
|
Theatrical: | |||||
Gamer
|
September 2009 | Bangkok Dangerous | September 2008 | |||
I Can Do Bad All By Myself
|
September 2009 | My Best Friends Girl | September 2008 | |||
Crank: High Voltage
|
April 2009 | The Family That Preys | September 2008 | |||
The Haunting in Connecticut
|
March 2009 | Disaster Movie | August 2008 | |||
The Forbidden Kingdom | April 2008 | |||||
Meet The Browns | March 2008 | |||||
Home Entertainment:
|
Home Entertainment: | |||||
Crank: High Voltage
|
September 2009 | The Forbidden Kingdom | September 2008 | |||
The Haunting in Connecticut
|
July 2009 | Meet The Browns | July 2008 | |||
Madea Goes to Jail
|
June 2009 | The Bank Job | July 2008 | |||
My Bloody Valentine 3-D
|
May 2009 | The Eye | June 2008 | |||
New In Town
|
May 2009 | Witless Protection | June 2008 | |||
The Spirit
|
April 2009 | Rambo | May 2008 |
Television: | Television: | |
Bangkok Dangerous Disaster Movie My Best Friends Girl Saw V The Family That Preys Transporter 3 W. |
3:10 to Yuma Good Luck Chuck Saw IV War Why Did I Get Married Feature |
|
International: | International: | |
My Best Friends Girl My Bloody Valentine 3-D Repo! The Genetic Opera Saw V |
My Best Friends Girl Saw IV The Eye War |
|
Mandate Pictures: | Mandate Pictures: | |
Drag Me To Hell Horsemen Juno Passengers Whip It |
30 Days of Night Harold & Kumar Escape from Guantanamo Bay Juno Nick and Norahs Infinite Playlist Passengers |
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Theatrical revenue of $53.0 million decreased $11.6 million, or 18.0%, in this period as
compared to the prior years period due to fewer wide theatrical releases in the current period as
compared to the prior years period. In the current six-month period, the titles listed in the
above table as contributing significant theatrical revenue represented individually between 11% and
39% of total theatrical revenue and, in the aggregate, approximately 92%, or $49.0 million of total
theatrical revenue. In the prior years period, the titles listed in the above table as
contributing significant theatrical revenue represented individually between 5% and 38% of total
theatrical revenue and, in the aggregate, approximately 95%, or $61.3 million of total theatrical
revenue.
Home entertainment revenue of $264.6 million decreased $51.9 million, or 16.4%, in this period
as compared to the prior years period. Approximately $36.0 million of the decrease is due to lower
revenue generated from the titles listed in the above table in the current period as compared to
the revenue generated from the titles in the above table for the prior years period. The titles
listed above as contributing significant home entertainment revenue in the current period
represented individually between 6% to 11% of total home entertainment revenue and, in the
aggregate, 44%, or $115.3 million of total home entertainment revenue for the period. In the prior
years period, the titles listed above as contributing significant home entertainment revenue
represented individually between 5% to 14% of total home entertainment revenue and, in the
aggregate, 48%, or $151.3 million of total home entertainment revenue for the period. In the
current period $149.3 million, or 56%, of total home entertainment revenue was contributed by
titles that individually make up less than 2% of total home entertainment revenue, and in the prior
years period this amounted to $165.2 million, or 52%, of total home entertainment revenue.
Television revenue included in motion pictures revenue of $88.8 million in this period
decreased $2.0 million, or 2.2%, compared to the prior years period. In the current six-month
period, the titles listed above as contributing significant television revenue represented
individually between 6% to 13% of total television revenue and, in the aggregate, 66% or $58.4
million of total television revenue for the period. In the prior years period, the titles listed
above as contributing significant television revenue represented individually between 8% to 16% of
total television revenue and, in the aggregate, 66%, or $59.5 million of total television revenue
for the period. In the current period, $30.4 million, or 34%, of total television revenue was
contributed by titles that individually make up less than 5% of total television revenue, and in
the prior years period, this amounted to $31.3 million, or 34%, of total television revenue for
the period.
International revenue of $60.0 million decreased $2.8 million, or 4.5%, in this period as
compared to the prior years period. Lionsgate UK contributed $28.5 million, or 47.5% of
international revenue in the current period, which included revenues from Crank: High Voltage, Drag
Me To Hell, My Bloody Valentine 3-D, and The Spirit, compared to $27.7 million, or 44.1%, of total
international revenue in the prior years period. In this period, the titles listed in the table
above as contributing significant international revenue, excluding revenue generated from these
titles by Lionsgate UK, represented individually between 2% to 8% of total international revenue
and, in the aggregate, 19%, or $11.5 million, of total international revenue for the period. In the
prior years period the titles listed in the table above as contributing significant revenue
represented individually between 3% to 9% of total international revenue and, in the aggregate,
24%, or $14.8 million, of total international revenue for the period.
Mandate Pictures revenue includes revenue from the sales and licensing of domestic and
worldwide rights of titles developed or acquired by Mandate Pictures to third-party distributors or
international sub-distributors. International revenue, other than international revenue from
Lionsgate UK, from Mandate Pictures titles is included in the Mandate Pictures revenue in the table
above. In the current period, Mandate Pictures revenue amounted to $78.9 million, as compared to
$29.6 million in the prior years period. This increase was mainly due to the release of the title
Drag Me To Hell in the current period. In this period, the titles listed in the table above as
contributing significant Mandate Pictures revenue represented individually between 8% and 53% of
total Mandate Pictures revenue and, in the aggregate, 94%, or $74.5 million of total Mandate
Pictures revenue for the period. In the prior years period, the titles listed in the table above
as contributing significant Mandate Pictures revenue represented individually between 5% and 44% of
total Mandate Pictures revenue and, in the aggregate, 87%, or $25.9 million of total Mandate
Pictures revenue for the period.
