Download Form S-2 - Lionsgate

As filed with the Securities and Exchange Commission on May 16, 2003
Registration No. 333-104836
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
To
Form S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Lions Gate Entertainment Corp.
(Exact name of registrant as specified in its charter)
British Columbia, Canada
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Suite 3123, Three Bentall Centre
4553 Glencoe Avenue, Suite 200
595 Burrard Street
Marina del Rey, California 90292
Vancouver, British Columbia V7X 1J1
(310) 314-2000
(604) 609-6100
(Address, including zip code, and telephone number, including area code,
of registrant’s principal executive offices)
Wayne Levin, General Counsel
Lions Gate Entertainment Corp.
4553 Glencoe Avenue, Suite 200
Marina del Rey, California 90292
(310) 314-2000
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
Allison M. Keller, Esq.
O’Melveny & Myers LLP
1999 Avenue of the Stars, Suite 700
Los Angeles, California 90067
(310) 553-6700
William F. Schwitter, Esq.
Paul, Hastings, Janofsky & Walker LLP
75 E. 55th Street
New York, New York 10022
(212) 318-6000
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the “Securities Act”), check the following box. 
If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to
Item 11(a)(1) of this form, check the following box. 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective registration statement for the same offering. 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective registration statement for the same offering. 
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.


The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS
(Subject to Completion)
May 16, 2003
15,000,000 Common Shares
We are selling 15,000,000 common shares.
Our common shares are listed on the American Stock Exchange and Toronto Stock Exchange under the symbol “LGF.” On May 15,
2003, the last reported sale prices of our common shares were US$2.02 per share and Cdn$2.69 per share on the American Stock Exchange and
the Toronto Stock Exchange, respectively.
Our business and an investment in our common shares involve significant risks. These risks are described under the caption
“Risk Factors” beginning on page 10 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Per Share
Public offering price
Underwriting discounts and commissions
Proceeds, before expenses, to us
$
$
$
Total
$
$
$
The underwriters may also purchase up to 1,250,000 common shares from us and 1,000,000 common shares from the selling shareholder
at the public offering price, less underwriting discounts and commissions, to cover over-allotments. We will not be receiving proceeds from the
sale of shares by the selling shareholder.
The underwriters expect to deliver the shares in New York, New York on or about
SG Cowen
, 2003.
Front Cover:
Photos of 16 movie posters from recent and upcoming releases.
Inside Cover and First Page:
Photos of movie posters from 14 recent and upcoming releases.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus, including the “Risk
Factors” section and our consolidated financial statements and the related notes, carefully before making an investment decision. All dollar
amounts are in United States dollars unless otherwise indicated. References in this prospectus to “Lions Gate,” the “company,” “we,” “us”
and “our” refer to the business of Lions Gate Entertainment Corp. and its subsidiaries. The term “independent,” as used in this prospectus, is
used to distinguish us from the term “major studios” that is generally regarded in the entertainment industry to mean Universal Pictures,
Warner Bros., Twentieth Century Fox, Sony Pictures Entertainment, Paramount Pictures, The Walt Disney Company, Metro Goldwyn Mayer
and their respective affiliates.
Our Business
We are an independent producer and distributor of film and television entertainment content. We typically produce and distribute films that
are completed and marketed using smaller budgets than those of major studios. We believe that our track record of producing and distributing
award winning and commercially successful films, as evidenced by our four Academy Awards in the last five years, affords us access to
leading Hollywood talent and scripts and third party productions for acquisition, without compromising our disciplined approach to managing
financial risk. We believe that the recent box office success of several independent films that were produced and marketed with relatively
modest budgets, including our own productions Monster’s Ball and American Psycho and our acquired releases O and Dogma , validate our
approach to the motion picture business. Our fiscal 2004 theatrical release schedule includes in-house productions Confidence, Wonderland,
Shattered Glass and Godsend and acquired titles Cabin Fever and The Cooler .
Our business is relatively diversified for an independent studio. We have a home entertainment library of approximately 2,000 motion
picture and television program titles. We generate recurring revenues through the distribution of our library directly to retailers, video rental
stores, pay and free television channels domestically and indirectly to international markets on a license basis through third parties. In addition
to our successful motion picture and home entertainment operations, we produce over 150 hours of television programming each year that we
distribute to such outlets as USA Networks, The Learning Channel, PBS, and several of Discovery Communications’ cable networks. We also
own and operate a film and television production studio in Vancouver, British Columbia that has had annual occupancy rates above 90% over
the last five years and own a majority interest in CinemaNow, a development stage internet-based video-on-demand provider. We believe our
diversification helps to minimize some of the risks typically associated with independent film production and distribution.
Key components of our business include:
Production
• Motion Pictures. Our strategic plan is to produce approximately eight motion pictures annually, including films released theatrically
and films released directly to home video or cable television. We maintain a disciplined approach to film production, which enables us
to produce compelling, commercially viable films. We distribute these films to theatrical and ancillary markets both domestically and
internationally. Production budgets for our films intended for theatrical release have generally ranged between $5 million and
$20 million, and production budgets for films intended for release directly to video or cable television have generally ranged between
$1 million and $5 million. Critically acclaimed and award-winning films we have recently produced include: Monster’s Ball , starring
Halle Berry and Billy Bob Thornton; Frailty , starring Matthew McConaughey and Bill Paxton; and American Psycho , starring
Christian Bale and Reese Witherspoon. Our fiscal 2004 release schedule includes the following films that we produced: Confidence ,
starring Ed Burns, Andy Garcia, Dustin Hoffman and Rachel Weisz; Godsend , starring Robert DeNiro, Greg Kinnear and Rebecca
Romijn-Stamos; Wonderland , starring Val Kilmer and
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Lisa Kudrow; and Shattered Glass , starring Hayden Christensen. We also recently announced an agreement to produce the sequel to
House of 1000 Corpses .
• Television and Animation. Over the past four years, we have produced over 150 hours of television programming each year, including
dramas, animated series, television movies, mini-series and reality and non-fiction programming through our in-house television
production operations, including Termite Art Productions, and our approximately 29% interest in the CinéGroupe animation studio.
In-house productions include The Dead Zone , which is broadcast on USA Network. Recent Termite Art productions include: Unsolved
History , a series on the Discovery Channel; Love U on TLC; Amazing Animal Videos on Animal Planet; and Criss Angel Mindfreak on
ABC Family. Recent CinéGroupe productions include: Sagwa, The Chinese Siamese Cat on PBS and Galidor: Defenders of the Outer
Dimension on ABC Family. We recently announced an agreement to distribute our in-house production 1-800 Missing for broadcast on
Lifetime Television.
Distribution
• Theatrical. We distribute motion pictures directly to North American movie theatres and indirectly to international markets on a license
basis through third parties. Over the past four years, we have theatrically released approximately 15 films per year. In the last five
years, films we have distributed have earned eleven Academy Award nominations and won four Academy Awards, including Halle
Berry’s 2002 Academy Award for Best Actress in our production Monster’s Ball . Our films have also been nominated for and won
numerous Golden Globe, Screen Actors Guild and Independent Spirit awards.
In addition to the films we produce, we also acquire films from third parties and distribute them in North American and foreign
markets. In acquiring such films for theatrical release, we seek to limit our financial exposure while adding films to our release
schedule and video library. Critically acclaimed and award winning films we have recently acquired and distributed include: Secretary ,
starring Maggie Gyllenhaal and James Spader; Lovely and Amazing , starring Brenda Blethyn and Emily Mortimer; O , starring Josh
Hartnett, Martin Sheen and Julia Stiles; and Dogma , starring Ben Affleck, Matt Damon and Chris Rock.
Our fiscal 2004 theatrical release schedule features several highly anticipated films. In addition to our productions Confidence,
Wonderland, Shattered Glass and Godsend , acquired titles to be distributed include Cabin Fever , directed by Eli Roth, and The Cooler
, starring William H. Macy, Maria Bello and Alec Baldwin.
• Home Entertainment. We distribute our library of approximately 2,000 motion picture and television program titles directly to retailers,
video rental stores and pay and free television channels and indirectly to international markets on a license basis through third parties.
In addition to our theatrical releases and our direct to video productions, we acquire approximately 80 additional films for our library
each year. Our film video library includes such films as Affliction, American Psycho, Eve’s Bayou, Frailty, Gods and Monsters,
Lantana, Lovely and Amazing, Monster’s Ball, O, The Red Violin, Rules of Attraction, Secretary and Shadow of the Vampire . Notable
television and other video properties in the library include the first season of Will and Grace, certain Saturday Night Live productions,
The Dead Zone, Tracker, Higher Ground and Mysterious Ways .
• Video-on-Demand. We own approximately 57% of CinemaNow, a development stage company that distributes feature films on demand
via the internet. CinemaNow has distribution agreements with Fox, Warner Bros., MGM and Allied Artists Entertainment Group,
among others. Microsoft and Blockbuster are also investors in CinemaNow.
Studio Facilities
Lions Gate Studios is a state-of-the-art film and television production studio occupying approximately 14 acres in Vancouver, British
Columbia. Annual studio occupancy has averaged above 90% over the last
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five years. Current studio productions at our facility include Miramax’s motion picture Scary Movie 3 , Warner Bros.’ motion picture Scooby
Doo 2 and Fox Television’s series John Doe.
Our Industry
Theatrical. According to the Motion Picture Association of America, or MPAA, overall domestic box office revenue increased 13.2% to
$9.5 billion in 2002. The domestic motion picture exhibition industry has historically maintained steady growth in revenues and attendance.
The MPAA reports that total domestic box office revenues have grown at a compound annual growth rate of 8.3% from 1996 to 2002 and
annual attendance has grown from 1.3 billion to over 1.6 billion over the same period.
The motion picture industry is comprised of major studios and independent studios. According to the MPAA, major studios spent
approximately $90 million, on average, to produce and market a film in 2002. Independent studios, in contrast, generally spend less than
$40 million to complete and market each theatrical release. Recent successful independent films such as Monster’s Ball, The Blair Witch
Project and My Big Fat Greek Wedding demonstrate moviegoers’ willingness to support high quality motion pictures despite marketing and
production budgets that are limited compared to those of the major studios.
In recent years, independent films have gained wider market approval and increased shares of overall box office receipts. According to the
MPAA, between 1999 and 2002, box office receipts for independent films have grown at a compound annual rate of 8.7% to approximately
$2.4 billion, representing 25% of total box office receipts.
Home Video. In its July 2002 Communications Industry Forecast, Veronis Suhler Stevenson, or VSS, a media merchant bank, estimated the
size of the U.S. Home Video market to be $24.9 billion in 2002. According to VSS, from 1996 to 2001, this market grew at a compound annual
growth rate of 5.8% and was projected to grow 10% in 2002. Growth in this sector has been supported by increased DVD penetration that
reached 36.4% in 2002, up from 23.6% in 2001, according to the MPAA. Declining prices of DVD players, enhanced video and audio quality
and special features such as deleted scenes, film commentaries and “behind the scenes” footage have helped increase the popularity of the DVD
format, sparking increased home video rentals and sales in recent years.
Television Programming. According to VSS’s July 2002 Communications Industry Forecast, spending on filmed entertainment for
television in the U.S. was projected to reach $22.1 billion in 2002, which would represent a 4.4% increase from 2001. VSS reported that from
1996 to 2001, spending on filmed entertainment for television grew at a compound rate of 7.2%, driven by increased spending by cable and
satellite networks. Increased capacity for channels on upgraded digital cable systems and satellite television has precipitated the launch of
numerous new networks seeking programming to compete with traditional broadcast networks.
International Markets . Worldwide demand for North American filmed content has increased in recent years. According to the MPAA,
international box office receipts in 2002 were a record $9.6 billion, a 20% increase from 2001. The ability to pre-sell international distribution
rights for films produced by independent studios has played a key role in helping these studios finance the production of motion pictures.
Competitive Strengths
To achieve our goal of being a leading independent producer and distributor of film and television entertainment content, we will continue
to exploit our competitive advantages, which we believe include:
• Our reputation for producing and distributing critically acclaimed content. Based on the success of such films as Monster’s Ball,
Frailty, American Psycho, O and Lovely and Amazing , we have established a reputation in the filmed entertainment industry for
producing and distributing critically acclaimed content. Our four Academy Awards in the last five years are a testament to the quality
films we produce, acquire and distribute. We believe our reputation and ability to produce and distribute critically acclaimed content
has made us an attractive outlet for acquiring and distributing
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third party film productions. We believe this reputation also attracts leading actors, directors and other talent, as well as stimulating
ideas, storylines and scripts, which provide the ingredients for success in our productions.
• Our disciplined approach to production, acquisition and distribution of filmed and television entertainment content. We seek to
minimize the financial risks often associated with film production, acquisition and distribution by negotiating co-production
agreements, pre-selling international distribution rights, capitalizing on government subsidies and tax credits, structuring efficient
production schedules and crafting agreements with top talent attracted to the films we develop and produce. In addition, we often
attempt to minimize our financial exposure by structuring deals with talent that provide for their participation in the financial success of
the motion picture in exchange for reduced up-front payments. Although the steps that we take to manage these risks may, in some
cases, limit the potential revenues of a particular project, we believe that our approach to the motion picture business creates operating
and financial stability for us.
• Our library of film and television content which provides us with substantial recurring revenues. Our film and television content
library, which includes approximately 2,000 motion picture and television program titles, provides us with substantial recurring
revenues. Because of our success in marketing our home video library, other sources of content, including ABC (Stephen King’s Rose
Red ), CBS ( Jesus ), NBC ( Saturday Night Live and Will and Grace ) and Sports Illustrated ( Sports Illustrated Swimsuit 2002 Home
Video ), have selected us to distribute their content to the home entertainment marketplace. As of December 31, 2002 our investment in
film and television programming was $206.0 million, of which investment in theatrical films at that date was $147.0 million and
investment in non-theatrical films and direct-to-television was $59.0 million. Library revenue included in motion picture revenue for
the nine months ended December 31, 2002 and December 31, 2001, and for fiscal 2002 was $31.0 million, $27.6 million and
$36.5 million, respectively. Library revenue is defined as revenue earned after the first cycle of sales which generally includes theatrical
revenue, the first six months of video sales, the first pay television contract and the minimum guarantees from the first international
sales.
• Our pursuit of acquisitions to enhance our competitive position. We have demonstrated a willingness and ability to use our financial
resources to acquire companies, content libraries and individual films that we believe present opportunities to enhance our competitive
position and generate significant financial returns. We have made or entered into, and will continue to pursue, various acquisitions,
business combinations and joint ventures intended to complement or expand our business.
Recent Developments
As we previously announced, on May 14, 2003, ENT Holding Corporation, controlled by Tom Gores, purchased 2.5 million of our
common shares at $2.20 per share from Frank Giustra, our founder. Mr. Giustra resigned as Chairman of our Board to devote full-time
attention to his role as head of Vancouver-based mining consulting firm Endeavour Financial. Mr. Giustra remains a director and officer of
several of our subsidiaries and the trustee of the trust that holds the shares of Lions Gate Television Corp. Mr. Giustra also continues to
beneficially own or retain voting control over 757,401 of our common shares or options exercisable for our common shares. Mr. Giustra, along
with our other officers and directors, has agreed not to transfer these remaining shares for 180 days following this offering as more fully set
forth in the section entitled “Underwriting” .
André Link, who has served as our President since April 2000, has succeeded Mr. Giustra as Chairman of our Board. Mr. Link was the
founder of Lions Gate Films Corp. Harald Ludwig, who has served on our Board since our inception, has been named Vice Chairman of the
Board of Directors.
With Mr. Giustra’s departure, the recent death of Woody Knight, and the recent resignations of Joe Houssain and Doug Holtby, four of our
Board of Directors seats required replacement. The four new
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directors are: Gary Newton, a senior executive in Montreal with Platinum Equity, a Los Angeles-based global investment and acquisition
company and affiliate of ENT Holding Corporation; Mitchell Wolfe, an entertainment lawyer with the Canadian law firm of Beard Winter;
David Doerksen, a Vancouver- and Saskatchewan-based producer; and Jeff Sagansky, our Series A Preferred shareholders’ nominee and a
senior executive formerly with Sony, CBS and Paxson Communications, who replaces Mr. Knight.
RISK FACTORS
See “Risk Factors” beginning on page 10 for factors that should be considered in evaluating the company and our business.
5
THE OFFERING
Common shares offered
15,000,000
Common shares offered to cover
over-allotments
2,250,000
Common shares to be outstanding
immediately after the offering
58,207,399*
Use of proceeds
We will use up to $20 million of the net proceeds from this offering to repurchase all or (if not all of
the shares can be purchased for $20 million) a portion of our Series A Preferred Shares from two
holders of such shares, in accordance with a written agreement with those holders. The redemption
price for these Series A Preferred Shares is dependent upon the price per share of common shares
sold to the public in this offering (see discussion under “Use of Proceeds” on page 22 below). We
intend to use the remaining net proceeds for general corporate purposes, including repayment of
indebtedness, film and television production, acquisitions and working capital purposes. We will not
receive any proceeds from the sale of shares by the selling shareholder.
AMEX/ TSX symbol
LGF
* The number of shares to be outstanding after the offering excludes (i) 8,405,823 shares underlying outstanding options at exercise prices
ranging from a low of $1.64 (converted from the exercise price of Cdn$2.30 at an exchange rate of Cdn$1.40 to US$1.00) to a high of
$4.00, (ii) warrants to purchase 5,525,000 shares at an exercise price of $5.00 per share, (iii) debentures convertible into 2,035,461 shares at
a conversion price of $5.79 (converted from the conversion price of Cdn$8.10 at an exchange rate of Cdn$1.40 to US$1.00), (iv) shares
underlying the Series A Preferred Shares, which would be 11,830,000 shares at a conversion price of $2.55 per share (not including the
effect of the repurchase of a portion of our Series A Preferred Shares, described in the section “Use of Proceeds” ) and (v) 1,250,000 shares
that may be purchased from us of the 2,250,000 shares that may be purchased pursuant to the underwriters’ over- allotment option.
GENERAL
Our principal executive offices are located at Suite 3123, Three Bentall Centre, 595 Burrard Street, Vancouver, British Columbia, V7X 1J1
and 4553 Glencoe Avenue, Suite 200, Marina del Rey, California, 90292. Our telephone numbers are (604) 609-6100 in Vancouver and
(310) 314-2000 in Los Angeles. Our website is www.lionsgatefilms.com. The information on our website is not part of this prospectus.
6
SUMMARY CONSOLIDATED FINANCIAL DATA
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada, or
Canadian GAAP, that conforms, in all material respects, with the accounting principles generally accepted in the United States, or U.S. GAAP,
except as described in the notes to the financial statements (specifically, note 21 to the notes to the consolidated financial statements beginning
on page F-31, and note 12 to the notes to the unaudited condensed consolidated financial statements beginning on page F-46). As described
more specifically in those notes and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the
differences between Canadian GAAP and U.S. GAAP cause adjustments in statement of operations data (including revenues and income (loss))
and balance sheet data (including shareholders’ equity).
The consolidated financial information included in this prospectus is expressed in U.S. dollars. Commencing with the period beginning
April 1, 2002, our condensed consolidated financial statements are presented in U.S. dollars, as a substantial component of our operations are
domiciled in the U.S. and the principal market for trading of our common shares is the American Stock Exchange. Prior to April 1, 2002, our
condensed consolidated financial statements were presented and audited in Canadian dollars and have been converted to U.S. dollars for
presentation in this prospectus. The U.S. dollar and the Canadian dollar are the functional currencies of the Company’s U.S. and Canadian
based businesses, respectively. Assets and liabilities denominated in currencies other than U.S. dollars are translated at exchange rates in effect
at the relevant balance sheet date. Revenue and expense items denominated in currencies other than U.S. dollars are translated at the average
rate of exchange for the relevant period. Any resulting foreign exchange gains and losses are recorded as a separate component of shareholders’
equity. You should read the following summary consolidated financial data together with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated financial statements and related notes included in this prospectus.
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Nine Months Ended
December 31,
2002
2001
(Unaudited)
2002
Year Ended March 31,
2001
2000
(In thousands except per share data)
Statement of Operations Data: (1)
Revenues
Expenses:
Direct operating
Distribution and marketing
General and administrative
Amortization
Severance and relocation
$ 233,924
$ 175,409
$ 272,489
$ 187,650
$ 184,361
117,889
77,611
24,204
3,918
—
97,698
47,949
24,865
3,190
—
159,907
76,245
34,668
4,554
—
104,003
34,426
25,073
5,695
—
151,482
—
21,334
4,673
1,154
223,622
173,702
275,374
169,197
178,643
10,302
1,707
(2,885 )
18,453
5,718
7,503
580
—
7,119
555
1,233
9,828
1,221
1,351
7,716
586
—
3,171
889
—
Total other expenses
8,083
8,907
12,400
8,302
4,060
Income (loss) before undernoted
Gain on dilution of investment in a
subsidiary
2,219
(7,200 )
(15,285 )
10,151
1,658
—
—
Total expenses
Operating income (loss)
Other expenses:
Interest
Minority interests
Unusual losses
—
Income (loss) before income taxes
and equity interests
Income taxes
Income (loss) before equity
interests
Write-down and equity interests in
investments subject to
significant influence
Net income (loss) from continuing
operations
Loss from discontinued operations
Net income (loss)
Basic and diluted income
(loss) per common share
Income (loss) from continuing
operations
Income (loss) from discontinued
operations
Weighted average number of
shares used in the computation
of net income per share
2,186
2,186 (2)
2,219
(1,029 )
(5,014 )
3,896
(13,099 )
(321 )
10,151
2,190
1,190
(1,118 )
(13,420 )
12,341
301
462
(1,134 )
(14,542 ) (3)
(1,021 )
108
1,652
—
(2,252 )
(1,132 )
(27,962 )
(18,997 ) (4)
11,320
(5,517 )
$
1,652
$
(3,384 )
$
(0.02 )
$
(0.12 )
—
43,232
(0.02 )
42,611
8
1,658
(1,357 )
409
(4,006 )
$ (46,959 )
$
5,803
$
(3,597 )
$
$
0.21
$
(0.02 )
(0.74 )
(0.44 )
42,753
(0.15 )
36,196
(0.13 )
30,665
Nine Months Ended
December 31,
2002
2001
(Unaudited)
2002
Year Ended March 31,
2001
2000
(In thousands except per share data)
Other Data:
Cash flow provided by (used in)
operating activities
Cash flow provided by (used in)
financing activities
Cash flow provided by (used in)
investing activities
EBITDA (5)
Balance Sheet Data (at end of
period): (1)
Investment in motion pictures and
television programs
Total assets
Total debt
Shareholders’ equity
$
3,654
$ (57,113 )
$ (60,712 )
$ (34,131 )
$ (28,989 )
(7,626 )
54,259
54,835
54,544
29,056
4,676
14,682
5,274
2,530
7,340
(14,224 )
(29,688 )
23,127
(4,349 )
10,499
206,040
390,541
208,436
75,534
207,098
439,694
212,556
118,078
181,002
381,984
215,075
75,394
142,178
370,200
158,470
124,843
88,571
277,338
66,497
142,414
(1)
Due to the retroactive adoption without restatement of Canadian Institute of Chartered Accountants Handbook Section 3062 on April 1,
2001 and SoP 00-2 and CICA Handbook Section 3465 on April 1, 2000, all as described in note 2(c) to the consolidated financial
statements, our Statement of Operations Data and Balance Sheet Data from periods prior to April 1, 2001 are not comparable to periods
after that date. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(2)
Represents gain on dilution of the company’s investment in a subsidiary of the company, from the subsidiary’s completion of an equity
financing with a third party.
(3)
Includes full write-down of $13.4 million of the company’s investment in CinemaNow.
(4)
Includes a write-down of $10.6 million of the company’s investment in Mandalay Pictures. Effective April 1, 2002, the carrying value of
the company’s investment in Mandalay was presented as a discontinued operation. On November 8, 2002, the company sold its
investment in Mandalay for cash of $4.2 million and an interest bearing convertible promissory note totaling $3.3 million.
(5)
To supplement our financial statements presented on a GAAP basis, throughout this document we reference non-GAAP financial
measures, such as EBITDA, to measure operating performance. Management believes EBITDA to be a meaningful indicator of our
performance that provides useful information to investors regarding our financial condition and results of operations. Presentation of
EBITDA is consistent with our past practice, and EBITDA is a non-GAAP financial measure commonly used in the entertainment
industry and by financial analysts and others who follow the industry to measure operating performance. EBITDA should not be
construed as an alternative to operating income or cash flows from operating activities (both of which are determined in accordance with
generally accepted accounting principles) or as a measure of liquidity. For a reconciliation of EBITDA (defined as earnings before
interest, provision for income taxes, amortization, minority interests, gain on dilution of investment in subsidiary and discontinued
operation) to net income (loss) see “Management’s Discussion and Analysis of Financial Condition and Results of Operations —
EBITDA.”
9
RISK FACTORS
An investment in our common shares involves a high degree of risk. You should carefully consider the risks described below together with
all of the other information included in this prospectus before making an investment decision. The risks and uncertainties described below are
not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we may currently deem immaterial, may become
important factors that harm our business, results of operations and financial condition. If any of the following risks actually occurs, our
business, results of operations and financial condition could suffer. In that case, the trading price of our common shares could decline, and you
may lose all or part of your investment.
We have had losses, and we cannot assure future profitability.
We have reported operating income for fiscal years 1998, 2000 and 2001 and operating losses for fiscal years 2002 and 1999. We have
reported net losses for all fiscal years, except in 2001 when we reported net income of $5.8 million. We reported operating income of
$10.3 million for the first nine months of fiscal year 2003 and net income of $1.7 million for the same period. Our accumulated deficit was
$106.5 million at December 31, 2002. We cannot assure you we will continue to operate profitably, and if we cannot we may not be able to
meet our debt service, working capital requirements, capital expenditure plans, anticipated production slate or other cash needs. Our inability to
meet those needs could have a material adverse effect on our business, results of operations and financial condition.
We face substantial capital requirements and financial risks.
Our business requires a substantial investment of capital. The production, acquisition and distribution of motion pictures and television
programs require a significant amount of capital. A significant amount of time may elapse between our expenditure of funds and the receipt of
commercial revenues from or government contributions to our motion pictures or television programs. This time lapse requires us to fund a
significant portion of our capital requirements from our revolving credit facility and from other sources. Although we intend to continue to
reduce the risks of our production exposure through financial contributions from broadcasters, distributors, tax shelters, government and
industry programs and studios, we cannot assure you that we will continue to implement successfully these arrangements or that we will not be
subject to substantial financial risks relating to the production, acquisition, completion and release of future motion pictures and television
programs. If we increase our production slate or our production budgets, we may be required to increase overhead, make larger up-front
payments to talent and consequently bear greater financial risks. Any of the foregoing could have a material adverse effect on our business,
results of operations or financial condition.
Our substantial leverage could adversely affect our financial condition. We are highly leveraged. Our primary source of capital is our
revolving credit facility. The amount we have available to borrow under this facility depends upon our borrowing base, which in turn depends
on the value of our existing library of films and television programs, as well as accounts receivable and cash in collateral accounts. If several of
our larger motion picture productions are commercial failures or our library declines in value, our borrowing base could decrease. Such a
decrease could have a material adverse effect on our business, results of operations or financial condition. For example, it could:
• require us to dedicate a substantial portion of our cash flow to the repayment of our indebtedness, reducing the amount of cash flow
available to fund motion picture and television production and other operating expenses;
• limit our flexibility in planning for or reacting to downturns in our business, our industry or the economy in general;
• limit our ability to obtain additional financing, if necessary, for operating expenses, or limit our ability to obtain such financing on
terms acceptable to us; and
• limit our ability to pursue strategic acquisitions and other business opportunities that may be in our best interests.
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Our revolving credit facility contains certain covenants and financial tests that limit the way we conduct business. Our revolving credit
facility contains various covenants limiting our ability to incur or guarantee additional indebtedness, pay dividends and make other
distributions, pre-pay any subordinated indebtedness, make investments and other restricted payments, make capital expenditures and sell
assets. These covenants may prevent us from raising additional financing, competing effectively or taking advantage of new business
opportunities. Under our revolving credit facility, we are also required to maintain specified financial ratios and satisfy certain financial tests. If
we cannot comply with these covenants or meet these ratios and other tests, it could result in us being in default under our revolving credit
facility, and unless we are able to negotiate an amendment, forbearance or waiver, we could then be required to repay all amounts then
outstanding, which could have a material adverse effect on our business, results of operations or financial condition.
Borrowings under our revolving credit facility are also secured by liens on substantially all of our assets and the assets of our subsidiaries.
If we are in default under our revolving credit facility, the lenders could foreclose upon substantially all of our assets and the assets of our
subsidiaries. We cannot assure you that we will generate sufficient cash flow to repay our indebtedness and we further cannot assure you that,
if the need arises, we will be able to obtain additional financing or to refinance our indebtedness on terms acceptable to us, if at all. Any such
failure to obtain financing could have a material adverse effect on our business, results of operations and financial condition.
Budget overruns may adversely affect our business. Our business model requires that we be efficient in production of our motion pictures
and television programs. Actual motion picture and television production costs often exceed their budget, sometimes significantly. The
production, completion and distribution of motion pictures and television productions are subject to a number of uncertainties, including delays
and increased expenditures due to creative differences among key cast members and other key creative personnel or other disruptions or events
beyond our control. Risks such as death or disability of star performers, technical complications with special effects or other aspects of
production, shortages of necessary equipment, damage to film negatives, master tapes and recordings or adverse weather conditions may cause
cost overruns and delay or frustrate completion of a production. If a motion picture or television production incurs substantial budget overruns,
we may have to seek additional financing from outside sources to complete production. We cannot make assurances regarding the availability
of such financing on terms acceptable to us, and the lack of such financing could have a material adverse effect on our business, results of
operations and financial condition.
In addition, if a motion picture or television production incurs substantial budget overruns, we cannot assure you that we will recoup these
costs, which could have a material adverse effect on our business, results of operations or financial condition. Increased costs incurred with
respect to a particular film may result in any such film not being ready for release at the intended time and the postponement to a potentially
less favorable time, all of which could cause a decline in box office performance, and thus the overall financial success of such film. Budget
overruns could also prevent a picture from being completed or released. Any of the foregoing could have a material adverse effect on our
business, results of operations and financial condition.
Production costs and marketing costs are rising at a faster rate than increases in either domestic admissions to movie theatres or admission
ticket prices, leaving us more dependent on other media, such as home video, television and foreign markets, and new media. If we cannot
successfully exploit these other media, it could have a material adverse effect on our business, results of operations or financial condition.
Our revenues and results of operations may fluctuate significantly.
Revenues and results of operations are difficult to predict and depend on a variety of factors. Our revenues and results of operations
depend significantly upon the commercial success of the motion pictures and television programming that we distribute, which cannot be
predicted with certainty. Accordingly, our revenues and results of operations may fluctuate significantly from period to period, and the results
of any one period may not be indicative of the results for any future periods. In recent years, our revenues and results of operations have been
significantly impacted by the success of critically acclaimed and award
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winning films, including Academy Award winners and nominees. We cannot assure you that we will manage the production, acquisition and
distribution of future motion pictures as profitably as we have done with these recent critically acclaimed and award winning films or that we
will produce or acquire motion pictures that will receive similar critical acclaim or perform as well commercially, which could have a material
adverse effect on our business, results of operations and financial condition.
We lack output agreements with cable and broadcast channels. We have an agreement with one cable or broadcast channel to exhibit our
films, and that agreement does not cover films released after 2003. While similar broadcasters exhibit our films, they license such rights on a
film-by-film, rather than an output, basis. We cannot assure you that our one agreement will be renewed or that we will be able to secure other
output agreements on acceptable terms, if at all. Without multiple output agreements that typically contain guaranteed minimum payments, our
revenues may be subject to greater volatility, which could have a material adverse effect on our business, results of operations or financial
condition.
Our revenue sharing agreements might not be renewed. We have one revenue sharing agreement with respect to the distribution of our
library on home videos, and one revenue sharing agreement with respect to the distribution of our library on home videos and DVD. These
agreements expire in September 2003 and August 2004, respectively. The agreement expiring in September 2003 accounts for approximately
10% of our gross revenues. The failure to renew either of these agreements on similar terms could have a material adverse effect on our
business, results of operations or financial condition.
We rely on a few major customers in realizing our filmed and television content library distribution revenues. A small number of retailers
account for a significant percentage of our filmed and television content library distribution revenues. We do not have long-term agreements
with any of these customers. We cannot assure you that we will continue to maintain favorable relationships with these customers or that they
will not be adversely affected by economic conditions. If any of these customers reduces or cancels a significant order, it could have a material
adverse effect on our business, results of operations or financial condition.
Our revenues and results of operations are vulnerable to currency fluctuations. We report our revenues and results of operations in
U.S. dollars, but a significant portion of our revenues are earned outside of the United States. Our principal currency exposure is between
Canadian and U.S. dollars, although this exposure is partially mitigated through the structuring of the $200 million revolving credit facility as a
$25 million Canadian dollar facility and a $175 million U.S. dollar facility. Each facility is borrowed and repaid in the respective country of
origin, in local currency. We cannot accurately predict the impact of future exchange rate fluctuations between the Canadian dollar and the
U.S. dollar or other foreign currencies on revenues and operating margins, and fluctuations could have a material adverse effect on our
business, results of operations or financial condition.
From time to time we may experience currency exposure on distribution and production revenues and expenses from foreign countries,
which could have a material adverse effect on our business, results of operations and financial condition.
Accounting practices used in our industry may accentuate fluctuations in operating results. In addition to the cyclical nature of the
entertainment industry, our accounting practices (which are standard for the industry) may accentuate fluctuations in our operating results. In
accordance with Canadian generally accepted accounting principles and industry practice, we amortize film and television programming costs
using the “individual-film-forecast” method. Under this accounting method, we amortize film and television programming costs for each film
or television program based on the following ratio:
Revenue earned by title in the current period
Estimated total revenues by title
We regularly review, and revise when necessary, our total revenue estimates on a title-by-title basis. This review may result in a change in the
rate of amortization and/or a write-down of the film or television
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asset to estimated fair value. Results of operations in future years depend upon our amortization of our film and television costs. Periodic
adjustments in amortization rates may significantly affect these results. In addition, we are required to expense film advertising costs as
incurred, but are also required to recognize the revenue from any motion picture or television program over the entire revenue stream expected
to be generated by the individual picture or television program.
Our ability to exploit our filmed and television content library may be limited.
A significant portion of our filmed and television content library revenues comes from a small number of titles. We depend on a limited
number of titles for the majority of the revenues generated by our filmed and television content library. In addition, many of the titles in our
library are not presently distributed and generate substantially no revenue. If we cannot acquire new product and rights to popular titles through
production, distribution agreements, acquisitions, mergers, joint ventures or other strategic alliances, it could have a material adverse effect on
our business, results of operations or financial condition.
We are limited in our ability to exploit a portion of our filmed and television content library. Our rights to the titles in our filmed and
television content library vary; in some cases we have only the right to distribute titles in certain media and territories for a limited term. We
cannot assure you that we will be able to renew expiring rights on acceptable terms, and any such failure could have a material adverse effect
on business, results of operations or financial condition.
Our success depends on external factors in the motion picture and television industry.
Our success depends on the commercial success of motion pictures and television programs, which is unpredictable. Operating in the
motion picture and television industry involves a substantial degree of risk. Each motion picture and television program is an individual artistic
work, and unpredictable audience reactions primarily determine commercial success. Generally, the popularity of our motion pictures or
programs depends on many factors, including the critical acclaim they receive, the format of their initial release, for example, theatrical or
direct-to-video, the actors and other key talent, their genre and their specific subject matter. The commercial success of our motion pictures or
television programs also depends upon the quality and acceptance of motion pictures or programs that our competitors release into the
marketplace at or near the same time, critical reviews, the availability of alternative forms of entertainment and leisure activities, general
economic conditions and other tangible and intangible factors, many of which we do not control and all of which may change. We cannot
predict the future effects of these factors with certainty, any of which factors could have a material adverse effect on our business, results of
operations and financial condition.
In addition, because a motion picture’s or television program’s performance in ancillary markets, such as home video and pay and free
television, is often directly related to its box office performance or television ratings, poor box office results or poor television ratings may
negatively affect future revenue streams. Our success will depend on the experience and judgment of our management to select and develop
new investment and production opportunities. We cannot make assurances that our motion pictures and television programs will obtain
favorable reviews or ratings, that our motion pictures will perform well at the box office or in ancillary markets or that broadcasters will license
the rights to broadcast any of our television programs in development or renew licenses to broadcast programs in our library. The failure to
achieve any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
Licensed distributors’ failure to promote our programs may adversely affect our business. Licensed distributors’ decisions regarding the
timing of release and promotional support of our motion pictures, television programs and related products are important in determining the
success of these pictures, programs and products. As with most companies engaging in licensed distribution, we do not control the timing and
manner in which our licensed distributors distribute our motion pictures or television programs. Any decision by those distributors not to
distribute or promote one of our motion pictures, television
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programs or related products or to promote competitors’ motion pictures, programs or related products to a greater extent than they promote
ours could have a material adverse effect on our business, results of operations or financial condition.
We could be adversely affected by strikes or other union job actions. The motion picture and television programs produced by us generally
employ actors, writers and directors who are members of the Screen Actors Guild, Writers Guild of America and Directors Guild of America,
respectively, pursuant to industry-wide collective bargaining agreements. The collective bargaining agreement with the Writers Guild of
America was successfully renegotiated and became effective as of May 2, 2001 for a term of three years. The collective bargaining agreements
with the Screen Actors Guild and Directors Guild of America were each successfully renegotiated and became effective as of July 1, 2002 for a
term of three years. Many productions also employ members of a number of other unions, including, without limitation, the International
Alliance of Theatrical and Stage Employees, the Teamsters and the Alliance of Canadian Cinema, Television and Radio Artists. A strike by one
or more of the unions that provide personnel essential to the production of motion pictures or television programs could delay or halt our
ongoing production activities. Such a halt or delay, depending on the length of time, could cause a delay or interruption in our release of new
motion pictures and television programs, which could have a material adverse effect on our business, results of operations or financial
condition.
We face substantial competition in all aspects of our business.
We are smaller and less diversified than many of our competitors. Although we are an independent distributor and producer, we constantly
compete with major U.S. and international studios. Most of the major U.S. studios are part of large diversified corporate groups with a variety
of other operations, including television networks and cable channels, that can provide both means of distributing their products and stable
sources of earnings that may allow them better to offset fluctuations in the financial performance of their motion picture and television
operations. In addition, the major studios have more resources with which to compete for ideas, storylines and scripts created by third parties as
well as for actors, directors and other personnel required for production. The resources of the major studios may also give them an advantage in
acquiring other businesses or assets, including film libraries, that we might also be interested in acquiring. The foregoing could have a material
adverse effect on our business, results of operations and financial condition.