Television Production Revenue
The following table sets forth the components and the changes in the components of revenue
that make up television production revenue for the six-month periods ended September 30, 2009 and
2008:
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Six Months | Six Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | Increase (Decrease) | ||||||||||||||
2009 | 2008 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
Television Production |
||||||||||||||||
Domestic series licensing |
$ | 129.1 | $ | 76.4 | $ | 52.7 | 69.0 | % | ||||||||
International |
22.1 | 10.7 | 11.4 | 106.5 | % | |||||||||||
Home entertainment releases of television production |
24.7 | 22.1 | 2.6 | 11.8 | % | |||||||||||
Other |
0.2 | 0.5 | (0.3 | ) | (60.0 | %) | ||||||||||
$ | 176.1 | $ | 109.7 | $ | 66.4 | 60.5 | % | |||||||||
The following table sets forth the components of revenue that make up domestic series
licensing revenue for the six-month periods ended September 30, 2009 and 2008:
Six Months | Six Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | Increase (Decrease) | ||||||||||||||
2009 | 2008 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
Domestic series licensing |
||||||||||||||||
Lionsgate Television |
$ | 71.4 | $ | 48.6 | $ | 22.8 | 46.9 | % | ||||||||
Debmar-Mercury |
41.7 | 26.0 | 15.7 | 60.4 | % | |||||||||||
Ish Entertainment |
16.0 | 1.8 | 14.2 | NM | ||||||||||||
$ | 129.1 | $ | 76.4 | $ | 52.7 | 69.0 | % | |||||||||
NM
Percentage not meaningful
Revenues included in domestic series licensing from Lionsgate Television of $71.4 million
increased by $22.8 million, or 46.9%, in the current six-month period compared to $48.6 million in
the prior years period. The following table sets forth the number of television episodes and hours
delivered by Lionsgate Television in the six months ended September 30, 2009 and 2008,
respectively:
Six Months Ended | ||||||||||||
September 30, 2009 | ||||||||||||
Episodes | Hours | |||||||||||
Weeds Season 5 |
1/2hr | 13 | 6.5 | |||||||||
Nurse Jackie Season 1 |
1/2hr | 12 | 6.0 | |||||||||
Crash TV Series Season 2 |
1hr | 5 | 5.0 | |||||||||
Mad Men Season 3 |
1hr | 8 | 8.0 | |||||||||
38 | 25.5 | |||||||||||
Six Months Ended | ||||||||||||
September 30, 2008 | ||||||||||||
Episodes | Hours | |||||||||||
Fear Itself |
1hr | 13 | 13.0 | |||||||||
Mad Men Season 2 |
1hr | 10 | 10.0 | |||||||||
Weeds Season 4 |
1/2hr | 13 | 6.5 | |||||||||
36 | 29.5 | |||||||||||
Revenues included in domestic series licensing from Debmar-Mercury increased $15.7
million to $41.7 million in the current period, from $26.0 million in the prior years period,
primarily due to increased revenue from the television series House of Payne, Meet the Browns and
The Wendy Williams Show.
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Revenues included in domestic series licensing from the Companys reality television venture
with Ish, of $16.0 million in the current period resulted from the production of the domestic
series Paris Hiltons My New BFF and My Antonio, as compared to $1.8 million in the prior years
period.
International revenue of $22.1 million increased by $11.4 million in the current period mainly
due to international revenue from Crash TV Series Season 1, Dead Zone, Paris Hiltons My New BFF,
and Mad Men Season 2, compared to international revenue of $10.7 million in the prior years period
from Kill Point, Mad Men Season 1, Weeds Season 3, and Wildfire Season 4.
The increase in revenue from home entertainment releases of television production is primarily
driven by DVD/Blu-Ray revenue from Weeds Season 4 and Mad Men Season 2.
Media Networks Revenue
Media Networks revenue for the six months ended September 30, 2009 and 2008 are $55.4 million
and nil, respectively. The acquisition of TV Guide Network occurred on February 28, 2009.
Direct Operating Expenses
The following table sets forth direct operating expenses by segment for the six months ended
September 30, 2009 and 2008:
Six Months Ended | Six Months Ended | |||||||||||||||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||||||||||||||
Motion | Television | Media | Motion | Television | ||||||||||||||||||||||||
Pictures | Production | Networks | Total | Pictures | Production | Total | ||||||||||||||||||||||
(Amounts in millions) | ||||||||||||||||||||||||||||
Direct operating expenses |
||||||||||||||||||||||||||||
Amortization of films
and television programs |
$ | 166.0 | $ | 102.7 | $ | 18.6 | $ | 287.3 | $ | 120.2 | $ | 66.5 | $ | 186.7 | ||||||||||||||
Participation and residual
expense |
87.4 | 34.8 | | 122.2 | 136.6 | 22.4 | 159.0 | |||||||||||||||||||||
Other expenses |
1.0 | 0.7 | (0.1 | ) | 1.6 | 1.1 | 0.5 | 1.6 | ||||||||||||||||||||
$ | 254.4 | $ | 138.2 | $ | 18.5 | $ | 411.1 | $ | 257.9 | $ | 89.4 | $ | 347.3 | |||||||||||||||
Direct operating expenses as a
percentage of segment revenues |
46.3 | % | 78.5 | % | 33.4 | % | 52.6 | % | 45.3 | % | 81.5 | % | 51.1 | % |
Direct operating expenses of the motion pictures segment of $254.4 million for the
current six-month period were 46.3% of motion pictures revenue, compared to $257.9 million, or
45.3% of motion pictures revenue for the prior years period. The increase in direct operating
expense of the motion pictures segment in the current period as a percent of revenue is primarily
due to the higher Mandate Pictures revenue in relation to total motion pictures revenue. Direct
operating expenses of Mandate Pictures are higher in relation to revenue as compared to the rest of
the motion pictures segment, however Mandate Pictures does not incur significant distribution and
marketing expenses. Investment in film write-downs of the motion picture segment totaled
approximately $5.3 million for the current period, compared to $6.3 million for the prior years
period. In the current period, approximately $2.5 million of the write down related to the change
in domestic release strategy of one motion picture. In the prior years period, approximately $4.2
million of the write down related to the change in the release strategy of one motion picture that
was completed in the prior years period. Other expenses consist of the provision for doubtful
accounts and foreign exchange losses (gains). Our direct operating expenses generally fluctuate
with changes in our revenue. Because of our current expectations on motion picture revenue for
fiscal 2010, we believe that our direct operating expenses of our motion picture segment for fiscal
2010 will not exceed our fiscal 2009 motion picture segment direct operating expenses. However, a
number of factors could impact the level of direct operating expenses, including, but not limited
to, the actual and anticipated performance of our films, possible write downs of our film costs,
foreign exchange rate changes, and bad debt expense.
Direct operating expenses of the television production segment of $138.2 million for this
period were 78.5% of television production revenue, compared to $89.4 million, or 81.5% of
television production revenue for the prior years period. In the current period, approximately
$1.7 million of charges for write-downs of television film costs were included in the amortization
of television programs, compared to $2.6 million in the prior years period. In the current
period, approximately $1.3 million of the write-down related to one television series. Included in
the charges in the prior years period was a write-down of approximately $1.1 million associated
with a television series. Because we anticipate our television production segment revenues to
increase in fiscal 2010, as
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compared to fiscal 2009, we also expect that our direct operating
expenses of our television production segment will increase in fiscal 2010, as compared to fiscal
2009. However, a number of factors could impact the level of direct operating expenses, including,
but not
limited to, the actual and anticipated performance of our television programs, possible write
downs of our television program costs, foreign exchange rate changes, and bad debt expense.
Direct operating expenses of the media networks segment of $18.5 million for the current
period consists primarily of programming expenses associated with the production of such programs
as Idol Tonight, Hollywood 411, and the 2009 Emmy Awards coverage.