The motion picture industry is highly competitive and at times may create an oversupply of motion pictures in the market. The number of
motion pictures released by our competitors, particularly the major U.S. studios, may create an oversupply of product in the market, reduce our
share of box office receipts and make it more difficult for our films to succeed commercially. Oversupply may become most pronounced during
peak release times, such as school holidays and national holidays, when theatre attendance is expected to be highest. For this reason, and
because of our more limited production and advertising budgets, we typically do not release our films during peak release times, which may
also reduce our potential revenues for a particular release. Moreover, we cannot guarantee that we can release all of our films when they are
otherwise scheduled. In addition to production or other delays that might cause us to alter our release schedule, a change in the schedule of a
major studio may force us to alter the release date of a film because we cannot always compete with a major studio’s larger promotion
campaign. Any such change could adversely impact a film’s financial performance. In addition, if we cannot change our schedule after such a
change by a major studio because we are too close to the release date, the major studio’s release and its typically larger promotion budget may
adversely impact the financial performance of our film. The foregoing could have a material adverse effect on our business, results of
operations and financial condition.
The limited supply of motion picture screens compounds this product oversupply problem. Currently, a substantial majority of the motion
picture screens in the U.S. typically are committed at any one time to only ten to 15 films distributed nationally by major studio distributors. In
addition, as a result of changes in the theatrical exhibition industry, including reorganizations and consolidations and the fact that major studio
releases occupy more screens, the number of screens available to us when we want to release a
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picture may decrease. If the number of motion picture screens decreases, box office receipts, and the correlating future revenue streams, such as
from home video and pay and free television, of our motion pictures may also decrease, which could have a material adverse effect on our
business, results of operations or financial condition.
Technological advances may reduce our ability to exploit our motion pictures and television programs. The entertainment industry in
general and the motion picture industry in particular continue to undergo significant technological developments, including video-on-demand.
This rapid growth of technology combined with shifting consumer tastes could change how consumers view our motion pictures and television
programs. For example, an increase in video-on-demand could decrease home video rentals. Other larger entertainment distribution companies
will have larger budgets to exploit these growing trends. While we have an interest in CinemaNow, it is a company in its infancy whose
commercial success is impossible to predict. We cannot predict how we will financially participate in the exploitation of our motion pictures
and television programs through these emerging technologies or whether we have the right to do so for certain of our library titles. If we cannot
successfully exploit these and other emerging technologies, it could have a material adverse effect on our business, results of operations or
financial condition.
The loss of key personnel could adversely affect our business.
Our success depends to a significant degree upon the efforts, contributions and abilities of our senior management, especially those set
forth under “Management.” Although we have employment agreements with many of our key personnel, Mr. Burns’ agreement has expired, he
is employed on a month-to-month basis and his agreement is being re-negotiated. In addition, 13 other employment agreements with senior
management have expired or will expire within one year from the date of this prospectus and such agreements must be re-negotiated. We
cannot assure you that the services of our key personnel will continue to be available to us or that we will be able to successfully re-negotiate
such employment agreements. The loss of services of any of these employees could have a material adverse effect on our business, results of
operations or financial condition.
Failure to manage future growth may adversely affect our business.
We may not be able to obtain additional funding to meet our requirements. Our ability to grow our company through acquisitions, business
combinations and joint ventures, to maintain and expand our development, production and distribution of motion pictures and television
programs and to fund our operating expenses depends upon our ability to obtain funds through equity financing, debt financing (including
credit facilities) or the sale or syndication of some or all of our interests in certain projects or other assets. If we do not have access to such
financing arrangements, and if other funding does not become available on terms acceptable to us, there could be a material adverse effect on
our business, results of operations or financial condition.
We are subject to risks associated with acquisitions and joint ventures. We have made or entered into, and will continue to pursue, various
acquisitions, business combinations and joint ventures intended to complement or expand our business. We may encounter difficulties in
integrating acquired assets with our operations. Furthermore, we may not realize the benefits we anticipated when we entered into these
transactions. In addition, the negotiation of potential acquisitions, business combinations or joint ventures as well as the integration of an
acquired business could require us to incur significant costs and cause diversion of management’s time and resources. Future acquisitions by us
could result in the following consequences:
• dilutive issuances of equity securities;
• incurrence of debt and contingent liabilities;
• impairment of goodwill and other intangibles;
15
• development write-offs; and
• other acquisition-related expenses.
Any of the foregoing could have a material adverse effect on our business, results of operations or financial condition.
We face risks from doing business internationally.
We distribute motion picture and television productions outside the United States and Canada through third party licensees and derive
revenues from these sources. As a result, our business is subject to certain risks inherent in international business, many of which are beyond
our control. These risks include:
• changes in local regulatory requirements, including restrictions on content;
• changes in the laws and policies affecting trade, investment and taxes (including laws and policies relating to the repatriation of funds
and to withholding taxes);
• differing degrees of protection for intellectual property;
• instability of foreign economies and governments;
• cultural barriers;
• wars and acts of terrorism; and
• the spread of severe acute respiratory syndrome, or SARS.
Any of these factors could have a material adverse effect on our business, results of operations or financial condition.
Protecting and defending against intellectual property claims may have a material adverse effect on our business.
Our ability to compete depends, in part, upon successful protection of our intellectual property. We do not have the financial resources to
protect our rights to the same extent as major studios. We attempt to protect proprietary and intellectual property rights to our productions
through available copyright and trademark laws and licensing and distribution arrangements with reputable international companies in specific
territories and media for limited durations. Despite these precautions, existing copyright and trademark laws afford only limited practical
protection in certain countries. We also distribute our products in other countries in which there is no copyright and trademark protection. As a
result, it may be possible for unauthorized third parties to copy and distribute our productions or certain portions or applications of our intended
productions, which could have a material adverse effect on our business, results of operations or financial condition.
Litigation may also be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, or to determine the
validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such litigation could result
in substantial costs and the diversion of resources and could have a material adverse effect on our business, results of operations or financial
condition. We cannot assure you that infringement or invalidity claims will not materially adversely affect our business, results of operations or
financial condition. Regardless of the validity or the success of the assertion of these claims, we could incur significant costs and diversion of
resources in enforcing our intellectual property rights or in defending against such claims, which could have a material adverse effect on our
business, results of operations or financial condition.
Piracy of motion pictures, including digital and internet piracy, may reduce the gross receipts from the exploitation of our films.
Motion picture piracy is extensive in many parts of the world, including South America, Asia, the countries of the former Soviet Union and
other former Eastern bloc countries. Additionally, as motion
16
pictures begin to be digitally distributed using emerging technologies such as the internet and online services, piracy could become more
prevalent, including in the U.S., because digital formats are easier to copy. As a result, users can download and distribute unauthorized copies
of copyrighted motion pictures over the internet. In addition, there could be increased use of devices capable of making unauthorized copies of
motion pictures. As long as pirated content is available to download digitally, many consumers may choose to download such pirated motion
pictures rather than pay for motion pictures. Piracy of our films may adversely impact the gross receipts received from the exploitation of these
films, which could have a material adverse effect on our business, results of operations or financial condition.
Our shareholders could experience substantial dilution as a result of the conversion of our preferred shares, which dilution could be
substantially increased if the anti-dilution provisions of our preferred shares apply to this offering.
As of May 15, 2003, we had 11,830 Series A Preferred Shares outstanding that were issued at a price of $2,550 per share and that are
currently convertible into 11,830,000 common shares (not including the effect of the repurchase of a portion of our Series A Preferred Shares
described in the section entitled “ Use of Proceeds ”). If we issue shares at a price less than the conversion price of the Series A Preferred
Shares (currently $2.55), then the conversion price would be reduced to such lower price, subject to certain exceptions, and the holders of
Series A Preferred Shares could convert such shares into the number of common shares equal to the issuance price of the Series A Preferred
Shares divided by the new conversion price. We have agreed with all the holders of our Series A Preferred Shares that we will promptly, after
consummation of this offering, authorize amendment of the terms of the Series A Preferred Shares so that their conversion price is reduced to
$2.30 rather than $2.55 and include such adjustment as an item to be voted upon by any required classes of shareholders at our next annual
shareholders meeting, currently expected to occur in September 2003. If approved, this amendment would result in dilution to our existing
shareholders as the Series A Preferred Shares would be convertible into 13,115,870 common shares. In connection with such agreement, each
holder of Series A Preferred Shares has conditionally agreed to waive any requirement that the conversion price of the Series A Preferred
Shares be adjusted as a result of this offering. This waiver will not apply to any future equity or convertible debt offering. If our shareholders
do not approve the amendment to $2.30 at our next annual shareholders meeting, then the conversion price of the Series A Preferred Shares
would be adjusted to the public offering price set forth on the cover of this prospectus, resulting in even greater dilution to our existing
shareholders. For example, if the public offering price were equal to the closing price of $2.02 on May 15, 2003, the Series A Preferred Shares
would be convertible into 14,933,911 common shares instead of the 11,830,000 common shares into which they are currently convertible or the
13,115,870 common shares into which they would be convertible if the amendment were approved. In addition, we are also authorized to issue
additional Series A Preferred Shares in lieu of cash dividends on such shares, which such issuances would result in additional dilution to our
existing shareholders.
Our shareholders could experience substantial dilution as a result of the issuance of additional shares, the conversion of our
debentures or the exercise of options or warrants.
We will have approximately 58,207,399 common shares outstanding after giving effect to this offering (excluding 1,250,000 shares that
may be purchased from us pursuant to the underwriters’ over-allotment option). We also have a significant number of additional authorized
shares that when issued will dilute our existing shareholders.
As of May 15, 2003, we had outstanding debentures convertible into 2,035,461 common shares and warrants to purchase 5,525,000
common shares. In addition, we have granted, as of May 15, 2003, options to purchase a total of 8,405,823 common shares. The exercise of the
options or warrants or conversion of the debentures would dilute your percentage ownership interest and reduce your influence on matters on
which our shareholders vote and might also result in a decrease in the price of our common shares.
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Future sales of our common shares could decrease the market price of those shares.
We will have approximately 58,207,399 common shares outstanding after giving effect to this offering (excluding 1,250,000 shares that
may be purchased pursuant to the underwriters’ overallotment option), of which approximately 17,716,724 will be “restricted” securities under
Rule 144 of the Securities Act and/or held by directors, officers or holders of ten percent or more of our outstanding common shares. As of
May 15, 2003, we had 11,830 Series A Preferred Shares outstanding that are currently convertible into 11,830,000 common shares (and could
be converted into 13,115,870 additional common shares assuming our shareholders approve adjustment of the conversion price from $2.55 to
$2.30)(not including the effect of the repurchase of a portion of our Series A Preferred Shares described in the section entitled “ Use of
Proceeds ”), and also granted options to purchase a total of 8,405,823 shares of our common shares and issued debentures convertible into
2,035,461 common shares and warrants to purchase 5,525,000 shares of our common shares. Possible or actual sales of any of these shares,
particularly by our directors and officers, under Rule 144 or otherwise, may decrease the price of our common shares.
Our common shares are relatively illiquid.
As of May 15, 2003, we have 43,207,399 common shares outstanding (58,207,399 shares after this offering, assuming no exercise of the
underwriters’ over-allotment option). Historically, as a result of our relatively small public float, our common shares have been less liquid than
the common shares of companies with broader public ownership. Among other things, trading of a relatively small volume of our common
shares may have a greater impact on the trading price for our shares than would be the case if our public float were larger. We cannot assure
you that such effects will change or that liquidity will improve after this offering.
We may lose certain benefits by failing to meet certain regulatory standards.
We may not be eligible to receive certain British Columbia refundable tax credits. A portion of our consolidated revenues includes certain
tax credits that Lions Gate Television Corp., or LGTC, applies to receive from the province of British Columbia under the British Columbia
Film and Television Tax Credit Program, or the Tax Credit Program, which is administered by the provincial government agency British
Columbia Film. For productions to qualify for the tax credits provided under the Tax Credit Program, LGTC must be “BC-controlled” for the
purposes of the Income Tax Act (British Columbia). LGTC is a corporation wholly-owned by a trust of which Frank Giustra, our former
Chairman of the Board, is the trustee. The beneficiaries of the trust are Lions Gate Entertainment Corp., LGTC and our subsidiaries. In a letter
dated January 17, 2003, British Columbia Film questioned the status of LGTC as a “BC-controlled” company and therefore the entitlement of
LGTC to receive the British Columbia tax credits sought for certain of its productions. In particular, British Columbia Film questioned whether
the trust currently holding the shares of LGTC was properly created and had the requisite indicia of ownership of the LGTC shares. We are
currently providing additional information to British Columbia Film in support of our belief that LGTC is a “BC-controlled” company within
the requirements of the Income Tax Act (British Columbia).
If there is a determination by British Columbia Film that LGTC is not “BC-controlled” within the meaning of the Income Tax Act (British
Columbia), then certain productions would not be eligible to receive the maximum British Columbia tax credits under the Tax Credit Program.
The amount at risk represents the difference between tax credits available under the Tax Credit Program for “BC-controlled” companies and
those available under the Tax Credit Program for non-BC-controlled companies. If such a determination were made, we would be required to
return to British Columbia Film Cdn$2,218,000, or US$1,511,000, worth of tax credits previously received, reducing our cash balance by that
amount. In addition, because under Canadian GAAP tax credits are included in our revenues, in the event of an adverse determination, we
would take a charge to earnings in the amount of the lost tax credits. We have estimated the charge that would result from such a determination
to be up to Cdn$5,354,000 (comprising the Cdn$2,218,000 in cash to be returned together with Cdn$3,136,000 included in revenue but not yet
received), or US$3,648,000, in the aggregate.
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We may lose investment funds, tax credits and other benefits if we fail to meet Canadian regulatory requirements. Certain programs
produced by us will be contractually required to be “Canadian content” programs in accordance with the requirements established from time to
time by the Canadian Radio-television and Telecommunications Commissions, or CRTC, the Canadian Audio-Visual Certification Office, the
Income Tax Act (Canada) and the regulations thereunder. If a program does not qualify under the applicable requirements, we would be in
default of our commitments made in connection with these contracts. Any default could result in reduction or the elimination of license fees
from the Canadian broadcasters, reduced or eliminated government incentives and/or future ineligibility for Canadian government incentive
programs.
The Canadian federal government and a number of its provincial counterparts have established refundable tax credit programs based on
eligible labor expenditures of qualifying production entities. We expect that certain of our motion picture and television productions will
incorporate these refundable tax credits as elements of production financing. If such productions do not ultimately qualify for anticipated
refundable tax credits, the relevant production may require additional funds for completion, which may not be available from other sources.
For our motion picture and television productions to continue to qualify for several refundable tax credits, we must remain
Canadian-controlled pursuant to the Investment Canada Act (Canada), or ICA, among other statutory requirements. The ICA contains rules, the
application of which determines whether an entity (as the term is defined in the ICA) is Canadian-controlled. Under these rules, an entity is
presumed to be a non-Canadian in certain circumstances, including where Canadians own less than a majority of voting interests of an entity.
This presumption may be rebutted, for example, if the entity establishes that it is not controlled in fact through the ownership of its voting
interests and that two-thirds of the members of its board of directors are Canadians.
Although we believe we are currently a Canadian-controlled entity under the ICA, there can be no assurance that the Minister of Canadian
Heritage will not determine we are out of compliance with the ICA, or that events beyond our control will not result in our ceasing to be
Canadian-controlled pursuant to the ICA. The ICA provides the Minister of Canadian Heritage with discretion to make a determination that a
business activity prescribed under the ICA as relating to Canada’s cultural heritage or national identity (which includes a business engaged in
the production, distribution, sale or exhibition of film or video products, hereinafter referred to as a “cultural business”) is not a
Canadian-controlled entity, if the Minister is satisfied, after considering any information or evidence submitted by the entity or otherwise made
available to the Minister or the Director of Investments, that the entity is controlled in fact by one or more non-Canadians. If we cease to be
Canadian-controlled under the ICA, we would no longer qualify or be entitled to access these refundable tax credits and other Canadian
government and private motion picture industry incentives that are restricted to Canadian-controlled corporations, including the ability to
produce under Canada’s official co-production treaties with other countries.
Such a change in status would require us to return tax credits previously received, reducing our cash balance. In addition, because under
Canadian GAAP tax credits are included in revenues, we would take a charge to earnings in the amount of the lost tax credits. There are
currently no transfer restrictions on our common shares as a class, and we accordingly may not be able to prevent a change of control to
non-Canadians. In addition, certain provincial refundable tax credits require that the applicant be provincially controlled. If any of our affiliates
that accesses or intends to access such credits ceases to be provincially controlled, we would no longer be entitled to access the applicable
provincial refundable tax credit.
For all of the foregoing reasons, the loss of our Canadian status could have a material adverse effect on our business, results of operations
or financial condition.
We face other risks in obtaining production financing from private and other international sources. For some productions, we finance a
portion of our production budgets from incentive programs from such agencies as Telefilm Canada, as well as international sources in the case
of our international treaty co-productions. There can be no assurance that local cultural incentive programs that we may access in Canada and
internationally, as a result of our Canadian-controlled status, will not be reduced, amended or
19
eliminated. Any change in policies in connection with incentive programs may have an adverse impact on us. In addition, we could lose our
ability to exploit such incentive programs in Canada if we cease to qualify as “Canadian.” Certain programs produced by us will be
contractually required to be certified as “Canadian Film and Video Production.” If a program does not qualify for such certification, we would
be in default on commitments made in connection with government incentive programs and licenses to broadcasters/distributors. In addition, to
the extent we do not qualify as “Canadian” as a result of a merger, an acquisition or an unconstrained share transfer to one or more
non-Canadians, we would no longer qualify for such incentives/tax credits and may be liable to repay certain benefits to the applicable
authorities. The foregoing could have a material adverse effect on our business, results of operations or financial condition.
An investment by non-Canadians in our business is potentially reviewable by the Minister of Canadian Heritage. Under the ICA, the
Minister of Canadian Heritage has discretion to determine, after considering any information or evidence submitted by the entity or otherwise
made available to the Minister or the Director of Investments, that an investment by a non-Canadian in a cultural business may constitute an
acquisition of control by that non-Canadian, notwithstanding the provisions in the ICA that state that certain investments do not or may not
constitute an acquisition of control that would require notification or review under the ICA. In the event that the Minister of Canadian Heritage
exercises her discretion and deems an investment by a non-Canadian in a cultural business to be an acquisition of control, the investment is
potentially subject to notification and/or review. If the investment is subject to review, the Minister must be satisfied that the investment is
likely to be of net benefit to Canada. Such a determination is often accompanied by requests that the non-Canadian provide undertakings
supportive of Canadian cultural policy. These undertakings may, in some circumstances, include a request for financial support of certain
initiatives. The determination by the Minister of whether a proposed investment is of net benefit to Canada also includes consideration of sector
specific policies of the Canadian federal government. One such policy prohibits takeovers of Canadian owned and controlled film distribution
businesses by non-Canadians. This prohibition is not contained in the ICA nor in the regulations made under the ICA, but is a separate foreign
investment policy relating to the Canadian film distribution sector. If an investment by a non-Canadian in our business is deemed by the
Minister to be an acquisition of control and ultimately subject to review, the current policy of the Canadian federal government prohibiting the
takeover of a Canadian owned and controlled film distribution business would be applied in the context of the Minister’s determination of
whether the proposed investment would be of net benefit to Canada, with the result that the company’s film distribution business in Canada
may have to be divested to a Canadian purchaser, which could have a material adverse effect on our business, results of operations or financial
condition.
A failure to meet Canadian programming restrictions may decrease the time slots or amount of license fees and incentive programs
available to us. Canadian broadcasters, including all conventional, specialty, pay and pay-per-view television services are typically required, as
a condition of their license, to broadcast significant minimum amounts of Canadian content programming on their overall schedule and in
prime time. The CRTC enforces compliance with these requirements, and failure to comply can result in fines or in the revocation of a
broadcaster’s license, or more restrictive terms on license renewal. The CRTC has issued detailed criteria that must be met for a television
production to qualify as a “Canadian program.” The criteria require, among other things, that Canadians perform a minimum level of key and
creative functions and that specified minimum production costs be paid to Canadians or Canadian companies. If our productions cease to
qualify as Canadian programs under existing CRTC regulations and policies, or if these regulations or policies should change on further review
by the CRTC, we may find it more difficult to secure time slots in Canada for our productions, or the amount of the license fees we may
generate in Canada may decrease if our programs do not qualify as Canadian programs. In addition, if our productions cease to meet minimum
Canadian content requirements, we may be unable to access various federal and provincial motion picture and television incentive programs,
including refundable tax credits, as discussed below. There could be a material adverse effect on our business, results of operations and
financial condition if any change in the policies of the Canadian or provincial governments in connection with their incentive programs occurs.
20
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that can
be identified by the use of forward-looking terms such as “may,” “will,” “intend,” “believe,” “assume,” “estimate,” “expect,” “could,”
“anticipate” or “continue” or the negative thereof or other variations of those terms or comparable terms. These forward-looking statements are
subject to numerous assumptions, risks and uncertainties that may cause our actual results to differ materially from any future results expressed
or implied by us in those statements.
Because these statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the
forward looking statements. We caution you not to place undue reliance on the statements, which speak only as of the date of this prospectus.
We do not undertake any obligation to release publicly any update or other revision to any forward-looking statements to reflect events or
circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events.
Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but
are not limited to, those described in “Risk Factors” contained in this prospectus.
21
USE OF PROCEEDS
We expect to receive approximately $27.5 million in estimated net proceeds, after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us, from the sale of our common shares in this offering, based on the sale of
15,000,000 shares at an assumed public offering price of $2.02 per share. If the underwriters exercise their over-allotment option in full, we
expect our additional net proceeds to be approximately $2.4 million from the sale of shares by us. We will not receive any proceeds from the
sale of shares by the selling shareholder.
We will use up to $20.0 million of the net proceeds from this offering to repurchase all or (if not all of the shares can be purchased for
$20 million) a portion of the Series A Preferred Shares held by SBS Broadcasting S.A. and Telemunchen Fernseh GmbH & Co. The per share
purchase price of such shares will be (a) $2,200 plus (b) if a positive number, an amount equal to one thousand multiplied by the difference
between (x) the per share price to the public in this offering and (y) $2.00. If we cannot repurchase all of the shares held by SBS and
Telemunchen for $20 million, then the number of shares repurchased will be allocated on a pro rata basis between SBS and Telemunchen. We
intend to use the remaining net proceeds for general corporate purposes, including repayment of indebtedness, film and television production
and working capital purposes. In addition, we may use the proceeds of this offering to acquire businesses or assets, including individual films
or libraries, that are complementary to our business. Although we actively engage in discussions with respect to possible acquisitions and
investments, we have no present agreements with respect to any material transaction.
Our $200 million revolving credit facility, which is structured as a $25 million Canadian dollar facility and a $175 million U.S. dollar
facility, matures on September 25, 2005. The U.S. dollar-denominated facility bears interest at U.S. prime plus 1.5% or LIBOR plus 2.5% and
the Canadian dollar-denominated facility bears interest at Canadian prime plus 1.5% or Bankers Acceptances plus 2.5%.
MARKET PRICES OF COMMON SHARES
Our common shares are listed on the American Stock Exchange, or AMEX, and the Toronto Stock Exchange, or the TSX, and trade under
the symbol “LGF.” On May 15, 2003, the last reported sale prices of our common shares were US$2.02 per share and Cdn$2.69 per share on
AMEX and the TSX, respectively.
The following table sets forth the range of high and low closing sale prices for our common shares, as reported by AMEX (the principal
exchange market for our common shares), for each quarter within our two most recent fiscal years:
High
Year ended March 31, 2002
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year ended March 31, 2003
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
22
Low
2.90
2.74
2.57
2.65
1.59
1.95
1.75
2.00
2.49
2.37
2.10
2.09
1.90
1.98
1.90
1.75
HOLDERS
As of May 15, 2003, there were 43,207,399 shares issued and outstanding and 377 registered holders of our common shares.
DIVIDEND POLICY
We have not paid any dividends on our outstanding common shares since our inception and do not anticipate doing so in the foreseeable
future. The declaration of dividends on our common shares is restricted by our revolving credit facility and preferred shares and is within the
discretion of our board of directors and will depend upon the assessment of, among other things, our earnings, financial requirements and
operating and financial condition. At the present time, given our anticipated capital requirements we intend to follow a policy of retaining
earnings in order to finance further development of our business. We are also limited in our ability to pay dividends on our common shares by
restrictions under the Company Act (British Columbia) relating to the sufficiency of profits from which dividends may be paid.
Our 5.25% Series A Convertible Redeemable Preferred Shares are entitled to cumulative dividends, as and when declared by the board of
directors, payable semi-annually on the last day of March and September of each year. At our option, the dividend may be paid in cash or
additional Series A Preferred Shares. We declared and, on each of March 31, 2001 and September 30, 2001, paid a cash dividend of $817,000,
or $66.94 per share. On March 31, 2002, we declared and paid, in kind, a dividend of $773,600, or $66.94 per share, by the issuance of 273
Series A Preferred Shares and cash payments of $77,450. On September 30, 2002, we declared and paid a cash dividend of $791,871, or $66.94
per share. On March 31, 2003, we declared and paid a cash dividend of $791,871, or $66.94 per share.
23
CAPITALIZATION
The following table sets forth our unaudited consolidated capitalization as of December 31, 2002: (i) on a historical basis; and (ii) on an as
adjusted basis giving effect to the offering, as if it had occurred on that date. The as adjusted basis assumes net proceeds from this offering are
used to repurchase a portion of the Series A Preferred Shares and the remaining net proceeds are used for repayment of bank loans. The
proceeds from the underwriters’ exercise of the over-allotment option, if any, are not included in the as adjusted basis. This table should be read
in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial
statements and notes to the consolidated financial statements in this prospectus.
Actual
At December 31, 2002
As Adjusted
(Unaudited)
(In thousands)
$
7,261
$
7,261
$
131,055
23,766
53,615
$
121,422
23,766
53,615
TOTAL DEBT
$
208,436
$
198,803
SHAREHOLDERS’ EQUITY
Preferred shares, 200,000,000 shares authorized, issued in series,
including 1,000,000 Series A (11,830 shares issued and
outstanding) (3,790 as adjusted) and ten Series B (ten shares
issued and outstanding) (liquidation preference $30,167)
($9,665 as adjusted)
Common shares, no par value, 500,000,000 shares authorized,
43,231,921 shares issued and outstanding (58,231,921 as
adjusted)
Accumulated deficit
Cumulative translation adjustments
$
32,076
$
10,277
TOTAL SHAREHOLDERS’ EQUITY
$
75,534
$
85,167
TOTAL CAPITALIZATION
$
283,970
$
283,970
CASH AND CASH EQUIVALENTS
DEBT
Bank loans
Production loans
Long-term debt
24
157,675
(106,506 )
(7,711 )
189,107
(106,506 )
(7,711 )
SELECTED CONSOLIDATED FINANCIAL DATA
Our consolidated financial statements have been prepared in accordance with Canadian GAAP that conforms, in all material respects, with
U.S. GAAP, except as described in the notes to the financial statements (specifically, note 21 to the notes to consolidated financial statements
beginning on page F-31, and note 12 to the notes to unaudited condensed consolidated financial statements beginning on page F-46). As
described more specifically in those notes and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
below, the differences between Canadian GAAP and U.S. GAAP cause adjustments in statement of operations data (including revenues and
income (loss)) and balance sheet data (including shareholders’ equity).
The consolidated financial information included in this prospectus is expressed in U.S. dollars. Commencing with the period beginning
April 1, 2002, our condensed consolidated financial statements are presented in U.S. dollars, as a substantial component of our operations are
domiciled in the U.S. and the principal market for trading of our common shares is the American Stock Exchange. Prior to April 1, 2002, our
condensed consolidated financial statements were presented and audited in Canadian dollars and have been converted to U.S. dollars for
presentation in this prospectus. The U.S. dollar and the Canadian dollar are the functional currencies of the Company’s U.S. and Canadian
based businesses, respectively. Assets and liabilities denominated in currencies other than U.S. dollars are translated at exchange rates in effect
at the relevant balance sheet date. Revenue and expense items denominated in currencies other than U.S. dollars are translated at the average
rate of exchange for the relevant period. Any resulting foreign exchange gains and losses are recorded as a separate component of shareholders
equity. You should read the following selected consolidated financial data together with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated financial statements and related notes included in this prospectus.
Nine Months Ended
December 31,
2002
2001
(Unaudited)
2002
2001
Year Ended March 31,
2000
1999
1998
(In thousands except per share data)
Statement of Operations
Data: (1)
Revenues
Expenses:
Direct operating
Distribution and
marketing
General and
administrative
Amortization
Severance and relocation
Total expenses
Operating income (loss)
Other Expenses:
Interest
Minority interests
Unusual losses
Total other expenses
Income (loss) before
undernoted
Gain on dilution of
investment in a
subsidiary
Income (loss) before
income taxes and equity
interests
Income taxes
$ 233,924
$ 175,409
$ 272,489
$ 187,650
$ 184,361
$ 78,671
$ 45,628
117,889
97,698
159,907
104,003
151,482
61,802
34,978
77,611
47,949
76,245
34,426
—
—
—
24,204
3,918
—
24,865
3,190
—
34,668
4,554
—
25,073
5,695
—
21,334
4,673
1,154
15,665
3,511
—
7,353
1,267
—
223,622
173,702
275,374
169,197
178,643
80,978
43,598
10,302
1,707
(2,885 )
18,453
5,718
(2,307 )
2,030
7,503
580
—
7,119
555
1,233
9,828
1,221
1,351
7,716
586
—
3,171
889
—
2,430
407
1,095
674
725
—
8,083
8,907
12,400
8,302
4,060
3,932
1,399
2,219
(7,200 )
(15,285 )
10,151
1,658
(6,239 )
—
—
—
2,219
(1,029 )
2,186
(5,014 )
3,896
2,186 (2)
(13,099 )
(321 )
25
10,151
2,190
1,658
(1,357 )
558
(5,681 )
(202 )
631
—
631
(1,024 )
Nine Months Ended
December 31,
2002
2001
(Unaudited)
2002
2001
Year Ended March 31,
2000
1999
1998
(In thousands except per share data)
Income (loss) before
equity interests
Write-down and equity
interests in
investments subject to
significant influence
Net income (loss) from
continuing operation
Loss from discontinued
operation
Net income (loss)
Basic and diluted
income (loss) per
common share
Income (loss) from
continuing
operations
Income (loss) from
discontinued
operations
Weighted average
number of shares used
in the computation of
net income per share
Other Data:
Cash flow provided by
(used in) operating
activities
Cash flow provided by
(used in) financing
activities
Cash flow provided by
(used in) investing
activities
EBITDA (5)
Balance Sheet Data (at
end of period): (1)
Investment in motion
pictures and television
programs
Total assets
Total debt
Shareholders’ equity
1,190
(1,118 )
(13,420 )
12,341
301
462
(1,134 )
(14,542 ) (3)
(1,021 )
108
1,652
(2,252 )
(27,962 )
11,320
409
—
(1,132 )
(18,997 ) (4)
(5,517 )
$
1,652
$
(3,384 )
$
(0.02 )
$
(0.12 )
—
43,232
$
3,654
(0.02 )
42,611
$ (57,113 )
(5,883 )
(393 )
—
93
(4,006 )
(5,790 )
(393 )
(3,624 )
—
$ (46,959 )
$
5,803
$
(3,597 )
$
(9,414 )
$
(393 )
$
$
0.21
$
(0.02 )
$
(0.23 )
$
(0.03 ) (6)
(0.74 )
(0.44 )
42,753
$ (60,712 )
(0.15 )
36,196
$ (34,131 )
(0.13 )
30,665
$ (28,989 )
(0.15 )
24,575
$ (21,101 )
—
14,160 (6)
$ (15,096 )
(7,626 )
54,259
54,835
54,544
29,056
34,111
89,407
4,676
14,682
5,274
2,530
7,340
(14,224 )
(29,688 )
23,127
(4,349 )
10,499
(1,593 )
202
(67,391 )
3,297
206,040
390,541
208,436
75,534
207,098
439,694
212,556
118,078
181,002
381,984
215,075
75,394
142,178
370,200
158,470
124,843
88,571
277,338
66,497
142,414
58,938
217,076
67,417
110,511
39,657
176,443
51,572
101,388
(1)
Due to the retroactive adoption without restatement of Canadian Institute of Chartered Accountants Handbook Section 3062 on April 1,
2001 and SoP 00-2 and CICA Handbook Section 3465 on April 1, 2000, all as described in note 2(c) to the consolidated financial
statements, our Statement of Operations Data and Balance Sheet Data from periods prior to April 1, 2001 are not comparable to periods
after that date. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(2)
Represents gain on dilution of the company’s investment in a subsidiary of the company, from the subsidiary’s completion of an equity
financing with a third party.
(3)
Includes full write-down of $13.4 million of the company’s investment in CinemaNow.
(4)
Includes a write-down of $10.6 million of the company’s investment in Mandalay Pictures. Effective April 1, 2002, the carrying value of
the company’s investment in Mandalay was presented as a discontinued operation. On November 8, 2002, the company sold its
investment in Mandalay for cash of $4.2 million and an interest bearing convertible promissory note totaling $3.3 million.
26
(5)
To supplement our financial statements presented on a GAAP basis, throughout this document we reference non-GAAP financial
measures, such as EBITDA, to measure operating performance. Management believes EBITDA to be a meaningful indicator of our
performance that provides useful information to investors regarding our financial condition and results of operations. Presentation of
EBITDA is consistent with our past practice, and EBITDA is a non-GAAP financial measure commonly used in the entertainment
industry and by financial analysts and others who follow the industry to measure operating performance. EBITDA should not be
construed as an alternative to operating income or cash flows from operating activities (both of which are determined in accordance with
generally accepted accounting principles) or as a measure of liquidity. For a reconciliation of EBITDA (defined as earnings before
interest, provision for income taxes, amortization, minority interests, gain on dilution of investment in subsidiary and discontinued
operation) to net income (loss) see “Management’s Discussion and Analysis of Financial Condition and Results of Operations —
EBITDA.”
(6)
On October 20, 1998 the shareholders approved a two for one share consolidation of the Company’s shares that took effect on
November 17, 1998. All shares and per share amounts above have been adjusted to reflect the share consolidation.
27
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial
statements and related notes. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not
limited to, those discussed in “Risk Factors” and elsewhere in this prospectus.
Overview
We are an independent producer and distributor of film and television entertainment content. We release approximately 15 motion pictures
theatrically per year. Our theatrical releases include films we produce in-house and films we acquire from third parties. We also have produced
over 150 hours of television programming on average each of the last four years. Our disciplined approach to production, acquisition and
distribution is designed to maximize our profit by balancing our financial risks against the probability of commercial success of each project.
We distribute our library of approximately 2,000 motion picture and television program titles directly to retailers, video rental stores, pay and
free television channels and indirectly to international markets through third parties. We also own a majority interest in CinemaNow, a
development stage internet video-on-demand provider, and own and operate a film and television production studio.
Our revenues are derived from the following business units:
• Motion Pictures, which includes Theatrical, Home Entertainment, Television and International Distribution. Theatrical revenues are
derived from the domestic theatrical release of motion pictures in North America. Home entertainment revenues are derived from the
sale of video and DVD releases of our own productions and acquired films, including theatrical releases and direct-to-video releases.
Television revenues are primarily derived from the licensing of our product to the domestic cable, free and pay television markets.
International revenues are derived from the licensing of our productions and acquired films to international markets on a
territory-by-territory basis.
• Television, which includes the licensing to domestic and international markets of one-hour drama series, television movies and
non-fiction programming.
• Animation, which includes an interest in CinéGroupe Corporation, a producer and distributor of animated feature films and television
programming.
• Studio Facilities, which includes Lions Gate Studios and the leased facility Eagle Creek Studios, which derive revenue from rental of
sound stages, production offices, construction mills, storage facilities and lighting equipment to film and television producers.
Our primary operating expenses include the following:
• Direct Operating Expenses, which include amortization of production or acquisition costs, participation and residual expenses.
• Distribution and Marketing Expenses, which primarily include the costs of theatrical “prints and advertising” and of video and DVD
duplication and marketing.
• General and Administrative Expenses, which include salaries and other overhead.
The functional currency of our business, based on the economic environment in which we primarily generate and expend cash, is the
Canadian dollar and the U.S. dollar for the Canadian and U.S.-based businesses, respectively. Commencing with the period beginning April 1,
2002, condensed consolidated financial statements are presented in U.S. dollars, as a substantial component of our operations are domiciled in
the U.S. and the principal market for trading of our common shares is the American Stock Exchange. This Management Discussion and
Analysis, and all financial statements in this prospectus have been restated in U.S. dollars. In accordance with generally accepted accounting
principles in both Canada
28
and the U.S., the financial statements of Canadian-based subsidiaries are translated for consolidation purposes using current exchange rates in
effect on the balance sheet date and revenue and expenses translated at the average rate of exchange for the relevant period. Any resulting
foreign exchange gains and losses are recorded as a separate component of shareholders’ equity. The functional currencies of each of the
Company’s operations in the United States and Canada are unchanged.
Due to the retroactive adoption without restatement of Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 3062
(“CICA 3062”) on April 1, 2001 and SoP 00-2 and CICA Handbook Section 3465 (“CICA 3465”) on April 1, 2000, all as described in
note 2(c) to the consolidated financial statements, our operating results from periods prior to April 1, 2001 are not comparable to periods after
that date. See our discussion of SoP 00-2 in “Critical Accounting Policies” below.
Critical Accounting Policies
The application of the following accounting policies, which are important to our financial position and results of operations, requires
significant judgments and estimates on the part of management. For a summary of all of our accounting policies, including the accounting
policies discussed below, see note 2 to our audited consolidated financial statements.
Generally Accepted Accounting Principles. Our consolidated financial statements have been prepared in accordance with Canadian GAAP,
which conforms, in all material respects, with U.S. GAAP, except as described in the notes to the financial statements. The U.S. dollar and the
Canadian dollar are the functional currencies of our U.S. and Canadian-based businesses, respectively. Commencing with the period beginning
April 1, 2002, our condensed consolidated financial statements are presented in U.S. dollars as a substantial component of our operations are
domiciled in the U.S. and the primary market for trading volume of our common shares is on the American Stock Exchange. Prior to April 1,
2002, our condensed consolidated financial statements were presented and audited in Canadian dollars. These consolidated financial statements
and those amounts previously reported in Canadian dollars have been translated from Canadian dollars to United States dollars by translating
the assets and liabilities at the rate in effect at the respective balance sheet dates and revenues and expenses at the average rate for the reporting
periods. Any resulting foreign exchange gains and losses are recorded as a separate component of shareholders equity. The functional
currencies of each of the Company’s operations in the United States and Canada are unchanged.
Accounting for Films and Television Programs. In June 2000, the Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position 00-2 “Accounting by Producers or Distributors of Films” (“SoP 00-2”). SoP 00-2
establishes new accounting standards for producers or distributors of films, including changes in revenue recognition, capitalization and
amortization of costs of acquiring films and television programs and accounting for exploitation costs, including advertising and marketing
expenses. We elected early adoption of SoP 00-2 and retroactively adopted SoP 00-2 effective as of April 1, 2000. We also elected to adopt
SoP 00-2 for Canadian GAAP purposes. The prior years’ financial statements were not restated, as the effect of the new policy on the prior
periods was deemed not reasonably determinable. Accordingly, opening accumulated deficit for the year ended March 31, 2001 was increased
to reflect the cumulative effect of the accounting change in the amount of $40.7 million (net of income taxes of $1.5 million). The principal
changes as a result of applying SoP 00-2 are as follows:
• Advertising and marketing costs, which were previously capitalized to investment in films and television programs on the balance sheet
and amortized using the individual film forecast method, are now expensed the first time the advertising takes place.
• The capitalization of production costs for episodic television series is limited to revenue that has been contracted for on an
episode-by-episode basis until such time as the criteria for recognizing secondary market revenues are met.
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We capitalize costs of production, including financing costs, to investment in motion pictures and television programs. These costs are
amortized to direct operating expenses in accordance with SoP 00-2. These costs are stated at the lower of unamortized motion picture or
television program costs or fair value (net present value). These costs for an individual motion picture or television program are amortized in
the proportion that current period actual revenues bear to management’s estimates of the total revenue expected to be received from such
motion picture or television program over a period not to exceed ten years from the date of delivery. As a result, if revenue estimates change
with respect to a motion picture or television program, we may be required to write down all or a portion of the unamortized costs of such
motion picture or television program. No assurance can be given that unfavorable changes to revenue estimates will not occur, which may
result in significant write-downs affecting our results of operations and financial condition.
Revenue Recognition. Revenue from the sale or licensing of motion pictures and television programs is recognized upon meeting all
recognition requirements of SoP 00-2. Revenue from the theatrical release of motion pictures is recognized at the time of exhibition based on
the company’s participation in box office receipts. Revenue from the sale of DVDs in the retail market, net of an allowance for estimated
returns, is recognized on the later of shipment to the customer or “street date” (when it is available for sale by the customer). Under revenue
sharing arrangements, rental revenue is recognized when we are entitled to receipts. For contracts that provide for rights to exploit a program
on multiple media (e.g. theatrical, video, television) with a fee for a single motion picture or television program where the contract specifies the
permissible timing of release to various media, the fee is allocated to the various media based on management’s assessment of the relative fair
value of the rights to exploit each media and is recognized as the program is released to each media. For multiple-title contracts with a fee, the
fee is allocated on a title-by-title basis, based on management’s assessment of the relative fair value of each title. Revenues from television
licensing are recognized when the motion picture or television program is available to the licensee for telecast. Rental revenue from short-term
operating leases of studio facilities is recognized over the term of the lease. Prior to December 2001, we earned fees from management services
provided to Canadian limited partnerships, whose purpose was to assist in the financing of motion pictures produced in Canada, and those fees
were recognized as revenue when the financing was completed. We no longer provide these management services due to the rescission of
certain tax shelter provisions by the Canadian government. Cash payments received are recorded as deferred revenue until all the conditions of
revenue recognition have been met. We accrue for video returns and provide for allowances in the financial statements based on previous
returns and our allowances history on a title-by-title basis in each of the video businesses. There may be differences between actual returns and
allowances and our historical experience.
Goodwill. In November 2001, the CICA released Handbook Section 3062, “Goodwill and Other Intangible Assets,” to be applied by
companies for fiscal years beginning on or after January 1, 2002. Early adoption of CICA 3062 was permitted for companies with their fiscal
year beginning on or after April 1, 2001, provided the first interim period financial statements had not been previously issued. We elected to
early-adopt CICA 3062 on April 1, 2001. Under CICA 3062, goodwill is no longer amortized but is reviewed annually for impairment, or more
frequently if impairment indicators arise, unless certain criteria have been met. CICA 3062 is similar, in many respects, to SFAS 142,
“Goodwill and Other Intangible Assets,” under U.S. GAAP. Goodwill is required to be tested for impairment between the annual tests if an
event occurs or circumstances change that more-likely-than-not reduce the fair value of a reporting unit below its carrying value. Notes 2(c)
and 6 to our consolidated financial statements include additional information relating to the net carrying value of goodwill and the pro forma
effect of the adoption of CICA 3062 on the prior years’ consolidated statements of operations.
Results of Operations
Nine Months Ended December 31, 2002 Compared to Nine Months Ended December 31, 2001
Revenue for the nine months ended December 31, 2002 of $233.9 million increased $58.5 million, or 33.4%, compared to $175.4 million
in the nine months ended December 31, 2001.
30
Motion pictures revenue of $163.3 million in the nine months ended December 31, 2002 increased $72 million, or 78.9%, from
$91.3 million in the nine months ended December 31, 2001. Theatrical revenue decreased $3.5 million to $13.0 million in the nine months
ended December 31, 2002, video revenue increased $51.3 million to $108.5 million in the nine months ended December 31, 2002, television
revenue increased $8.9 million to $14.5 million in the nine months ended December 31, 2002 and international revenue increased $10.3 million
to $21.6 million in the nine months ended December 31, 2002. The most significant theatrical release in the nine months ended December 31,
2002 was Frailty , with theatrical revenue of $3.7 million. Monster’s Ball , which was released in fiscal 2002, earned additional theatrical
revenue in the nine months ended December 31, 2002 of $2.8 million. Significant theatrical releases in the nine months ended December 31,
2001 included O , The Wash and Amores Perros with theatrical revenue of $5.4 million, $3.0 million and $3.0 million, respectively. Significant
video releases in the nine months ended December 31, 2002 included: Frailty with video revenue of $12.6 million, and Monster’s Ball with
video revenue of $31.7 million. A majority of the television revenue in the nine months ended December 31, 2002 relates to the licensing of
Monster’s Ball to pay television and to a single library sale to a cable network for $1.8 million. The most significant international releases in
the nine months ended December 31, 2002 were Frailty , Rules of Attraction , Cube 2 , and Monster’s Ball , with international revenue of
$4.1 million, $2.1 million, $2.6 million, and $2.2 million, respectively. In the nine months ended December 31, 2002, 136 titles generated
revenue in excess of $100,000 each.
Television production revenue of $42.2 million in the nine months ended December 31, 2002 decreased $14.2 million, or 25.2%, from
$56.4 million in the nine months ended December 31, 2001. Deliveries in the nine months ended December 31, 2002 included 13 one-hour
episodes of Dead Zone , 29 one-hour episodes of Tracker , 13 one-hour episodes of No Boundaries and eight hours of television movies. The
deliveries in the nine months ended December 31, 2001 included 18 one-hour episodes of Mysterious Ways , two one-hour pilots of Dead Zone
, the mini-series Superfire and three hours of television movies. Termite Art Productions contributed revenue of $9.6 million in the nine months
ended December 31, 2002, compared to $9.8 million in the nine months ended December 31, 2001. In the nine months ended December 31,
2002, Termite Art Productions delivered 51 hours of programming, compared to 63 hours delivered in the nine months ended December 31,
2001.
In animation, CinéGroupe’s revenue of $24.5 million in the nine months ended December 31, 2002 increased $1.1 million, or 4.7%,
compared to $23.4 million in the nine months ended December 31, 2001. In the nine months ended December 31, 2002, a total of 72 half-hours
were delivered including Daft Planet , Outer Dimension , Strange Tales and Pig City . In the nine months ended December 31, 2001, 76.5
half-hours were delivered including What’s with Andy , Big Wolf on Campus , Kids from Room 402 and Wunchpunch .
Studio facilities revenue of $4.0 million in the nine months ended December 31, 2002 increased $0.9 million, or 29%, from $3.1 million in
the nine months ended December 31, 2001, due primarily to revenues earned from our subleased stages and ancillary operations and to an
increase in rental rates. In the nine months ended December 31, 2002, stage and office occupancy levels averaged 83% and 80% respectively,
compared to 98% and 93% respectively in the nine months ended December 31, 2001. Occupancy rates decreased partially due to an increase
in occupancy space from the building of a new sound stage.
Direct operating expenses of $117.9 million for the nine months ended December 31, 2002 were 50.4% of revenue, compared to direct
operating expenses of $97.7 million, which were 55.7% of revenue in the nine months ended December 31, 2001. Direct operating expenses as
a percentage of revenue decreased primarily due to higher margin titles such as Monster’s Ball and State Property and a one-hour special and
rights license fees included in Television and provisions in Animation and Television taken in the prior year’s period. These favorable
variances were offset by lower margin titles and the loss recognized on the delivery of Tracker described in television production revenue
above.
Distribution and marketing costs of $77.6 million for the nine months ended December 31, 2002 increased $29.7 million or 62% compared
to $47.9 million in the nine months ended December 31, 2001.
31
Distribution and marketing costs (also known as “P&A”) increased in the nine months ended December 31, 2002 compared to the nine months
ended December 31, 2001 primarily due to larger expenditure on theatrical releases of Rules of Attraction and Frailty and to an increase in
marketing and video and DVD duplication costs related to the increase in video revenues generated during the nine months ended
December 31, 2002, primarily due to the release of Monster’s Ball .
General and administrative expenses of $24.2 million decreased $0.7 million in the nine months ended December 31, 2002, or 2.8%,
compared to $24.9 million in the nine months ended December 31, 2001.
Amortization expense in the nine months ended December 31, 2002 of $3.9 million increased $0.7 million, or 21.9%, from $3.2 million in
the nine months ended December 31, 2001 due to an increase in property and equipment amortization. Property and equipment amortization
increased due to additional animation and post-production equipment purchases and newly-constructed soundstages in fiscal 2001, as well as
the amortization from June 2002 of costs associated with information technology systems implementation.
Interest expense in the nine months ended December 31, 2002 of $7.5 million increased $0.4 million or 5.6% from $7.1 million in the nine
months ended December 31, 2001. Interest expense increased compared to the nine months ended December 31, 2001 due to a $2.2 million
decrease in capitalized interest resulting from a decline in new production financed by the revolving credit facility in the nine months ended
December 31, 2002 and a $0.3 million increase in amortization of bank financing charges. These increases were partially offset by a reduction
in total interest-bearing debt at the end of the nine months ended December 31, 2002 and a decrease in annual interest rates.
In the nine months ended December 31, 2001, unusual losses of $1.2 million included a loss of $0.4 million related to the demolition of an
existing structure to provide room to build a new sound stage at Lions Gate Studios and a loss of $0.8 million on the acquisition of the
remaining 50% of Eaton Entertainment LLC.
On July 10, 2001, a subsidiary of the company completed an equity financing with a third party for $9.2 million. The gain on dilution of
the company’s investment was $2.2 million (net of income taxes of $0), and the issuance resulted in a decrease of $0.1 million in goodwill.
The $0.5 million equity interest in Christal Films Distribution consists of an allocation of 75% of the net income of Christal Films
Distribution for the nine months ended December 31, 2002. Our investment in CinemaNow was written down to $0 at March 31, 2002. The
equity interest in CinemaNow of $1.1 million as of December 31, 2002 represented a 63% allocation of the operating losses of CinemaNow for
the nine months ended December 31, 2001.
Loss from discontinued operation in the nine months ended December 31, 2002 of $0 compares to loss from discontinued operation in the
nine months ended December 31, 2001 of $1.1 million. The loss from discontinued operation for the nine months ended December 31, 2001
represented 100% of the operating loss of Mandalay Pictures for the nine months ended December 31, 2001 of $0.2 million, plus of
amortization of capitalized pre-operating period costs of $0.9 million. On November 8, 2002, the Company sold its investment in Mandalay for
cash of $4.2 million and an interest bearing convertible promissory note totaling $3.3 million. The note, bearing interest at 6%, is payable
$1.3 million on December 31, 2005, $1.0 million on December 31, 2006 and $1.0 million on December 31, 2007. No gain or loss was recorded
on the sale as the Company’s carrying value of $7.5 million equaled the sales price.
Income from continuing operations, income from discontinued operations and net income for the nine months ended December 31, 2002,
were $1.7 million, $0 and $1.7 million, respectively, or loss per share of $0.02, loss per share of $0 and loss per share of $0.02, respectively, on
43.2 million weighted average common shares outstanding (after giving effect to the Series A Preferred Share dividends and accretion on the
Series A Preferred Shares). This compares to loss from continuing operations, loss from discontinued operations and net loss of $2.3 million,
$1.1 million and $3.4 million, respectively, or loss per share of $0.12, loss per share of $0.02 and loss per share of $0.14 respectively on
42.6 million weighted average
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common shares outstanding (after giving effect to the Series A Preferred Share dividends and accretion on the Series A Preferred Shares) for
the nine months ended December 31, 2001.
Under U.S. GAAP the net loss for the nine months ended December 31, 2002 was $0.8 million. The net income for the period under U.S.
GAAP is less than under Canadian GAAP due primarily to inclusion of the net loss in Mandalay Pictures until November 8, 2002, the date of
sale of the company’s investment in Mandalay Pictures. This is partially offset by the add back of the amortization of pre-operating costs
relating to our television one-hour series business, as described in notes 12(a), 12(b) and 12(c) respectively, to the unaudited condensed
consolidated financial statements.
Fiscal 2002 compared to Fiscal 2001
Revenues in fiscal 2002 of $272.5 million increased $84.8 million, or 45.2%, compared to $187.7 million in fiscal 2001.
Motion pictures revenue of $160.6 million in fiscal 2002 increased $44.9 million, or 38.8%, compared to $115.7 million in fiscal 2001. The
increase was due primarily to the inclusion of the Trimark operations for the full fiscal 2002 period compared to the inclusion of Trimark’s
post-acquisition revenue for the period October 13, 2000 to March 31, 2001 of $33.4 million in fiscal 2001. Theatrical revenue of $27.9 million
increased $14.7 million or 111.4% compared to $13.2 million in fiscal 2001. Significant theatrical releases in fiscal 2002 included: Monster’s
Ball with revenue of $7.5 million; O, with revenue of $5.3 million; and The Wash, with revenue of $3.2 million. Other significant theatrical
releases include Amores Perros, Les Boys 3 , Lantana and Songcatcher . Video revenue of $98.7 million increased $33.0 million, or 50.2%, in
fiscal 2002 compared to $65.7 million in fiscal 2001. Significant video releases in fiscal 2002 included O, which was released on video on
February 19, 2002 and earned revenue in excess of $14.1 million in the last six weeks of fiscal 2002; The Wash, with video revenue in excess
of $6.4 million; and Shadow of the Vampire, with video revenue in excess of $3.2 million. International revenues were relatively consistent
year-over-year, while television revenue from motion pictures decreased $4.1 million in fiscal 2002 to $8.1 million due to the timing of the
availability of the television windows.
Television production revenue of $70.7 million in fiscal 2002 increased by $23.2 million, or 48.8%, from $47.5 million in fiscal 2001, due
primarily to the increased number of hours delivered in fiscal 2002 in all television divisions. In fiscal 2002, 48 hours of one-hour drama series
were delivered, contributing revenue of $34.2 million. Deliveries in fiscal 2002 included: 22 episodes of Mysterious Ways to PAXTV, NBC
(eight of 22 episodes), CTV in Canada and Columbia Tristar internationally; 14 episodes of Tracker to the U.S. syndication market, CHUM
Television in Canada, Telemunchen in Germany and other international broadcasters; eight episodes of No Boundaries to WB Network in the
U.S., CanWest Global in Canada and international broadcasters; two episodes of Dead Zone to UPN in the U.S. and Paramount internationally;
and two episodes of Iron Chef to UPN in the U.S., City TV and Alliance Atlantis in Canada, and international broadcasters. In fiscal 2001, 29
hours of one-hour drama series were delivered for revenue of $29.6 million. Television movies contributed revenue of $20.0 million in fiscal
2002. Deliveries included: Superfire to ABC and international broadcasters; The Pilot’s Wife to CBS in the U.S. and international broadcasters;
and Attack on the Queen to TBS in the U.S. and international broadcasters. In fiscal 2001, one television movie was delivered to international
territories. In fiscal 2002, Termite Art Productions contributed revenue of $15.0 million on the delivery of 78.5 hours of non-fiction
programming including 25.5 hours of Amazing Animal Videos to Animal Planet, 13 hours of Incredible Vacation Videos to Travel Channel; six
and one-half hours of Wild Rescues to Animal Planet and five hours of MTV Video Party to MTV. In fiscal 2001, Termite Art Productions
delivered 68.5 hours of non-fiction programming for revenue of $12.2 million. Under Canadian GAAP, tax credits earned are included in
revenue. Under U.S. GAAP, tax credits earned are recorded as an offset to income tax expense. In fiscal 2002, $16.4 million of tax credits
earned were included in revenue.
In animation, CinéGroupe’s revenue of $35.5 million in fiscal 2002 increased $15.8 million, or 80.2%, compared to $19.7 million in fiscal
2001. The increase was primarily due to increased deliveries in fiscal 2002. In fiscal 2002, a total of 110.5 half-hours of television
programming were delivered (compared to
33
81.5 half-hours in fiscal 2001) including: 26.5 half-hours of Sagwa, The Chinese Siamese Cat to PBS in the U.S. and TVO in Canada; 26
half-hours of What’s With Andy to ABC Family in the U.S. and Teletoon in Canada; 21 half-hours of Big Wolf on Campus to ABC Family in
the U.S. and YTV in Canada; 12 half-hours of Wunchpunch to Radio Canada and Saban internationally; 12 half-hours of Kids From Room 402
to ABC Family in the U.S. and Teletoon and TQS in Canada; and nine half-hours of Galidor: Defender of the Outer Dimension to Fox Kids
and Lego in the U.S. and YTV in Canada. In addition, the motion picture Wilderness Station was delivered to distribution partners around the
world. CinéGroupe Library revenue of $3.0 million, interactive revenue of $0.6 million and service and other revenue of $0.1 million were
earned in fiscal 2002, compared to $0.8 million, $0.5 million and $0.9 million, respectively, in fiscal 2001.
Studio facilities revenue of $4.2 million in fiscal 2002 increased $0.5 million, or 13.5%, compared to $3.7 million in fiscal 2001 due
primarily to an improvement in occupancy levels and revenues generated from additional services now offered at the studios including lighting,
equipment and furniture rentals. Stage and office occupancy levels averaged 96% and 94%, respectively, for fiscal 2002 compared to 94% and
85%, respectively, in fiscal 2001.
Prior to CineGate ceasing operations in fiscal 2002, we arranged financing and received commission revenue on production financings
arranged for CineGate. We earned commission revenue of $1.5 million in fiscal 2002 on approximately $172.5 million of production financing
arranged through the CineGate joint venture, compared to revenue of $1.1 million earned in fiscal 2001. CineGate ceased operations in fiscal
2002 upon the rescission of certain tax shelter provisions by the Canadian government.
Direct operating expenses of $159.9 million for fiscal 2002 were 58.7% of revenue, compared to direct operating expenses of $104 million,
which were 55.4% of revenue in fiscal 2001. Direct operating expenses as a percentage of revenue increased in fiscal 2002 primarily due to the
loss recognized on the delivery of the 14 episodes of Tracker, the impact of the significant theatrical and video revenues on O (a distribution
service deal with 15% fees), and the softening of the European marketplace, which has resulted in increased provisions for bad debts. In fiscal
2002, we increased our provision for doubtful accounts by $6.9 million (including $1.6 million relating to KirchMedia) and wrote off or
cancelled contracts directly against revenue totaling $1.9 million. Excluding tax credits receivable, the provision for doubtful accounts at
March 31, 2002 represented 11.6% of accounts receivable, compared to 4.5% at March 31, 2001.
Our P&A expenses of $76.2 million more than doubled in fiscal 2002, increasing $41.8 million, or 121.5%, compared to $34.4 million in
fiscal 2001. P&A increased year-over-year primarily due to the advertising expenditures on the more significant theatrical and video releases in
fiscal 2002. Theatrical P&A in fiscal 2002 was $33.9 million, compared to $21.8 million in fiscal 2001. Video P&A of $41.3 million compared
to $11.6 million in fiscal 2001 due to the significant increase in video activity and video releases being brought “in-house.” Revenues earned on
videos released through our Universal output deal, which expired on August 31, 2002, were recorded net of distribution and marketing
expenses. In fiscal 2002, our most significant video releases, O and The Wash, were released directly by us, outside of the Universal output
deal.
General and administrative expenses of $34.7 million in fiscal 2002 increased $9.6 million, or 38.2%, compared to $25.1 million in fiscal
2001. In motion pictures, general and administrative expenses increased $4.4 million, or 28.8%, to $19.7 million in fiscal 2002 from
$15.3 million in fiscal 2001 primarily as a result of a full year of combined operations with Trimark and the growth of the production and
theatrical and video distribution businesses. Television general and administrative expenses of $3.4 million in fiscal 2002 were virtually
unchanged year-over-year. Animation general and administrative expenses increased $0.8 million, or 44.4%, to $2.6 million in fiscal 2002 from
$1.8 million in fiscal 2001 due to the creation of an international sales department and increased head count at the corporate head office.
General and administrative expenses in the corporate office of $8.7 million in fiscal 2002 increased $4.6 million, or 112.2%, from $4.1 million
in fiscal 2001 primarily due to increased headcount as a result of growth in corporate administration and support functions.
34
Amortization of $4.6 million in fiscal 2002 decreased $1.1 million, or 19.3%, from $5.7 million in fiscal 2001 due primarily to a decrease
in goodwill amortization of $1.8 million year-over-year as a result of the adoption of CICA 3062, which was partially offset by increased
amortization of capital assets of $0.9 million, primarily in animation, pertaining to the acquisition of animation and technical services
equipment financed through capital leases.
Fiscal 2002 interest expense of $9.8 million increased by $2.1 million, or 27.3%, from $7.7 million in fiscal 2001 due to interest on
borrowings used to finance the purchase of Trimark and increased production and acquisition activity, and bank charges related to bank
facilities, which amounts were partially offset by decreased interest rates.
Unusual losses of $1.4 million recorded in fiscal 2002 related to a $0.8 million loss recorded on the acquisition of the remaining 50% of
Eaton Entertainment LLC, a $0.4 million loss on disposal related to the demolition of an existing structure to provide room to build a new
20,500 square foot sound stage at Lions Gate Studios and the write-off of capital assets relating to the downsizing of our offices.
On July 10, 2001, a subsidiary of the company completed an equity financing with a third party for $9.2 million. The gain on dilution of
the company’s investment was $2.2 million (net of income taxes of $0).
The fiscal 2002 provision for income taxes of $0.3 million consisted of a $1.3 million provision for income taxes, partially offset by the
recognition of the benefits of income tax losses of $1 million. At March 31, 2002, we had Canadian non-capital losses of approximately
$28.5 million available to reduce Canadian income taxes carried forward for seven years and $38.1 million for U.S. income tax losses carried
forward for 15 to 20 years.
The $1.1 million equity interest in the loss of CinemaNow represented 63% of the operating losses of CinemaNow for the nine months
ended December 31, 2001, compared to a $1.0 million equity interest in the loss for the year ended March 31, 2001. CinemaNow has
experienced recurring losses and cannot demonstrate with reasonable certainty that it has twelve months of cash to fund operations, and as a
result we were required by Canadian and U.S. GAAP to reassess the carrying value of our investment in CinemaNow. The write-down of the
investment of $13.4 million, which had no impact on the fiscal 2002 cash flows, was expensed, as a component of write-down and equity
interests in investments subject to significant influence, in the consolidated statement of operations.
In fiscal 2002, the Company received cash of $5.4 million from Mandalay, which was recorded as a reduction in the Company’s
investment in Mandalay. With the authority granted by the Board of Directors, prior to the close of the fourth quarter of fiscal 2002,
management committed to a plan to divest its ownership interest in Mandalay. Mandalay was written down to its estimated fair value at
March 31, 2002 of $10.0 million. Such estimated fair value was supported by cash expected to be received from Mandalay under a prior
agreement and estimated proceeds from the sale of the Company’s ownership interest in Mandalay. The resulting write-down of $10.6 million
is included as a component of loss from discontinued operations. Subsequent to year end, the Company received distributions of $2.5 million
from Mandalay under a prior agreement. On November 8, 2002, the Company sold its investment in Mandalay for cash of $4.2 million and an
interest bearing convertible promissory note totaling $3.3 million. The note, bearing interest at 6%, is payable $1.3 million on December 31,
2005, $1.0 million on December 31, 2006 and $1.0 million on December 31, 2007. No gain or loss was recorded on the sale as the Company’s
carrying value of $7.5 million equaled the sales price.
Net loss for the year ended March 31, 2002 was $47.0 million, representing a loss of $1.18 per share on 42.8 million weighted average
common shares outstanding (after giving effect to the Series A Preferred Share dividends and accretion on the Series A Preferred Shares),
compared to net income of $5.8 million or $0.06 per share on 36.2 million weighted average common shares outstanding (after giving effect to
the Series A Preferred Share dividends and accretion on the Series A Preferred Shares) for the year ended March 31, 2001.
35
Under U.S. GAAP the net loss for the year ended March 31, 2002 was $43.5 million. The loss under U.S. GAAP is less than under
Canadian GAAP, due primarily to the add back of the amortization of pre-operating costs relating to Mandalay Pictures and our television
one-hour series business, as described in notes 21(a) and 21(b).
Fiscal 2001 compared to Fiscal 2000
Revenue in fiscal 2001 of $187.7 million increased $3.3 million, or 1.8%, compared to $184.4 million in fiscal 2000. Revenue in fiscal
2001 increased significantly in Motion Pictures, and was down slightly in Television and Animation, due to the timing of deliveries.
Motion picture revenue in fiscal 2001 of $115.7 million increased $15.8 million, or 15.8%, compared to $99.9 million in fiscal 2000. The
increase was due primarily to the inclusion of Trimark’s revenue for the period October 13, 2000 to March 31, 2001 of $33.4 million, partially
offset by decreased revenue in Lions Gate Films of $15.5 million year-over-year. In Lions Gate Films, the majority of the year-over-year
decrease was in theatrical distribution. In fiscal 2000, Dogma (a theatrical distribution service deal) contributed theatrical revenue of close to
$13.6 million. The Dogma service deal generated fees of 15%, which increased the fiscal 2000 direct operating expenses as a percentage of
revenue. Significant theatrical releases in fiscal 2001 included: American Psycho; Shadow of the Vampire; and Big Kahuna . Significant video
releases in fiscal 2001 included: American Psycho; Big Kahuna; and Million Dollar Hotel . Television and international revenues were
relatively consistent year-over-year. Trimark contributed video revenue of approximately $20.0 million, international sales revenue of
approximately $9.3 million and television revenue of approximately $4.7 million in fiscal 2001. Significant revenue generators for Trimark
included Shriek, Saturday Night Live “Best of” comedy series, and Held Up .
Television production revenue in fiscal 2001 of $47.5 million decreased by $8.1 million, or 14.6%, from $55.6 million in fiscal 2000, due
primarily to fewer television movie deliveries, which was partially offset by increased deliveries in Termite Art Productions. Trimark
contributed television revenue of $2.5 million. In fiscal 2001, the one-hour drama series business contributed revenue of $29.6 million.
Deliveries in fiscal 2001 included: 22 episodes of Mysterious Ways to PAXTV, NBC (13 of 22 episodes), CTV and Columbia Tristar; and
seven episodes of Higher Ground to Fox Family, WIC and Paramount. In fiscal 2000, 37 hours of one-hour drama series were delivered for
revenue of $31.2 million. Termite Art Productions contributed revenue of $12.2 million in fiscal 2001 on the delivery of 68.5 hours of
non-fiction programming including: 6.5 hours of Incredible Vacation Videos to Travel Channel; 6.5 hours of After Midnight to Discovery; six
hours of VH1 Confidential to VH1; five hours of MTV Video Party to MTV; and four hours of Great Streets to PBS. In addition, producer fees
were earned on the delivery of 19 episodes of Ripley’s Believe It or Not to UPN. In fiscal 2000, Termite Art Productions delivered 35 hours of
proprietary programming and 12 hours of Ripley’s Believe It or Not for total revenue of $7.5 million. The first Avalanche project, The Void,
was delivered to international territories in fiscal 2001 and producer fees were earned on four productions. In fiscal 2000, four television
movies were delivered for revenue of $16.5 million. In fiscal 2001, $12.1 million of tax credits earned were included in revenue.
In animation, CinéGroupe’s fiscal 2001 revenue of $19.7 million decreased $4.5 million, or 18.6%, compared to $24.2 million in fiscal
2000. The decrease was due to the fact that several episodes were not available for delivery at March 31, 2001 and were subsequently delivered
in the first quarter of fiscal 2002. In fiscal 2001 a total of 81.5 half-hours of television programming were delivered including: 40 half-hours of
Wunchpunch to Radio Canada and Saban; 18 half-hours of Kids From Room 402 to TQS and Fox Family; 13.5 half-hours of Sagwa, The
Chinese Siamese Cat to PBS and TVO; and seven half-hours of Mega Babies to Teletoon and Fox, as well as the television movie Lion of Oz to
Disney Channel and TMN. Library revenue of $0.8 million, interactive revenue of $0.5 million and service and other revenue of $0.9 million
were earned in fiscal 2001.
Studio facilities fiscal 2001 revenue of $3.7 million decreased $1 million, or 21.3%, compared to fiscal 2000 revenue of $4.7 million due to
the elimination on financial statement consolidation of $1 million of intercompany revenue earned from our productions filmed at the studio
facilities. Stage and office
36
occupancy levels averaged 94% and 85%, respectively, in fiscal 2001 compared to 96% and 92%, respectively, in fiscal 2000.
Since commencing CineGate operations in September 2000, we earned commission revenue of $1.1 million on approximately
$179.5 million of production financing arranged through the CineGate joint venture to March 31, 2001. CineGate ceased operating in fiscal
2002.
Direct operating expenses of $104.0 million in fiscal 2001 were 55.4% of revenue, compared to direct operating expenses of $151.5 million
in fiscal 2000, which were 82.2% of revenue. The primary reason for the decrease year-over-year is due to the adoption of SoP 00-2 at the
beginning of fiscal 2001. Commencing in fiscal 2001, distribution and marketing expense was disclosed separately rather than as a component
of direct operating expenses in fiscal 2000.
Fiscal 2001 general and administrative expenses of $25.1 million increased $3.8 million, or 17.8%, compared to fiscal 2000 general and
administrative expenses of $21.3 million. In motion pictures, general and administrative expenses increased $4.3 million, or 39.1%, to
$15.3 million from $11.0 million in fiscal 2001 primarily as a result of combining operations with Trimark in fiscal 2001 and the growth of the
production and video distribution businesses in that year. General and administrative expenses in corporate increased primarily due to increased
salaries and benefits expenses. General and administrative expenses decreased in television as a result of cost savings initiatives and remained
relatively consistent year-over-year in animation and studio facilities.
Goodwill arising on the Trimark acquisition contributed to an increase in amortization in fiscal 2001 of $1.0 million.
Year-over-year interest expense increased by $4.5 million due to borrowings related to the purchase of Trimark and increased production
and acquisition activity and bank charges related to bank facilities.
The fiscal 2001 equity interest in CinemaNow consisted primarily of our 66.9% of operating losses of $0.8 million and amortization of
goodwill of $0.2 million.
The fiscal 2001 loss from discontinued operation represents 100% of the operating loss of Mandalay Pictures of $4.3 million and
amortization of previously deferred pre-operating costs of $1.2 million. We sold our interest in Mandalay in November 2002.
In fiscal 2001, we recognized the benefit of previously unrecognized income tax loss carry-forwards of approximately $3.7 million. At
March 31, 2001, we had Canadian non-capital losses of approximately Cdn$52.8 million available to reduce Canadian income taxes carried
forward for seven years and $21.3 million for U.S. income tax losses carried forward for 20 years.
Under U.S. GAAP the net loss for fiscal 2001 was $34.9 million. The earnings under U.S. GAAP were lower than under Canadian GAAP
for that fiscal year due primarily to the recognition of the opening SoP 00-2 adjustment as a reduction in net income under U.S. GAAP.
Liquidity and Capital Resources
Our liquidity and capital resources are provided principally through cash generated from operations, a $200 million revolving credit facility
with J.P. Morgan Chase Bank, German tax shelter financing, and production loans. The revolving credit facility is limited by our borrowing
base, which includes certain accounts receivable and credits for our film and television program library. The third party valuation of our film
and television program library used in our borrowing base was updated as at September 30, 2002. At December 31, 2002, the borrowing base
assets totaled $156.6 million and we had drawn $127.1 million of our $200 million revolving credit facility.
Cash flows from operating activities in the nine months ended December 31, 2002 were $3.7 million, compared to cash flows used in
operating activities of $57.1 million in the nine months ended December 31, 2001 due primarily to improved operating results, a decrease in
accounts receivable, an increase in accruals and a decrease in investment in films and television programs in the current period as
37
a result of less production and acquisition activity in the current period. Cash flows used in financing activities in the nine months ended
December 31, 2002 were $7.6 million compared to cash flows from financing activities of $54.3 million in the nine months ended
December 31, 2001 primarily due to the repayment of bank loans in the nine months ended December 31, 2002 compared to the nine months
ended December 31, 2001 where a significant component of production activity was financed through bank loans. This decrease in bank loans
was offset by an increase in production loans during the nine months ended December 31, 2002 used to finance production activity. Cash flows
from investing activities in the nine months ended December 31, 2002 were $4.7 million compared to cash flows from investing activities of
$5.3 million in the nine months ended December 31, 2001. In the nine months ended December 31, 2001, $9.2 million of equity financing from
a third party for shares in CinéGroupe was received. In the nine months ended December 31, 2002, $2.5 million was received from Mandalay
Pictures as distributions under a prior agreement, and $4.2 million was received as proceeds from the sale of the Company’s investment in
Mandalay Pictures. Cash flows used for the purchase of property and equipment decreased in the nine months ended December 31, 2002
compared to the nine months ended December 31, 2001 where animation and post-production equipment was purchased.
Cash flows used in operating activities in the year ended March 31, 2002 were $60.7 million compared to cash flows used in operating
activities of $34.1 million in the year ended March 31, 2001 and $29.0 million in the year ended March 31, 2000, all primarily due to the net
increase in investment in motion pictures and television programs in fiscal 2002. Cash flows from financing activities in the year ended
March 31, 2002 were $54.8 million compared to cash flows from financing activities of $54.5 million in the year ended March 31, 2001 and
$29.1 million in the year ended March 31, 2000, due primarily to the increase in bank loans and net proceeds from production and distribution
loans. Cash flows from investing activities of $7.3 million in fiscal 2002 is due to the $9.2 million third party investment in a subsidiary and
$5.4 million received from Mandalay Pictures, partially offset by additions to animation and studio property and equipment of $7.7 million. In
fiscal 2001, the majority of the $29.7 million use of cash in investing activities was due to the acquisition of Trimark, and in fiscal 2000 the
entire $4.3 million use of cash was due to the purchase of property and equipment.
The nature of our business is such that significant initial expenditures are required to produce and acquire motion pictures and television
programs, while revenues from these motion pictures and television programs are earned over an extended period of time after their completion
or acquisition. As our operations grow, our financing requirements are expected to grow and management projects the continued use of cash in
operating activities and therefore we are dependent on continued access to external sources of financing. We believe that cash flow from
operations, cash on hand, credit lines available and tax shelter financing available will be adequate to meet known operational cash
requirements for the foreseeable future, including the funding of future motion picture and television production, motion picture rights
acquisitions, and theatrical and video release schedules. We monitor our cash flow, interest coverage, liquidity, capital base and debt-to-total
capital ratios with the long-term goal of maintaining our creditworthiness.
Our current financing strategy is to finance substantially with equity at the corporate level and to leverage investment in motion picture and
television programs through operating credit facilities and single-purpose production financing. We usually obtain financing commitments,
including, in some cases, funds from government incentive programs and foreign distribution commitments. These commitments have
averaged at least 70% of the budgeted third-party costs of a project before commencing production.
Our 5.25% Convertible Redeemable Series A Preferred Shares are entitled to cumulative dividends, as and when declared by the board of
directors, payable semi-annually on the last day of March and September of each year. We have the option of paying such dividends either in
cash or additional Series A Preferred Shares. We do not pay and do not intend to pay, and are restricted from paying by our revolving credit
facility, dividends on common shares. We believe it to be in the best interest of shareholders to invest all available cash in the expansion of our
business.
38
Principal debt repayments due during the years ending March 31, 2003 and March 31, 2004 of $7.6 million and $63.8 million, respectively,
consist principally of $10.1 million of mortgages on the Studio Facility, $23.8 million of production loans, $19.8 million of German tax shelter
financings and $10.5 of convertible subordinated notes. Mortgages due are expected to be refinanced. $19.0 million of production loans are
secured by accounts receivable, which we expect to collect and use for repayment of these loans. Other repayments due are expected to be paid
through cash generated from operations or from the available borrowing capacity from our $200 million credit facility with J.P. Morgan
Securities.
EBITDA
EBITDA, defined as earnings before interest, provision for income taxes, amortization, minority interests, gain on dilution of investment in
subsidiary and discontinued operation, of $14.7 million for the nine months ended December 31, 2002 increased $12.2 million, or 488.0%,
compared to $2.5 million for the nine months ended December 31, 2001. EBITDA of negative $14.2 million for the year ended March 31, 2002
decreased $37.3 million, or 161.5%, compared to $23.1 million for the year ended March 31, 2001, which had increased $12.6 million, or
120.0%, compared to $10.5 million for the year ended March 31, 2000.
EBITDA is a non-GAAP financial measure. Management believes EBITDA to be a meaningful indicator of our performance that provides
useful information to investors regarding our financial condition and results of operations. Presentation of EBITDA is consistent with our past
practice, and EBITDA is a non-GAAP financial measure commonly used in the entertainment industry and by financial analysts and others
who follow the industry to measure operating performance. While management considers EBITDA to be an important measure of comparative
operating performance, it should be considered in addition to, but not as a substitute for, operating income, net income and other measures of
financial performance reported in accordance with GAAP. EBITDA does not reflect cash available to fund cash requirements. Not all
companies calculate EBITDA in the same manner and the measure as presented may not be comparable to similarly-titled measures presented
by other companies.