Distribution and Marketing Expenses
The following table sets forth distribution and marketing expenses by segment for the six
months ended September 30, 2009 and 2008:
Six Months Ended | Six Months Ended | |||||||||||||||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||||||||||||||
Motion | Television | Media | Motion | Television | ||||||||||||||||||||||||
Pictures | Production | Networks | Total | Pictures | Production | Total | ||||||||||||||||||||||
(Amounts in millions) | ||||||||||||||||||||||||||||
Distribution and
marketing expenses |
||||||||||||||||||||||||||||
Theatrical |
$ | 50.1 | $ | 0.2 | $ | | $ | 50.3 | $ | 131.4 | $ | | $ | 131.4 | ||||||||||||||
Home Entertainment |
98.3 | 7.6 | | 105.9 | 123.6 | 6.7 | 130.3 | |||||||||||||||||||||
Television |
1.6 | 4.1 | | 5.7 | 2.4 | 2.5 | 4.9 | |||||||||||||||||||||
International |
15.4 | 2.5 | | 17.9 | 18.6 | 2.1 | 20.7 | |||||||||||||||||||||
Media Networks |
| | 6.4 | 6.4 | | | | |||||||||||||||||||||
Other |
0.9 | 0.1 | | 1.0 | 0.9 | 0.2 | 1.1 | |||||||||||||||||||||
$ | 166.3 | $ | 14.5 | $ | 6.4 | $ | 187.2 | $ | 276.9 | $ | 11.5 | $ | 288.4 | |||||||||||||||
The majority of distribution and marketing expenses relate to the motion pictures
segment. Theatrical prints and advertising (P&A) in the motion pictures segment in the current
period of $50.1 million decreased $81.3 million, or 61.9%, compared to $131.4 million in the prior
years period. Domestic theatrical P&A from the motion pictures segment in this period included P&A
incurred on the release of Crank: High Voltage, I Can Do Bad All By Myself, and Gamer, and P&A
incurred in advance of the release of titles such as Saw VI, which individually represented between
9% and 36% of total theatrical P&A and in the aggregate accounted for 83% of the total theatrical
P&A. Domestic theatrical P&A from the motion pictures segment in the prior years period included
P&A incurred on the release of Bangkok Dangerous, Disaster Movie, My Best Friends Girl, The Family
That Preys, and The Forbidden Kingdom, which individually represented between 10% and 22% of total
theatrical P&A and in the aggregate accounted for 84% of the total theatrical P&A.
Theatrical distribution and marketing expenses generally depend on the number of theatrical
motion pictures we release and the release plan of those motion pictures in a given year. As a
result, we do not currently believe that total theatrical distribution and marketing expenses for
fiscal 2010 will exceed that of fiscal 2009 levels because the number of pictures that we expect to
release in fiscal 2010 will be less than the number released last fiscal year.
Home entertainment distribution and marketing costs on motion pictures and television product
in this period of $105.9 million decreased $24.4 million, or 18.7%, compared to $130.3 million in
the prior years period. The decrease in home entertainment distribution and marketing costs is
mainly due to the decrease in home entertainment revenue in the current period as compared to the
prior years period, respectively. Home entertainment distribution and marketing costs as a
percentage of home entertainment revenues was 36.6% and 38.5% in the current period and prior
years period, respectively.
International distribution and marketing expenses in this period includes $13.3 million of
distribution and marketing costs from Lionsgate UK, compared to $16.6 million in the prior years
period.
Media Networks includes transmission and marketing and promotion expenses.
General and Administrative Expenses
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The following table sets forth general and administrative expenses by segment for the six
months ended September 30, 2009 and 2008:
Six Months | Six Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | Increase (Decrease) | ||||||||||||||
2009 | 2008 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
General and Administrative Expenses |
||||||||||||||||
Motion Pictures |
$ | 22.8 | $ | 24.9 | $ | (2.1 | ) | (8.4 | %) | |||||||
Television Production |
4.1 | 5.3 | (1.2 | ) | (22.6 | %) | ||||||||||
Media Networks |
22.2 | | 22.2 | 100.0 | % | |||||||||||
Corporate |
34.5 | 38.7 | (4.2 | ) | (10.9 | %) | ||||||||||
$ | 83.6 | $ | 68.9 | $ | 14.7 | 21.3 | % | |||||||||
General and administrative expenses as a
percentage of revenue |
10.7 | % | 10.1 | % |
General and administrative expenses increased by $14.7 million or 21% mainly due to the
general and administrative expenses associated with the Media Networks segment, which was acquired
in February 2009, of $22.2 million offset by decreases in our other three reporting segments.
General and administrative expenses of the Media Networks segment are primarily related to salaries
and related expenses.
General and administrative expenses of the motion pictures segment decreased $2.1 million or
8.4% mainly due to a decrease in other general overhead such as travel and entertainment expenses.
General and administrative expenses of the television production segment decreased $1.2
million or 22.6% mainly due to decreases in professional and consulting fees associated with the
Companys Asian television channel venture and other general overhead decreases.
General and administrative expenses of the corporate segment decreased $4.2 million or 10.9%
mainly due to decreases in salaries and related expenses, professional and consulting fees, and
other general overhead costs.
The following table sets forth stock-based compensation expense (benefit) included in our
corporate segment for the six months ended September 30, 2009 and 2008:
Six Months | Six Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | Increase (Decrease) | ||||||||||||||
2009 | 2008 | Amount | Percent | |||||||||||||
(Amounts in millions) | ||||||||||||||||
Stock-Based Compensation Expense (Benefit): |
||||||||||||||||
Stock options |
$ | 1.6 | $ | 1.6 | $ | | 0.0 | % | ||||||||
Restricted share units |
6.1 | 5.9 | 0.2 | 3.4 | % | |||||||||||
Stock appreciation rights |
0.6 | (0.6 | ) | 1.2 | (200.0 | %) | ||||||||||
$ | 8.3 | $ | 6.9 | $ | 1.4 | 20.3 | % | |||||||||
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Depreciation, Amortization and Other Expenses (Income)
Depreciation and amortization of $14.4 million this period increased $11.6 million from $2.8
million in the prior years period. The increase is primarily due to depreciation of tangible
assets and amortization of intangible assets acquired in connection with the purchase of TV Guide
Network. Estimated amortization expense, based on the preliminary allocation of the purchase price
related to the acquisition of TV Guide Network, for the six-months ended March 31, 2010 and for each of the years ending March 31, 2011 through
2014 is approximately $5.3 million, $10.3 million, $7.6 million, $7.2 million, and $6.8 million,
respectively.
Interest expense of $24.0 million this period increased $7.2 million, or 42.9%, from the prior
years period of $16.8 million. The following table sets forth the components of interest expense
for the six months ended September 30, 2009 and 2008:
Six Months | Six Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
(Amounts in millions) | ||||||||
Interest Expense |
||||||||
Cash Based: |
||||||||
Interest cost associated with credit facility |
$ | 3.9 | $ | 0.8 | ||||
Contractual coupon rate on senior subordinated debentures |
5.2 | 5.4 | ||||||
Other |
1.3 | 0.7 | ||||||
10.4 | 6.9 | |||||||
Non-Cash Based: |
||||||||
Amortization of discount on liability component of
senior subordinated debentures |
8.4 | 7.6 | ||||||
Amortization of deferred financing costs |
1.3 | 2.3 | ||||||
Accretion of mandatorily redeemable preferred stock units
and 10% non-cash dividend |
3.9 | | ||||||
13.6 | 9.9 | |||||||
$ | 24.0 | $ | 16.8 | |||||
We expect that our interest expense will increase through the end of our fiscal year 2010
because of additional interest expense related to the notes issued on October 21, 2009 (see description
of notes in Recent Developments) and higher average
outstanding balances under our senior secured credit facility, as compared to the average
outstanding balance of the prior year.
Interest and other income was $0.8 million for the period ended September 30, 2009, compared
to $4.2 million in the prior years period. Interest and other income this period was earned on the
lower average cash balances and restricted investments held during the six months ended September
30, 2009 as compared to 2008.