The following table reconciles EBITDA to net income (loss):
Nine Months Ended
December 31,
(unaudited)
2002
2001
EBITDA, as defined
Amortization
Interest
Minority interests
Gain on dilution of investment
in subsidiary
Income taxes
Loss from discontinued
operation
$ 14,682
(3,918 )
(7,503 )
(580 )
Net income (loss)
$
—
(1,029 )
$
Year Ended March 31,
2002
2001
(Amounts in thousands)
2,530
(3,190 )
(7,119 )
(555 )
2,186
3,896
$ (14,224 )
(4,554 )
(9,828 )
(1,221 )
$ 23,127
(5,695 )
(7,716 )
(586 )
2,186
(321 )
—
(1,132 )
(18,997 )
1,652
$ (3,384 )
$ (46,959 )
$
2000
$ 10,499
(4,673 )
(3,171 )
(889 )
—
2,190
—
(1,357 )
(5,517 )
(4,006 )
5,803
$ (3,597 )
Interest Rate and Currency Risk Management
On April 1, 2001, we adopted Statement of Financial Accounting Standards (“SFAS”) 133 “Accounting for Derivative Instruments and
Hedging Activities,” where the provisions of SFAS 133 are applicable under Canadian GAAP and as described in EIC-117: FASB Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities and in EIC-128: Accounting for
Trading, Speculative or Non-Hedging Derivative Financial Instruments. SFAS 133 requires that all derivative instruments be reported on the
balance sheet at fair value and establishes criteria for the
39
designation and effectiveness of hedging relationships. The cumulative effect of adopting SFAS 133 was not material to our consolidated
financial statements.
Additionally, as part of our overall risk management program, we evaluate and manage our exposure to changes in interest rates and
currency exchange risks on an ongoing basis. We entered into foreign exchange contracts to hedge future production expenses denominated in
Canadian dollars. These forward exchange contracts do not subject us to risk from exchange rate movements because gains and losses on the
contracts offset losses and gains on the transactions being hedged. No collateral or other security was pledged as security to support these
financial instruments. In July 2002, we entered into a $100.0 million interest rate swap at an interest rate of 3.08%, commencing January 2003
and ending September 2005. The swap is in effect as long as three month LIBOR is less than 5.0%. Other hedges and derivative financial
instruments will be used in the future, within guidelines approved or to be approved by the board of directors for counterparty exposure, limits
and hedging practices, in order to manage our interest rate and currency exposure. We have no intention of entering into financial derivative
contracts, other than to hedge a specific financial risk.
Our principal currency exposure is between Canadian and U.S. dollars, although this exposure has been significantly mitigated through the
structuring of the $200 million revolving credit facility as a $25 million Canadian dollar facility and a $175 million U.S. dollar credit facility.
Each facility is borrowed and repaid in the respective country of origin, in local currency.
Commitments
The table below presents future commitments under contractual obligations and commercial commitments at December 31, 2002 by
expected maturity date.
Expected Maturity Date
Year Ending March 31,
2004
2005
(Amounts in thousands)
2003
Operating leases
Employment contracts
Unconditional purchase obligations
Distribution and marketing
commitments
Corporate guarantee
$
662
2,856
5,984
$
2006
2007
2,367
6,735
12,039
$ 2,064
1,643
—
$ 1,375
370
—
$ 1,006
—
—
3,500
321
13,200
—
—
—
—
—
—
—
$ 13,323
$ 34,341
$ 3,707
$ 1,745
$ 1,006
Quantitative and Qualitative Disclosures about Market Risk
Market risks relating to our operations result primarily from changes in interest rates and changes in foreign currency exchange rates. Our
exposure to interest rate risk results from the financial debt instruments that arise from transactions entered into during the normal course of
business.
Debt. We are exposed to cash flow risk due to changes in market interest rates related to our outstanding debt. For example, our credit
facilities bear interest on borrowings outstanding at various time intervals and at market rates based on either the Canadian prime rate or the
U.S. prime rate, plus a margin ranging from -0.34% to 4%. Our principal risk with respect to our long-term debt is interest rate risk, to the
extent not mitigated by interest rate swap and foreign exchange contracts.
40
The table below presents principal debt repayments and related weighted average interest rates for our credit facilities and long-term debt
obligations at December 31, 2002 by expected maturity date.
Expected Maturity Date
Year Ending March 31,
2004
2005
(Amounts in thousands)
2003
Bank Loans:
Variable(1)
Variable(2)
Long-term Debt:
Fixed(3)
Fixed(4)
Fixed(5)
Variable(6)
Variable(7)
$
—
2,963
$
—
998
$
2006
2007
—
—
$ 127,094
—
$—
—
—
—
296
4,362
—
20,530
19,839
1,230
14,217
6,987
—
—
581
529
—
1,503
6,255
—
—
—
—
—
—
—
—
$ 7,621
$ 63,801
$ 1,110
$ 134,852
$—
(1)
Revolving credit facilities, which expire September 25, 2005. Average variable interest rate on principal of $14,010 equal to Canadian
prime plus 0.9% and average variable interest rate on principal of $113,084 equal to U.S. prime minus 0.05%.
(2)
Demand loans at Canadian prime plus 0%-4% and line of credit due July 31, 2003 at Canadian prime plus 1%.
(3)
Average fixed interest rate equal to 6.44%.
(4)
Non interest-bearing.
(5)
Average fixed interest rate equal to 10.8%.
(6)
Majority consists of production loans secured by accounts receivable. Average variable interest rate on production loans equal to
Canadian prime plus 1.58%.
(7)
Production loans with an average variable interest rate equal to U.S. prime plus 0.31%.
Foreign Currency. We incur certain operating and production costs in foreign currencies and are subject to market risks resulting from
fluctuations in foreign currency exchange rates. In certain instances, we enter into foreign currency exchange contracts in order to reduce
exposure to changes in foreign currency exchange rates that affect the value of our firm commitments and certain anticipated foreign currency
cash flows. We currently intend to continue to enter into such contracts to hedge against future material foreign currency exchange rate risks.
We have entered into foreign exchange contracts to hedge future production costs denominated in Canadian dollars. Gains and losses on
the foreign exchange contracts are capitalized and recorded as production costs when the gains and losses are realized. At December 31, 2002,
we had contracts to sell $2.3 million in exchange for Cdn$3.7 million over a period of six weeks at a weighted average exchange rate of
1.5775.
We do not require collateral or other security to support any of these contracts. Net unrecognized gains as at December 31, 2002 amounted
to $0.1 million.
41
BUSINESS
Overview
We are an independent producer and distributor of film and television entertainment content. We release approximately 15 motion pictures
theatrically per year. Our theatrical releases include films we produce in-house and films we acquire from third parties. We also have produced
over 150 hours of television programming on average each of the last four years. Our disciplined approach to production, acquisition and
distribution is designed to maximize our profit by balancing our financial risks against the probability of commercial success of each project.
We distribute our library of approximately 2,000 motion picture and television program titles directly to retailers, video rental stores, pay and
free television channels and indirectly to international markets through third parties. We also own a majority interest in CinemaNow, a
development stage internet video-on-demand provider and own and operate a film and television production studio.
Our Industry
Motion Pictures
General. According to the Motion Picture Association of America, or MPAA, overall domestic box office revenue increased 13.2% to
$9.5 billion in 2002. The domestic motion picture exhibition industry has historically maintained steady growth in revenues and attendance.
The MPAA reports that total domestic box office revenues grew at a compound annual growth rate of 8.3% from 1996 to 2002, and annual
attendance grew from 1.3 billion to over 1.6 billion over the same period.
Competition. Major studios have historically dominated the motion picture industry. The term major studios is generally regarded in the
entertainment industry to mean: Universal Pictures, which includes Focus Features; Warner Bros., which includes New Line Cinema, Castle
Rock Entertainment and Fine Line Features; Twentieth Century Fox, which includes Searchlight Pictures; Sony Pictures Entertainment, which
includes Columbia Pictures, TriStar Pictures, Screen Gems Pictures and Sony Classics; Paramount Pictures, which includes Paramount
Classics; The Walt Disney Company, which includes Buena Vista, Hollywood Pictures, Touchstone and Miramax Film Corp.; and MGM,
which includes Metro Goldwyn Mayer Pictures and United Artists Pictures. Competitors less diversified than the major studios include
Dreamworks SKG, Alliance Atlantis, Artisan Entertainment and IFC Entertainment.
According to the MPAA, the average cost to produce and distribute a major studio film in 2002 was $89.4 million, including $58.8 million
of production costs and $30.6 million of distribution and marketing expenses (sometimes called “P&A”). In comparison, films released by
independent studios typically cost less than $40.0 million to produce and market. Despite the limited resources available to independent
studios, independent films have gained wider market approval and increased share of overall box office receipts in recent years. Recent
successful independent films such as Monster’s Ball, The Blair Witch Project and My Big Fat Greek Wedding highlight moviegoers’
willingness to support high quality motion pictures despite limited marketing and production budgets.
In recent years, independent films have gained wider market approval and increased shares of overall box office receipts. According to the
MPAA, between 1999 and 2002, box office receipts for independent films have grown at a compound rate of 8.7% to approximately
$2.4 billion, representing 25% of total box office receipts.
Product Life Cycle. Successful motion pictures may continue to play in theaters for up to six months or longer following their initial
release. Concurrent with their release in the United States, motion pictures are generally released in Canada and may also be released in one or
more other foreign markets. After the
42
initial theatrical release, distributors seek to maximize revenues by releasing movies in sequential release date windows, which are generally
exclusive against other non-theatrical distribution channels:
Typical Film Release Windows
Months After
Initial Release
Release Period
Theatrical
—
Home video/DVD
4-6 months
6-9 months
Pay-per-transaction (Pay per-view and Video-on-demand)
Pay television
10-29 months
Network or basic cable
30-36 months
Syndication
48-70 months
Concurrent
Concurrent
Licensing and merchandising
All international releasing
Approximate
Release Period
0-3
months
1-3
months
3 months
12-21
months
18-36
months
3-15
years
Ongoing
Ongoing
Home Video
In its July 2002 Communications Industry Forecast, Veronis Suhler Stevenson, or VSS, a media merchant bank, estimated the size of the
U.S. Home Video market to be $24.9 billion in 2002. According to VSS, from 1996 to 2001, this market grew at a compound annual growth
rate of 5.8% and was projected to grow 10% in 2002. Growth in this sector has been supported by increased DVD penetration that reached
36.4% in 2002, up from 23.6% in 2001, according to the MPAA. Declining prices of DVD players, enhanced video and audio quality and
special features such as deleted scenes, film commentaries and “behind the scenes” footage have helped increase the popularity of the DVD
format, sparking increased home video rentals and sales in recent years.
Television Programming
According to VSS’s July 2002 Communications Industry Forecast, spending on filmed entertainment for television in the U.S. was
projected to reach $22.1 billion in 2002, which would represent a 4.4% increase from 2001. VSS reported that from 1996 to 2001, spending on
filmed entertainment for television grew at a compound rate of 7.2%, driven by increased spending by cable and satellite networks. Increased
capacity for channels on upgraded digital cable systems and satellite television has precipitated the launch of numerous new networks seeking
programming to compete with traditional broadcast networks.
International Markets
Worldwide demand for North American filmed content has increased in recent years. According to the MPAA, international box office
receipts in 2002 were a record $9.6 billion, a 20% increase from 2001. The ability to pre-sell international distribution rights for films produced
by independent studios has played a key role in helping these studios finance the production of motion pictures.
The Company
Production
Motion Pictures. We primarily produce English language motion pictures with production budgets of $20 million or less. Films intended
for theatrical release are generally budgeted between $5 million and $20 million, and those films intended for release directly to video or cable
television are generally budgeted between $1 million and $5 million. We take a disciplined approach to film production with the goal of
producing content that we can distribute to theatrical and ancillary markets, which include home video and pay and free television, both
domestically and internationally. In fiscal 2002, we completed principal
43
photography on seven productions and delivered 11 motion pictures. In fiscal 2003, we produced seven motion pictures, including the
following:
• Confidence — starring Ed Burns, Dustin Hoffman, Andy Garcia and Rachel Weisz;
• Godsend — starring Robert DeNiro, Greg Kinnear and Rebecca Romijn-Stamos;
• Wonderland — starring Val Kilmer, Lisa Kudrow, Dylan McDermott, Josh Lucas and Kate Bosworth;
• Shattered Glass — starring Hayden Christensen; and
• The Game — an urban reality motion picture starring Roc-A-Fella Records artists, including Beanie Sigel and Jay-Z.
Our current strategic plan is to produce approximately eight motion pictures annually. We have the following motion pictures slated for
production in fiscal 2004, (some of which we anticipate will be released in fiscal 2004, others we anticipate will be released at a later date):
• The Cookout — an urban comedy starring Queen Latifah;
• The Photograph — an action thriller being produced by Brett Ratner; and
• Final Cut — a futuristic drama being produced by Nick Wechsler.
We also recently announced an agreement to produce the sequel to House of 1000 Corpses .
In fiscal 2003, Christal Films Productions, our French language film production unit, produced Le Secret des Grands Cours D’eau
(working title), a Canadian production produced with the financial assistance of Telefilm Canada, Sodec, Super Écran and the CFT Production
Fund.
Our production team has developed a track record for producing modestly budgeted films with commercial potential. Our production
division reviews hundreds of scripts, looking for material that will attract top talent. We then actively develop such scripts, working with the
major talent agencies and producers to recruit talent that appeals to the film’s target audience. Recent successful examples of our process
include Monster’s Ball, which earned Halle Berry an Oscar for best actress, Frailty starring Matthew McConaughey and Bill Paxton and
American Psycho starring Christian Bale. We believe the commercial and critical success of these films should enhance our reputation and
continue to give us access to top talent, scripts and projects. We also develop films in other niche markets, as evidenced by the recent successes
of our urban films, including The Wash and State Property .
The decision whether to “greenlight,” or proceed with production of, a film is a diligent process that involves numerous key executives of
the company. Generally, the production division presents projects to a committee comprised of the heads of our production, distribution, home
entertainment, international, legal and finance departments. In this process, scripts are discussed for both artistic merit and commercial
viability. The committee considers the entire package, including the script, the talent that may be attached or pursued and the production
division’s initial budget. They also discuss talent and story elements that could make the product more successful. Next, the heads of domestic
and international distribution prepare estimates of projected revenues and the costs of marketing and distributing the film. Our finance and legal
professionals review all of the projections, and the committee decides whether the picture is worth pursuing by balancing the risk of a
production against its potential for financial success. We typically seek to mitigate the financial risk associated with film production by
negotiating co-production agreements, pre-selling international distribution rights and capitalizing on government subsidies and tax credits. In
addition, we often attempt to minimize our production exposure by structuring deals with talent that provide for them to participate in the
financial success of the motion picture in exchange for reducing up-front payments.
Television and Animation. Over the past four years, we have produced over 150 hours of television programming per year, including
dramas, animated series, television movies, mini-series and reality and
44
non-fiction programming through our in-house television production operations, including Termite Art Productions, and our interest in
CinéGroupe.
• One-Hour Drama Series. In fiscal 2003 we delivered the second 13-episode season of The Dead Zone , which is broadcast on USA
Network in the United States and CHUM Television in Canada and is distributed by Paramount International Television around the
world. We recently announced an agreement to distribute our in-house production 1-800 Missing for broadcast on Lifetime Television.
• Animated Series. CinéGroupe, in which we have an approximately 29% interest, develops and produces animated and live-action
television series and television movies and motion picture product using 2-D and 3-D computer generated imagery and traditional ink
and paint techniques. CinéGroupe has produced more than 800 half-hour animated and live-action episodes for television, including
such series as Galidor: Defenders of the Outer Dimension, Sagwa, The Chinese Siamese Cat, What’s with Andy, Kids From Room 402,
Pig City and Seriously Weird . CinéGroupe plans to expand production volume in response to heightened international demand for
animated product and build its library using its state-of-the-art 3-D and technical equipment to its maximum capacity.
• Reality and Non-Fiction Programming. Our subsidiary Termite Art Productions has created documentary and reality-based programs
for such notable clients as the Discovery networks, Bravo, Court TV, MTV, VH1, A&E and The History Channel, as well as CBS, Fox
and UPN. Over the last four years, Termite Art Productions has produced Unsolved History for the Discovery Channel, When Good
Times Go Bad and Busted on the Job for Fox, Great Streets for PBS, Amazing Animal Videos for Animal Planet and Ripley’s Believe It
or Not for Sony Television and TBS. In addition to distributing Termite Art Productions programs to domestic and international
markets, we acquire third party productions for distribution.
• Television Movies. We are actively involved in the development, acquisition, production and distribution of television productions in
the movie-of-the-week and mini-series formats. Production recently began in Québec on Inappropriate Behaviour , a
movie-of-the-week to be produced by CinéGroupe and distributed worldwide by Lions Gate Television. In addition to the television
movies already completed or nearing completion, we have approximately 20 hours of television movie programming in development
with U.S. broadcasters and cable companies.
Distribution
Domestic Theatrical Distribution. We distribute motion pictures directly to North American movie theatres. Over the last few years our
releases have included the following in-house productions: Monster’s Ball , starring Halle Berry and Billy Bob Thornton; American Psycho,
starring Christian Bale; Frailty , starring Matthew McConaughey and Bill Paxton; The Wash , starring Snoop Dogg and Dr. Dre; and Rules of
Attraction , starring James Van der Beek and Jessica Biel. Films that we have acquired and distributed in this same time period include: Dogma
, starring Ben Affleck, Matt Damon and Chris Rock; O , starring Julia Stiles and Mekhi Phifer; The Red Violin , starring Samuel L. Jackson;
Shadow of the Vampire , starring Willem Dafoe and John Malkovich; Secretary , starring Maggie Gyllenhaal and James Spader; Lovely &
Amazing , starring Brenda Blethyn and Emily Mortimer; Gods and Monsters , starring Brendan Fraser, Ian McKellan and Lynn Redgrave; and
Affliction , starring Nick Nolte and Sissy Spacek. In the last five years, films we have distributed have earned eleven Academy Award
nominations and won four Academy Awards and have been nominated for and won numerous Golden Globe, Screen Actors Guild and
Independent Spirit Awards.
Our strategy is to release approximately 15 titles per year in theaters, which includes both our productions and acquisitions. Our approach
to acquiring films for theatrical release is similar to our approach to film production in that we seek to limit our financial exposure while adding
films to our release schedule and our video library. The decision whether to acquire a motion picture for theatrical release entails a process
involving key executives at the company, including those from the releasing, home entertainment and acquisitions departments. The team
meets to discuss a film’s expected critical reaction,
45
marketability, and potential for commercial success, as well as the cost to acquire the picture, the estimated P&A required to enable the film to
reach its widest possible audience, and the ancillary market potential for the film after the theatrical release.
We prepare our marketing campaign and release schedules to attract the widest possible audience, with P&A typically tailored to minimize
financial exposure while maximizing revenue potential for our releases. We construct release schedules taking into account moviegoer
attendance patterns and competition from other studios’ scheduled theatrical releases. We use either wide or limited initial releases depending
on the film. We generally spend less than half on P&A for a given film than a major studio and design our marketing plan to cost-effectively
reach the widest possible audience.
The following table represents our anticipated ultimate financial results from all distribution channels of the twenty films we released
theatrically between July 2001 and December 2002. This table shows the anticipated contribution to our financial performance of these films
based on our estimates and is categorized by size of production, acquisition and promotional budgets, before allocation of general and
administrative expenses. We are including this table to illustrate the actual and estimated financial results of our film production, acquisition
and distribution business. This table reflects our cost and revenue estimates as of December 2002.
This table includes estimates of both our costs and revenues that are based on numerous assumptions. Our management periodically
assesses these estimates and the underlying assumptions based on a film’s performance and general market conditions. We believe that our
estimates are reasonable, based on our experience and knowledge of the business; however, in light of the significant uncertainties inherent in
these estimates, the inclusion of this information in this prospectus should not be regarded as a representation by us or any other person that any
of these estimates will be achieved. We cannot assure that we will achieve the estimated financial performance set forth in the table.
The estimates contained in the table are “forward-looking” statements as described on page 21 of this prospectus, and actual results may
differ materially from those expressed or implied by these forward-looking statements. Some of the factors that may cause our actual results to
differ from these estimates are described in “Risk Factors” contained in this prospectus.
Film Category
Total Production/ Acquisition and P&A
Costs (1) Under $5 million
Total Production/Acquisition and P&A
Costs between $5 million and $13 million
Total Production/Acquisition and P&A
Costs in excess of $13 million
TOTALS
# of
Films
14
Actual Plus
Estimated
Direct Film
Costs (2)
$
30,489
Actual Plus
Estimated
Revenues (3)
Contribution (4)
(Amounts in thousands)
$
43,126
$
Contribution
Margin (5)
12,637
29.3 %
Average
Contribution
Per Film
$
903
3
49,271
57,344
8,073
14.1 %
2,691
3
83,687
109,281
25,594
23.4 %
8,531
20
$ 163,447 (6)
$ 209,751 (7)
46,304
22.1 %
$
$
2,315
(1)
Total Production/ Acquisition and P&A Costs are the total of (i) the costs to produce a film or acquire the distribution rights to a film and
(ii) the costs of theatrical prints and advertising for a film.
(2)
Actual Plus Estimated Direct Film Costs include production/ acquisition costs, P&A, international distribution costs, home video
expenses, participations and residuals. Actual Plus Estimated Direct Film Costs do not include general and administrative expenses.
(3)
Actual Plus Estimated Revenues include theatrical, international, home video, television, and other revenues.
(4)
Contribution equals Actual Plus Estimated Revenues less Actual Plus Estimated Direct Film Costs. This represents contribution to our
financial performance prior to allocation of general and administrative expenses.
(5)
Contribution Margin equals Contribution divided by Actual Plus Estimated Revenues.
(6)
Of total Actual Plus Estimated Direct Film Costs, approximately 84%, or $137.9 million, represent costs incurred, and approximately
16%, or $25.5 million, represent estimated future costs.
(7)
Of total Actual Plus Estimated Revenues, approximately 68%, or $143.0 million, represent revenues recognized, and approximately 32%,
or $66.8 million, represent estimated future revenues.
46
Our fiscal 2004 theatrical release schedule features some of our most highly anticipated films, including (in anticipated order of release):
Title
House of 1000 Corpses
Mondays in the Sun
Confidence
Sweet 16
The Hard Word
Wonderland
Godsend
Cabin Fever
The Cooler
Shattered Glass
Girl with a Pearl Earring
Produced or
Acquired
Summary
Principal Actors
Four people lose their way,
and most of them their lives,
on a dark and stormy
Halloween night.
Five friends cope with the
loss of their jobs when a
local shipyard closes and
moves their jobs to Korea.
A veteran con man pulls the
ultimate con over a local
mob boss.
A young boy about to turn 16
tries to build a better life for
his mother away from her
abusive boyfriend.
Three brothers try to leave
their life of crime behind
them, but crooked cops and
lawyers will not let them.
Based on the true story of the
infamous murders atop
Wonderland Avenue in Los
Angeles during the summer
of 1981, allegedly involving
adult film star John Holmes
and gangster Eddie Nash.
A thriller about human
cloning.
Five friends encounter a
flesh-eating virus in the
woods while on summer
vacation.
A casino cooler, an unlucky
man used to cool off hot
players at the tables, sees his
luck change for the better
when he falls in love.
Based on the Vanity Fair
article about Stephen Glass,
the associate editor of The
New Republic, who, as it
turns out, fabricated much of
what he wrote.
Based on the best selling
book by Tracey Chevalier,
the story of the painter
Vermeer and his muse.
Karen Black and Sheri Moon
Acquisition
Javier Bardem
Acquisition
Edward Burns, Andy Garcia,
Dustin Hoffman and Rachel
Weisz
Martin Compston
Production
47
Acquisition
Rachel Griffiths and Guy
Pearce
Acquisition
Val Kilmer, Kate Bosworth,
Josh Lucas, Lisa Kudrow,
Eric Bogosian, Dylan
McDermott, Tim Blake
Nelson and Christina
Applegate
Production
Robert DeNiro, Greg Kinnear
and Rebecca Romijn-Stamos
James De Bello, Jordan Ladd,
Joey Kern, Rider Strong and
Cerrina Vincent
Production
Acquisition
Alec Baldwin, Maria Bello
and William H. Macy
Acquisition
Hayden Christensen, Peter
Sarsgaard, Chloe Sevigny
and Steve Zahn
Production
Colin Firth, Scarlett
Johansson and Tom
Wilkinson
Acquisition
We may revise the release date of a motion picture as the production schedule changes or in such a manner as we believe is likely to
maximize revenues. Additionally, there can be no assurance that any of the motion pictures scheduled for release will be completed, that
completion will occur in accordance with the anticipated schedule or budget, or that the motion pictures will necessarily involve any of the
creative talent listed above.
We also distribute French language films in North America through our Christal Films Distribution unit. In fiscal 2003, Christal Films
Distribution distributed the following motion pictures: La Mystérieuse Mlle C; Savage Messiah ; the Oscar-nominated Winged Migration (in
French); Mission Cléopâtre ; and Astérix et Obélix , the highest grossing foreign film in Quebec history. Upcoming releases include: Les
Tourtereaux , starring Gérard Depardieu and Jean Reno; L’Auberge Espagnole , and La Fleur du Mal .
International Distribution. We distribute our in-house productions and third party acquisitions to the international marketplace on a
territory-by-territory basis through third parties. We license international rights for approximately 185 motion pictures, including in-house
productions American Psycho, Frailty and the Academy Award winning Monster’s Ball , which gained further momentum by winning the
Silver Bear for Best Actress at the 2002 Berlin Film Festival. We also license the Academy Award nominated Amores Perros internationally,
which won two major prizes at the 2000 Cannes Film Festival. In the past year, we have also sold our biggest slate of in-house productions to
the international marketplace, including the soon to be released Confidence, Godsend and Wonderland , to some of the world’s leading
independent distributors. For these and other in-house productions, international sales are often pre-sold to cover a significant portion of the
production budget. We have also sold three foreign language titles that were acquired for international distribution, including the Argentinean
motion picture Nine Queens , to be remade by Steven Soderberg, and the Spanish film El Otro lado de la Cama .
Home Video Distribution. We have two U.S. video distribution labels, Trimark Home Video and Studio Home Entertainment, both branded
to consumers as Lions Gate Home Entertainment, which aim to exploit our filmed and television content library of approximately 2,000 motion
picture and television program titles. We have established a strong track record for building on the awareness generated from our theatrical
releases, including the recent video release of Rules of Attraction . Recent home video releases include in-house productions Monster’s Ball,
The Wash, Frailty and State Property and acquired films O, Lantana, and Lovely and Amazing .
In addition to our approximately 15 theatrical releases each year, we also acquire approximately 80 titles annually for direct-to-video
distribution, adding almost 100 films to our library each year. We also produce and acquire motion pictures that are not theatrically released,
but have commercial potential in video and ancillary markets, including: The Badge, starring Billy Bob Thornton and Patricia Arquette; Wise
Girls, starring Mira Sorvino and Mariah Carey; and the sequels to the Cube and Reanimator franchises. We are also able to distribute
successful television product on video, including the Saturday Night Live product and the first season of the hit comedy series Will and Grace,
both from NBC . We recently reacquired the home entertainment distribution rights to several films we produced, including Academy Award
winners and nominees Gods and Monsters starring Brendan Fraser and Ian McKellan, Affliction starring Nick Nolte and Sissy Spacek, Shadow
of the Vampire starring Willem Dafoe and John Malkovich and The Red Violin starring Samuel L. Jackson.
We directly distribute to the rental market through Blockbuster, Inc., Hollywood Entertainment Corporation, Movie Gallery, Inc. and
Rentrak Corporation. We also distribute or sell directly to mass merchandisers, such as Costco Wholesale Corporation, Target Corporation,
Best Buy Co. Inc., and others who buy large volumes of our videos and DVDs to sell directly to consumers .
Pay and Free Television Distribution. We have more than 250 titles in active distribution in the domestic cable, free and pay television
markets. We sell our library titles and new product to cable channels, including HBO, Starz, Showtime, Sci-Fi, IFC and USA. We also entered
into an arrangement with Warner Home Entertainment for pay-per-view and video-on-demand distribution of Lions Gate Home Entertainment
product, as well as into a movie syndication deal with New Line Television.
48
Canadian Distribution. In Canada, we operate a full service theatrical, video/ DVD and television distribution business in partnership with
TVA Films, Inc. We and TVA Films each own 50% of JV Media Inc., a joint venture established to service each other’s motion picture and
television product through all distribution media. JV Media has recently released the best selling, critically acclaimed French horror film
Brotherhood of the Wolf in the home video market. JV Media has also slated such releases as our in-house production Confidence, starring
Dustin Hoffman, and Cabin Fever, directed by Eli Roth. On video/ DVD, JV Media recently released our in-house production Rules of
Attraction, which achieved top five-bestseller designation at many of Canada’s top video/ DVD retailers. JV Media also recently completed a
number of movie packages with Canada’s pay television networks and secured broadcast licenses for our titles such as Monster’s Ball, O and
Frailty .
Video-on-Demand. We own approximately 57% of CinemaNow, a development stage company that distributes feature films on demand
via the internet. CinemaNow streams and downloads over 730 motion pictures, delivering over 2.5 million streams to over 1.2 million users per
month, using the Windows Media Player as its viewing platform. CinemaNow’s fee based, on demand selections are securely streamed using
Microsoft’s Digital Rights Management. CinemaNow controls internet distribution rights to approximately 3,000 motion pictures from over
100 licensors, including distribution licenses with Fox, Warner Bros., MGM, Lions Gate, Allied Artists Entertainment Group, Inc., Tai Seng
Video Marketing and Salvation motion picture libraries. CinemaNow makes select movies available through syndication partners including
WindowsMedia.com and numerous international distribution partnerships. CinemaNow also licenses its proprietary PatchBay™ technology,
which is a suite of software capable of managing an online content distribution website. CinemaNow has completed three rounds of financing
with investors including Microsoft, Blockbuster and Kipco.
Studio Facilities
We own and operate Lions Gate Studios, a state-of-the-art film and television production studio occupying nearly 14 acres in North
Vancouver, British Columbia.
Motion picture and television production has increased over the past five years in Canada. This increase can be attributed to numerous
factors, including: i) close professional contacts between Canadian and U.S. studios, independent producers, distributors and buyers resulting
from Canada’s geographic proximity to the United States; ii) lower production costs in Canada than in the U.S. and other countries due, in part,
to lower guild and union minimums; iii) the favorable exchange rate of the Canadian dollar; iv) government tax incentives; v) the availability of
location assistance to motion picture and television producers offered by many Canadian cities and several provinces; vi) a large number of
highly trained and professional crews, technicians and production personnel; vii) flexible trade unions that insist upon less onerous
requirements than their U.S. counterparts; and viii) Canada’s wide-ranging topography that makes Canada ideally suited for location shooting.
Our studio’s annual occupancy has averaged above 90% over the last five years. Current studio productions include Miramax’s motion
picture Scary Movie 3 , Warner Bros.’ motion picture Scooby Doo 2 , Fox Television’s series John Doe , USA Cable’s mini-series Battlestar
Galactica and two Fox Television pilots.
We expect to have continued high occupancy rates for both our studios and offices for the next year and have entered into an additional
operating lease with Eagle Creek Studios in Burnaby, British Columbia. Eagle Creek Studios is occupied by Warner Bros. and has two 17,000
square foot sound stages with accompanying office space. The addition of Eagle Creek Studios increases Lions Gate Studios’ sound stage
inventory to ten. We have also entered into a revenue sharing equipment supply contract with William F. White Limited for equipment on the
stages.
Government Incentives and Regulation
Regulation by the CRTC. The Canadian Radio-television and Telecommunications Commission, or CRTC, has jurisdiction over all
Canadian broadcasting and telecommunications companies. The CRTC
49
has and continues to license and regulate broadcasting undertakings, including conventional (i.e., over-the-air television stations), specialty and
pay television services, pursuant to the Broadcasting Act (Canada) and the applicable regulations made thereunder, the policies and decisions
of the CRTC as issued from time to time and the conditions and expectations established in the broadcasting license for each undertaking.
Canadian pay and specialty television channels have experienced rapid growth since the CRTC first issued licenses for these types of
broadcasting undertakings in 1982. Specialty and pay television services are available to all subscribers of broadcasting distribution
undertakings including cable and DTH companies. Subscriptions generally are through packages of special interest, news, sports, arts and
entertainment programming. As of September 2002, there were over 50 Canadian specialty services and 13 Canadian pay-TV services available
to Canadian subscribers. Moreover, in September 2002, an additional 47 new digital-only specialty channels were launched to subscribers of
digital cable television services and to all DTH subscribers.
Under the Broadcasting Act (Canada), the CRTC is responsible for regulating and supervising all aspects of the Canadian broadcasting
system with a view to ensuring compliance with certain broadcasting policy objectives of the Broadcasting Act (Canada). For example, the
Broadcasting Act (Canada) empowers the CRTC to issue licenses for terms of up to seven years to carry on a television programming
undertaking (i.e., a conventional, specialty or pay television service) to entities eligible by virtue of their status as Canadian-owned and
controlled under applicable foreign ownership and control directives issued under the legislation. In addition, the CRTC also imposes
restrictions on the transfer of ownership and control of all licensed broadcasting undertakings, including television programming services.
CRTC requirements provide that each Canadian broadcaster, including all conventional, specialty, pay and pay-per-view television
services, must typically, as a condition of their CRTC issued broadcasting license, broadcast significant minimum amounts of Canadian content
programming on their overall schedule and in prime time. Over-the-air private broadcasters must broadcast Canadian programs for a minimum
of 60% of their entire schedule and 50% of their schedule between 6 p.m. and midnight. In addition, since September 2000, conventional
broadcasters that are of the class of a “large multi-station ownership group” (including CTV, Global and TVA) must broadcast an average of at
least eight hours per week of “priority Canadian programs” (as defined by the CRTC) during “peak hours” of 7:00 p.m. to 11:00 p.m.
The CRTC enforces compliance with these requirements, and failure to comply can result in fines, shorter-term license renewals or
revocation of a broadcaster’s license. The CRTC may also amend the terms and conditions governing such licenses at the time of renewal or in
the final two years of a seven-year term, or earlier at the licensee’s request.
Government Financial Support. Telefilm Canada, a government agency, provides financial assistance in the form of equity investments,
interest free and low interest loans, and development and interim financing. Canadian motion picture and television productions that have
significant Canadian creative, artistic and technical content and that meet certain published criteria qualify for such financial assistance.
Telefilm Canada’s provincial counterparts in Quebec, Ontario, Manitoba, Saskatchewan, British Columbia, New Brunswick and Nova Scotia
also provide financial support to qualifying Canadian content productions. In 1996, the Canadian federal government established the Canada
Television and Cable Production Fund (now operating as the CTF), a government-cable industry partnership that combined the former Cable
Production Fund, Telefilm Canada’s Canadian Broadcast Program Development Fund and a $100 million contribution from the Department of
Canadian Heritage to form the television funding initiative. In its 2003 budget, the federal government announced that the amount provided by
the Department of Canadian Heritage would be reduced to $75 million a year for 2003 and 2004.
Tax Credits. The federal government provides a refundable tax credit for eligible Canadian-content motion picture or video productions
produced by qualified taxable Canadian corporations. The federal tax credit is for a maximum amount of approximately 12% of the total
production costs of an eligible production.
50
The federal Film or Video Production Services Tax Credit, or FVPSTC, was introduced in 1997 to encourage the production in Canada of
non-Canadian-content motion pictures and videos. Until recently, the FVPSTC refunded 11% of the cost of qualifying Canadian labor
expenditures. In its 2003 budget, the federal government announced that it would increase the rate of the FVPSTC from 11% to 16%. This
higher refundable rate will cover more of the overall production costs. Assuming that Canadian labor expenditures generally represent
approximately 50% of the total production budget, the FVPSTC may net applicants approximately 8% of total production costs.
In addition to the federal tax credits, most provinces offer a form of refundable provincial tax credit for motion pictures and videos that are
produced, in whole or in part, in the particular province. These tax credits range from 5.5% to 25% of eligible production costs. The applicable
rate for any particular production will depend on a number of factors including the particular province in which the production occurs, whether
the production meets provincial content requirements (where applicable) and whether the production is filmed in a specific location in a
province that provides additional regional incentives.
Co-Production Treaties. Canada is a party to motion picture and/or television co-production treaties with over 50 countries, which enables
co-productions to qualify as local content and thus be eligible for government assistance and financing in more than one country, which reduces
the cost of production. The most active relationship has traditionally been with France, but recently the United Kingdom has become a close
second in volume of production.
For financial information about our government incentives for each of the last three fiscal years, refer to the consolidated financial
statements note 16 — Government Assistance.
51
INTERCORPORATE RELATIONSHIPS
The chart below lists the principal corporate entities through which we carry out our business. Unless otherwise indicated, we directly or
indirectly own 100% of the voting and equity securities of each listed entity.
* The shares of Lions Gate Television Corp. are owned by a trust, the trustee of which is Frank Giustra, our former Chairman of the Board.
The beneficiaries of the trust are us, our subsidiaries and Lions Gate Television Corp. The trust terminates in June 2004.
52
MANAGEMENT
The following table provides information about our executive officers and directors at May 15, 2003:
Name
Mark Amin
Thomas Augsberger
Michael Burns
Drew Craig
David Doerksen
Arthur Evrensel
Jon Feltheimer
James Keegan
Gordon Keep
Morley Koffman
Patrick Lavelle
Wayne Levin
André Link
Harald Ludwig
Gary Newton
G. Scott Paterson
Jeff Sagansky
E. Duff Scott
Harry Sloan
Mitchell Wolfe
Marni Wieshofer
Position
Vice Chairman and Director
Director
Vice Chairman and Director
Director
Director
Director
Chief Executive Officer and Director
Chief Administrative Officer and Chief Financial Officer
Senior Vice President, Secretary and Director
Director
Director
Executive Vice President, Legal and Business Affairs
President and Chairman of the Board
Vice Chairman of the Board
Director
Director
Director
Director
Director
Director
Executive Vice President, Corporate Development
Age
53
40
44
44
38
44
51
45
46
73
64
40
70
48
51
39
51
66
53
51
40
Mark Amin. Mr. Amin has been our Vice Chairman since October 2000. From 1984 to October 2000, Mr. Amin served as Chief Executive
Officer or Chairman of Trimark Holdings, Inc., which he founded. Since 1998 Mr. Amin has been Chairman of CinemaNow and since 2001
the owner and Chief Executive Officer of Sobini Films. Mr. Amin became a director in October 2000.
Thomas Augsberger. Mr. Augsberger has been a director since June 2002. Mr. Augsberger is a consultant and independent motion picture
and television producer through his company Eden Rock Media. From 1996 to 2002, Mr. Augsberger was a partner with Key Entertainment, an
independent production, financing and foreign sales business.
Michael Burns. Mr. Burns has been our Vice Chairman since March 2000. From 1991 to March 2000, Mr. Burns served as Managing
Director and Head of Prudential Securities Inc.’s Los Angeles Investment Banking Office. Mr. Burns became a director in August 1999.
Mr. Burns is Chairman and a director of Novica.com.
Drew Craig. Mr. Craig became a director in September 2000. Mr. Craig is President and Chief Executive Officer of Craig Media Inc. Prior
thereto he was President of Craig Broadcast Systems Inc. and Craig Broadcast Alberta Inc. since September 1997. Mr. Craig is a director of
Craig Music & Entertainment Inc.
David Doerksen. Mr. Doerksen became a director in May 2003. Mr. Doerksen is President of Edge Entertainment Inc., a production
company, which he founded in 1993.
Arthur Evrensel. Mr. Evrensel became a director in September 2001. Mr. Evrensel has been a partner with the law firm of Heenan Blaikie
LLP since 1992.
53
Jon Feltheimer. Mr. Feltheimer has been our Chief Executive Officer since March 2000. From 1997 to 1999, Mr. Feltheimer served as
Executive Vice President of Sony Pictures Entertainment. Mr. Feltheimer became a director in January 2000.
James Keegan. Mr. Keegan has been our Chief Administrative Officer since April 2002 and our Chief Financial Officer since September
2002. From September 1998 to April 2002, Mr. Keegan was the Chief Financial Officer of Artisan Entertainment. From April 1989 to March
1990, he was Controller of Trimark Holdings, Inc. and from March 1990 to August 1998, he was the Chief Financial Officer of Trimark
Holdings, Inc.
Gordon Keep. Mr. Keep has been our Senior Vice President since October 1997. From 1987 to October 1997, Mr. Keep served as Vice
President, Corporate Finance of Yorkton Securities Inc. Mr. Keep has been a director since June 2000. From January 2001 to September 2002,
Mr. Keep was a consultant for Endeavour Financial and from October 2002 to the present, Mr. Keep has been the Managing Director,
Corporate Finance of Endeavour Financial. Mr. Keep is a director and member of the audit committees of Dunsmuir Ventures Ltd. and Adobe
Ventures Inc. Mr. Keep is President, a director and a member of the audit committee of Full Riches Investments Ltd.
Morley Koffman. Mr. Koffman has been a director since November 1997 and is a member of the audit committee. Mr. Koffman is a partner
with the law firm of Koffman Kalef, where he has practiced since 1993. Mr. Koffman is a director and a member of the audit committee of
Anthem Properties Corp., a director, the chairman of the audit committee and a member of the executive committee of USFreightways
Corporation and a director and the Chairman of the corporate governance committee of Ainsworth Lumber Co. Ltd.
Patrick Lavelle. Mr. Lavelle has been a director since October 2000. Mr. Lavelle was Chairman and a director of Export Development
Corporation, a commercial financial institution, from December 1997 to January 2002. From 1994 to December 1997, Mr. Lavelle served as
Chairman of the Business Development Bank of Canada. Mr. Lavelle is a director of Canadian Bank Note Company Limited, a director of
Westport Innovations Inc., a director and a member of the audit committee of Slater Steel Inc., a director and a member of the corporate
governance, audit and compensation committees of Algoma Steel, a director and a member of the audit and compensation committees of
Tahera Corporation and a director and a member of the audit committee of Proprietary Industries Inc. Mr. Lavelle is Chairman of Patrick J.
Lavelle & Associates. From March 2001 to March 2002, Mr. Lavelle was Chief Executive Officer of Unique Broadband Services.
Wayne Levin. Mr. Levin has been our Executive Vice President, Legal and Business Affairs since November 2000. He worked for Trimark
Holdings, Inc. from September 1996 to November 2000, first as Director of Legal and Business Affairs from 1996 to 1998 and then as General
Counsel and Vice President from 1998 to 2000.
André Link. Mr. Link has been our President since April 2000 and our Chairman since May 2003. Since 1962, Mr. Link has been Chief
Executive Officer of Lions Gate Films Corp. Mr. Link has been a director since November 1997.
Harald Ludwig. Mr. Ludwig has been a director since November 1997 and our Vice Chairman since May 2003. Since 1985, Mr. Ludwig
has served as President of Macluan Capital Corporation, a leverage buy-out company. Mr. Ludwig is a director and a member of the
compensation committee of West Fraser Timber Limited and a director of SVC Second Ventures Limited and Compass Aerospace Limited.
Gary Newton. Mr. Newton became a director in May 2003. Mr. Newton has been Executive Vice President of Platinum Equity since 2000
and before that a Vice President of Platinum Equity since 1996, and has also been President of Manac Solutions, a provider of application
software for the legal profession, since 1995.
G. Scott Paterson. Mr. Paterson has been a director since November 1997. Mr. Paterson is a merchant banker and venture capitalist. From
October 1998 to December 2001 Mr. Paterson served as
54
Chairman and Chief Executive Officer of Yorkton Securities Inc. From May 1997 to October 1998, Mr. Paterson served as President of
Yorkton. Mr. Paterson has been President of Patstar, Inc. since January 2002. Mr. Paterson is the past Chairman of the Canadian Venture
Exchange. Mr. Paterson is a trustee of the Art Gallery of Ontario, a governor of Ridley College and Chairman of the Merry Go Round
Children’s Foundation. In December 2001, Mr. Paterson entered into a Settlement Agreement with the Ontario Securities Commission in
connection with conduct that was agreed to be contrary to the public interest in connection with certain corporate finance and trading activities
engaged in by Mr. Paterson and the investment dealer with which he was associated. Under the Settlement Agreement, Mr. Paterson agreed
that he could not be registered under the Securities Act (Ontario) until December 17, 2003, made a voluntary payment to the Ontario Securities
Commission of one million dollars, agreed to a cease trade order for a period of six months and was reprimanded, among other terms and
conditions. There were no allegations of securities law breaches. No restrictions were imposed on Mr. Paterson regarding his capacity to act as
an officer and/or director of public companies.
Jeff Sagansky. Mr. Sagansky became a director in May 2003. Mr. Sagansky is Vice-Chairman and a director of Paxson Communications
Corporation (PAX TV). Previously, he was Chief Executive Officer and President of PAX TV from May 1998 to December 2002.
E. Duff Scott. Mr. Scott has been a director since September 2001. Mr. Scott has served as Chairman and a nominating committee member
of QLT Inc., a biotechnology company, since 1991. Mr. Scott served as Chairman of Peoples Jewelers from 1993 to 1998. Mr. Scott is a
director, audit and compensation committee member of The Becker Milk Company Ltd. and Perle Systems Inc. Mr. Scott is a director, audit,
compensation and corporate governance committee member of Simmons Canada Inc. Mr. Scott is also a director and audit committee member
of B Split Corp., Aberdeen Asia Pacific Income Investment Company and Aberdeen Global Income Fund Inc.
Harry Sloan. Mr. Sloan has been a director since September 2001. Mr. Sloan is Executive Chairman and has been a director of SBS
Broadcasting SA since January 1993. Mr. Sloan was Chief Executive Officer of SBS Broadcasting SA from January 1993 until September
2001. Mr. Sloan is also a director of Zenimax, Inc.
Mitchell Wolfe. Mr. Wolfe became a director in May 2003. Mr. Wolfe practices corporate, commercial, real estate and banking law at the
Toronto law firm of Beard Winter LLP where he has been a partner since 1988.
Marni Wieshofer. Ms. Wieshofer has been our Executive Vice President, Corporate Development since September 2002. From April 1999
until September 2002. Ms. Wieshofer served as our Chief Financial Officer. From February 1999 to April 1999, Ms. Wieshofer was our Vice
President, Finance. From October 1995 to January 1999, Ms. Wieshofer served as Vice President, Finance of Alliance Atlantis
Communications, an entertainment company.
BENEFICIAL OWNERSHIP
The following table presents certain information about beneficial ownership of our common shares as of March 31, 2003, by (1) each
person (or group of affiliated persons) who is known by us to own beneficially more than 5% of our common shares, (2) each director and
nominee for director, our Chief Executive Officer, our Chief Financial Officer and each of our four other most highly compensated executive
officers whose salary and bonuses exceeded $100,000 for the year ended March 31, 2003, and (3) all directors and executive officers as a
group. Except as indicated in the footnotes to this table, the
55
persons named in the table have sole voting and investment power with respect to all common shares shown as beneficially owned by them,
subject to community property laws, where applicable.
Shares Beneficially Owned
Number
Percentage
Name of Beneficial Owner (1)
Capital Research and Management Company (2)
Fidelity Management and Research Company (3)
SBS Broadcasting S.A. (4)
Telemunchen Fernseh GmbH & Co. Produktionsgesellschaft (5)
Vulcan Ventures Incorporated (6)
ENT Holding Corporation (7)
Mark Cuban (8)
Mark Amin (9)
Thomas Augsberger (10)
Michael Burns (11)
Drew Craig (12)
David Doerksen
John Dellaverson (13)
Arthur Evrensel (14)
Jon Feltheimer (15)
Jim Keegan (16)
Gordon Keep (17)
Morley Koffman (18)
Patrick Lavelle (19)
André Link (20)
Harald Ludwig (21)
Gary Newton
G. Scott Paterson (22)
Jeff Sagansky
E. Duff Scott (23)
Harry Sloan (24)
Mitchell Wolfe
Marni Wieshofer (25)
All executive officers and directors as a group (21 persons)
*
4,152,850
6,475,000
5,680,125
5,696,125
2,515,125
2,500,000
2,950,348
3,533,104
16,667
693,887
50,000
0
255,000
37,183
1,022,854
38,333
283,878
55,700
51,000
1,188,031
251,000
0
202,300
0
43,333
46,533
0
150,000
7,918,803
9.4
15.0
11.6
11.6
5.5
5.8
6.8
8.2
*
1.6
*
*
*
*
2.3
*
*
*
*
2.7
*
*
*
*
*
*
*
*
16.8
Less than 1%
(1)
The addresses for the listed beneficial owners are as follows: for SBS Broadcasting S.A., 8-10 rue Mathias Hardt, BP39, L-2010,
Luxembourg; for Telemunchen Gruppe, Kaufingerstrasse 24, 80331, Munich, Germany; for Capital Research and Management
Company, 333 South Hope St., Los Angeles, California 90071; for Fidelity Management and Research Company, 82 Devonshire St.,
Boston, Massachusetts 02109-3614; for Vulcan Ventures Incorporated, 110 110 th Ave., N.E., Suite 550, Bellevue, Washington 98804;
for Mark Cuban, 5424 Deloache Ave., Dallas, Texas 75220; for Tom Gores c/o Platinum Equity, LLC, 2049 Century Park East, Los
Angeles, CA 90067; for each other listed individual c/o the Company, Suite 3123, Three Bentall Centre, 595 Burrard Street,
Vancouver, British Columbia, V7X 1J1.
(2)
Includes (a) 572,000 shares from the possible conversion of the Series A preferred shares and (b) 237,150 shares from warrants
exercisable into shares. This information is based solely on a Schedule 13G, filed February 13, 2003 with the Securities and Exchange
Commission by Capital Research and Management Company.
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(3)
The information is based solely on a Schedule 13G, filed February 13, 2003 with the Securities and Exchange Commission by Fidelity
Management and Research Company.
(4)
Includes (a) 4,012,000 shares from the possible conversion of the Series A preferred shares and (b) 1,668,125 shares from warrants
exercisable into shares.
(5)
Includes (a) 4,028,000 shares from the possible conversion of the Series A preferred shares and (b) 1,668,125 shares from warrants
exercisable into shares.
(6)
Includes (a) 1,765,000 shares from the possible conversion of the Series A preferred shares and (b) 750,125 shares from warrants
exercisable into shares. The information is based solely on a Schedule 13G, filed January 10, 2000 with the Securities and Exchange
Commission by Vulcan Ventures Incorporated.
(7)
ENT Holding Corporation is a corporation directly controlled by Tom Gores.
(8)
The information is based solely on a Schedule 13G/A, filed May 14, 2003 with the Securities and Exchange Commission by Mr.
Cuban.
(9)
Mr. Amin acquired the shares from us on October 13, 2000. If the over-allotment option is exercised by the underwriters, Mr. Amin
may sell up to 1,000,000 shares. In the event that all such shares are sold, Mr. Amin will be the beneficial owner of 2,533,104 shares,
representing 4.2% of the total number of our shares outstanding after the offering. Shares beneficially owned by Mr. Amin include
125,000 shares subject to options exercisable on or before May 30, 2003. While Mr. Amin beneficially owns all of the shares only
794,037 of the shares are owned of record.
(10)
Includes 16,667 shares subject to options exercisable on or before May 30, 2003.
(11)
Includes (a) 225,000 shares subject to options exercisable on or before May 30, 2003, (b) 105,000 shares from the possible conversion
of the Series A preferred shares and (c) 43,987 shares from warrants exercisable into shares.
(12)
Includes 50,000 shares subject to options exercisable on or before May 30, 2003.
(13)
Includes 100,000 shares subject to options exercisable on or before May 30, 2003. Mr. Dellaverson resigned his position with the
company effective March 31, 2003.
(14)
Includes 33,333 shares subject to options exercisable on or before May 30, 2003.
(15)
Includes (a) 789,666 shares subject to options exercisable on or before May 30, 2003, (b) 107,000 shares from the possible conversion
of the Series A preferred shares and (c) 43,988 from warrants exercisable into shares.
(16)
Includes 33,333 shares subject to options exercisable on or before May 30, 2003.
(17)
Includes (a) 175,000 shares subject to options exercisable on or before May 30, 2003, (b) 24,691 shares from the possible conversion of
a debenture, (c) 23,115 shares from the possible conversion of a debenture owned by his spouse, and (d) 53,000 shares held by his
spouse. Mr. Keep disclaims beneficial ownership of the 23,115 shares from the debentures and the 53,000 shares held by his spouse.
(18)
Includes 50,000 shares subject to options exercisable on or before May 30, 2003.
(19)
Includes (a) 50,000 shares subject to options exercisable on or before May 30, 2003 and (b) 1,000 shares held by his spouse.
Mr. Lavelle disclaims beneficial ownership of the 1,000 shares held by his spouse.
(20)
Includes (a) 100,000 shares subject to options exercisable on or before May 30, 2003 and (b) 1,088,031 shares held by Cinepix Inc.,
which is 50% owned by Mr. Link.
(21)
Includes 50,000 shares subject to options exercisable on or before May 30, 2003.
(22)
Includes 50,000 shares subject to options exercisable on or before May 30, 2003.
(23)
Includes 33,333 shares subject to options exercisable on or before May 30, 2003.
(24)
Includes 33,333 shares subject to options exercisable on or before May 30, 2003.
(25)
Includes 125,000 shares subject to options exercisable on or before May 30, 2003.
57
CHANGE IN ACCOUNTANTS
Ernst & Young LLP have been our auditors since August 2001. PricewaterhouseCoopers LLP, or PwC, were our auditors for the fiscal year
ended March 31, 2001 and had been our auditors since November 1997. On July 29, 2001, the board of directors, upon the recommendation of
the Audit Committee and the company’s senior management, requested the resignation of PwC as the company’s auditors effective as of
July 24, 2001.
PwC’s reports on the consolidated financial statements for fiscal years ended March 31, 2001 and 2000 did not contain an adverse opinion,
disclaimer of opinion, or qualification or modification as to uncertainty, audit scope or accounting principles. In addition, there were no
disagreements within the meaning of Item 304(a)(1)(iv) of the Securities and Exchange Commission Regulation S-K for the fiscal years ended
March 31, 2001 and 2000 and the interim period ended July 29, 2001.
In August 2001, PwC advised us and the Audit Committee of the following matters under Item 304(a)(1)(v):
1. We did not then have procedures that were effective in ensuring that the information relevant to international sales revenue
recognition was collected and reported to ensure that the timing of certain revenue recognition was appropriate.
2. A number of material adjustments recorded by management were identified by the auditors during the audit. The auditors advised
that while internal controls over systems were adequate, lack of timely monitoring controls over systems output and accounting entries,
such as reconciliations of account balances, analysis and review of transactions, balances and adjustments, may have contributed to the
number of adjustments. The auditors advised that they were not able to determine whether the matters raised were related solely to
significant events that occurred during the year ended March 31, 2001 as the auditors were dismissed upon completion of the audit for the
year ended March 31, 2001.
3. We were advised to undertake additional training and support of its accounting employees and management to ensure employees
and management are able to fulfill their assigned functions.
In response to PwC’s comment 1, we continue to monitor our international sales revenue recognition practices in light of our ongoing
development.
In response to PwC’s comment 2, we note again that PwC advised the Audit Committee at the conclusion of its audit that our internal
controls were adequate, however, management acknowledges that certain processes could be improved upon. We are committed to a strong
internal control environment and related processes.
In response to PwC’s comment 3, we note that in fiscal 2001 we had grown substantially and as we continue to grow, we will continue to
hire and train staff to support the accounting function.
PwC’s letter stating that it agrees with the above statements is filed as an exhibit to the Registration Statement of which this prospectus is a
part.
DESCRIPTION OF SHARE CAPITAL
Our authorized capital consists of 500,000,000 common shares and 200,000,000 preferred shares, 1,000,000 shares of which are designated
as 5.25% Convertible Redeemable Series A Preferred Shares and 10 of which are designated as Series B Preferred Shares.
Common Shares
At the close of business on May 15, 2003, 43,207,399 of our common shares were issued and outstanding. Our common shares are listed
on the American Stock Exchange and Toronto Stock Exchange under the symbol “LGF.” We are registering 15,000,000 of our common shares,
no par value (not including any shares that may be purchased pursuant to the underwriters’ over-allotment option). Subject
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to any preference as to dividends provided to the holders of any of our preferred shares, and to other shares ranking senior or pari passu to our
common shares with respect to priority in the payment of dividends, the holders of our common shares will be entitled to receive dividends. We
will pay dividends on the common shares, as and when declared by our board of directors, out of monies properly applicable to the payment of
dividends, in the manner and form the board of directors determines. At the present time, given our anticipated capital requirements we intend
to follow a policy of retaining earnings in order to finance further development of our business. We are also limited in our ability to pay
dividends on our common shares by restrictions under the Company Act (British Columbia) relating to the sufficiency of profits from which
dividends may be paid. Holders of common shares have no preemptive, conversion or redemption rights and are not subject to further
assessment by us.
If we dissolve, or liquidate, or our assets are distributed among our shareholders for the purpose of winding-up our affairs, the holders of
common shares will be entitled to receive our remaining property and assets, subject to the prior rights of holders of our Series A Preferred
Shares to receive amounts equal to the purchase price of such shares plus all accrued and unpaid dividends and to any other shares ranking
senior or pari passu to the common shares with respect to priority in the distribution of assets upon dissolution, liquidation or winding-up.
Except for meetings at which only holders of another specified class or series of our shares are entitled to vote separately as a class or
series, the holders of common shares will be entitled to receive notice of and to attend all meetings of our shareholders and will have one vote
for each common share held at all meetings of our shareholders.
Pursuant to our charter and the provisions of the Company Act (British Columbia), certain actions that may be proposed by us require the
approval of the shareholders. We may, by ordinary resolution, alter our charter to increase our authorized capital by such means as creating
shares with or without par value or increasing the number of shares with or without par value. Under the Company Act (British Columbia), an
ordinary resolution is a resolution passed at a duly-convened meeting of shareholders by a simple majority of the votes cast in person or by
proxy, or a written resolution, that has been submitted to all shareholders who would have been entitled to vote on it at a meeting of
shareholders and consented to by shareholders holding shares carrying not less than three-fourths ( 3/4) of the votes entitled to be cast on it. We
may, by special resolution, alter our charter to subdivide, consolidate, change from shares with par value to shares without par value or from
shares without par value to shares with par value or change the designation of all or any of its shares. We may also, by special resolution, alter
its charter to create, define, attach, vary, or abrogate special rights or restrictions to any shares. Under the Company Act (British Columbia), a
special resolution is a resolution passed at a duly-convened meeting of shareholders by three-fourths ( 3/4) of the votes cast in person or by
proxy, or a written resolution consented to by all shareholders who would have been entitled to vote at a meeting of shareholders. In addition,
with respect to capital alterations that apply to any part of a class or, in the case of any class with more than one series, any series of issued
shares or where rights attached to issued shares are prejudiced or interfered with, that class or series must consent by separate resolution
requiring three-fourths ( 3/4) of the votes cast.
Series A Preferred Shares
On December 21, 1999, we issued 13,000 shares of our 5.25% Convertible Redeemable Series A Preferred Shares, of which 11,830 remain
issued and outstanding. The Series A Preferred Shares are non-voting, except for the right to elect between one and three directors, depending
on the number of preferred shares outstanding. The Series A Preferred Shares are entitled to cumulative dividends, as and when declared by the
board of directors, payable semi-annually on the last day of March and September of each year. We may pay the dividends in cash or additional
Series A Preferred Shares. The Series A Preferred Shares have a liquidation preference entitling each holder to receive an amount equal to
$2,550 per share plus the cumulative amount of all dividends accrued and unpaid. Each holder of the Series A Preferred Shares may convert all,
but not less than all, of the Series A Preferred Shares at any time into common shares at a rate of 1,000 common shares for each Series A
Preferred Share, subject to certain anti-dilution
59
adjustments. We may convert the Series A Preferred Shares, in whole or in part, to common shares, subject to certain conditions, which include
certain price and volume requirements.
We may redeem the Series A Preferred Shares, in whole or part, on or after January 1, 2005 for a cash payment of 105% of the stated value
of $2,550 per share plus accrued and unpaid dividends up to the date of redemption. A holder has a right to require redemption of all, but not
less than all, of the Series A Preferred Shares, for a cash payment of 100% of the stated value of $2,550 per share if the composition of the
board of directors ceases to be in compliance with certain provisions requiring the nomination of one Canadian director and election of up to
three directors, depending on the number of preferred shares outstanding.
We have agreed to use up to $20 million of the net proceeds from this offering to repurchase all or (if not all of the shares can be purchased
for $20 million) a portion of the Series A Preferred Shares held by SBS Broadcasting S.A. and Telemunchen Fernseh GmbH & Co. The per
share purchase price of such shares will be (a) $2,200 plus (b) if a positive number, an amount equal to one thousand multiplied by the
difference between (x) the per share price to the public in this offering and (y) $2.00. SBS holds 4,012 shares of Series A Preferred, and
Telemunchen holds 4,028 shares of Series A Preferred. If we cannot repurchase all of the shares held by SBS and Telemunchen for
$20 million, then the number of shares repurchased will be allocated on a pro rata basis between SBS and Telemunchen. Each Series A
Preferred shareholder other than SBS and Telemunchen has waived any requirement that the Company repurchase any of that holder’s Series A
Preferred Shares.
Each Series A Preferred shareholder has also conditionally agreed to waive with respect to this offering any requirement that the
conversion price of any Series A Preferred Share be adjusted from $2.55 to the purchase price per share of the common shares we sell in this
offering. We have agreed with all holders of our Series A Preferred Shares that with respect to any Series A Preferred Shares remaining after
the repurchase discussed above, we will promptly after consummation of this offering authorize amendment of the terms of the Series A
Preferred Shares so that their initial conversion price is $2.30 rather than $2.55. Our common shareholders, voting as a class, must approve the
adjustment at our next shareholders meeting. If our common shareholders do not approve the adjustment to $2.30 at our next shareholders
meeting, then the Series A Preferred Share conversion price will be adjusted to the public offering price set forth on the cover of this
prospectus. We expect the shareholders meeting to take place in September 2003.
Series B Preferred Shares
As a condition of the purchase of Trimark Holdings, Inc., a company that became our subsidiary, on October 13, 2000, we issued ten
Series B Preferred Shares at $10 per share to the principal shareholder of the subsidiary. The Series B Preferred Shares are non-transferable and
are not entitled to dividends. The Series B Preferred Shares are non-voting except that the holder, who was a principal of the subsidiary
acquired, has the right to elect himself to the board of directors. The Series B Preferred Shares are redeemable by us if certain events occur. The
Series B Preferred Shares have a liquidation preference equal to the stated value of $10 per share.
Registration Rights Agreements
We have a Registration Rights Agreement with Mr. Mark Amin and Mr. Reza Amin, pursuant to which we have agreed to file registration
statements covering our securities owned by them. As of May 12, 2003, Mark Amin and Reza Amin had the right to demand up to two
registration statements. In addition, we gave these shareholders various piggyback registration rights, which Mark Amin exercised to be
included as a selling shareholder as part of this registration statement. In general, we will pay all fees, costs and expenses of any such
registration statements.
We also have a Registration Rights Agreement with ENT Holding Corporation, pursuant to which we have agreed to file registration
statements covering our securities owned by them. Beginning May 13, 2005, ENT Holding Corporation will have the right to demand up to two
registration statements. In addition, we
60
gave ENT Holding Corporation various piggyback registration rights after this offering. In general, ENT Holding Corporation will pay all fees,
costs and expenses for any demand registration and we will pay all fees, costs and expenses of any piggyback registration.
TAXATION
Canadian Income Taxation
The following is a general summary of certain Canadian income tax consequences to U.S. Holders (who deal at arm’s length with the
company) of the purchase, ownership and disposition of common shares. For the purposes of this Canadian income tax discussion, a
“U.S. Holder” means a holder of common shares who (1) for the purposes of the Income Tax Act (Canada) is not, has not, and will not be
resident in Canada at any time while he or she holds common shares, (2) at all relevant times is a resident of the United States under the
Canada-United States Income Tax Convention (1980) (the “Convention”), and (3) does not and will not use or be deemed to use the common
shares in carrying on a business in Canada. This summary does not apply to U.S. Holders who are insurers. Such U.S. Holders should seek tax
advice from their advisors. An actual or prospective investor that is a United States limited liability company in some circumstances may not be
considered to be a resident of the United States for the purposes of the Convention and therefore may not be entitled to benefits thereunder.
This summary is not intended to be, and should not be construed to be, legal or tax advice to any prospective investor and no representation
with respect to the tax consequences to any particular investor is made. The summary does not address any aspect of any provincial, state or
local tax laws or the tax laws of any jurisdiction other than Canada or the tax considerations applicable to non-U.S. Holders. Accordingly,
prospective investors should consult with their own tax advisors for advice with respect to the income tax consequences to them having regard
to their own particular circumstances, including any consequences of an investment in common shares arising under any provincial, state or
local tax laws or the tax laws of any jurisdiction other than Canada.
This summary is based upon the current provisions of the Income Tax Act (Canada), the regulations thereunder and the proposed
amendments thereto publicly announced by the Department of Finance, Canada before the date hereof and our understanding of the current
published administrative and assessing practices of the Canada Customs and Revenue Agency. It does not otherwise take into account or
anticipate any changes in law, whether by legislative, governmental or judicial action.
The following summary applies only to U.S. Holders who hold their common shares as capital property. In general, common shares will be
considered capital property of a holder where the holder is neither a trader nor dealer in securities, does not hold the common shares in the
course of carrying on a business and is not engaged in an adventure in the nature of trade in respect thereof. This summary does not apply to
holders who are “financial institutions” within the meaning of the mark-to-market rules contained in the Income Tax Act (Canada).
Amounts in respect of common shares paid or credited or deemed to be paid or credited as, on account or in lieu of payment of, or in
satisfaction of, dividends to a shareholder who is not a resident of Canada within the meaning of the Income Tax Act (Canada) will generally be
subject to Canadian non-resident withholding tax. Such withholding tax is levied at a basic rate of 25%, which may be reduced pursuant to the
terms of an applicable tax treaty between Canada and the country of residence of the non-resident shareholder. Under the Convention, the rate
of Canadian non-resident withholding tax on the gross amount of dividends received by a U.S. Holder is generally 15%. However, where such
beneficial owner is a company that owns at least 10% of the voting shares of the company paying the dividends, the rate of such withholding is
5%.
A U.S. Holder will generally not be subject to tax under the Income Tax Act (Canada) in respect of any capital gain arising on a disposition
of common shares (including on a purchase by the company) unless at the time of disposition such shares constitute taxable Canadian property
of the holder for
61
purposes of the Income Tax Act (Canada) and such holder is not entitled to relief under an applicable tax treaty. If the common shares are listed
on a prescribed stock exchange at the time they are disposed of, they will generally not constitute taxable Canadian property of a U.S. Holder
unless, at any time during the five year period immediately preceding the disposition of the common shares, the U.S. Holder, persons with
whom he or she does not deal at arm’s length, or the U.S. Holder together with non-arm’s length persons, owned 25% or more of the issued
shares of any class or series of the capital stock of the company. In any event, under the Convention, gains derived by a U.S. Holder from the
disposition of common shares will generally not be subject to tax in Canada unless the value of the company’s shares is derived principally
from real property or certain other immovable property situated in Canada.
U.S. Federal Income Taxation
This summary describes the material U.S. federal income tax consequences of the purchase, ownership and disposition of our common
shares. This summary does not address any aspect of U.S. federal gift or estate tax, or the state, local or foreign tax consequences of an
investment in our common shares. This summary applies to you only if you hold and beneficially own common shares as capital assets for tax
purposes. This summary does not apply to you if you are a member of a class of holders subject to special rules, such as:
• dealers in securities or currencies;
• traders in securities that elect to use a mark-to-market method of accounting for securities holdings;
• banks or other financial institutions;
• insurance companies;
• tax-exempt organizations;
• persons that hold common shares as part of a hedge, straddle, constructive sale, conversion transaction or other integrated investment;
• persons whose functional currency for tax purposes is not the U.S. dollar;
• a person liable for alternative minimum tax; or
• persons who own or are deemed to own more than 10% of any class of our stock.
This summary is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations
promulgated thereunder, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a
retroactive basis.
You should consult your own tax advisor concerning the particular U.S. federal income tax consequences to you of the purchase,
ownership and disposition of our common shares, as well as the consequences to you arising under the laws of any other taxing jurisdiction.
For purposes of the U.S. federal income tax discussion below, you are a “U.S. holder” if you beneficially own common shares and are:
• a citizen or resident of the United States;
• a corporation, or entity taxable as a corporation, that was created or organized in or under the laws of the United States or any political
subdivision thereof;
• an estate the income of which is subject to U.S. federal income tax regardless of its source; or
• a trust if: (a) a court within the United States is able to exercise primary supervision over its administration and one or more
U.S. persons have the authority to control all substantial decisions of the trust or (b) the trust has a valid election in effect under
applicable U.S. Treasury regulations to be treated as a U.S. person.
If you are not a U.S. holder, please refer to the discussion below under “Non-U.S. Holders.”
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For U.S. federal income tax purposes, income earned through a foreign or domestic partnership or other flow-through entity is attributed to
its owners. Accordingly, if a partnership or other flow-through entity holds common shares, the tax treatment of the holder will generally
depend on the status of the partner or other owner and the activities of the partnership or other flow-through entity.
U.S. Holders
Dividends on Common Shares
Subject to the discussion under the heading “Anti-Deferral Rules” below, the gross amount of distributions you receive on your common
shares will generally be treated as dividend income if the distributions are made from our current or accumulated earnings and profits,
calculated according to U.S. federal income tax principles. Such income will be includible in your gross income as ordinary income on the day
you actually or constructively receive such distributions. To the extent that the amount of any distribution exceeds our current and accumulated
earnings and profits for a taxable year, the distribution will first be treated as a tax-free return of capital, causing a reduction in your adjusted
basis in your common shares, thereby increasing the amount of gain, or decreasing the amount of loss, you will recognize on a subsequent
disposition of your common shares. Generally, the amount of any distribution in excess of current and accumulated earnings and profits and
adjusted basis will be taxed as capital gain recognized on a sale or exchange. However, we do not intend to calculate U.S. earnings and profits
and, accordingly, all distributions will likely be treated as dividends. You will not be entitled to claim a dividends-received deduction with
respect to distributions you receive from us.
For foreign tax credit purposes, dividends paid by a foreign corporation generally constitute foreign source income and generally constitute
“passive income.” The rules relating to foreign tax credits are complex and their application may depend on your own circumstances. You are
urged to consult your tax advisors to determine whether and to what extent a foreign tax credit might be available to you in connection with
dividends paid on our common shares, taking into account, among other rules, the special rules that apply to shareholders of U.S.-owned
foreign corporations.
Dividends paid in Canadian dollars will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in
effect on the date of your receipt of the dividend, regardless of whether the payment is in fact converted into U.S. dollars. If such a dividend is
converted into U.S. dollars on the date of receipt, you generally should not be required to recognize foreign currency gain or loss in respect of
the dividend income. If the Canadian dollars received as a dividend distribution are not converted into U.S. dollars on the date of receipt, then
you may recognize exchange gain or loss on a subsequent conversion of such Canadian dollars into U.S. dollars. The amount of any gain or
loss recognized in connection with a subsequent conversion will be treated as ordinary income or loss and generally will be treated as
U.S. source income or loss for foreign tax credit purposes.
Sale and Other Dispositions of Common Shares
Subject to the discussion under the heading “Anti-Deferral Rules” below, when you sell or otherwise dispose of common shares, you will
generally recognize capital gain or loss in an amount equal to the difference between the amount realized on the sale or other disposition and
your tax basis in the common shares, which is generally the cost of the common shares reduced by any previous distributions that are not
characterized as dividends. Any recognized gain or loss will be long-term capital gain or loss if the common shares have been held for more
than one year on the date of the sale or other disposition. In general, any capital gain or loss will be treated as U.S. source income or loss, as the
case may be, for U.S. foreign tax credit purposes. Your ability to deduct capital losses may be subject to limitations.
If you receive proceeds upon the sale or exchange of common shares denominated in Canadian dollars, you will realize an amount equal to
the U.S. dollar value of the proceeds calculated by reference to the exchange rate in effect on the date of the sale or other disposition (or in the
case of cash basis and electing accrual basis taxpayers, the settlement date), regardless of whether the payment is in fact converted into
U.S. dollars. You will have a basis in the Canadian dollars received equal to the U.S. dollar
63
value of the Canadian dollars when received. If such proceeds are converted into U.S. dollars on the date of receipt, you generally should not be
required to recognize foreign currency gain or loss in respect of the proceeds from the sale or exchange. If the Canadian dollars received upon
the sale or exchange are not converted into U.S. dollars on the date of receipt, then you may recognize exchange gain or loss on a subsequent
conversion of such Canadian dollars into U.S. dollars. The amount of any gain or loss recognized in connection with a subsequent conversion
generally will be treated as ordinary income or loss and generally will be treated as U.S. source income or loss for foreign tax credit purposes.
Anti-Deferral Rules
The earnings of foreign corporations are generally not subject to U.S. federal income tax until they are distributed to their shareholders.
You should be aware, however, that there are certain anti-deferral rules that, if applicable, might accelerate U.S. federal income taxation to you
of some or all of our earnings or might otherwise have adverse tax consequences to you. The more commonly applicable such anti-deferral
rules are the so-called passive foreign investment company, or PFIC, controlled foreign corporation, or CFC, and foreign personal holding
company, or FPHC, rules.
Because we are actively engaged in businesses related to the entertainment industry, we believe we are not, and we do not expect to
become, a PFIC for U.S. federal income tax purposes. We would be a PFIC in any taxable year in which, after application of certain
look-through rules, at least 75% of our gross income is passive income, or at least 50% of the average value of our assets produces or is held
for the production of passive income.
Because PFIC determinations are made annually and our situation could change as a result of, among other things, changes in our activities
or assets or the activities or assets of companies in which we own a 25% or greater interest, it is possible that we may become a PFIC in the
future. If we are a PFIC in any taxable year, you would generally be subject to additional taxes and interest charges on certain “excess”
distributions we make and any gain realized on the disposition or deemed disposition of your common shares regardless of whether we
continue to be a PFIC. To compute the tax on excess distributions or any gain, (i) the excess distribution or the gain would be allocated ratably
to each day in your holding period, (ii) the amount allocated to the current year and any tax year before we became a PFIC would be taxed as
ordinary income in the current year, (iii) the amount allocated to other taxable years would be taxable at the highest applicable marginal rate in
effect for that year, and (iv) an interest charge would be imposed that would negate the economic benefit to you of having deferred payment of
U.S. taxes on our earnings or the appreciation in our stock. You would generally have an excess distribution to the extent that distributions on
our common shares in a taxable year exceed 125% of the average amount received with respect to those shares over the three preceding taxable
years or, if shorter, the portion of your holding period before the present taxable year.
Because our stock is held by a large number of individual and corporate shareholders, we believe we are not, and we do not expect to
become, a CFC or FPHC for U.S. federal income tax purposes.
You should consult your own tax advisor concerning the consequences to you if we are or become subject to any of the anti-deferral rules
mentioned above, including, but not limited to, the availability of any elections such as the so-called “qualified electing fund” or “mark to
market” elections that might mitigate adverse tax consequences to you.
Non-U.S. Holders
If you are a non-U.S. holder, you generally will not be subject to U.S federal income tax or withholding on dividends received from us with
respect to common shares unless that income is considered effectively connected with your conduct of a U.S. trade or business and, if an
applicable income tax treaty so requires as a condition for you to be subject to U.S. federal income tax with respect to income from your
common shares, such dividends are attributable to a permanent establishment that you maintain in the United States.
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You generally will not be subject to U.S. federal income tax, including withholding tax, on any gain realized upon the sale or exchange of
common shares, unless:
• that gain is effectively connected with the conduct of a U.S. trade or business and, if an applicable income tax treaty so requires as a
condition for you to be subject to U.S. federal income tax with respect to income from your common shares, such gain is attributable to
a permanent establishment that you maintain in the United States; or
• you are an individual and are present in the United States for at least 183 days in the taxable year of the sale or other disposition and
either (i) your gain is attributable to an office or other fixed place of business that you maintain in the United States or (ii) you have a
tax home in the United States.
If you are engaged in a U.S. trade or business, the income from your common shares, including dividends and the gain from the disposition
of common shares, that is effectively connected with the conduct of that trade or business will generally be subject to the rules applicable to
U.S. holders discussed above. In addition, if you are a corporation, your earnings and profits that are attributable to that effectively connected
income, subject to certain adjustments, may be subject to a branch profits tax at a rate of 30% or any lower rate as may be specified by an
applicable tax treaty.