Gain on extinguishment of debt was $7.5 million for the period ended September 30, 2009,
resulting from the exchange of $66.6 million of the Companys 3.625% convertible senior
subordinated notes, compared to nil in the prior years period.
The Companys equity interests in this period included a $0.4 million loss from the Companys
33.33% equity interest in FEARnet, a loss of $0.6 million from the Companys 42% equity interest in
Break.com, a $0.1 million loss from the Companys 43% equity interest in Roadside, and a $2.5
million loss from our 28.57% equity interest in EPIX. For the six months ended September 30, 2008,
equity interests included a $2.4 million loss from the Companys 33.33% equity interest in FEARnet,
a loss of $1.1 million from the Companys 42% equity interest in Break.com, a $0.4 million loss
from the Companys 43% equity interest in Roadside, and a $0.2 million loss from our 28.57% equity
interest in EPIX.
We had income tax expense of $2.0 million, or 2.9% of income before income taxes in the six
months ended September 30, 2009, compared to an expense of $3.3 million, or (7.4%) of loss before
income taxes in the six months ended September 30, 2008. The tax expense reflected in the current
period is primarily attributable to U.S. and Canadian income taxes and foreign withholding taxes.
Our actual annual effective tax rate will differ from the statutory federal rate as a result of
several factors, including changes in the valuation allowance against net deferred tax assets,
non-temporary differences, foreign income taxed at different rates, and state and local income
taxes. Income tax loss carryforwards, subject to certain limitations that may prevent us from fully
utilizing them, amount to approximately $133.2 million for U.S. federal income tax purposes
available to reduce income taxes over twenty years,
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$147.3 million for U.S. state income tax
purposes available to reduce income taxes over future years with varying expirations, $18.9 million
for Canadian income tax purposes available to reduce income taxes over 20 years with varying
expirations, $20.9 million for UK income tax purposes available indefinitely to reduce future
income taxes and $2.4 million of Hong Kong loss carryforwards available indefinitely to reduce
future income taxes.
At March 31, 2009, the Company had U.S. Alternative Minimum Tax (AMT) credit carryforwards
of approximately $2.0 million available to reduce future federal income tax, which begin to expire
in 2011.
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Net income for the six months ended September 30, 2009 was $63.7 million, compared to net loss
for the six months ended September 30, 2008 of $48.3 million.
Net loss attributable to noncontrolling interest for the six months ended September 30, 2009
was $4.4 million, compared to nil for the six months ended September 30, 2008.
Net income attributable to our shareholders for the six months ended September 30, 2009 was
$68.1 million, or basic net income per common share of $0.58 on 117.2 million weighted average
common shares outstanding. Diluted net income per common share for the six months ended September
30, 2009 was $0.56 on 137.7 million weighted average common shares outstanding. This compares to
net loss attributable to our shareholders for the six months ended September 30, 2008 of $48.3
million, or basic and diluted net loss per common share of $0.41 on 117.6 million weighted average
common shares outstanding.
Liquidity and Capital Resources
Our liquidity and capital resources are provided principally through cash generated from
operations, issuance of subordinated notes, and our credit facility.
10.25% Senior Secured Second-Priority Notes. On October 21, 2009, our wholly-owned subsidiary
Lions Gate Entertainment Inc. (LGEI), issued approximately $236.0 million aggregate principal
amount of senior secured second-priority notes due 2016 (the Notes) in a private offering
conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the
Securities Act).
The Notes will pay interest semi-annually on May 1 and November 1 of each year at a rate of
10.25% per year and will mature on November 1, 2016.
The Notes are guaranteed on a senior secured basis by our parent Lions Gate Entertainment
Corp. (LGEC), and certain wholly-owned subsidiaries of both LGEC and LGEI.
The Notes were issued by LGEI at an initial price of 95.222% of the principal amount and,
after deducting discounts and the underwriting fee, the net proceeds from the sale of the Notes was
approximately $219.4 million, of which $218.0 million was used by LGEI to repay a portion of its
outstanding debt under its credit facility. We expect the total net proceeds after all transaction
costs (including legal, accounting and other professional fees) to be approximately $215.1 million.
Film Credit Facility. On October 6, 2009, we entered into a revolving film credit facility
agreement (Film Credit Facility) which provides for borrowings for the acquisition or production
of motion pictures. Currently, the Film Credit Facility provides for total borrowings up to $120
million and can be increased to $200 million if additional lenders or financial institutions become
a party to and provide a commitment under the facility. The Film Credit Facility has a maturity
date of April 6, 2013 and generally bears an interest rate of 3.25% over the LIBO rate (as
defined in the credit agreement). We are required to pay a quarterly commitment fee of 0.75% per
annum on the unused commitment under the Film Credit Facility. Borrowings under the Film Credit
Facility are due the earlier of (a) nine months after delivery of each motion picture or (b) April
6, 2013. Borrowings under the Film Credit Facility are subject to a borrowing base calculation and
are secured by interests in the related motion pictures, together with certain other receivables
from other motion picture and television productions pledged by us including a minimum pledge of
such receivables of $25 million. Receivables pledged to the Film Credit Facility must be excluded
from the borrowing base calculation under our credit facility.
Amended Credit Facility. On September 30, 2009, we amended our credit facility and had
borrowings of $255 million (March 31, 2009 $255 million). In connection with the Amendment, we
paid fees to the lenders equal to approximately $0.8 million. The availability of funds under our
credit facility is limited by a borrowing base and also reduced by outstanding letters of credit
which amounted to $22.7 million at September 30, 2009 (March 31, 2009 $46.7 million). At
September 30, 2009, there was $62.3 million available under our credit facility (March 31, 2009
$38.3 million). We are required to pay a quarterly commitment fee based upon 0.375% per annum on
the total credit facility of $340 million less the amount drawn. Our credit facility expires July
25, 2013 and bears interest at 2.50 (increased 0.25% pursuant to the September 30, 2009 amendment)
over the Adjusted LIBOR rate (effective rate of 2.56% and 2.75% as of September 30, 2009 and
March 31, 2009, respectively). Obligations under our credit facility are secured by collateral (as
defined in the credit agreement) granted by us and certain of our subsidiaries, as well as a pledge
of equity interests in certain of our subsidiaries. The credit facility contains a number of
affirmative and negative covenants that, among other things, require us to satisfy certain
financial covenants and restrict our ability to incur additional debt, pay dividends and make
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distributions, make certain investments and acquisitions, repurchase our stock and prepay
certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of our
business, enter into sale-leaseback transactions, transfer and sell material assets and merge or
consolidate. Under our credit facility, we may also be subject to an event of default upon a
change in control (as defined in the credit facility) which, among other things, includes a
person or group acquiring ownership or control in excess of 20% of our common stock.
October 2004 2.9375% Notes. In October 2004, Lions Gate Entertainment Inc., the Companys
wholly-owned subsidiary, (LGEI) sold $150.0 million of 2.9375% Convertible Senior Subordinated
Notes (the October 2004 2.9375% Notes). The Company received $146.0 million of net proceeds after
paying placement agents fees from the sale of $150.0 million of the October 2004 2.9375% Notes.