U.S. Information Reporting and Backup Withholding Rules
In general, dividend payments with respect to the common shares and the proceeds received on the sale or other disposition of those
common shares may be subject to information reporting to the U.S. Internal Revenue Service, or IRS, and to backup withholding (currently
imposed at a rate of 30%). Backup withholding will not apply, however, if you (i) are a corporation or come within certain other exempt
categories and, when required, demonstrate such fact or (ii) provide a taxpayer identification number, certify as to no loss of exemption from
backup withholding and otherwise comply with applicable backup withholding rules. To establish status as an exempt person, you will
generally be required to provide certification on IRS Form W-9 or W-8BEN. Any amounts withheld from payments to you under the backup
withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability, provided that you furnish the required
information to the IRS.
CANADIAN STATUTORY RIGHTS OF WITHDRAWAL AND RESCISSION
Securities legislation in certain of the provinces of Canada provides purchasers with the right to withdraw from an agreement to purchase
securities. This right may be exercised within two business days after receipt or deemed receipt of a prospectus and any amendments thereto. In
several of the provinces, securities legislation further provides a purchaser with remedies for rescission or, in some jurisdictions, damages, if
the prospectus or any amendment contains a misrepresentation or is not delivered to the purchaser, provided that such remedies for rescission
or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province. The
purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province for the particulars of these rights or
consult with a legal adviser.
65
UNDERWRITING
We and the selling shareholder and the underwriters named below have entered into an underwriting agreement with respect to the
common shares being offered. Subject to the terms and conditions of the underwriting agreement, the underwriters named below have severally
agreed to purchase from us and the selling shareholder the number of shares of our common shares set forth opposite their names on the table
below at the public offering price, less the underwriting discounts and commissions set forth on the cover page of this prospectus as follows:
Name
Number of
Shares
SG Cowen Securities Corporation
Total
15,000,000
The underwriting agreement provides that the obligations of the underwriters to purchase the common shares offered hereby are
conditional and may be terminated at their discretion based on their assessment of the state of the financial markets. The obligations of the
underwriters may also be terminated upon the occurrence of other events specified in the underwriting agreement. The underwriters are
severally committed to purchase all of the common shares being offered by us and the selling shareholder if any shares are purchased.
The underwriters propose to offer the common shares to the public at the public offering price set forth on the cover of this prospectus. The
underwriters may offer the common shares to securities dealers at the price to the public less a concession not in excess of $
per share.
Securities dealers may reallow a concession not in excess of $
per share to other dealers. After the common shares are released for sale to
the public, the underwriters may vary the offering price and other selling terms from time to time.
We and the selling shareholder have granted to the underwriters an option, exercisable not later than 30 days after the date of this
prospectus, to purchase up to an aggregate of 2,250,000 additional common shares at the public offering price set forth on the cover page of
this prospectus less the underwriting discounts and commissions. The underwriters may exercise this option only to cover over-allotments, if
any, made in connection with the sale of common shares offered hereby. If the over-allotment option is exercised in full, the underwriters will
purchase 1,250,000 additional common shares from us and 1,000,000 additional common shares from the selling shareholder.
The following table shows the underwriting discounts and commissions that we are to pay to the underwriters in connection with this
offering. These amounts are shown assuming no exercise and full exercise of the underwriters’ option to purchase additional common shares.
Payable by Lions Gate
Entertainment Corp.
No Exercise
Full Exercise
Per share
Total
$
$ —
$ —
$ —
$ —
We estimate that the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately
.
We and the selling shareholder have agreed to indemnify the underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933 and liabilities arising from breaches of representations and warranties contained in the underwriting agreement, and to
contribute to payments the underwriters may be required to make in respect of any such liabilities.
Other than André Link as discussed below and other than with respect to up to 1,000,000 shares to be sold by the selling shareholder if the
underwriters exercise their over-allotment option, our directors and executive officers and certain shareholders have agreed with the
underwriters that for a period of 180 days following the date of this prospectus, they will not offer, sell, assign, transfer, pledge, contract to sell
or
66
otherwise dispose of or hedge any of our common shares or any securities convertible into or exchangeable for common shares. Because Mr.
Link holds his shares through a corporation whose only shareholders are Mr. Link and an individual who is not an officer or director of the
company, Mr. Link’s agreement binds him but not the other shareholder of the corporation from selling or otherwise transferring the shares that
the corporation holds. In addition, so long as the transferee agrees to be bound by the terms of the lock-up agreement, a director or executive
officer may transfer his or her securities by gift or for estate planning purposes. SG Cowen Securities Corporation may, in its sole discretion, at
any time without prior notice, release all or any portion of the shares from the restrictions in any such agreement. We have entered into a
similar agreement with SG Cowen Securities Corporation other than with respect to our issuing shares pursuant to employee benefit plans,
qualified option plans or other employee compensation plans already in existence, or pursuant to currently outstanding options, warrants or
rights. There are no agreements between SG Cowen Securities Corporation and any of our shareholders, option holders or affiliates releasing
them from these lock-up agreements prior to the expiration of the 180-day period.
This prospectus forms part of a registration statement on Form S-2 filed with the United States Securities and Exchange Commission, to
register the common shares under the United States Securities Act of 1933, as amended. We have also filed a prospectus with the British
Columbia Securities Commission to qualify under the securities laws of the Province of British Columbia the distribution of the common
shares being offered and sold in the United States and elsewhere outside of Canada. That prospectus does not qualify the distribution of any
common shares that may be offered and sold in any province of Canada, including the Province of British Columbia.
The underwriters will not offer or sell the common shares, directly or indirectly, in Canada, or to or for the benefit of any resident of
Canada, except on a private placement basis pursuant to exemptions from the prospectus requirements of Canadian securities laws and
otherwise in compliance with those laws, and any such sales will be made by securities dealers registered in the applicable province or territory
or pursuant to exemptions from the registered dealer requirements.
The underwriters may engage in over-allotment, stabilizing transactions, syndicate covering transactions, penalty bids and passive market
making in accordance with Regulation M under the Securities Exchange Act of 1934. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Covered short sales are sales made in an amount not greater than the number of shares
available for purchase by the underwriters under the over-allotment option. SG Cowen Securities Corporation may close out a covered short
sale by exercising its over-allotment option or purchasing shares in the open market. Naked short sales are sales made in an amount in excess of
the number of shares available under the over-allotment option. The underwriters must close out any naked short sale by purchasing shares in
the open market. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the shares of common shares in the open market after the distribution
has been completed in order to cover syndicate short positions. Penalty bids permit the representatives to reclaim a selling concession from a
syndicate member when the shares of common shares originally sold by such syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. Penalty bids may have the effect of deterring syndicate members from selling to people who have
a history of quickly selling their shares. In passive market making, market makers in the shares of common shares who are underwriters or
prospective underwriters may, subject to certain limitations, make bids for or purchases of the shares of common shares until the time, if any, at
which a stabilizing bid is made. These stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the
shares of common shares to be higher than it would otherwise be in the absence of these transactions. These transactions may be commenced
and discontinued at any time.
LEGAL MATTERS
The validity of the common shares offered hereby will be passed upon for the company by Heenan Blaikie LLP. Certain legal matters in
connection with the offering will be passed upon for the company by
67
O’Melveny & Myers LLP, Los Angeles, California and for the underwriters by Paul, Hastings, Janofsky & Walker LLP, New York, New York
and, with respect to matters of Canadian law, by Osler, Hoskin & Harcourt LLP, Toronto, Ontario and New York, New York.
EXPERTS
The consolidated financial statements of Lions Gate Entertainment Corp. at March 31, 2002 and for the year then ended appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and
auditing.
Our consolidated financial statements as of March 31, 2000 and 2001, and for each of the years in the two-year period ended March 31,
2001 included herein and in the registration statement have been audited by PricewaterhouseCoopers LLP, independent public accountants, as
indicated in their reports with respect thereto, and are incorporated in reliance upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
We file annual, quarterly and current reports, proxy statements and other information with the SEC, in accordance with the Securities
Exchange Act of 1934. You may read and copy any document we file at the SEC’s Public Reference Room at Washington, D.C., 450 Fifth
Street, N.W., 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also
available to the public from the SEC’s web site at: http://www.sec.gov.
INCORPORATION BY REFERENCE
The SEC allows us to “incorporate by reference” into this prospectus the information we file with them, which means that we can disclose
important information to you by referring to our filed SEC documents. The information incorporated by reference is considered to be part of
this prospectus. Information we file with the SEC after the date of this document will update and supersede the information in this prospectus.
We incorporate by reference the documents listed below and any future filings made with the SEC under Sections 13(a), 13(c), 14, or 15(d) of
the Securities Exchange Act of 1934 until this offering is completed:
(1) Our Annual Report on Form 10-K for the year March 31, 2002;
(2) Our Quarterly Reports on Form 10-Q for the periods ended June 30, 2002, September 30, 2002 and December 31, 2002; and
(3) Our Current Reports on Form 8-K filed April 30, 2003 and May 16, 2003.
We have also filed a Registration Statement on Form S-2 with the SEC for the common shares offered by this prospectus. This prospectus
does not contain all of the information set forth in the registration statement. You should read the registration statement for further information
about our common shares and us. The registration statement can be found in the SEC’s public reference room or on the SEC’s website referred
to above, and you may request a copy of any of these filings, at no cost, by writing or calling:
Investor Relations Department
Lions Gate Entertainment Corp.
4553 Glencoe Avenue, Suite 200
Marina del Rey, California 90292
(310) 314-2000
68
INDEX TO FINANCIAL STATEMENTS
Description of Financial Statement
Lions Gate Entertainment Corp.
Audited Financial Statements
Report of Independent Auditors — Ernst & Young LLP
Report of Independent Auditors — PricewaterhouseCoopers LLP
Consolidated Balance Sheets — March 31, 2002 and 2001
Consolidated Statements of Operations — Years Ended March 31,
2002, 2001 and 2000
Consolidated Statements of Shareholders’ Equity — Years Ended
March 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows — Years Ended March 31,
2002, 2001 and 2000
Notes to Audited Consolidated Financial Statements
Unaudited Interim Financial Statements
Condensed Consolidated Balance Sheets — December 31, 2002 and
March 31, 2002
Condensed Consolidated Statements of Operations — Three and Nine
Months Ended December 31, 2002 and 2001
Condensed Consolidated Statements of Shareholders’ Equity — Nine
Months Ended December 31, 2002 and year ended March 31, 2002
Condensed Consolidated Statements of Cash Flows — Three and Nine
Months Ended December 31, 2002 and 2001
Notes to Unaudited Condensed Consolidated Financial Statements
Mandalay Pictures, LLC
Audited Financial Statements
Report of Independent Auditors — Ernst & Young LLP
Consolidated Balance Sheets — March 31, 2002 and 2001
Consolidated Statements of Operations — Years Ended March 31,
2002 and 2001
Consolidated Statements of Changes in Members’ Equity — Years
Ended March 31, 2002 and 2001
Consolidated Statements of Cash Flows — Years Ended March 31,
2002 and 2001
Notes to Audited Consolidated Financial Statements
Audited Financial Statements
Report of Independent Auditors — PricewaterhouseCoopers LLP
Consolidated Balance Sheets — March 31, 2001 and 2000
Consolidated Statements of Operations — Years Ended March 31,
2001 and 2000
Consolidated Statements of Changes in Members’ Equity — Years
Ended March 31, 2001 and 2000
Consolidated Statements of Cash Flows — Years Ended March 31,
2001 and 2000
Notes to Audited Consolidated Financial Statements
F-1
Page Number
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-38
F-39
F-40
F-41
F-42
F-51
F-52
F-53
F-54
F-55
F-56
F-63
F-64
F-65
F-66
F-67
F-68
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of Lions Gate Entertainment Corp.
We have audited the accompanying consolidated balance sheet of Lions Gate Entertainment Corp. as of March 31, 2002 and the related
consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We
did not audit the financial statements of CineGroupe Corporation, a consolidated subsidiary (see note 21 (m)) which statements reflect total
assets of $84.4 million as of March 31, 2002, and total revenues of $55.5 million for the year then ended. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for CineGroupe Corporation, is
based solely on the report of the other auditors. The financial statements of Lions Gate Entertainment Corp. for the years ended March 31, 2001
and 2000 were audited by other auditors, whose report dated June 22, 2001, except for note 2(a) as to which the date is April 28, 2003,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Lions Gate Entertainment Corp. at March 31, 2002, and the results of its operations and its cash
flows for the year then ended, in conformity with accounting principles generally accepted in Canada.
/s/ ERNST & YOUNG LLP
Los Angeles, California
July 1, 2002, except for Notes 2(a) and 4(a),
as to which the date is April 28, 2003
F-2
AUDITORS’ REPORT
TO THE SHAREHOLDERS OF
LIONS GATE ENTERTAINMENT CORP
We have audited the accompanying consolidated balance sheet of Lions Gate Entertainment Corp. as at March 31, 2001 and the
consolidated statements of operations, deficit and cash flows for each of the years in the two-year period ended March 31, 2001. These
consolidated financial statements are the responsibility of the company’s management, presented in U.S. dollars. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian and United States generally accepted auditing standards. Those standards require
that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at
March 31, 2001 and the results of its operations and its cash flows for each of the years in the two-year period ended March 31, 2001 in
accordance with Canadian generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Ontario
June 22, 2001 (except for note 2(a) which as at April 28, 2003)
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP and the other member firms of PricewaterhouseCoopers
International Limited, each of which is a separate and independent legal entity.
F-3
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
March 31, 2002
March 31, 2001
(All amounts in thousands of
United States dollars)
ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable, net of reserve for video returns of $6,342
(2001 — $6,772) and provision for doubtful accounts of $10,794
(2001 — $3,896)
Investment in films and television programs
Investments subject to significant influence
Discontinued operation
Property and equipment, net
Goodwill, net of accumulated amortization of $5,643 (2001 —
$5,735)
Other assets
Future income taxes
$
6,641
706
$
6,652
—
116,941
181,002
—
10,000
31,729
109,822
142,178
14,542
34,452
28,048
25,048
9,451
466
22,156
12,350
—
$
381,984
$ 370,200
$
143,734
52,277
16,939
23,941
47,400
13,818
—
8,481
$ 101,354
48,403
23,091
15,254
41,862
14,136
480
777
306,590
245,357
30,751
29,936
157,675
(105,435 )
(7,597 )
155,540
(54,795 )
(5,838 )
75,394
124,843
381,984
$ 370,200
LIABILITIES
Bank loans
Accounts payable and accrued liabilities
Accrued participations and residuals costs
Production loans
Long-term debt
Deferred revenue
Future income taxes
Minority interests
Commitments and Contingencies
Shareholders’ Equity
Preferred shares, 200,000,000 shares authorized, issued in series,
including 1,000,000 series A (11,830 and 12,205 shares issued and
outstanding) and 10 series B (10 and 10 shares issued and
outstanding) (liquidation preference $30,167)
Common stock, no par value, 500,000,000 shares authorized,
43,231,921 and 42,296,838 issued and outstanding
Deficit
Cumulative translation adjustments
$
See accompanying notes.
F-4
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
March 31, 2002
Year Ended
March 31, 2001
(All amounts in thousands of United States dollars,
except per share amounts)
Year Ended
March 31, 2000
$ 272,489
$ 187,650
$ 184,361
159,907
76,245
34,668
4,554
—
104,003
34,426
25,073
5,695
—
151,482
—
21,334
4,673
1,154
275,374
169,197
178,643
(2,885 )
18,453
5,718
9,828
1,221
1,351
7,716
586
—
3,171
889
—
12,400
8,302
4,060
Income (Loss) Before Undernoted
Gain on dilution of investment in a subsidiary
(15,285 )
2,186
10,151
—
1,658
—
Income (Loss) Before Income Taxes and Equity Interests
Income taxes
(13,099 )
(321 )
10,151
2,190
1,658
(1,357 )
Income (Loss) Before Equity Interests
Write-down and equity interest in investments subject to
significant influence
Other equity interests
(13,420 )
12,341
301
(14,542 )
—
(1,021 )
—
—
108
Net Income (Loss) from Continuing Operations
Loss from Discontinued Operations
(27,962 )
(18,997 )
11,320
(5,517 )
409
(4,006 )
Net Income (Loss)
Dividends on Series A preferred shares
Accretion on Series A preferred shares
(46,959 )
(1,592 )
(2,089 )
5,803
(1,660 )
(2,071 )
(3,597 )
(402 )
(494 )
Revenues
Expenses:
Direct operating
Distribution and marketing
General and administration
Amortization
Severance and relocation costs
Total expenses
Operating Income (Loss)
Other Expenses:
Interest on debt initially incurred for a term of more than
one year (net of interest income of $0.3 million
(2001 — $0.4 million; 2000 — $0.3 million))
Minority interests
Unusual losses
Total other expenses
Net Income (Loss) Attributed to Common Shareholders
$ (50,640 )
$
2,072
$
(4,493 )
Basic and Diluted Income (Loss) Per Common Share:
Income (Loss) from Continuing Operations
Loss from Discontinued Operations
$
(0.74 )
(0.44 )
$
0.21
(0.15 )
$
(0.02 )
(0.13 )
$
(1.18 )
$
0.06
$
(0.15 )
See accompanying notes.
F-5
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Series B
Preferred
Shares
Series A Preferred
Common Stock
Balance at March 31,
2000
Effect of adoption of
accounting
pronouncements
Issued upon
acquisition of
subsidiary
Issued pursuant to a
settlement
agreement with
employee
Exercise of stock
options
Stock options granted
in conjunction with
acquisition of a
subsidiary
Net income (loss)
available to
common
shareholders
Accretion of Series A
preferred shares
Foreign currency
translation
adjustment
Balance at March 31,
Cumulative
Translation
Numbe
Amoun
Deficit
r
t
(All amounts in thousands of United States dollars, except per share amounts)
Number
Balance at March 31,
1999
Public offering
5,525,000 warrants
issued in
conjunction with
public offering
Conversion of
Series A preferred
shares
Exercise of stock
options
Net income (loss)
available to
common
shareholders
Accretion of Series A
preferred shares
Series B preferred
shares
Foreign currency
translation
adjustment
Shares
Amount
Number
30,607,418
$ 124,948
—
3,900
795,000
1,686
58,333
165
—
13,000
Amount
$
—
29,431
—
$—
$
(9,807 )
Adjustments
Total
$ (4,630 )
$ 110,511
29,431
3,900
(795 )
—
(1,686 )
165
(4,493 )
—
(4,493 )
422
422
10
—
—
2,478
31,460,751
130,699
12,205
28,167
10
—
(14,300 )
(2,152 )
(42,567 )
2,478
142,414
(42,567 )
10,229,837
23,112
23,112
600,000
1,500
1,500
6,250
9
9
—
220
220
2,072
—
2,072
1,769
1,769
(3,686 )
42,296,838
155,540
12,205
29,936
10
—
(54,795 )
(5,838 )
(3,686 )
124,843
2001
Conversion of
Series A preferred
shares
Exercise of stock
options
Issued pursuant to
share bonus plan
Stock dividends
Net income (loss)
available to
common
shareholders
Accretion of Series A
preferred shares
Foreign currency
translation
adjustments
Balance March 31,
2002
648,000
1,652
87,083
137
200,000
346
(648 )
—
(1,652 )
137
273
346
696
696
(50,640 )
—
(50,640 )
1,771
1,771
(1,759 )
43,231,921
$ 157,675
11,830
$ 30,751
See accompanying notes.
F-6
10
$—
$
(105,435 )
$ (7,597 )
(1,759 )
$
75,394
LIONS GATE ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands of United States dollars)
Cash flows from (used in) operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Amortization of property and equipment
Amortization of goodwill
Write-off of projects in development
Amortization of pre-operating costs
Amortization of deferred financing costs
Amortization of films and television programs
Gain on dilution of investment in a subsidiary
Unusual losses
Minority interests
Write-down and equity interest in investments subject to
significant influence
Discontinued operations
Other equity interest
Changes in operating assets and liabilities, excluding the
effects of acquisitions:
Accounts receivable
Increase in investment in films and television programs
Other assets
Future income taxes
Accounts payable and accrued liabilities
Accrued participations and residuals costs
Deferred revenue
Cash flows from (used in) financing activities:
Issuance of capital stock
Dividends paid on Series A preferred shares
Financing fees
Increase in bank loans
Increase in restricted cash
Proceeds from production and distribution loans
Repayments of production and distribution loans
Proceeds from long-term debt
Repayments of long-term debt
Cash flows from (used in) investing activities:
Minority investment in subsidiary
Cash received from investment in Mandalay Pictures, LLC
Acquisition of Eaton Entertainment, LLC, net of cash
acquired
Acquisition of Sterling Home Entertainment, LLC, net of
cash acquired
Acquisition of Trimark Holdings Inc.
Purchase of property and equipment
Year Ended
March 31, 2002
Year Ended
March 31, 2001
Year Ended
March 31, 2000
$
$
$
(46,959 )
3,113
—
826
615
1,177
158,172
(2,186 )
1,351
1,221
14,542
18,997
—
5,803
2,200
1,801
1,054
640
879
102,259
—
—
586
1,021
5,517
—
(3,597 )
1,756
1,681
582
654
135
149,815
—
—
889
—
4,006
(108 )
(3,394 )
(202,230 )
430
(809 )
777
(6,157 )
(198 )
(10,247 )
(138,687 )
(5,350 )
(3,131 )
(4,840 )
5,511
853
(31,721 )
(177,330 )
(2,224 )
111
10,119
10,473
5,770
(60,712 )
(34,131 )
(28,989 )
137
(883 )
(1,239 )
42,715
(719 )
28,251
(19,292 )
9,017
(3,152 )
9
(1,661 )
(4,572 )
57,159
—
9,229
(21,717 )
17,814
(1,717 )
33,417
(402 )
(313 )
1,495
—
24,400
(28,870 )
2,149
(2,820 )
54,835
54,544
29,056
9,200
5,362
—
—
—
—
472
—
—
—
—
(7,694 )
(2,000 )
(26,016 )
(1,672 )
—
—
(4,349 )
7,340
(29,688 )
(4,349 )
1,463
(1,474 )
6,652
Net change in cash and cash equivalents
Foreign exchange effect on cash
Cash and cash equivalents — beginning of year
Cash and cash equivalents — end of year
$
6,641
See accompanying notes.
F-7
(9,275 )
2,623
13,304
$
6,652
(4,282 )
190
17,396
$
13,304
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of Operations
Lions Gate Entertainment Corp. (the “Company” or “Lions Gate”) is a fully integrated entertainment company engaged in the
development, production and distribution of feature films, television series, television movies and mini-series, non-fiction programming and
animated programming, as well as the management of Canadian-based studio facilities and management services provided to Canadian limited
partnerships. As an independent distribution company, the Company also acquires distribution rights from a wide variety of studios, production
companies and independent producers.
2.
Significant Accounting Policies
(a) Generally Accepted Accounting Principles
These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada
(“Canadian GAAP”) which conforms, in all material respects, with the accounting principles generally accepted in the United States
(“U.S. GAAP”), except as described in note 21. The Canadian dollar and the U.S. dollar are the functional currencies of the Company’s
Canadian and U.S. based businesses, respectively. These consolidated financial statements were previously expressed in Canadian dollars, with
the translation of financial statements of individual entities in accordance with note 2(o).
Effective April 1, 2002, the Company adopted the United States dollar as its reporting currency as a substantial component of its operations
are domiciled in the United States and the dominant market for trading volume of its common stock is on the American Stock Exchange. Prior
to April 1, 2002, the Company’s consolidated financial statements were presented and audited in Canadian dollars. These consolidated
financial statements and those amounts previously reported in Canadian dollars have been translated from Canadian dollars to United States
dollars by translating the assets and liabilities at the rate in effect at the respective balance sheet dates and revenues and expenses at the average
rate for the reporting periods. Any resulting foreign exchange gains and losses are recorded as a separate component of shareholders equity.
The functional currencies of each of the Company’s operations in the United States and Canada are unchanged.
(b) Principles of Consolidation
The accompanying consolidated financial statements of Lions Gate Entertainment Corp. (the “Company” or “Lions Gate”) include the
accounts of Lions Gate and all of its majority-owned and controlled subsidiaries, with a provision for minority interests, and the Company’s
proportionate share of assets, liabilities, revenues and expenses of jointly controlled companies. The Company controls a subsidiary company
through a combination of existing voting interests and an ability to exercise various rights under certain shareholder agreements and debentures
to acquire common shares.
(c) Accounting Changes
Goodwill
On November 1, 2001, the Canadian Institute of Chartered Accountants (“CICA”) released Section 3062, “Goodwill and Other Intangible
Assets”, to be applied by companies for fiscal years beginning on or after January 1, 2002. Early adoption was permitted for companies with
their fiscal year beginning on or after April 1, 2001, provided the first interim period financial statements had not been previously issued. The
Company elected to early-adopt CICA 3062 on April 1, 2001. Under CICA 3062, goodwill is no longer amortized but is reviewed annually, or
more frequently if impairment indicators arise, for impairment, unless certain criteria have been met, and is similar, in many respects, to
Statement of Financial Accounting Standards (“SFAS”) 142, “Goodwill and Other Intangible Assets”, under U.S. GAAP. In accordance with
the adoption provisions of CICA 3062, goodwill is required to be tested
F-8
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
for impairment on the date of adoption. Under SFAS 142 goodwill is required to be tested for impairment within six months of adoption, as of
the beginning of the year. At April 1, 2001 and September 30, 2001, it was determined that the fair value of each of the reporting units was in
excess of its carrying value including goodwill and, therefore, no further work was required and an impairment loss was not required. Goodwill
is required to be tested for impairment between the annual tests if an event occurs or circumstances change that more-likely-than-not reduce the
fair value of a reporting unit below its carrying value. The amortization provisions of CICA 3062 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the amortization and impairment
provisions of CICA 3062 are effective upon adoption of CICA 3062. (Refer to note 1(k) for additional information.)
Accounting for Films and Television Programs
In June 2000, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement
of Position 00-2 “Accounting by Producers or Distributors of Films” (“SoP 00-2”). SoP 00-2 establishes new accounting standards for
producers or distributors of films, including changes in revenue recognition, capitalization and amortization of costs of acquiring films and
television programs and accounting for exploitation costs, including advertising and marketing expenses. The Company elected early adoption
of SoP 00-2 and retroactively adopted SoP 00-2 effective as of April 1, 2000. The Company also elected to adopt SoP 00-2 for Canadian
GAAP purposes. The prior years’ financial statements were not restated, as the effect of the new policy on the prior periods was deemed not
reasonably determinable. Accordingly, opening accumulated deficit for the year ended March 31, 2001 was reduced to reflect the cumulative
effect of the accounting change in the amount of $40.7 million (net of income taxes of $1.5 million). The principal changes as a result of
applying SoP 00-2 are as follows:
Advertising and marketing costs, which were previously capitalized to investment in films and television programs and amortized using the
individual film forecasts method, are now expensed the first time the advertising takes place.
The capitalization of production costs for episodic television series is limited to revenue that has been contracted for on an
episode-by-episode basis until such time as the criteria for recognizing secondary market revenues are met.
The effect of the change on the income statement for the year ended March 31, 2001 was an increase in net income of approximately
$3.6 million. The effect of the change on the balance sheet accounts at March 31, 2000 was to reduce investment in films and television
programs relating to advertising costs, the capitalization of production costs for episodic television series and media holdbacks by
$13.8 million, $24.0 million and $4.4 million, respectively.
Accounting for Income Taxes
In December 1997, the CICA released Section 3465, “Income Taxes”, to be applied by companies for fiscal years beginning on or after
January 1, 2000. The standard requires recognition of future income tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns, and is similar, in many respects, to SFAS 109, “Accounting for Income
Taxes” under U.S. GAAP. Future income taxes are provided for using the liability method. The Company retroactively adopted Section 3465
effective as of April 1, 2000, without restatement of prior years’ financial statements. Prior to adopting the new standard, the Company used the
deferral method of accounting for income taxes. The application of Section 3465 resulted in increasing future income tax liabilities by
$1.9 million as at April 1, 2000 with an equivalent charge to accumulated deficit. The effect of the change on the income statement for the year
ended March 31, 2001 was an increase in the tax
F-9
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recovery of $3.7 million due to the benefit recognized of previously unrecognized income tax assets, where realization is judged
“more-likely-than-not” in accordance with Section 3465 whereas previously realization had to be based on the concept of “virtual certainty.”
Earnings Per Share
In December 2000, the Canadian Institute of Chartered Accountants released revised Section 3500, “Earnings per share”. The revised
standard requires the use of the treasury stock method for calculating diluted earnings per share, consistent with U.S. GAAP. Previously, fully
diluted earnings per share were calculated using the imputed interest method. The Company adopted the new standard for its fiscal 2001
financial statements. The revised section did not impact previously reported losses per share, as there were no significant potentially dilutive
common share equivalents outstanding.
(d) Revenue Recognition
Revenue from the sale or licensing of films and television programs is recognized upon meeting all recognition requirements of SoP 00-2.
Revenue from the theatrical release of motion pictures is recognized at the time of exhibition based on the Company’s participation in box
office receipts. Revenue from the sale of videocassettes and digital video disks (“DVDs”) in the retail market, net of an allowance for estimated
returns, is recognized on the later of shipment to the customer or “street date” (when it is available for sale by the customer). Under revenue
sharing arrangements, rental revenue is recognized when the Company is entitled to receipts. For multiple media rights contracts with a fee for
a single film or television program where the contract provides for media holdbacks, the fee is allocated to the various media based on
management’s assessment of the relative fair value of the rights to exploit each media and is recognized as each holdback is released. For
multiple-title contracts with a fee, the fee is allocated on a title-by-title basis, based on management’s assessment of the relative fair value of
each title.
Revenues from television licensing are recognized when the feature film or television program is available to the licensee for telecast.
Rental revenue from short-term operating leases of studio facilities is recognized over the term of the lease.
The Company earns fees from management services provided to Canadian limited partnerships, whose purpose is to assist in the financing
of films produced in Canada, which are recognized as revenue when the financing is completed.
Cash payments received are recorded as deferred revenue until all the conditions of revenue recognition have been met.
(e) Restricted Cash
Restricted cash represents an amount on deposit with a financial institution that is contractually designated for the repayment of a specific
bank loan.
(f) Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid debt investments with original maturities of ninety days or less when purchased.
(g) Investment in Films and Television Programs
Investment in films and television programs includes the unamortized costs of completed films and television programs which have been
produced by the Company or for which the Company has acquired
F-10
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
distribution rights, an acquired library, films and television programs in progress and projects in development. For films and television
programs produced by the Company, these capitalized costs include all production and financing costs, capitalized interest and overhead. For
acquired films and television programs, these capitalized costs consist of minimum guarantee payments to acquire the distribution rights.
Costs of acquiring and producing films and television programs are capitalized and amortized using the
individual-film-forecast-computation method, whereby capitalized costs are amortized and ultimate participation and residual costs are accrued
in the proportion that current revenue bears to management’s estimate of ultimate revenue expected to be recognized from the exploitation,
exhibition or sale of the films or television programs. The acquired film library is being amortized over a period of twenty years.
Investment in films and television programs is stated at the lower of amortized cost or estimated fair value on an individual film basis. The
valuation of investment in films and television programs is reviewed on a title-by-title basis, when an event or change in circumstances indicate
that the fair value of a film or television program is less than its unamortized cost. The fair value of the film or television program is
determined using management’s future revenue estimates and a discounted cash flow approach. Additional amortization is recorded in the
amount by which the unamortized costs exceed the estimated fair value of the film or television program. Estimates of future revenue involve
measurement uncertainty and it is therefore possible that reductions in the carrying value of investment in films and television programs may
be required as a consequence of changes in management’s future revenue estimates. The potential effect of future changes in management’s
future revenue estimates on net income has not been disclosed in these consolidated financial statements, as the amount is not readily
determinable.
Films and television programs in development include costs of acquiring film rights to books, stage plays or original screenplays and costs
to adapt such projects. Such costs are capitalized and, upon commencement of production, are transferred to production costs. Projects in
development are written off at the earlier of the date determined not to be recoverable or when projects under development are abandoned, or
three years from the date of the initial investment.
(h) Prints, Advertising and Marketing Expenses
The cost of film prints is included in investment in films and television programs and charged to expense on a straight-line basis over the
period of theatrical release.
The costs of advertising and marketing expenses are expensed the first time the advertising takes place. At March 31, 2002, $1.7 million of
capitalized advertising and marketing costs were included in other assets.
(i) Investments Subject to Significant Influence
Investments in companies over which the Company can exercise significant influence are accounted for using the equity method. The
Company’s investments subject to significant influence are periodically reviewed to determine whether there has been a loss in value that is
other than a temporary decline. Estimates of net future cash flows on an undiscounted basis are used to assess whether there is a loss in value.
F-11
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(j) Property and Equipment
Property and equipment is carried at cost less accumulated amortization. Amortization is provided for using the following rates and
methods:
Buildings
Computer equipment and software
Automobiles
Furniture and equipment
Leasehold improvements
25 years straight-line
2-4 years straight-line and 30% declining balance
30% declining balance
10 years straight-line and 20%-30% declining balance
Over the lease term or the useful life, whichever is shorter
Equipment under capital lease is amortized using the above rates.
The Company periodically reviews and evaluates the recoverability of property and equipment. Where applicable, estimates of net future
cash flows, on an undiscounted basis, are calculated based on future revenue estimates, if appropriate and where deemed necessary, a reduction
in the carrying amount is recorded.
(k) Goodwill
Goodwill is assessed for impairment at least annually or if an event occurs or circumstances change that more-likely-than-not reduce the
fair value of a reporting unit below its carrying value. The Company completed impairment tests required under CICA 3062 at April 1, 2001
and under SFAS 142 at September 30, 2001 and determined that the recognition of impairment losses was not necessary, as described in note 6.
(l) Pre-Operating Period Costs
Pre-operating period costs related to the period before commencement of commercial operations of new businesses are deferred and
amortized on a straight-line basis over a period not to exceed five years commencing once the pre-operating period has ended.
(m) Income Taxes
The Company recognizes future income tax assets and liabilities for the expected future income tax consequences of transactions that have
been included in the financial statements or income tax returns. Future income taxes are provided for using the liability method. Under the
liability method, future income taxes are recognized for all significant temporary differences between the tax and financial statement bases of
assets and liabilities.
Future income tax assets, after deducting valuation allowances, are recognized to the extent that it is more-likely-than-not that they will be
realized in the foreseeable future. Future income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates at the date
of substantive enactment.
(n) Government Assistance
The Company has access to several government programs that are designed to assist film and television production and distribution in
Canada.
Federal and provincial refundable income tax credits earned with respect to production expenditures are included in revenue in accordance
with the Company’s revenue recognition policy for completed films and television programs. Federal and provincial refundable income tax
credits are considered earned when
F-12
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the qualifying expenditures have been incurred provided that there is reasonable assurance that the credits will be realized (see note 16).
Amounts received with respect to the acquisition of distribution rights are recorded as a reduction of investment in films and television
programs. Amounts received are repayable on a title-by-title basis once the title has achieved cash break-even to the extent of profit earned on
that title. There are no fixed repayment terms, no interest payments and no claims on any assets of the Company or for the recovery of the
amount invested, other than those that might be repayable out of future distribution revenue attached to the film rights. To the extent an
individual film does not perform to pre-agreed levels, no amounts are repayable by the Company.
Government assistance toward distribution and marketing expenses is recorded as a reduction of those expenses.
(o) Foreign Currency Translation
Monetary assets and liabilities denominated in currencies other than Canadian dollars are translated at exchange rates in effect at the
balance sheet date. Resulting translation gains and losses are included in the determination of earnings.
Foreign subsidiary assets and liabilities in foreign currencies are translated into Canadian dollars at the exchange rate in effect at the
balance sheet date. Foreign subsidiary revenue and expense items are translated at the average rate of exchange for the year. Gains or losses
arising on the translation of the accounts of foreign subsidiaries are included in cumulative translation adjustments, a separate component of
shareholders’ equity.
Effective April 1, 2000 the Company classified its U.S. operations as self-sustaining following a significant change in the economic status
of these operations, including a restructuring of certain operating entities and the ability to self-finance certain operations.
(p) Debt Financing Costs
Amounts incurred in connection with obtaining debt financing are deferred and amortized, as a component of interest expense, over the
term to maturity of the related debt obligation.
(q) Research and Development
Research and development expenses incurred relating to multimedia products and other interactive software are expensed until all of the
following criteria are met: the product is clearly defined and the costs attributable thereto can be identified; the technical feasibility of the
product as demonstrated by a working model has been established; a decision has been made to produce and market, or use, the product; the
future market for the product is clearly defined; and adequate resources exist, or are expected to be available, to complete the project. All
expenses incurred after technological feasibility is established are capitalized to investment in film and will be amortized against future
revenues generated from the sale of the resulting products; such capitalized amounts are not significant.
(r) Stock-Based Compensation Plan
The Company has a stock-based compensation plan, which is described in note 11(c). No compensation expense is recognized for this plan
when stock or stock options are issued to employees of the Company, its subsidiaries and equity investees. Consideration paid by employees on
exercise of stock options or purchase of stock is credited to share capital.
F-13
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(s) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The most significant estimates made
by management in the preparation of the financial statements relate to ultimate revenue and costs for investment in films and television
programs. Future results could differ from such estimates.
(t) Recent Accounting Pronouncements
Derivative Instruments and Hedging Activities
On April 1, 2001, the Company adopted SFAS 133 “Accounting for Derivative Instruments and Hedging Activities”, as amended in June
2000 by SFAS 138 “Accounting for Certain Derivative Instruments and Certain Hedging Activities”, where the provisions of SFAS 133 were
applicable under Canadian GAAP, which requires companies to recognize all derivatives as either assets or liabilities in the balance sheet and
measure such instruments at fair value. The adoption of these standards did not have a material impact on the Company’s consolidated financial
statements.
(u) Reclassifications
Certain amounts presented in prior years have been reclassified to conform to the current year’s presentation.
3.
Investment in Films and Television Programs
March 31,
2002
Films
Released, net of accumulated amortization
Completed and not released
Acquired library, net of accumulated amortization
In progress
In development
$
Television Programs
Released, net of accumulated amortization
Completed and not released
In progress
In development
67,298
9,648
38,405
5,405
1,923
March 31,
2001
$
43,587
—
40,135
19,470
3,154
122,679
106,346
38,092
1,843
15,533
2,855
15,443
—
17,269
3,120
58,323
35,832
$ 181,002
$ 142,178
The Company earns revenue from certain productions that have been fully amortized and are not reflected on the balance sheet.
The Company expects approximately 48% of completed and released films and television programs, net of accumulated amortization will
be amortized during the one year period ending March 31, 2003, and
F-14
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
approximately 55% of accrued participants’ share will be paid during the one year period ending March 31, 2003.
Additionally, the Company expects approximately 85% of completed and released films and television programs, net of accumulated
amortization will be amortized during the three year period ending March 31, 2005.
The remaining life of the acquired film library as at March 31, 2002 is 18.5 years.
Interest capitalized relating to productions during the year ended March 31, 2002 amounted to $2.9 million (2001 — $1.5 million; 2000 —
$2.5 million).
4.
Investments Subject to Significant Influence and Discontinued Operation
(a) Mandalay Pictures, LLC (“Mandalay”)
The Company’s investment in Mandalay was comprised of a 45% common stock interest, and a 100% interest in preferred stock with a
stated value of $50.0 million. Lions Gate recorded 100% of the operating losses of Mandalay to March 31, 2002, as it was the sole funder of
Mandalay. The Company received $2.5 million on December 19, 2001, and $2.9 million on March 19, 2002 from Mandalay, which amounts
were recorded as reductions in the Company’s investment in Mandalay. Pre-operating costs, incurred in fiscal 1998 and fiscal 1999, were being
amortized on a straight-line basis of $0.3 million per quarter. Amortization of $1.3 million in the year ended March 31, 2002 (2001 —
$1.3 million) has been included in loss from discontinued operations.
With the authority granted by the Board of Directors, prior to the close of the fourth quarter of fiscal 2002, management committed to a
plan to divest its ownership interest in Mandalay. Mandalay was written down to its estimated fair value at March 31, 2002 of $10.0 million
taking into account the expiration and non-renewal of Mandalay’s international output agreements on December 31, 2001 and the pending
expiration of its production and distribution agreement with Paramount Pictures Corp. in fiscal 2003. Such estimated fair value was supported
by cash expected to be received from Mandalay under a prior agreement and estimated proceeds from the sale of the Company’s ownership
interest in Mandalay. The resulting write-down of $10.6 million is included as a component of loss from discontinued operations. Subsequent
to year end, the Company received distributions of $2.5 million from Mandalay under a prior agreement.
On November 8, 2002, the Company sold its investment in Mandalay for cash of $4.2 million and an interest bearing convertible
promissory note totaling $3.3 million. The note, bearing interest at 6%, is payable $1.3 million on December 31, 2005, $1.0 million on
December 31, 2006 and $1.0 million on December 31, 2007. No gain or loss was recorded on the sale as the Company’s carrying value of
$7.5 million equaled the sales price.
F-15
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Summarized financial information of Mandalay is as follows:
March 31,
2002
Assets
Restricted cash
Cash and cash equivalents
Accounts receivable
Other receivables
Film inventory
Due from (to) affiliates
Other assets
$
Liabilities
Accounts payable and accrued expenses
Accrued participations and residuals
Production and bank loans
Contractual obligations
Deferred revenue
$
Net assets
Revenue
Operating expenses
General and administration expenses
Loss before provision for income taxes and cumulative
effect of change in accounting principle
March 31,
2001
13,648
4,842
16,215
—
86,745
43
39
$
21,148
16,113
29,105
15,225
133,127
(33 )
114
121,532
214,799
4,380
13,868
47,430
6,846
31,347
875
9,847
96,212
36,575
41,256
103,871
184,765
17,661
$
30,034
Year Ended
March 31,
2002
Year Ended
March 31,
2001
Year Ended
March 31,
2000
$ 79,672
$ (84,317 )
$ (4,020 )
$ 42,672
$ (42,910 )
$ (5,769 )
$ 87,034
$ (87,989 )
$ (4,165 )
$
$
$
(6,989 )
(4,197 )
(2,710 )
Mandalay is considered a partnership for income tax purposes and contractually, Lions Gate was entitled to access the tax losses of
Mandalay. Accordingly, the tax effects attributable to the operating losses of Mandalay were included in the Company’s tax provision.
Mandalay adopted, on a retroactive basis, SoP 00-2 effective as of April 1, 2000 on a basis consistent with the Company’s adoption of
accounting changes as explained in note 2(c). The cumulative adjustment made to the net equity of Mandalay on April 1, 2000 was
$3.8 million, net of the benefit of income tax losses attributable to the Company of $nil.
(b) CinemaNow, Inc. (“CinemaNow”)
During the quarter ended March 31, 2002, CinemaNow advised the Company of its inability to generate sufficient cash flows from
operations to sustain its operations over the next twelve months, without raising additional capital. Given the uncertain economic climate and
CinemaNow’s recurring losses there can be no assurance that further financing will be forthcoming and as a result, the Company wrote down
its investment in CinemaNow to $nil. The write-off of the investment in CinemaNow of
F-16
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$13.4 million is disclosed in the statement of operations as a component of write-down and equity interest in investments subject to significant
influence. The Company’s investment in CinemaNow is comprised of a 90.1% common stock interest, representing 63% voting and economic
interests after taking into account the voting rights held by the holders of preferred shares. The investment in CinemaNow was accounted for
using the equity method as the Company did not have the ability to control the strategic operating, investing and financing decisions of
CinemaNow as a consequence of the Company’s inability to elect the majority of the board of directors of CinemaNow.
Prior to the write-off, the Company’s investment in CinemaNow consisted of its 63% share of the economic and voting interests, recorded
at the estimated fair value at the time of the Trimark acquisition of $15.6 million, net of the losses of CinemaNow incurred between
October 13, 2000 and December 31, 2001. The difference between the net carrying amount of the assets and liabilities of CinemaNow at the
date of acquisition and the fair value of the investment had been allocated as follows:
Investment in films and television programs
Property and equipment
Goodwill
Other assets
$
2,310
9,702
3,546
5
$ 15,563
5.
Property and Equipment
March 31,
2002
Accumulated
Amortization
Cost
Land held for leasing purposes
Buildings held for leasing purposes
Leasehold improvements
Furniture and equipment
Automobiles
Computer equipment and software
Equipment under capital leases
$
9,095
15,075
958
3,995
31
6,292
4,148
$
$ 39,594
$
7,865
$ 33,470
$ 31,729
Net book value
F-17
Cost
—
1,877
322
2,168
23
2,443
1,032
9,199
14,396
825
3,738
24
4,528
760
March 31,
2001
Accumulated
Amortization
$
—
1,534
301
1,734
22
1,592
239
5,422
$ 28,048
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6.
Goodwill
The net carrying value of goodwill recorded through acquisitions is $25.0 million as at March 31, 2002. Effective April 1, 2001, the
Company adopted CICA 3062, which is similar, in many respects, to SFAS 142. This asset will be assessed for impairment at least annually or
upon an adverse change in operations. Prior to the adoption of CICA 3062 the assets were amortized using the straight-line method over
periods ranging from five to twenty years. The following is the pro forma effect had the years ended March 31, 2001 and 2000 been subject to
CICA 3062:
7.
Year Ended
March 31,
2002
Year Ended
March 31,
2001
Year Ended
March 31,
2000
Reported net income (loss)
Amortization
$ (46,959 )
—
$ 5,803
1,801
$ (3,597 )
1,681
Adjusted net income (loss)
$ (46,959 )
$ 7,604
$ (1,916 )
Reported net income (loss) per share
Amortization per share
$
(1.18 )
—
$
0.06
0.05
$
(0.15 )
0.05
Adjusted net income (loss) per share
$
(1.18 )
$
0.11
$
(0.10 )
Joint Ventures
Eaton Home Entertainment, LLC (“Eaton”)
On September 30, 1999 the Company acquired an additional 16.67% interest bringing its total ownership in Eaton at that date to 50%, and
resulting in Eaton becoming a jointly controlled company. Under the agreement the partner’s cumulative share of earnings up to September 30,
1999 was paid out in cash. This amounted to $0.1 million and was paid directly from Eaton. Between September 30, 1999 and December 20,
2001 the Company accounted for its investment in Eaton using the proportionate consolidation method. Prior to September 30, 1999, the
Company held a 33.33% interest in Eaton and accounted for the investment using the equity method.
On December 20, 2001 the Company acquired the remaining 50% interest in Eaton for total consideration of $0.1 million, and discontinued
the separate operations of Eaton. The Company recorded an unusual loss of $0.8 million relating to the non-continuing assets acquired in the
transaction.
Sterling Home Entertainment, LLC (“Sterling”)
On November 27, 2000, the Company acquired the remaining 50% interest in Sterling for total consideration of $2.8 million. The
acquisition was accounted for as a purchase, with the incremental 50% of the results of the acquired company consolidated from November 27,
2000 onwards. Goodwill arising on the acquisition amounted to $1.1 million. Prior to November 27, 2000 the Company had accounted for its
investment in Sterling using the proportionate consolidation method.
The Company’s share of the assets, liabilities, revenues, expenses, net income and cash flows of the joint ventures has not been disclosed
as the amounts are not significant.
8.
Bank Loans
The Company has a $175 million (2001 — $175 million) U.S. dollar-denominated revolving credit facility, a $25 million (2001 —
$25 million) Canadian dollar-denominated revolving credit facility, a
F-18
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$1.25 million (2001 — $1.3 million) operating line of credit and $3.1 million (2001 $2.9 million) in demand loans.
As at March 31, 2002, a total of $139.9 million (2001 — $97.4 million) was drawn on the revolving credit facilities. The revolving credit
facilities expire on September 25, 2005. The U.S. dollar-denominated revolving credit facility bears interest at U.S. prime (4.75% at March 31,
2002) plus 1.5% or LIBOR (weighted average of 1.86% at March 31, 2002) plus 2.5% and the Canadian dollar-denominated revolving credit
facility bears interest at Canadian prime (3.75% at March 31, 2002) plus 1.5% or Bankers Acceptances (weighted average of 2.12% at
March 31, 2002) plus 2.5%. The availability of funds under the revolving credit facilities is limited by the borrowing base, which is calculated
on a monthly basis. The borrowing base assets at March 31, 2002 totaled $152.1 million (2001 — $120.1 million ). The Company is required to
pay a monthly commitment fee of 0.375% on the total revolving credit facilities of $200.0 million less the total amount drawn. Right, title and
interest in and to all personal property of Lions Gate Entertainment Corp. and Lions Gate Entertainment Inc. is being pledged as security for
the revolving credit facilities. The revolving credit facilities restrict the Company from paying cash dividends on its common shares.
The operating line of credit of a subsidiary expires on July 31, 2002 and bears interest at Canadian prime plus 1%. Management of the
subsidiary expects the facility to be extended. As at March 31, 2002, $0.7 million (2001 — $1.1 million) was drawn on the operating line of
credit. The carrying value of certain accounts receivable, investment in films and television programs and capital assets totaling $1.9 million at
March 31, 2002 (2001 — $3.7 million) is being pledged as security for the operating line of credit.
Demand loans in the amount of $0.7 million bear interest at Canadian prime, $0.2 million bear interest at Canadian prime plus 2% and
$2.2 million bear interest at Canadian prime plus 4%. Certain accounts receivable, guarantees from shareholders of a subsidiary in the amount
of $1.0 million, a corporate guarantee provided by Lions Gate Entertainment Corp. in the amount of $0.3 million (2001 — $1.0 million), and
restricted cash in the amount of $0.7 million are provided as security for the demand loans.
The weighted average interest rate on bank loans at March 31, 2002 was 5.18% (2001 — 8.06%; 2000 — 9.02%).
9.
Production Loans
Production loans consist of bank demand loans bearing interest at various rates between Canadian prime and 9.25%. Rights to certain films
and television programs, a floating charge on certain book debts, certain film rights, and certain tangible assets and an assignment of all
expected future revenue from exploitation of certain films and television programs have been provided as collateral. The carrying value of
investment in films and television programs relating to these motion pictures was $31.1 million at March 31, 2002 (2001 — $14.1 million).
Federal and provincial film tax credits receivable with a carrying value of $9.8 million at March 31, 2002 (2001 — $15.9 million), accounts
receivable in the amount of $1.3 million at March 31, 2002 (2001 — $nil), guarantees from SODEC (Société de Développement des
Enterprises Culturelles), and general security agreements are also provided as collateral for certain of the loans. Of the outstanding amount,
$11.1 million (2001 — $2.9 million) is repayable in U.S. dollars.
The weighted average interest rate on production loans at March 31, 2002 was 5.37% (2001 — 8.18%; 2000 — 8.34%).
F-19
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10.
Long-Term Debt
March 31,
2002
Obligations under capital leases, bearing interest at 8.47% to
20.69%, due fiscal 2003, 2004 and 2005, with certain equipment
provided as collateral
Loans bearing interest at 5.75% to Canadian prime plus 2%, due in
fiscal 2003 and 2005, with certain equipment provided as
collateral
Promissory notes, bearing interest at 6.0%, due July 31, 2003. The
outstanding principal is convertible at the option of the holder
into common shares of the Company at Cdn$8.10 per share
Loans bearing interest at Canadian prime plus 1.75%, due in 2003,
and 2004, with guarantees from SDI (Société de Développement
Industriel de Québec)
Loans bearing interest at 6.47% to 7.51%, due in fiscal 2004, 2005
and 2008, with property, building and equipment with carrying
values of approximately $22.6 million provided as collateral
Loans bearing interest at Canadian prime plus 1%, repayable on
demand and due fiscal 2003 and fiscal 2005, with income tax
credits receivable up to $0.8 million provided as collateral
Non-interest bearing convertible promissory note issued on the
acquisition of a subsidiary
Non-interest bearing sales guarantees, due fiscal 2004 and 2005
$
2,930
March 31,
2001
$
312
630
1,023
10,342
10,459
13
21
13,083
12,818
563
671
—
19,839
343
16,215
$ 47,400
$ 41,862
Non interest-bearing sales guarantees represent amounts due under production financing arrangements whereby the Company has
contracted with a third party and the third party has financed 100% of the production budgets for certain films, and in turn the Company retains
the worldwide distribution rights for a period of at least twenty-five years. The Company has guaranteed to repay minimum amounts at the
dates indicated. Under the terms of the arrangement, the third party is entitled to participate in future net revenue after deduction of certain
specified items including, without limitation, distribution fees payable to the Company and distribution expenses paid by the Company. A
subsidiary of the Company was out of compliance with one financial covenant under each of the $2.9 million obligations under capital leases
and $0.6 million loans at March 31, 2002, for which waivers have been received.
11.
Capital Stock
(a) Series A Preferred Shares and Share Warrants
On December 21, 1999, the Company issued 13,000 units at a price of $2,550 per unit. Each unit consisted of one 5.25% convertible,
non-voting (except for the right to elect between one and three directors, depending on the number of preferred shares outstanding) redeemable
Series A preferred share and 425 detachable common share purchase warrants (for a total of 5,525,000 common share purchase warrants). The
proceeds received on the offering were allocated as follows: common share purchase warrants were valued at fair value, using the
Black-Scholes option pricing model, of $0.706 per warrant or $3.9 million (which have been included in common stock in the consolidated
statements of equity); conversion features were valued at fair value, using the Black-Scholes option pricing model, of $3.4 million; and the
basic preferred shares were valued at the residual value of $25.9 million. The basic preferred shares and the conversion option are presented on
a combined basis in the consolidated statements of equity. The preferred shares are entitled to cumulative dividends, as and when declared by
F-20
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the Board, payable semi-annually on the last day of March and September of each year. The Company may pay the dividends in cash or
additional preferred shares. On September 30, 2001, the Company declared and paid cash dividends of $0.8 million or $66.94 per share. On
March 31, 2002 the Company declared dividends of $0.8 million or $66.94 per share, which were paid in cash and additional preferred shares.
The Company issued 273 preferred shares with a value of $0.7 million. The number of shares to be issued was calculated by using the
semi-annual dividend rate of 2.625% multiplied by the number of outstanding preferred shares at March 31, 2002, less applicable withholding
taxes. The withholding taxes and fractional shares were paid in cash of $0.1 million. The preferred shares have a liquidation preference
entitling each holder to receive an amount equal to $2,550 per share plus the cumulative amount of all dividends accrued and unpaid. Each
holder of the preferred shares may convert all, but not less than all, of the preferred shares at any time into common shares at a rate of 1,000
common shares for each preferred share, subject to certain anti-dilution adjustments. During the years ended March 31, 2002, and 2000, 648
and 795 preferred shares were converted, respectively. On or after January 1, 2003, the Company may convert the preferred shares, in whole or
in part, to common shares on the same terms as the holders, subject to certain conditions.
The Company may redeem the preferred shares, in whole or part, on or after January 1, 2005 for a cash payment of 105% of the stated
value of $2,550 per share plus accrued and unpaid dividends up to the date of redemption. A holder has a right to require redemption of all, but
not less than all, of the preferred shares, for a cash payment of 100% of the stated value of $2,550 per share in the event that the composition of
the Board of Directors ceases to be in compliance with certain provisions relating to the nomination and election of up to three directors.
Management believes the occurrence of such an event is remote.
The difference between the initial carrying value of the preferred shares of $25.9 million and the redemption price of $34.8 million is being
accreted as a charge to accumulated deficit over the five-year period from the date of issuance to the first available redemption date.
The Company’s Series A preferred shares have been included in shareholders’ equity as the terms of the instrument do not provide a
probable contractual obligation under which the Company would be required to transfer cash or other financial instruments to the holders under
terms that would be potentially unfavourable to the Company.
Each share purchase warrant entitles the holder to purchase one common share at a price of $5.00. The warrants expire on January 1, 2004,
and are not transferable except with the consent of the Company.
(b) Series B Preferred Shares
As a condition of the purchase of a subsidiary, on October 13, 2000, the Company issued ten shares at $10 per share to the principal
shareholder of Trimark. The shares are nontransferable and are not entitled to dividends. The shares are nonvoting except that the holder, who
was a principal of the subsidiary acquired, has the right to elect himself to the Board of Directors. The shares are redeemable by the Company
if certain events occur. The shares have a liquidation preference equal to the stated value of $10 per share.
(c) Stock-Based Compensation Plan
The shareholders have approved an Employees’ and Directors’ Equity Incentive Plan (the “Plan”) that provides for the issue of up to
8.0 million common shares of the Company to eligible employees, directors and service providers of the Company and its affiliates. Of the
8.0 million common shares allocated for issuance, up to a maximum of 250,000 common shares may be issued as discretionary bonuses in
accordance with the terms of a share bonus plan. As of March 31, 2002, no shares have been
F-21
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
issued under the share bonus plan. The Board of Directors approved an additional 1.4 million options to be issued outside of the Plan to a
certain principal of a subsidiary upon acquisition of that subsidiary. These shares were issued in fiscal 2001 and are included in the total
number of share options granted and outstanding at March 31, 2002.
The Plan authorizes the granting of options to purchase shares of the Company’s common stock at an option price at least equal to the
weighted average price of the shares for the five trading days prior to the grant. The options generally vest with the recipient within three years
of grant, and have a maximum term of five years.
On November 13, 2001 the Board of Directors of the Company resolved that 750,000 options, granted to certain officers of the Company,
to purchase shares of the Company’s common stock be revised to entitle the holders to receive cash only and not common shares. The amount
of cash received will be equal to the amount that the twenty day average trading price prior to the exercise notice date exceeds the option price
of $5.00 multiplied by the number of options exercised. These revised options are not considered part of the Plan.
Changes in share options granted and outstanding for fiscal 2000, 2001 and 2002 were as follows:
Number of Shares
Weighted Average
Exercise Price
Outstanding at March 31, 1999
Granted
Exercised
Forfeited
Expired
3,412,790
1,157,500
(58,333 )
(575,213 )
(167,081 )
$ 3.65
4.01
2.82
4.58
3.72
Outstanding at March 31, 2000
Granted
Exercised
Forfeited
Expired
3,769,663
5,887,334
(6,250 )
(149,501 )
(605,829 )
3.77
2.76
1.46
2.98
3.22
Outstanding at March 31, 2001
Granted
Exercised
Forfeited
Expired
8,895,417
1,000,498
(87,083 )
(979,839 )
(660,831 )
3.06
2.73
1.51
4.57
3.27
Outstanding at March 31, 2002
8,168,162
$ 2.82
Outstanding and exercisable options at March 31, 2002 were as follows:
Price Range
$1.44
$2.51 to $3.45
$4.00
Weighted Average
Remaining Contractual
Life of Outstanding
Options
2.34
Years
2.80
Years
3.19
Years
2.81
Years
Outstanding
Exercisable
120,000
79,998
7,648,162
2,965,644
400,000
—
8,168,162
3,045,642
F-22
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12.
Acquisitions
Trimark Holdings Inc. (“Trimark”)
On October 13, 2000, the Company acquired the shares of Trimark for total consideration of $49.6 million consisting of $22.0 million cash,
10,229,837 common shares with a fair value of $23.6 million and acquisition costs of $4.0 million. At March 31, 2002 the remaining liabilities
under the restructuring costs totaled $0.6 million. The acquisition was accounted for as a purchase, with the results of operations of the
acquired company consolidated from October 13, 2000 onwards. Goodwill arising on the acquisition amounted to $7.9 million. In fiscal 2002
the allocation of the fair value of the consideration was amended resulting in a decrease in investment in films and television programs, an
increase in goodwill and a decrease in accounts payable and accrued liabilities of $3.6 million, $2.3 million and $1.5 million respectively.
Identifiable assets acquired:
Accounts receivable
Investment in films and television programs
Investment in CinemaNow
Property and equipment
Other assets
$ 20,561
53,985
15,563
264
914
91,287
Liabilities assumed:
Bank loans
Accounts payable
Deferred revenue
Future income taxes
37,750
13,915
405
773
52,843
Net assets acquired:
Previously unrecognized income tax assets of the Company
38,444
3,040
$ 41,484
F-23
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The supplemental unaudited consolidated statement of operations presented below illustrates the results of operations of the Company
assuming the acquisition of Trimark had occurred at the beginning of the period ended March 31, 2000:
March 31, 2001
March 31, 2000
Unaudited
Revenue
Expenses:
Direct operating
Distribution and marketing
General and administration
Amortization
$ 232,584
$ 277,278
142,411
36,876
36,096
6,689
229,933
—
33,750
5,021
222,072
268,704
10,512
8,574
9,791
586
—
4,913
889
1,154
10,377
6,956
135
1,456
1,618
(589 )
1,591
(5,517 )
(1,334 )
—
1,029
(4,006 )
—
108
Total expenses
Operating Income
Other Expenses:
Interest
Minority interests
Unusual losses
Total other expenses
Income Before Income Taxes and Equity
Income taxes
Income Before Equity Interests
Equity interest in Mandalay
Equity interest in CinemaNow
Other equity interests
13.
Net Loss
$
(5,260 )
$
(2,869 )
Basic and Diluted Loss per Common Share
$
(0.25 )
$
(0.12 )
Gain
On July 10, 2001, a third party invested $9.2 million in a subsidiary of the Company to obtain a 35% interest. The gain on dilution of the
Company’s investment was $2.2 million (net of income taxes of $nil) and resulted in a decrease of $0.1 million in goodwill.
14.
Income Taxes
Income before income taxes and equity interests by tax jurisdiction is as follows:
Year Ended
March 31,
2002
Canada
United States
$
10,046
(23,145 )
$ (13,099 )
F-24
Year Ended
March 31,
2001
$
Year Ended
March 31,
2000
3,560
6,591
$
4,476
(2,818 )
$ 10,151
$
1,658
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The provision for (recovery of) income taxes is as follows:
Year Ended
March 31,
2002
Current
Future
Adjustments to opening future income tax valuation
allowances following change in circumstances
$ 1,279
(958 )
$
Canada
Current
Future
Year Ended
March 31,
2001
$
(3,679 )
—
321
$ (2,190 )
$ 1,357
$
939
—
$ 1,024
333
939
1,357
1,279
Total
$
$ 1,024
333
—
$ 1,279
—
United States
Current
Future
1,489
—
Year Ended
March 31,
2000
—
(958 )
550
(3,679 )
—
—
(958 )
(3,129 )
—
$ (2,190 )
$ 1,357
321
The Company’s provision for income tax expense differs from the provision computed at statutory rates as follows:
Year Ended
March 31,
2002
Income tax expense (recovery) computed at Canadian
combined federal and provincial statutory rates
Foreign and provincial operations subject to different
income tax rates
Expenses not deductible for income tax purposes
Write-off of investments subject to significant influence
$ (20,240 )
1,592
221
10,155
—
8,585
481
(473 )
Tax benefits received from Mandalay
Increase (decrease) of valuation
Minority interests
Other
$
321
Year Ended
March 31,
2001
$
4,606
Year Ended
March 31,
2000
$
739
(403 )
809
—
(44 )
586
—
(4,016 )
(3,678 )
211
281
—
(432 )
397
111
$ (2,190 )
$ 1,357
The Company has certain income tax loss carry-forwards, the benefits of which have not yet been recognized and an estimated evaluation
allowance has been provided for in the financial statements. These income tax loss carry-forwards amount to approximately Cdn$45.4 million
($28.5 million) for Canadian
F-25
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
income tax purposes, and $38.1 million for U.S. income tax purposes. The expiration dates of these losses, which are available to reduce future
taxable income in each country, are as follows:
Canada
Cdn$
Year ending March 31, 2003
2004
2005
2006
2007
2008
2009
2019
2020
2021
2022
$
United States
U.S.$
1,469
2,486
294
4,776
4,186
26,445
5,742
—
—
—
—
300
—
—
—
—
$
7,900
11,600
1,500
16,831
$ 45,398
$ 38,131
Following are the components of the Company’s future income tax assets at March 31:
March 31,
2002
Canada
Assets
Net operating losses
Accounts payable
Other assets
Valuation allowance
$
Liabilities
Investment in films and television programs
Property and equipment
$
Liabilities
Investment in films and television programs
Investment in CinemaNow
Net United States
Total
$ 11,482
193
473
(9,740 )
2,832
2,408
(1,911 )
(921 )
(1,090 )
(1,318 )
—
Net Canada
United States
Assets
Net operating losses
Accounts payable
Other assets
Investment in Mandalay
Valuation allowance
10,347
191
176
(7,882 )
March 31,
2001
8,572
3,818
1,012
9,169
(14,831 )
—
$
7,740
12,392
(1,566 )
(5,708 )
(7,099 )
(5,773 )
466
$
4,634
4,217
938
6,689
(4,086 )
466
(480 )
$
(480 )
F-26
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company has recorded a partial valuation allowance against its Canadian future tax assets based on the extent to which it is not
more-likely-than-not that sufficient taxable income will be realized during the carry-forward periods to utilize all the future tax assets. The
valuation allowances recorded against Canadian and United States future income tax assets decreased by $1.8 million and increased by
$10.7 million, respectively, during fiscal 2002. Realization of the future tax benefit is based on the Company’s ability to generate taxable
income in the applicable jurisdictions within a one year period. It is reasonably possible that changes in circumstances could occur in the future
requiring a significant adjustment to the amount of the valuation allowances against future income tax assets.
The amount of unrecognized future income tax liability for temporary differences related to the Company investments in United States
subsidiaries and its equity investee Mandalay, which are not expected to reverse in the foreseeable future, is $2.6 million (2001 —
$2.5 million).
15.
Income (Loss) per Common Share
Year Ended
March 31,
2002
Basic income (loss) per common share is calculated as
follows:
Numerator:
Net income (loss) attributed to common shareholders
$ (50,640 )
Denominator:
Weighted average common shares outstanding
(number/’000s)
Year Ended
March 31,
2001
$
42,753
Basic and diluted income (loss) per common share
$
(1.18 )
2,072
Year Ended
March 31,
2000
$ (4,493 )
36,196
$
0.06
30,665
$
(0.15 )
Options to purchase 8,168,162 common shares (2001 — 8,895,417 common shares, 2000 — 3,769,663 common shares) at an average price
of $2.82 (2001 — $3.06, 2000 — $3.77) and share purchase warrants to purchase 5,525,000 common shares (2001 — 5,525,000 common
shares, 2000 — 5,525,000 common shares) at an exercise price of $5.00 (2001 — $5.00, 2000 — $5.00) were outstanding during the year.
11,830 Series A preferred share units which are each convertible into 1,000 common shares for no additional consideration were outstanding at
March 31, 2002 (2001 — 12,205 units). Additionally, convertible promissory notes with a principal amount of $10.4 million were outstanding
at March 31, 2002 (2001 — $10.5 million; 2000 — $11.4 million). These notes are convertible into common shares at a price of Cdn$8.10 per
share. Under the “if converted” method of calculating diluted earnings per share, the share purchase options, the share purchase warrants, the
Series A preferred shares and the convertible promissory notes were anti-dilutive in each of the years presented and were not reflected in
diluted earnings per share.
16.
Government Assistance
Revenue includes tax credits earned totaling approximately $16.4 million (2001 — $12.1 million; 2000 — $16.3 million). Accounts
receivable at March 31, 2002 includes $23.5 million with respect to government assistance (2001 — $22.8 million).
Investment in films and television programs as at March 31, 2002 includes a reduction of $2.3 million with respect to government
assistance for acquisition of certain programs, which represents management’s estimate of the future liability relating to government assistance,
taking into consideration future revenue estimates, net of repaid amounts. This government assistance is repayable in whole or in part based on
F-27
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
profits generated by certain individual film and television programs, and is forgivable in the event that the individual film and television
programs do ultimately not generate sufficient profits.
Distribution and marketing expenses include a reduction of $0.8 million (2001 — $0.7 million; 2000 — $0.4 million) with respect to
government assistance towards print and advertising expenses.
The Company is subject to routine inquiries and review by Regulatory authorities of its various incentive claims which have been received
or are receivable. Adjustments of claims, if any, as a result of such inquiries or reviews, will be recorded at the time of such determination.
17.
Segment Information
The Company has five reportable business segments: Motion Pictures; Television; Animation; Studio Facilities; and CineGate. The
Company’s reportable business segments are strategic business units that offer different products and services, and are managed separately.
Motion Pictures consists of the development and production of feature films, acquisition of North American and worldwide distribution
rights, North American theatrical, video and television distribution of feature films produced and acquired and worldwide licensing of
distribution rights to feature films produced and acquired.
Television consists of the development, production and worldwide distribution of television productions including television series,
television movies and mini-series and non-fiction programming.
Animation consists of the development, production and worldwide distribution of animated and live action television series, television
movies and feature films.
Studio Facilities consists of management of an eight-soundstage studio facility in Vancouver, Canada. Rental revenue is earned from
soundstages, office and other services such as furniture, telephones and lighting equipment to tenants that produce or support the production of
feature films, television series, movies and commercials. Tenancies vary from a few days to five years depending on the nature of the project
and the tenant.
CineGate provides management services to Canadian limited partnerships, including accessing tax credits to finance production in Canada.
CineGate ceased operations in fiscal 2002 upon the recission of the tax shelter business by the Canadian government.
F-28
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Segmented information by business is as follows:
Revenues
Motion Pictures
Television
Animation
Studio Facilities
CineGate
Direct operating expenses
Motion Pictures
Television
Animation
Studio Facilities
CineGate
Distribution and marketing expenses
Motion Pictures
Television
Animation
Studio Facilities
CineGate
General and administration expenses
Motion Pictures
Television
Animation
Studio Facilities
Corporate
Year Ended
March 31,
2002
Year Ended
March 31,
2001
$ 160,552
70,710
35,485
4,243
1,499
$ 115,652
47,508
19,719
3,678
1,093
$
$ 272,489
$ 187,650
$ 184,361
$
$
$
65,977
64,562
27,633
1,735
—
48,951
39,198
14,110
1,744
—
Year Ended
March 31,
2000
99,850
55,569
24,210
4,732
—
81,176
50,465
18,174
1,667
—
$ 159,907
$ 104,003
$ 151,482
$
75,391
606
248
—
—
$
34,250
176
—
—
—
$
—
—
—
—
—
$
76,245
$
34,426
$
—
$
19,712
3,424
2,635
220
8,677
$
15,315
3,586
1,847
187
4,138
$
11,000
5,449
1,764
186
2,935
$
34,668
$
25,073
$
21,334
Revenue by geographic location, based on the location of the customers, is as follows:
Year Ended
March 31,
2002
Canada
United States
Other foreign
$
50,911
180,565
41,013
$ 272,489
F-29
Year Ended
March 31,
2001
$
38,047
117,877
31,726
$ 187,650
Year Ended
March 31,
2000
$
47,611
89,331
47,419
$ 184,361
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Assets by geographic location are as follows:
Canada
United States
18.
March 31,
2002
March 31,
2001
$ 116,807
265,177
$ 212,342
157,858
$ 381,984
$ 370,200
Commitments and Contingencies
(a) Future minimum annual commitments under contractual obligations and commercial commitments as of March 31, 2002 are as follows:
2003
Contractual Obligations:
Long-term debt
Operating leases
Employment contracts
Unconditional purchase
obligations
Distribution and marketing
commitments
Other Commercial
Commitments:
Production guarantee
Corporate guarantee
$
2004
2005
2,525
2,811
3,942
$ 41,546
2,424
2,265
16,814
$
2006
2007
$
Thereafter
Total
—
1,117
—
$ 1,085
1,599
—
$ 47,400
11,574
6,207
957
2,111
—
$ 1,287
1,512
—
3,210
—
—
—
—
20,024
4,888
—
—
—
—
—
4,888
30,980
49,445
3,068
2,799
1,117
2,684
90,093
100
314
—
—
—
—
—
—
—
—
—
—
100
314
$ 31,394
$ 49,445
$ 3,068
$ 2,799
$ 1,117
$ 2,684
$ 90,507
Unconditional purchase obligations relate to the purchase of film rights for future delivery and advances to producers.
Production guarantees relate to guarantees for bank loans used to finance production costs of unrelated production companies, which have
been provided by a subsidiary of the Company in the normal course of business.
Corporate guarantee relates to a guarantee the Company has provided for a demand loan to a subsidiary up to Cdn$500,000.
(b) The Company is from time to time involved in various claims, legal proceedings and complaints arising in the ordinary course of
business. The Company does not believe that adverse decisions in any pending or threatened proceedings, or any amount which the Company
might be required to pay by reason thereof, would have a material adverse effect on the financial condition or future results of the Company.
(c) The Company incurred rental expense of $2.6 million during the year ended March 31, 2002 (2001 — $2.0 million, 2000 —
$1.3 million).
(d) The Company subleases two locations, which expire on January 31, 2003 and November 30, 2003. Sublease revenue of $0.9 million is
expected to be earned in fiscal 2003 and $0.3 million is expected to be earned in fiscal 2004.
F-30
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
19.
Financial Instruments
(a) Credit Risk
Accounts receivable includes amounts receivable from Canadian governmental agencies in connection with government assistance for
productions as well as amounts due from customers. Amounts receivable from governmental agencies amounted to 20.0% of total accounts
receivable at March 31, 2002 (2001 — 19.0%). Concentration of credit risk with the Company’s customers is limited due to the Company’s
customer base and the diversity of its sales throughout the world. The Company performs ongoing credit evaluations and maintains a provision
for potential credit losses. The Company generally does not require collateral for its trade accounts receivable.
(b) Forward Contracts
The Company has entered into foreign exchange contracts to hedge future production expenses denominated in Canadian, Australian and
New Zealand dollars. Gains and losses on the foreign exchange contracts are capitalized and recorded as production costs when the gains and
losses are realized. As at March 31, 2002, the Company had contracts to sell $10.1 million in exchange for Cdn$16.3 million over a period of
nine months at a weighted average exchange rate of Cdn$1.5952. During the year, the Company completed foreign exchange contracts
denominated in Australian and New Zealand dollars. The net loss resulting from the completed contracts amounted to $nil. These contracts are
entered into with a major financial institution as counterparty. The Company is exposed to credit loss in the event of nonperformance by the
counterparty, which is limited to the cost of replacing the contracts, at current market rates. The Company does not require collateral or other
security to support these contracts. Unrecognized gains as at March 31, 2002 amounted to $0.3 million.
20.
Supplementary Cash Flow Statement Information
(a) Common shares issued in fiscal 2001 in conjunction with a business combination in the amount of $23.1 million are on a non-cash basis
and are, therefore, excluded from the consolidated statement of cash flows.
(b) Interest paid during the year ended March 31, 2002 amounted to $12.0 million (2001 — $6.9 million; 2000 — $4.8 million).
(c) Income taxes paid during the year ended March 31, 2002 amounted to $0.9 million (2001 — $1.7 million; 2000 — $0.3 million).
21.
Reconciliation to United States GAAP
The consolidated financial statements of the Company have been prepared in accordance with Canadian GAAP. The material differences
between the accounting policies used by the Company under Canadian GAAP and U.S. GAAP are disclosed below in accordance with the
provisions of the Securities and Exchange Commission.
F-31
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Under U.S. GAAP, the net loss and loss per share figures for the years ended March 31, 2002, 2001 and 2000, and the shareholders’ equity
as at March 31, 2002 and 2001 are as follows:
Net Income (Loss)
Shareholders’ Equity
Year Ended
March 31,
2002
As reported under Canadian GAAP
Equity interest in loss of Mandalay(a)
Adjustment for capitalized pre-operating
costs(b)
Restructuring costs(c)
Accounting for income taxes(d)
Presentation of Series A preferred Shares
outside shareholders equity(e)
$ (46,959 )
3,074
Year Ended
March 31,
2001
$
370
—
—
5,803
773
—
(43,515 )
5,801
—
Net loss/shareholders’ equity under
U.S. GAAP
Adjustment to cumulative translation
adjustments account (net of tax of
$nil)(g)
Other comprehensive loss (net of tax of
$nil)(g)
$ (3,597 )
1,282
370
(1,145 )
—
—
Net income (loss) before accounting
change/shareholders’ equity under
U.S. GAAP
Cumulative effect of accounting changes,
net of income taxes(f)
Year Ended
March 31,
2000
$ 124,843
(3,074 )
(1,717 )
(1,145 )
1,900
(2,087 )
(1,145 )
1,900
—
(27,884 )
(26,879 )
46,548
93,558
—
—
46,548
93,558
—
—
(259 )
—
—
(34,866 )
(1,701 )
(1,759 )
(3,686 )
2,478
—
75,394
—
March 31,
2001
614
—
—
(43,515 )
—
Comprehensive loss attributable to
common shareholders under
U.S. GAAP
$ (45,527 )
$ (38,552 )
$
777
Basic and diluted income (loss) per
common share under U.S. GAAP
before accounting change
$
(1.09 )
$
0.08
$
(0.09 )
Basic and diluted loss per common
share under U.S. GAAP
$
(1.09 )
$
(1.04 )
$
(0.09 )
F-32
$
(1,701 )
(40,667 )
(259 )
March 31,
2002
$
46,289
$
93,558
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reconciliation of movement in Shareholders’ Equity under U.S. GAAP:
March 31,
2002
Balance at beginning of the year
Increase in capital stock
Dividends paid on preferred shares
Accretion on preferred shares(e)
Net loss under U.S. GAAP
Adjustment to cumulative translation adjustments account
Other comprehensive loss
$
93,558
1,179
(1,592 )
(1,323 )
(43,515 )
(1,759 )
(259 )
Balance — end of the year
$
46,289
March 31,
2001
March 31,
2000
$ 110,001
24,841
(1,660 )
(1,072 )
(34,866 )
(3,686 )
—
$ 102,315
7,619
(402 )
(308 )
(1,701 )
2,478
—
$
$ 110,001
93,558
(a) Equity Interest in Loss of Mandalay
The Company accounts for Mandalay using the equity method. As described in note 4, under Canadian GAAP, pre-operating costs incurred
by Mandalay were deferred and were amortized to income to December 31, 2001. Under U.S. GAAP, all start-up costs are required to be
expensed as incurred. The amounts are presented net of income taxes of $0.5 million (2001 — $0.5 million; 2000 — $nil).