Interest on the October 2004 2.9375% Notes is payable semi-annually on April 15 and October 15. The
October 2004 2.9375% Notes mature on October 15, 2024. From October 15, 2009 to October 14, 2010,
LGEI may redeem the October 2004 2.9375% Notes at 100.839%; from October 15, 2010 to October 14,
2011, LGEI may redeem the October 2004 2.9375% Notes at 100.420%; and thereafter, LGEI may redeem
the notes at 100%.
The holder may require LGEI to repurchase the October 2004 2.9375% Notes on October 15, 2011,
2014 and 2019 or upon a change in control at a price equal to 100% of the principal amount,
together with accrued and unpaid interest through the date of repurchase. Under certain
circumstances, if the holder requires LGEI to repurchase all or a portion of their notes upon a
change in control, they will be entitled to receive a make whole premium. The amount of the make
whole premium, if any, will be based on the price of the Companys common shares on the effective
date of the change in control. No make whole premium will be paid if the price of the Companys
common shares at such time is less than $8.79 per share or exceeds $50.00 per share.
The holder may convert the October 2004 2.9375% Notes into the Companys common shares prior
to maturity only if the price of the Companys common shares issuable upon conversion of a note
reaches a specified threshold over a specified period, the trading price of the notes falls below
certain thresholds, the notes have been called for redemption, a change in control occurs or
certain other corporate transactions occur. In addition, under certain circumstances, if the holder
converts their notes upon a change in control, they will be entitled to receive a make whole
premium. Before the close of business on or prior to the trading day immediately before the
maturity date, if the notes have not been previously redeemed or repurchased, the holder may
convert the notes into the Companys common shares at a conversion rate equal to 86.9565 shares per
$1,000 principal amount of the October 2004 2.9375% Notes, subject to adjustment in certain
circumstances, which represents a conversion price of approximately $11.50 per share.
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February 2005 3.625% Notes. In February 2005, LGEI sold $175.0 million of 3.625% Convertible
Senior Subordinated Notes (February 2005 3.625% Notes). The Company received $170.2 million of
net proceeds after paying placement agents fees from the sale of $175.0 million of the February
2005 3.625% Notes. Interest on the February 2005 3.625% Notes is payable at 3.625% per annum
semi-annually on March 15 and September 15 until March 15, 2012 and at 3.125% per annum thereafter
until maturity on March 15, 2025. LGEI may redeem all or a portion of the February 2005 3.625%
Notes at its option on or after March 15, 2012 at 100% of their principal amount, together with
accrued and unpaid interest through the date of redemption.
The holder may require LGEI to repurchase the February 2005 3.625% Notes on March 15, 2012,
2015 and 2020 or upon a change in control at a price equal to 100% of the principal amount,
together with accrued and unpaid interest through the date of repurchase. Under certain
circumstances, if the holder requires LGEI to repurchase all or a portion of their notes upon a
change in control, they will be entitled to receive a make whole premium. The amount of the make
whole premium, if any, will be based on the price of the Companys common shares on the effective
date of the change in control. No make whole premium will be paid if the price of the Companys
common shares at such time is less than $10.35 per share or exceeds $75.00 per share.
The February 2005 3.625% Notes are convertible, at the option of the holder, at any time
before the maturity date, if the notes have not been previously redeemed or repurchased, at a
conversion rate equal to 70.0133 shares per $1,000 principal amount of the February 2005 3.625%
Notes, subject to adjustment in certain circumstances, which represents a conversion price of
approximately $14.28 per share. Upon conversion of the February 2005 3.625% Notes, the Company has
the option to deliver, in lieu of common shares, cash or a combination of cash and common shares of
the Company.
In December 2008, LGEI repurchased $9.0 million of the February 2005 3.625% Notes for $5.3
million plus $0.1 million in accrued interest, resulting in a gain of $3.0 million.
On April 20, 2009, LGEI entered into Refinancing Exchange Agreements with certain existing
holders of the February 2005 3.625% Notes. Pursuant to the terms of the Refinancing Exchange
Agreements, holders of the February 2005 3.625% Notes exchanged approximately $66.6 million
aggregate principal amount of the February 2005 3.625% Notes for new 3.625% convertible senior
subordinated notes (April 2009 3.625% Notes) in the same aggregate principal amount under a new
indenture entered into by LGEI, the Company, as guarantor, and an indenture trustee thereunder.
April 2009 3.625% Notes. As discussed above, in April 2009, LGEI issued approximately $66.6
million of 3.625% Convertible Senior Subordinated Notes (the April 2009 3.625% Notes). The
Company will pay interest on the April 2009 3.625% Notes on March 15 and September 15 of each year.
The April 2009 3.625% Notes will mature on March 15, 2025. On or after March 15, 2015, the Company
may redeem the April 2009 3.625% Notes, in whole or in part, at a price equal to 100% of the
principal amount of the April 2009 3.625% Notes to be redeemed, plus accrued and unpaid interest
and additional interest, if any, to, but excluding, the date of redemption.
The holder may require LGEI to repurchase the April 2009 3.625% Notes on March 15, 2015, 2018
and 2023 or upon a designated event, at a price equal to 100% of the principal amount of the
April 2009 3.625% Notes to be repurchased plus accrued and unpaid interest. Under certain
circumstances, if the holder requires LGEI to repurchase all or a portion of their notes upon a
change in control, they will be entitled to receive a make whole premium. The amount of the make
whole premium, if any, will be based on the price of the Companys common shares on the effective
date of the change in control. No make whole premium will be paid if the price of the Companys
common shares at such time is less than $5.36 per share or exceeds $50.00 per share.
The April 2009 3.625% Notes may be converted into common shares of the Company at any time
before maturity, redemption or repurchase. In addition, under certain circumstances upon a change
in control, the holders of the April 2009 3.625% Notes will be entitled to receive a make whole
premium. The initial conversion rate of the April 2009 3.625% Notes is 121.2121 common shares per
$1,000 principal amount of the April 2009 3.625% Notes, subject to adjustment in certain
circumstances, which represents a conversion price of approximately $8.25 per share. Upon
conversion of the April 2009 3.625% Notes, the Company has the option to deliver, in lieu of common
shares, cash or a combination of cash and common shares of the Company.
Theatrical Slate Participation. On May 29, 2009, LGEI and LGF terminated our theatrical slate
participation arrangement with Pride. The arrangement was evidenced by, among other documents, that
certain Master Covered Picture Purchase Agreement between LGF and FilmCo and the FilmCo Operating
Agreement for FilmCo by and between LGEI and Pride, each dated as of May 25, 2007 and amended on
January 30, 2008. Under the arrangement, Pride contributed, in general, 50% of our production,
acquisition, marketing and distribution costs of theatrical feature films and participated in a pro
rata portion of the pictures net profits or losses similar to a co-production arrangement based on
the portion of costs funded. Amounts provided from Pride were reflected as a
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participation liability. In late 2008, the administrative agent for the senior lenders under
Prides senior credit facility took the position, among others, that the senior lenders did not
have an obligation to continue to fund under the senior credit facility because the conditions
precedent to funding set forth in the senior credit facility could not be satisfied. The Company
was not a party to the credit facility. Consequently, Pride did not purchase the pictures The
Spirit, My Bloody Valentine 3-D and Madea Goes To Jail. Thereafter, on April 20, 2009, after failed
attempts by us to facilitate a resolution, we gave FilmCo and Pride notice that FilmCo, through
Prides failure to make certain capital contributions, was in default of the Master Picture
Purchase Agreement. On May 5, 2009, the representative for the Pride equity and the Pride mezzanine
investor responded that the required amount was fully funded and that it had no further obligations
to make any additional capital contributions. Consequently, on May 29, 2009, we gave notice of
termination of the Master Picture Purchase Agreement. Since May 29, 2009, there have been no developments with respect to the arrangement.
Although we will no longer receive financing as provided from the participation of Pride in
our films, we do not believe this will have a material adverse effect to our business.
Société Générale de Financement du Québec. On July 30, 2007, the Company entered into a
four-year filmed entertainment slate participation agreement with Société Générale de Financement
du Québec (SGF), the Québec provincial governments investment arm. SGF will provide up to 35% of
production costs of television and feature film productions produced in Québec for a four-year
period for an aggregate participation of up to $140 million, and we will advance all amounts
necessary to fund the remaining budgeted costs. The maximum aggregate of budgeted costs over the
four-year period will be $400 million, including our portion, but no more than $100 million per
year. In connection with this agreement, we and SGF will proportionally share in the proceeds
derived from the productions after we deduct a distribution fee, recoup all distribution expenses
and releasing costs, and pay all applicable third party participations and residuals. Under the
terms of the arrangement $35 million is available through July 30, 2010 and $35 million is
available during the twelve-month period ended July 30, 2011 to be provided by SGF.
Filmed Entertainment Backlog. Backlog represents the amount of future revenue not yet
recorded from contracts for the licensing of films and television product for television exhibition
and in international markets. Backlog at September 30, 2009 and
March 31, 2009 is $464.8 million
and $499.5 million, respectively.
Cash Flows Used in Operating Activities. Cash flows used in operating activities for the six
months ended September 30, 2009 were $163.9 million compared to cash flows used in operating
activities in the six months ended September 30, 2008 of $39.7 million. The increase in cash used
in operating activities was primarily due to a lower reduction in accounts receivable and higher
reductions of accounts payable and accrued liabilities, participations and residuals, film
obligations and deferred revenues, offset by an increase in net income and amortization of films
and television programs as compared to the six months ended September 30, 2008.
Cash Flows Used in Investing Activities. Cash flows used in investing activities of $10.3
million for the six months ended September 30, 2009 consisted of $3.7 million for purchases of
property and equipment and $14.9 million of capital contributions to companies accounted as equity
method investments, offset by $8.3 million repayment on a loan made to a third party producer. Cash
flows used in investing activities of $45.1 million for the six months ended September 30, 2008
consisted of $5.7 million for purchases of property and equipment, $11.1 million of capital
contributions to companies accounted as equity method investments and $28.4 million for an increase
in a loan receivable from Break.com and a third party producer.
Cash Flows Provided by/Used In Financing Activities. Cash flows provided by financing
activities of $146.2 million for the six months ended September 30, 2009 resulted from increased
production obligations of $128.1 million and proceeds of $122.4 million from the sale of our 49%
interest in TV Guide Network, offset by $102.5 million repayment of production obligations, $1.3
million paid for tax withholding requirements associated with our equity awards, and $0.4 million
repayment of other financing obligations. Cash flows used in financing activities of $35.7 million
for the six months ended September 30, 2008 resulted from increased production obligations of
$113.3 million and the exercise of stock options of $2.9 million, offset by $104.2 million
repayment of production obligations, $44.7 million paid for the repurchase of the Companys common
shares and $2.9 million paid for tax withholding requirements associated with our equity awards.
Anticipated Cash Requirements. The nature of our business is such that significant initial
expenditures are required to produce, acquire, distribute and market 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. We believe that cash flow from operations, cash on hand,
credit facility availability, tax-efficient financing and available production financing 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 liquidity, availability, fixed charge coverage, capital
base, film spending and leverage ratios with the long-term goal of maintaining our credit
worthiness.
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Our current financing strategy is to fund operations and to leverage investment in films and
television programs through our cash flow from operations, our credit facility, single-purpose
production financing, government incentive programs, film funds, and distribution commitments. In
addition, we may acquire businesses or assets, including individual films or libraries that are
complementary to our business. Any such transaction could be financed through our cash flow from
operations, credit facilities, equity or debt financing.
Future commitments under contractual obligations as of September 30, 2009 are as follows:
Year Ended March 31, | ||||||||||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | ||||||||||||||||||||||
Future annual repayment of debt and other
financing obligations as of September 30, 2009 |
||||||||||||||||||||||||||||
Borrowings under bank line of credit |
$ | | $ | | $ | | $ | | $ | 255,000 | $ | | $ | 255,000 | ||||||||||||||
Production obligations(1) |
12,233 | 166,621 | 38,753 | | 23,733 | | 241,340 | |||||||||||||||||||||
Interest payments on subordinated notes and other
financing obligations |
5,740 | 11,437 | 11,376 | 3,032 | 2,936 | 3,821 | 38,342 | |||||||||||||||||||||
Subordinated notes and other financing obligations (2) |
420 | 883 | 250,363 | 4,726 | 1,078 | 73,840 | 331,310 | |||||||||||||||||||||
Mandatorily redeemable preferred stock units (3) |
| | | | | 324,088 | 324,088 | |||||||||||||||||||||
$ | 18,393 | $ | 178,941 | $ | 300,492 | $ | 7,758 | $ | 282,747 | $ | 401,749 | $ | 1,190,080 | |||||||||||||||
Contractual commitments by expected
repayment date |
||||||||||||||||||||||||||||
Film obligations(1) |
$ | 52,374 | $ | | $ | | $ | | $ | | $ | | $ | 52,374 | ||||||||||||||
Distribution and marketing commitments (4) |
63,008 | 53,771 | | 22,000 | | | 138,779 | |||||||||||||||||||||
Minimum guarantee commitments (5) |
49,221 | 111,907 | 7,728 | 6,478 | 5,750 | 9,183 | 190,267 | |||||||||||||||||||||
Production obligation commitments (5) |
398 | 13,061 | 3,855 | | | | 17,314 | |||||||||||||||||||||
Operating lease commitments |
5,901 | 10,906 | 10,754 | 11,343 | 11,435 | 14,631 | 64,970 | |||||||||||||||||||||
Other contractual obligations |
22,763 | 2,654 | 2,399 | 1,317 | 1,200 | 3,900 | 34,233 | |||||||||||||||||||||
Employment and consulting contracts |
18,489 | 25,498 | 10,923 | 2,813 | 1,196 | | 58,919 | |||||||||||||||||||||
$ | 212,154 | $ | 217,797 | $ | 35,659 | $ | 43,951 | $ | 19,581 | $ | 27,714 | $ | 556,856 | |||||||||||||||
Total future commitments under
contractual obligations |
$ | 230,547 | $ | 396,738 | $ | 336,151 | $ | 51,709 | $ | 302,328 | $ | 429,463 | $ | 1,746,936 | ||||||||||||||
(1) | Film and production obligations include minimum guarantees, theatrical marketing obligations and production obligations as disclosed in Note 7 of our unaudited condensed consolidated financial statements. Repayment dates are based on anticipated delivery or release date of the related film or contractual due dates of the obligation. | |
(2) | Subordinated notes and other financing obligations reflect the principal amounts of our October 2004 2.9375% Notes, February 2005 3.625% Notes and our April 2009 3.625% Notes and other financing obligations with a carrying amount of $15.3 million as of September 30, 2009. The combined carrying value of our subordinated notes was $251.0 million as of September 30, 2009. The difference between the carrying value and the principal amounts is being amortized as a non-cash charge to interest expense over the expected life of the Notes. | |
(3) | Amount represents the anticipated redemption amount (i.e. principal amount of $125.0 million plus the accretion of a 10% annual dividend) payable in May 2019 of the mandatorily redeemable preferred stock units held by the noncontrolling interest in TV Guide Network. The carrying amount of the mandatorily redeemable preferred stock held by the non controlling interest was $88.4 million as of September 30, 2009. The carrying amount and the 10% dividend is being accreted, through a non cash charge to interest expense, up to its redemption amount over the ten year period to the redemption date. | |
(4) | Distribution and marketing commitments represent contractual commitments for future expenditures associated with distribution and marketing of films which we will distribute. The payment dates of these amounts are primarily based on the anticipated release date of the film. |
(5) | Minimum guarantee commitments represent contractual commitments related to the purchase of film rights for future delivery. Production obligation commitments represent amounts committed for future film production and development to be funded through production financing and recorded as a production obligation liability. Future payments under these obligations are based on anticipated delivery or release dates of the related film or contractual due dates of the obligation. The amounts include future interest payments associated with the obligations. |
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Off-Balance Sheet Arrangements
We do not have any transactions, arrangements and other relationships with unconsolidated
entities that will affect our liquidity or capital resources. We have no special purpose entities
that provided off-balance sheet financing, liquidity or market or credit risk support, nor do we
engage in leasing, hedging or research and development services, that could expose us to liability
that is not reflected in our financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Currency and Interest Rate Risk Management
Market risks relating to our operations result primarily from changes in interest rates and
changes in foreign currency exchange rates. Our exposure to interest rate risk results from the
financial debt instruments that arise from transactions entered into during the normal course of
business. As part of our overall risk management program, we evaluate and manage our exposure to
changes in interest rates and currency exchange risks on an ongoing basis. Hedges and derivative
financial instruments will be used in the future in order to manage our interest rate and currency
exposure. We have no intention of entering into financial derivative contracts, other than to hedge
a specific financial risk.
Currency Rate Risk. We enter into forward foreign exchange contracts to hedge our foreign
currency exposures on future production expenses denominated in various foreign currencies. As of
September 30, 2009, we had outstanding forward foreign exchange contracts to buy US$1.2 million in
exchange for British Pound Sterling (GBP) £0.8 million over a period of 8 weeks at a weighted
average exchange rate of GBP £0.61. During the six months ended September 30, 2009, we completed
forward foreign exchange contracts denominated in European Euros and in US dollars, resulting in a
net realized fair value loss of less than $0.1 million. Contracts are entered into with a major
financial institution as counterparty. 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.
Interest Rate Risk. Our principal risk with respect to our debt is interest rate risk. We
currently have exposure to cash flow risk due to changes in market interest rates related to our
outstanding debt and other financing obligations. Our credit facility has a balance of $255 million
at September 30, 2009. Other financing obligations subject to variable interest rates include
$161.9 million owed to film production entities on delivery of titles.
The table below presents repayments of the principal amounts for our interest-bearing debt,
production obligations, subordinated notes and other financing obligations, and mandatorily
redeemable preferred stock units as of September 30, 2009. The footnotes to the table provide the
contractual interest rates.
Year Ended March 31, | ||||||||||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | ||||||||||||||||||||||
Revolving Credit Facility: |
||||||||||||||||||||||||||||
Variable (1) |
$ | | $ | | $ | | $ | | $ | 255,000 | $ | | 255,000 | |||||||||||||||
Production Obligations: |
||||||||||||||||||||||||||||
Variable (2) |
8,527 | 144,597 | 8,765 | | | | 161,889 | |||||||||||||||||||||
Fixed (3) |
| | | | 8,734 | | 8,734 | |||||||||||||||||||||
Subordinated Notes and
Other Financing Obligations: |
||||||||||||||||||||||||||||
Fixed (4) |
| | 249,419 | | | 66,581 | 316,000 | |||||||||||||||||||||
Fixed (5) |
| | | 3,718 | | | 3,718 | |||||||||||||||||||||
Fixed (6) |
420 | 883 | 944 | 1,008 | 1,078 | 7,259 | 11,592 | |||||||||||||||||||||
Mandatorily Redeemable
Preferred
Stock Units: |
||||||||||||||||||||||||||||
Fixed (7) |
| | | | | 125,009 | 125,009 | |||||||||||||||||||||
$ | 8,947 | $ | 145,480 | $ | 259,128 | $ | 4,726 | $ | 264,812 | $ | 198,849 | $ | 881,942 | |||||||||||||||
(1) | Revolving credit facility, which expires July 25, 2013 and bore interest at 2.25% over the Adjusted LIBOR rate through September 29, 2009. On September 30, 2009, the Company amended its credit facility, which resulted in an increase of the interest rate of 0.25%. At September 30, 2009, we had borrowings of $255 million under this facility. | |
(2) | Amounts owed to film production entities on anticipated delivery date or release date of the titles or the contractual due dates of |
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the obligation. Production obligations of $161.9 million incur interest at rates ranging from approximately 1.89% to 4.04%. Not included in the table above are approximately $70.7 million of production obligations which are non-interest bearing. | ||
(3) | Long term production obligations of $8.7 million with a fixed interest rate equal to 1.0%. | |
(4) | Subordinated notes reflect the principal amounts of our October 2004 2.9375% Notes, February 2005 3.625% Notes and our April 2009 3.625% Notes as of September 30, 2009. | |
(5) | Other financing obligation with fixed interest rate equal to 8.02%. | |
(6) | Capital lease obligation for a satellite transponder with an imputed interest rate equal to 6.65%. | |
(7) | Mandatorily redeemable preferred stock units reflect the principal amount of $125.0 million with a 10% dividend accretion through a non cash charge to interest expense, up to its redemption amount over the ten year period to the redemption date of May 2019. |
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The term disclosure controls and procedures is defined in Rules 13a-15(e) and 15d-15(e) of
the Securities Exchange Act of 1934 as amended (the Exchange Act). These rules refer to the
controls and other procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within required time periods specified in the SECs
rules and forms, and that such information is accumulated and communicated to management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
As of September 30, 2009, the end of the period covered by this report, the Company carried
out an evaluation under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer of the effectiveness of our disclosure controls and procedures. Our
Chief Executive Officer and Chief Financial Officer have concluded that such controls and
procedures were effective as of September 30, 2009.
Changes in Internal Control over Financial Reporting
As required by Rule 13a-15(d) of the Exchange Act, the Company, under the supervision and with
the participation of the Companys management, including the Chief Executive Officer and Chief
Financial Officer, also evaluated whether any changes occurred to the Companys internal control
over financial reporting during the period covered by this report that have materially affected, or
are reasonably likely to materially affect, such control. Based on that evaluation, there has been
no such change during the period covered by this report.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 1A. Risk Factors.
Other than the changes to the risk factors enclosed as Exhibit 99.1 to our Current Report on Form
8-K filed on October 13, 2009, which are incorporated herein by
reference, and other than the risk factors below, there were no
other material changes to the risk factors previously reported in our Annual Report on Form 10-K
for the fiscal year ended March 31, 2009.
Certain shareholders own a majority of our outstanding common shares.
As of September 30, 2009, three of our shareholders beneficially owned an aggregate of 61,201,718
of our common shares, or approximately 52.0% of the outstanding shares. Pursuant to a letter
agreement dated July 9, 2009 that we entered into with Mark H. Rachesky, M.D., the beneficial owner
of 19.7% of our outstanding common shares, we agreed to, among other things, name Dr.
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Rachesky to
our slate of nominees for election to our board of directors at our 2009 Annual General Meeting of
Shareholders and, subject to certain terms and conditions, enter into a registration rights
agreement with him and his affiliates. On September 15, 2009, Dr.
Rachesky was nominated to our
board of directors. In accordance with the letter agreement, we entered into a registration rights
agreement with Dr. Rachesky on October 22, 2009. Accordingly, these three shareholders,
collectively, have the power to exercise substantial influence over us and on matters requiring
approval by our shareholders, including the election of directors, the approval of mergers and
other significant corporate transactions. This concentration of ownership may make it more
difficult for other shareholders to effect substantial changes in our company and may also have the
effect of delaying, preventing or expediting, as the case may be, a change in control of our
company.
Sales of a substantial number of shares of our common shares, or the perception that such sales
might occur, could have an adverse effect on the price of our common shares, and therefore our
ability to raise additional capital to fund our operations.
As of September 30, 2009, approximately 71.1% of our common shares were held beneficially by
certain individuals and institutional investors who each had ownership of greater than 5% of our
common shares. Sales by such individuals and institutional investors of a substantial number of
shares of our common shares into the public market, or the perception that such sales might occur,
could have an adverse effect on the price of our common shares, which could materially impair our
ability to raise capital through the sale of common shares or debt that is convertible into our
common shares.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On May 31, 2007, our Board of Directors authorized the repurchase of up to $50 million of our
common shares. Thereafter, on each of May 29, 2008 and November 6, 2008, as part of its regularly
scheduled meetings, our Board of Directors authorized the repurchase up to an additional $50
million of our common shares, subject to market conditions. The additional resolutions increased
the total authorization to $150 million. The common shares may be purchased, from time to time, at
the Companys discretion, including the quantity, timing and price thereof. Such purchases will be
structured as permitted by securities laws and other legal requirements. During the period from the
authorization date through September 30, 2009, 6,787,310 shares have been repurchased at a cost of
approximately $65.2 million (including commission costs). The share repurchase program has no
expiration date.
The following table sets forth information with respect to shares of our common stock purchased by
us during the three months ended September 30, 2009:
ISSUER PURCHASES OF EQUITY SECURITIES
(d) Approximate | ||||||||||||||||
(c) Total Number of | Dollar Value of | |||||||||||||||
Shares Purchased as | Shares that May Yet | |||||||||||||||
Part of Publicly | Be Purchased Under | |||||||||||||||
(a) Total Number of | (b) Average Price | Announced Plans or | the Plans or | |||||||||||||
Period | Shares Purchased | Paid per Share | Programs | Programs | ||||||||||||
July 1, 2009 July 31, 2009 |
| | | | ||||||||||||
August 1, 2009 August 31, 2009 |
| | | | ||||||||||||
September 1, 2009 September
30, 2009 |
| | | | ||||||||||||
Total |
| | | $ | 85,080,000 |
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
On September 15, 2009, the Company held its Annual General Meeting of Shareholders (the Annual
Meeting). Below is a summary of the matters voted on at the meeting:
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1. At the Annual Meeting, the stockholders voted to elect twelve (12) directors to the Board of
Directors of the Company to serve for a term of one year. The votes for the director nominees were
as follows:
Nominees | For | Withhold | ||||||
Norman Bacal |
89,766,978 | 21,441,321 | ||||||
Michael Burns |
89,807,281 | 21,401,018 | ||||||
Arthur Evrensel |
83,265,395 | 27,942,904 | ||||||
Jon Feltheimer |
89,813,032 | 21,395,267 | ||||||
Morley Koffman |
89,769,630 | 21,438,669 | ||||||
Harald Ludwig |
89,790,500 | 21,417,799 | ||||||
G. Scott Paterson |
89,538,310 | 21,669,989 | ||||||
Mark H. Rachesky, M.D. |
87,103,291 | 24,105,008 | ||||||
Daryl Simm |
85,553,015 | 25,655,284 | ||||||
Hardwick Simmons |
85,532,544 | 25,675,755 | ||||||
Brian V. Tobin |
89,765,014 | 21,443,285 | ||||||
Phyllis Yaffe |
89,835,420 | 21,372,879 |
2. Ernst & Young LLP was re-appointed as the Companys independent registered public accounting
firm for the fiscal year ending March 31, 2010 and the Audit Committee of the Board of Directors
was authorized to determine the remuneration to be paid to Ernst & Young LLP. The vote was as
follows:
For |
90,212,129 | |||
Abstain |
20,835,893 | |||
Against |
160,279 |
Under applicable law, the proposals before the Companys stockholders for the election of each
of the nominated directors (Proposal 1) and the re-appointment of Ernst & Young LLP as the
Companys independent registered public accounting firm (Proposal 2) each required the
affirmative vote of a majority of the common shares present or represented by proxy. Abstentions
and broker non-votes were not counted in determining the number of shares necessary for approval.
Item 5. Other Information.
None
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Item 6. Exhibits.
Exhibit | ||
Number | Description of Documents | |
3.1(1)
|
Articles | |
3.2
|
Notice of Articles | |
3.3(2)
|
Vertical Short Form Amalgamation Application | |
3.4(2)
|
Certificate of Amalgamation | |
10.65
|
Letter Agreement between Mark H. Rachesky and Lions Gate Entertainment Corp. dated July 9, 2009 (3) | |
10.70*
|
Amendment No. 1 to the Second Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of July 25, 2008, with the guarantors and lenders referred to therein, JP Morgan ChaseBank, N.A., as administrative agent and issuing bank, and Wachovia Bank, N.A., as syndication agent. | |
31.1
|
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(1) | Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2005 as filed on June 29, 2005. | |
(2) | Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2007 as filed on May 30, 2007. | |
(3) | Incorporated by reference to Exhibit 10.65 to the Companys Current Report on Form 8-K as filed on July 10, 2009. | |
* | Confidential treatment has been requested for portions of this exhibit. Portions of this document have been omitted and submitted separately to the Securities and Exchange Commission. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LIONS GATE ENTERTAINMENT CORP. |
||||
By: | /s/ James Keegan | |||
Name: | James Keegan | |||
Title: | Duly Authorized Officer and Chief Financial Officer | |||
Date: November 9, 2009
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