(b) Accounting for Capitalized Pre-Operating Period Costs
Under Canadian GAAP, the Company deferred certain pre-operating costs related to the launch of the television one-hour series business
amounting to $3.1 million. This amount is being amortized over five years commencing in the year ended March 31, 2000. Under U.S. GAAP,
all start-up costs are to be expensed as incurred. The amounts are presented net of income taxes of $0.2 million (2001 — $0.2 million; 2000 —
$nil).
(c) Accounting for Business Combinations
Under Canadian GAAP prior to January 1, 2001, costs related to activities or employees of an acquiring company were considered in the
purchase price allocation. In fiscal 2001, the Company included $1.4 million of such costs in the purchase price for a subsidiary. Under U.S.
GAAP, costs related to the acquiring Company must be expensed as incurred. The amount is presented net of income taxes of $0.3 million.
(d) Accounting for Income Taxes
Under Canadian GAAP commencing in the year ended March 31, 2001, the Company used the asset and liability method to recognize
future income taxes which is consistent with the U.S. GAAP method required under SFAS 109 except that Canadian GAAP requires use of the
substantively enacted tax rates and legislation, whereas U.S. GAAP only permits use of enacted tax rates and legislation. For the year ended
March 31, 2000, the Company used the deferral method for accounting for deferred income taxes, which differs from the requirements of
SFAS 109. The use of substantively enacted tax rates under Canadian GAAP to measure future income tax assets and liabilities resulted in an
increase in Canadian net future income tax assets (before valuation allowances) by $0.2 million (2001 — $1.5 million), with a corresponding
increase in valuation allowances by $0.2 million (2001 — $1.5 million).
SFAS 109 requires deferred tax assets and liabilities be recognized for temporary differences, other than non-deductible goodwill, arising
in a business combination. In the year ended March 31, 2000, under
F-33
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
U.S. GAAP, goodwill was increased to reflect the additional deferred tax liability resulting from temporary differences arising on the
acquisition of Lions Gate Studios in fiscal 1999. Under Canadian GAAP, the Company did not restate income taxes for years prior to
March 31, 2001, accordingly, there is a difference in the carrying amount of goodwill arising in the business combination of $1.9 million as at
March 31, 2002 (March 31, 2001 — $1.9 million).
(e) Accretion on Preferred Shares
Under Canadian GAAP, the Company’s preferred shares have been included in shareholders’ equity as the Company considers the
likelihood of redemption by the holders to be remote. Under U.S. GAAP, the preferred shares would be presented outside of shareholders
equity.
As explained in note 11(b), under Canadian GAAP, the fair value of the basic preferred shares was determined using the residual value
method after determining the fair value of the common share purchase warrants and the preferred share conversion feature. Under U.S. GAAP,
the carrying amount of the preferred shares at the date of the offering of $27.6 million is the residual value arrived at by taking the
$33.2 million proceeds less the fair value of the share purchase warrants of $3.9 million less share issue costs of $1.7 million.
Under Canadian GAAP, the difference between the carrying amount and the redemption value of $32.3 million is being accreted as a
charge to accumulated deficit on a straight-line basis over five years whereas, under U.S. GAAP, the difference is being accreted using the
effective interest method over five years.
(f) Accounting changes
In the year ended March 31, 2001, the Company elected early adoption of SoP 00-2. Under Canadian GAAP, the one-time after-tax
adjustment for the initial adoption of SoP 00-2 was made to opening accumulated deficit. Under SoP 00-2, the cumulative effect of changes in
accounting principles caused by adopting the provisions of SoP 00-2 should be included in the determination of net earnings for GAAP
purposes. The cumulative effect of the adjustment comprises $40.6 million net of income taxes of $1.5 million for the Company and its
subsidiaries as well as $3.8 million, net of income taxes of $nil for the Company’s equity investee Mandalay.
(g) Comprehensive Loss
Comprehensive loss consists of net income (loss) and other gains and losses affecting shareholders’ equity that, under U.S. GAAP are
excluded from the determination of net income or loss. Adjustment to cumulative translation adjustments comprises foreign currency
translation gains and losses. Other comprehensive loss comprises unrealized losses on investments available for sale based on the market price
of the shares at March 31, 2002 net of income taxes of $nil (2001 — $nil).
(h) Accounting for Tax Credits
Under Canadian GAAP, federal and provincial tax credits earned with respect to production costs may be included in revenue. Accounting
Principles Board Opinion No. 4, “Accounting for the Investment Credit,” requires tax credits to be presented as reduction of income tax
expense. The corresponding impact would be a reduction of revenue and credit to income tax expense of $16.4 million (2001 — $12.1 million;
2000 — $16.3 million).
F-34
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(i) Accounting for Stock Based Compensation
Under U.S. GAAP the Company has elected to use the intrinsic value method in accounting for stock based compensation. In accordance
with SFAS No. 123 accounting for stock based compensation the following disclosures are provided about the costs of stock based
compensation awards using the fair value method.
The weighted average estimated fair value of each stock option granted in the year ended March 31, 2002 was $0.85 (2001 — $1.04;
2000 — $1.21). On December 14, 1998 the Company modified the terms of 2,676,414 options outstanding on that date, reducing the exercise
price from Cdn$8.10 to Cdn$5.25, with the effect that it effectively issued new options with an exercise price of Cdn$5.25. The vesting period
and remaining contractual term were unchanged. For proforma purposes, the Company has recognized additional compensation cost for the
excess of the fair value of the modified options issued over the value of the original options at the date of the exchange measured using the
Black-Scholes option pricing model, with the following assumptions: Cdn$4.75 market common share price, Cdn$5.25 exercise price, 6.0%
risk-free interest rate, 35% volatility, and a 0% dividend yield. The total excess fair value of the stock options affected was estimated to be
Cdn$1.4 million and is being recognized over the remaining vesting period of the options.
The total stock compensation expense in the year ended March 31, 2002 would be $2.5 million (2001 — $3.6 million; 2000 —
$2.7 million).
For disclosure purposes fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions used for stock options granted: a dividend yield of 0%, expected volatility of 50% (2001 — 50%;
2000 — $35%), risk-free interest rate of 2.0 % (2001 — 5.5%; 2000 — 6.0%) and expected life of five years.
The resulting pro forma U.S. GAAP loss and loss per share for the year ended March 31, 2002 before the effect of adoption of new
accounting pronouncements was $46.0 million and $1.14 respectively (2001 — net income of $2.2 million and loss per share of $0.01; 2000 —
loss and loss per share $4.4 million and $0.18 respectively).
The resulting pro forma U.S. GAAP net loss and loss per share for the year ended March 31, 2002 was $46.0 million and $1.14
respectively (2001 — loss and loss per share of $38.5 million and $1.14 respectively; 2000 — loss and loss per share $4.4 million and $0.18
respectively).
F-35
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(j) Income (Loss) Per Share
Basic income (loss) per share under U.S. GAAP is calculated as follows:
Year Ended
March 31,
2002
Numerator:
Net income (loss) (before accounting change in 2001)
Less:
Series A preferred share dividends
Accretion on Series A preferred shares
$ (43,515 )
Year Ended
March 31,
2001
Year Ended
March 31,
2000
$
$ (1,701 )
(1,592 )
(1,323 )
Income (loss) attributed to common shareholders
$ (46,430 )
Denominator:
Weighted average common shares outstanding
(number/’000s)
(1,660 )
(1,072 )
$
42,753
Basic and diluted income (loss) per share
$
(1.09 )
5,801
3,069
(402 )
(696 )
$ (2,799 )
36,196
$
0.08
30,665
$
(0.09 )
(k) Proportionate Consolidation
The accounts of all jointly controlled companies are proportionately consolidated according to the Company’s ownership interest. Under
U.S. GAAP, proportionate consolidation is not permitted for jointly controlled companies and the cost, equity or full consolidation methods of
accounting must be followed, as appropriate. As permitted by the United States Securities and Exchange Commission, the effect of this
difference in accounting principles is not reflected above.
(l) Consolidated Statements of Cash Flows
The Company’s cash flow statement prepared in accordance with Canadian GAAP complies with U.S. GAAP.
(m) Consolidated Financial Statements
Under Canadian GAAP, the Company consolidates the financial statements of CineGroupe Corporation (“CineGroupe”). On July 10, 2001,
as a condition of a $9.2 million equity financing with a third party, CineGroupe’s Shareholders’ Agreement was amended to allow for certain
participatory super-majority rights to be granted to the shareholders. Therefore, under U.S. GAAP, the Company is now precluded from
consolidating CineGroupe and will account for CineGroupe, commencing April 1, 2001, using the equity method.
The impact of accounting for CineGroupe using the equity method under U.S. GAAP, would be a reduction in fiscal 2002 revenue to
$237.0 million, direct operating expenses to $132.2 million, distribution and marketing costs to $76.0 million and general and administration
expenses to $32.0 million. The impact of using the equity method under U.S. GAAP on the consolidated balance sheet at March 31, 2002
would be a reduction in total assets to $337.3 million and a reduction in debt (including bank loans, production and distribution loans, and
long-term debt) to $188.6 million.
F-36
LIONS GATE ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
22.
Recent Pronouncements
Accounting for the Impairment or Disposal of Long-Lived Assets
In August 2001, the Financial Accounting Standards Board issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets”. SFAS 144 will be effective for financial statements issued for fiscal years beginning after December 15, 2001. SFAS 144 supersedes
SFAS 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”, however, it retains the
fundamental provisions of that statement related to the recognition and measurement of the impairment of long-lived assets to be “held and
used”. In addition, SFAS 144 provides more guidance on estimating cash flows when performing a recoverability test, requires that long-lived
assets to be disposed of other than by sale to be classified as “held and used” until it is disposed of, and establishes more restrictive criteria to
classify an asset as “held for sale”. The new standard is not expected to have any affect on the Company.
Stock-Based Compensation
In January 2002, the CICA released Section 3870, “Stock-Based Compensation and Other Stock-Based Payments”, to be applied by
companies for fiscal years beginning on or after January 1, 2002 and applied to awards granted on or after the date of adoption. Section 3870
establishes standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based payments made in
exchange for goods and services, and is similar, in many respects to APB 25. The new standard is not expected to have any affect on the
Company.
23.
Quarterly Financial Data (unaudited)
Certain quarterly information is presented below:
2002
First Quarter
Second Quarter
Third Quarter
Revenues
Direct operating costs
Income (loss) before write-down and
equity interest in investments subject to
significant influence
Net income (loss)
Basic and diluted loss per share
$ 45,124
$ 24,825
$ 59,733
$ 32,198
$ 70,552
$ 40,675
$
$
$
$
$
$
$
$
$ (2,440 )
$ (3,192 )
$ (0.10 )
$ (12,302 )
$ (43,575 )
$
(1.03 )
984
(335 )
(0.03 )
F-37
338
143
(0.02 )
Fourth Quarter
97,080
62,209
LIONS GATE ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2002
March 31, 2002
(Unaudited)
(Note 2)
(All amounts in thousands of
United States dollars)
Assets
Cash and cash equivalents
Restricted cash
Accounts receivable, net of video reserves $11,654
(March 31, 2002 — $6,342) and provision for doubtful accounts
of $6,919 (March 31, 2002 — $10,794)
Investment in films and television programs
Discontinued operation
Property and equipment, net
Goodwill, net of accumulated amortization of $5,643
Other assets
Future income taxes
Liabilities
Bank loans
Accounts payable and accrued liabilities
Accrued participations and residuals costs
Production loans
Long-term debt
Deferred revenue
Minority interests
$
6,641
706
116,941
181,002
10,000
31,729
25,048
9,451
466
$
390,541
$
381,984
$
131,055
53,298
23,995
23,766
53,615
20,134
9,144
$
143,734
52,277
16,939
23,941
47,400
13,818
8,481
$
F-38
$
102,704
206,040
—
30,976
25,048
18,046
466
Commitments and contingencies
Shareholders’ Equity
Preferred shares, 200,000,000 shares authorized, issued in series,
including 1,000,000 series A (11,830 shares issued and
outstanding) and 10 series B (10 shares issued and outstanding)
(liquidation preference $30,167)
Common stock, no par value, 500,000,000 shares authorized,
43,231,921 shares issued and outstanding
Accumulated deficit
Cumulative translation adjustments
See accompanying notes.
7,261
—
315,007
306,590
32,076
30,751
157,675
(106,506 )
(7,711 )
157,675
(105,435 )
(7,597 )
75,534
75,394
390,541
$
381,984
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months
Ended
December 31,
2002
Three Months
Nine Months
Ended
Ended
December 31,
December 31,
2001
2002
(All amounts in thousands of United States dollars,
except per share amounts)
Nine Months
Ended
December 31,
2001
$ 61,867
$ 70,552
$ 233,924
$ 175,409
28,595
23,230
8,871
1,215
40,675
21,354
9,247
1,205
117,889
77,611
24,204
3,918
97,698
47,949
24,865
3,190
61,911
72,481
223,622
173,702
(1,929 )
10,302
1,707
2,288
(51 )
—
2,282
135
814
7,503
580
—
7,119
555
1,233
Total other expenses
2,237
3,231
8,083
8,907
Income (Loss) Before Undernoted
Gain on dilution of investment in a subsidiary
(2,281 )
—
(5,160 )
—
2,219
—
(7,200 )
2,186
Income (Loss) Before Income Taxes and
Equity Interests
Income taxes
(2,281 )
13
(5,160 )
2,720
2,219
(1,029 )
(5,014 )
3,896
Income (Loss) Before Equity Interests
Equity interest in Christal Films Distribution Inc.
Equity interest in CinemaNow, Inc.
(2,268 )
16
—
(2,440 )
—
(394 )
1,190
462
—
(1,118 )
—
(1,134 )
Net Income (Loss) from Continuing
Operations
Loss from Discontinued Operation
(2,252 )
—
(2,834 )
(358 )
1,652
—
(2,252 )
(1,132 )
Net Income (Loss)
Dividends on Series A preferred shares
Accretion on Series A preferred shares
(2,252 )
(396 )
(512 )
(3,192 )
(387 )
(515 )
1,652
(1,188 )
(1,535 )
(3,384 )
(1,204 )
(1,549 )
Net Loss Attributed to Common Shareholders
$ (3,160 )
$ (4,094 )
$
(1,071 )
$
(6,137 )
Basic and Diluted Loss Per Common Share —
Loss from continuing operations
Loss from discontinued operation
$
(0.07 )
—
$
(0.09 )
(0.01 )
$
(0.02 )
—
$
(0.12 )
(0.02 )
Net Loss
$
(0.07 )
$
(0.10 )
$
(0.02 )
$
(0.14 )
Revenues
Expenses:
Direct operating
Distribution and marketing
General and administration
Amortization
Total expenses
(44 )
Operating Income (Loss)
Other Expenses:
Interest on debt initially incurred for a term
of more than one year
Minority interests
Unusual losses
See accompanying notes.
F-39
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Series A Preferred
Shares
Common Stock
Number
Balance at March 31, 2001
Conversion of Series A
preferred shares
Exercise of stock options
Issued pursuant to share
bonus plan
Stock dividends
Net loss allocated to
common shareholders
Accretion of Series A
preferred shares
Foreign currency translation
adjustments
42,296,838
Balance at March 31, 2002
Net loss allocated to
common shareholders
Accretion of Series A
preferred shares
Foreign currency translation
adjustments
43,231,921
Balance at December 31,
2002
Series B Preferred
Shares
Amount
Number
Amount
Number
Amount
Deficit
(All amounts in thousands of United States dollars, except share amounts)
$ 155,540
12,205
$ 29,936
10
$ —
$
(54,795 )
648,000
87,083
1,652
137
200,000
346
(648 )
273
Cumulative
Translation
Adjustments
$
(5,838 )
Total
$ 124,843
—
137
(1,652 )
346
696
696
(50,640 )
—
157,675
11,830
(50,640 )
1,771
30,751
1,771
10
—
(105,435 )
(1,759 )
(1,759 )
(7,597 )
75,394
(1,071 )
—
(1,071 )
1,325
1,325
(114 )
43,231,921
$ 157,675
11,830
$ 32,076
See accompanying notes.
F-40
10
$ —
$
(106,506 )
$
(7,711 )
(114 )
$
75,534
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months
Ended
December 31,
2002
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Amortization of property and equipment
Write-off of projects in development
Amortization of pre-operating costs
Amortization of deferred financing costs
Amortization of films and television
programs
Unusual items
Minority interests
Gain on dilution of investment in subsidiary
Other equity interests
Discontinued operation
Changes in operating assets and liabilities:
Accounts receivable
Increase in investment in films and
television programs
Other assets
Future income taxes
Accounts payable and accrued liabilities
Accrued participations and residuals costs
Deferred revenue
$
(2,252 )
928
128
159
342
Three Months
Nine Months
Ended
Ended
December 31,
December 31,
2001
2002
(All amounts in thousands of United States dollars)
$
(3,192 )
956
97
152
296
$
1,652
Nine Months
Ended
December 31,
2001
$
(3,384 )
2,782
658
478
1,045
2,077
649
464
792
28,191
—
(51 )
—
(16 )
—
40,287
814
135
—
394
358
116,664
—
580
—
(462 )
—
96,402
1,233
555
(2,186 )
1,134
1,132
11,641
2,796
12,047
(2,100 )
(43,620 )
(3,421 )
—
5,569
1,152
4,880
(33,767 )
(876 )
(858 )
740
(869 )
(12,331 )
(143,145 )
(6,076 )
—
4,061
7,043
6,327
3,630
(4,868 )
3,654
(57,113 )
Financing activities:
Issuance of capital stock
Dividends paid on Series A preferred shares
Increase (decrease) in bank loans
Decrease in restricted cash
Increase (decrease) in production loans
Increase (decrease) in long-term debt
—
—
4,095
236
(11,044 )
(3,492 )
82
—
(2,831 )
—
3,522
5,962
—
(792 )
(13,058 )
706
(404 )
5,922
117
(817 )
40,688
—
8,590
5,681
Net cash flows provided by (used in)
financing activities
(10,205 )
6,735
(7,626 )
54,259
Net cash flows provided by (used in)
operating activities
(162,075 )
(3,597 )
(1,192 )
8,326
(1,028 )
5,685
Investing activities:
Minority investment in subsidiary
Cash received from discontinued operation
Acquisition of Eaton, net of cash acquired
Purchase of property and equipment
—
4,394
—
(309 )
—
2,500
479
(4,702 )
—
6,634
—
(1,958 )
9,070
2,500
479
(6,775 )
Net cash flows provided by (used in)
investing activities
4,085
(1,723 )
4,676
5,274
Net change in cash and cash equivalents
Foreign exchange effect on cash
Cash and cash equivalents — beginning of
period
(2,490 )
(2,004 )
11,755
144
(271 )
6,918
704
(84 )
6,641
2,420
(2,281 )
6,652
Cash and cash equivalents — end of period
$
7,261
$
See accompanying notes.
F-41
6,791
$
7,261
$
6,791
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of Operations
Lions Gate Entertainment Corp. (“the Company” or “Lions Gate”) is a fully integrated entertainment company engaged in the
development, production and distribution of feature films, television series, television movies and mini-series, non-fiction programming and
animated programming, as well as the management of Canadian-based studio facilities. As an independent distribution company, the Company
also acquires distribution rights from a wide variety of studios, production companies and independent producers.
2.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Lions Gate and all of its majority-owned
and controlled subsidiaries, with a provision for minority interests. The Company controls a subsidiary company through a combination of
existing voting interests and an ability to exercise various rights under certain shareholder agreements and debentures to acquire common
shares.
These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles in Canada (“Canadian GAAP”) which conforms, in all material respects, with the accounting principles generally accepted in the
United States (“U.S. GAAP”), except as described in note 12, for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by Canadian or U.S. GAAP for
complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been reflected in these condensed consolidated financial statements. Operating results for the three and
the nine months ended December 31, 2002 are not necessarily indicative of the results that may be expected for the year ending March 31,
2003. Certain reclassifications have been made in the fiscal 2002 financial statements to conform to the fiscal 2003 presentation. For further
information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for the year
ended March 31, 2002.
The balance sheet at March 31, 2002 has been derived from the audited financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting principles for complete financial statements.
Commencing in the quarter ended June 30, 2002 and going forward, our audited condensed consolidated financial statements are, and will
be, presented in U.S. dollars as a substantial component of our operations are domiciled in the U.S. and the dominant market for trading volume
of our common stock is on the American Stock Exchange.
3.
Accounting Changes
Goodwill
The Company elected to early-adopt the Canadian Institute of Chartered Accountants Section 3062 (“CICA 3062”) on April 1, 2001.
Under CICA 3062, goodwill is no longer amortized but is reviewed annually, or more frequently if impairment indicators arise, for impairment,
unless certain criteria have been met, and is similar, in many respects, to Statement of Financial Accounting Standards (“SFAS”) 142,
“Goodwill and Other Intangible Assets”, under U.S. GAAP. In accordance with the adoption provisions of CICA 3062, goodwill is required to
be tested for impairment on the date of adoption. Under SFAS 142 goodwill is required to be tested for impairment within six months of
adoption, as of the beginning of the year. At April 1, 2001 and September 30, 2001, it was determined that the fair value of each of the
reporting units was in excess of its carrying value including goodwill and, therefore, no
F-42
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
further work was required and an impairment loss was not required. Goodwill is required to be tested for impairment between the annual tests if
an event occurs or circumstances change that more-likely-than-not reduce the fair value of a reporting unit below its carrying value.
Derivative Instruments and Hedging Activities
On April 1, 2001, the Company adopted SFAS 133 “Accounting for Derivative Instruments and Hedging Activities”, as amended in
June 2000 by SFAS 138 “Accounting for Certain Derivative Instruments and Certain Hedging Activities”, where the provisions of SFAS 133
were applicable under Canadian GAAP, which requires companies to recognize all derivatives as either assets or liabilities in the balance sheet
and measure such instruments at fair value. The adoption of these standards did not have a material impact on the Company’s unaudited
condensed consolidated financial statements.
4.
Investment in Films and Television Programs
December 31,
March 31,
2002
2002
(All amounts in thousands
of U.S. dollars)
Theatrical Films
Released, net of accumulated amortization
Completed and not released
Acquired library, net of accumulated amortization
In progress
In development
$
Non-Theatrical Films and Direct-To-Television
Released, net of accumulated amortization
Completed and not released
In progress
In development
63,898
17,471
37,695
27,244
696
$
67,298
9,648
38,405
5,405
1,923
147,004
122,679
41,944
—
14,700
2,392
38,093
1,842
15,533
2,855
59,036
58,323
$ 206,040
$ 181,002
The Company expects that approximately 44% of completed films and television programs, net of accumulated amortization, will be
amortized during the one-year period ending December 31, 2003, and approximately 47% of accrued participants’ share will be paid during the
one-year period ending December 31, 2003.
Additionally, the Company expects approximately 84% of completed and released films and television programs, net of accumulated
amortization, will be amortized over the three-year period ending December 31, 2005.
The acquired library is being amortized using the straight-line method over a period of twenty years from the acquisition date. The
remaining amortization period is 17.75 years at December 31, 2002 on the unamortized costs of $37.7 million.
F-43
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5.
Discontinued Operation
Mandalay Pictures, LLC (“Mandalay”) develops and produces large budget, class-A feature films. Effective April 1, 2002, the carrying
value of the Company’s investment in Mandalay was presented as a discontinued operation as it was expected to be sold by the end of the
current fiscal year. During the period, the Company received distributions of $2.5 million from Mandalay under a prior agreement. On
November 8, 2002, the Company sold its investment in Mandalay for cash of $4.2 million and an interest bearing convertible promissory note
totaling $3.3 million. The note, bearing interest at 6%, is payable $1.3 million on December 31, 2005, $1.0 million on December 31, 2006 and
$1.0 million on December 31, 2007. No gain or loss was recorded on the sale as the Company’s carrying value of $7.5 million equaled the sales
price. At December 31, 2002 the note is included in Other assets in the accompanying Condensed Consolidated Balance Sheet.
6.
Bank Loans
The Company has a $175.0 million U.S. dollar-denominated revolving credit facility, a $25.0 million Canadian dollar-denominated
revolving credit facility, a Cdn$2.0 million ($1.3 million) operating line of credit and Cdn$5.0 million ($3.2 million) in demand loans.
The availability of funds under the revolving credit facilities is limited by the borrowing base, which is calculated on a monthly basis. The
borrowing base assets at December 31, 2002 totaled $156.6 million (March 31, 2002 — $152.1 million). The revolving credit facility has an
average variable interest rate of U.S. prime minus 0.05% on principal of $113.1 million and an average variable interest rate of Canadian prime
plus 0.9% on principal of $14.0 million. The operating line of credit bears interest at Canadian prime plus 1% and the demand loans at
Canadian prime plus 0% — 4%. The Company is required to pay a monthly commitment fee of 0.375% on the total revolving credit facilities
of $200.0 million less the amount drawn.
7.
Gain on Dilution
On July 10, 2001 a third party invested Cdn$14.0 million ($9.2 million) in the Company’s animation partner to obtain a 35% interest. The
gain on dilution of the Company’s investment was Cdn$3.4 million, net of income taxes of $nil ($2.2 million, net of income taxes of $nil) and
resulted in a decrease of Cdn$0.2 million ($0.1 million) in goodwill.
8.
Income (Loss) Per Share
Basic income (loss) per share is calculated after adjusting net income (loss) for dividends and accretion on the preferred shares and using
the weighted average number of common shares outstanding during the three and nine months ended December 31, 2002 of 43,232,000 shares
and 43,232,000 shares, respectively (December 31, 2001 — 42,976,000 shares and 42,611,000 shares respectively). The exercise of common
share equivalents including employee stock options, share purchase warrants, convertible promissory notes and Series A preferred shares could
potentially dilute earnings per share in the future, but were not reflected in fully diluted income per share because to do so would be
anti-dilutive.
9.
Segmented Information
SFAS 131 “Disclosures about Segments of an Enterprise and Related Information” requires the Company to make certain disclosures about
each reportable segment. The Company has five reportable business segments: Motion Pictures; Television; Animation; Studio Facilities; and
CineGate. The
F-44
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company’s reportable business segments are strategic business units that offer different products and services, and are managed separately.
Motion Pictures consists of the development and production of feature films, acquisition of North American and worldwide distribution
rights, North American theatrical, video and television distribution of feature films produced and acquired and worldwide licensing of
distribution rights to feature films produced and acquired.
Television consists of the development, production and worldwide distribution of television productions including television series,
television movies and mini-series and non-fiction programming.
Animation consists of the development, production and worldwide distribution of animated and live action television series, television
movies and feature films.
Studio Facilities consists of management of an eight-soundstage studio facility in Vancouver, Canada. Rental revenue is earned from
soundstages, office and other services such as furniture, telephones and lighting equipment to tenants that produce or support the production of
feature films, television series, movies and commercials. Tenancies vary from a few days to five years depending on the nature of the project
and the tenant.
CineGate provided management services to Canadian limited partnerships, including accessing tax credits to finance production in Canada.
CineGate ceased operations in fiscal 2002 upon the rescission of the tax shelter business by the Canadian government.
Segmented information by business is as follows:
Revenues
Motion Pictures
Television
Animation
Studio Facilities
CineGate
Segment profit (loss)
Motion Pictures
Television
Animation
Studio Facilities
Cinegate
For the Three
Months Ended
Dec 31, 2002
For the Three
For the Nine
Months Ended
Months Ended
Dec 31, 2001
Dec 31, 2002
(All amounts in thousands of U.S. dollars)
For the Nine
Months Ended
Dec 31, 2001
$ 43,598
12,199
4,862
1,208
—
$ 29,545
30,965
8,845
1,013
184
$ 163,280
42,161
24,514
3,969
—
$
$ 61,867
$ 70,552
$ 233,924
$ 175,409
$
2,602
433
672
720
—
$ (3,799 )
3,274
1,160
562
184
$
17,085
(724 )
3,575
2,536
—
$
(1,550 )
6,407
2,815
1,685
1,195
$
4,427
$
$
22,472
$
10,552
F-45
1,381
91,291
56,428
23,362
3,133
1,195
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The reconciliation of total segment profit to the Company’s income before income taxes and discontinued operations is as follows:
For the three
months ended
Dec. 31, 2002
Company’s total segment profit
Less:
Corporate general and administration
Unusual items
Equity interests
Amortization
Interest
Minority interests
Gain on dilution of investment in a
subsidiary
$
For the three
months ended
Dec. 31, 2001
4,427
$
(3,256 )
—
16
(1,215 )
(2,288 )
51
For the nine
months ended
Dec. 31, 2001
$ 22,472
$ 10,552
(2,105 )
(814 )
(394 )
(1,205 )
(2,282 )
(135 )
—
(8,252 )
—
462
(3,918 )
(7,503 )
(580 )
—
$ (2,265 )
10.
1,381
For the nine
months ended
Dec. 31, 2002
$ (5,554 )
—
$
2,681
(5,655 )
(1,233 )
(1,134 )
(3,190 )
(7,119 )
(555 )
2,186
$ (6,148 )
Supplementary Cash Flow Statement Information
Interest paid for the nine months ended December 31, 2002 amounted to $6.2 million (December 31, 2001 — $8.6 million).
Income taxes paid for the nine months ended December 31, 2002 amounted to $1.1 million (December 31, 2001 — $1.1 million).
11.
Commitments and Contingencies
The Company is from time to time involved in various claims, legal proceedings and complaints arising in the ordinary course of business.
The Company does not believe that adverse decisions in any pending or threatened proceedings, or any amount which the Company might be
required to pay by reason thereof, would have a material adverse effect on the financial condition or future results of the Company.
12.
Reconciliation to United States GAAP
The consolidated financial statements of the Company have been prepared in accordance with Canadian GAAP. The material differences
between the accounting policies used by the Company under Canadian GAAP and U.S. GAAP are disclosed below in accordance with the rules
and regulations of the Securities and Exchange Commission.
F-46
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Under U.S. GAAP, the net loss and loss per share figures for the three months and nine months ended December 31, 2002 and 2001 and
the shareholders’ equity as at December 31, 2002 and March 31, 2002 were as follows:
Net Income (Loss)
Three
Nine
Nine
Months
Months
Months
Shareholders’ Equity
Ended
Ended
Ended
Dec 31,
Dec 31,
Dec 31,
Dec 31,
March 31,
2001
2002
2001
2002
2002
(All amounts in thousands of U.S. dollars, except per share amounts)
Three
Months
Ended
Dec 31,
2002
As reported under Canadian
GAAP
Accounting for capitalized
pre-operating costs — Mandalay
Pictures(a)
Discontinued operation(b)
Adjustment for capitalized
pre-operating costs(c)
Accounting for business
combinations(d)
Accounting for income taxes(e)
Reclassification of Series A
preferred Shares outside
shareholders’ equity(f)
$ (2,252 )
Net loss/ shareholders’ equity
under U.S. GAAP
Adjustment to cumulative
translation adjustments
account(g)
Other comprehensive income
(loss)(g)
$ (3,192 )
—
(185 )
194
—
93
93
—
—
—
$
1,652
$ (3,384 )
—
(2,760 )
$
75,534
$
75,394
581
—
—
(2,760 )
—
—
279
279
(1,438 )
(1,717 )
—
—
—
—
—
—
(1,145 )
1,900
(1,145 )
1,900
—
—
—
(28,706 )
(27,884 )
(2,344 )
(2,905 )
(829 )
(2,524 )
43,385
46,548
(1,825 )
(214 )
(114 )
(3,026 )
—
—
75
230
(28 )
(259 )
(9 )
(174 )
Comprehensive loss attributable
to common shareholders’/
shareholders’ equity under
U.S. GAAP
$ (4,178 )
$ (3,044 )
$
(713 )
$ (5,724 )
Basic and diluted loss per
common share under
U.S. GAAP
$
$
$
(0.07 )
$
(0.07 )
(0.08 )
F-47
(0.11 )
$
43,357
$
46,289
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reconciliation of movement in Shareholders’ Equity under U.S. GAAP:
December 31, 2002
March 31, 2002
(All amounts in thousands
of US dollars)
Balance at beginning of the period
Increase in capital stock
Dividends paid on preferred shares
Accretion on preferred shares(f)
Net income (loss) under U.S. GAAP
Adjustment to cumulative translation adjustments account(g)
Other comprehensive income (loss)(g)
$ 46,289
—
(1,188 )
(1,031 )
(829 )
(114 )
230
$
93,558
1,179
(1,592 )
(1,323 )
(43,515 )
(1,759 )
(259 )
Balance at end of the period
$ 43,357
$
46,289
(a) Accounting for Capitalized Pre-Operating Period Costs — Mandalay
Under Canadian GAAP, pre-operating costs incurred by Mandalay were deferred and amortized to income to March 31, 2002. The
remaining unamortized pre-operating costs of $1.2 million at March 31, 2002 were included in write down and equity interest in investments
subject to significant influence. Under U.S. GAAP, all start-up costs are required to be expensed as incurred. The amount for the three months
and nine months ended December 31, 2001 is presented net of income taxes of $0.1 million and $0.4 million respectively.
(b) Accounting for Discontinued Operation
Under Canadian GAAP, effective April 1, 2002 and continuing until November 8, 2002, the date of the sale of the Company’s investment
in Mandalay, the carrying value of the investment is presented as a discontinued operation and the results of Mandalay are reported separately
for the current and comparable period. Under U.S. GAAP, the investment in Mandalay is not considered a discontinued operation and would be
accounted for using the equity method. Accordingly, in the three months and nine months ended December 31, 2002 Mandalay’s net loss of
$0.2 million and $2.8 million, respectively, would be recorded as a reduction in net income. Refer to note 5 for further information.
(c) Accounting for Capitalized Pre-Operating Period Costs — One-Hour Series Business
Under Canadian GAAP, the Company deferred certain pre-operating costs related to the launch of the television one-hour series business
amounting to $3.0 million. This amount is being amortized over five years commencing in the year ended March 31, 2000. Under U.S. GAAP,
all start-up costs are required to be expensed as incurred. The amounts are presented net of income taxes for the three and nine months ended
December 31, 2002 of $0.1 million and $0.2 million respectively (December 31, 2001 — $0.1 million and $0.2 million respectively).
(d) Accounting for Business Combinations
Under Canadian GAAP prior to January 1, 2001, costs related to activities or employees of an acquiring company were considered in the
purchase price allocation. In fiscal 2001, the Company included $1.4 million of such costs in the purchase price for a subsidiary. Under
U.S. GAAP, costs related to the acquiring Company must be expensed as incurred. The amount is presented net of income taxes of
$0.3 million.
F-48
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(e) Accounting for Income Taxes
Under Canadian GAAP commencing in the year ended March 31, 2001, the Company used the asset and liability method to recognize
future income taxes which is consistent with the U.S. GAAP method required under Statement of Financial Accounting Standards No. 109,
“Accounting for Income Taxes”, (“SFAS 109”) except that Canadian GAAP requires use of the substantively enacted tax rates and legislation,
whereas U.S. GAAP only permits use of enacted tax rates and legislation. The use of substantively enacted tax rates under Canadian GAAP to
measure future income tax assets and liabilities resulted in an increase in Canadian net future income tax assets (before valuation allowances)
of $0.1 million (December 31, 2001 — $1.5 million), with a corresponding increase in valuation allowances of $0.1 million (December 31,
2001 — $1.1 million).
SFAS 109 requires deferred tax assets and liabilities be recognized for temporary differences, other than non-deductible goodwill, arising
in a business combination. In the year ended March 31, 2000, under U.S. GAAP, goodwill was increased to reflect the additional deferred tax
liability resulting from temporary differences arising on the acquisition. Under Canadian GAAP, the company did not restate income taxes for
years prior to March 31, 2001, accordingly, there is a difference in the carrying amount of goodwill arising in the business combination of
$1.9 million as at December 31, 2002 (March 31, 2002 — $1.9 million).
(f) Accretion on Preferred Shares
Under Canadian GAAP, the Company’s preferred shares have been included in shareholders’ equity as the Company considers the
likelihood of redemption by the holders to be remote. Under U.S. GAAP, the preferred shares would be presented outside of shareholders
equity.
Under Canadian GAAP, the fair value of the basic preferred shares was determined using the residual value method after determining the
fair value of the common share purchase warrants and the preferred share conversion feature. Under U.S. GAAP, the carrying amount of the
preferred shares at the date of the offering of $27.6 million is the residual value arrived at by taking the $33.2 million proceeds less the fair
value of the share purchase warrants of $3.9 million less share issue costs of $1.7 million.
Under Canadian GAAP, the difference between the carrying amount and the redemption value of $32.3 million is being accreted as a
charge to accumulated deficit on a straight line basis over five years whereas, under U.S. GAAP, the difference would be accreted using the
effective interest method over five years.
(g) Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting shareholders’ equity that, under
U.S. GAAP are excluded from the determination of net income or loss. Adjustment to cumulative translation adjustments comprises foreign
currency translation gains and losses. Other comprehensive income (loss) comprises unrealized gains and losses on investments available for
sale based on the market price of the shares at December 31, 2002 net of income taxes of $nil (December 31, 2001 — $nil).
(h) Accounting for Tax Credits
Under Canadian GAAP, federal and provincial tax credits earned with respect to production costs may be included in revenue. U.S. GAAP
requires that tax credits be presented as reduction of income tax expense. For the three and nine months ended December 31, 2002, the
corresponding impact would be a
F-49
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
reduction of revenue and a credit to income tax expense of $1.5 million and $8.8 million respectively (December 31, 2001 — $4.0 million and
$11.2 million respectively).
(i) Consolidated Financial Statements
Under Canadian GAAP, the Company consolidates the financial statements of CineGroupe Corporation (“CineGroupe”) as a result of its
shareholder rights. On July 10, 2001, as a condition of a $9.2 million equity financing with a third party, CineGroupe’s Shareholders’
Agreement was amended to allow for certain participatory super-majority rights to be granted to the shareholders. Therefore, under
U.S. GAAP, the Company would be precluded from consolidating CineGroupe and would account for its 29.4% ownership of CineGroupe,
commencing April 1, 2001, using the equity method.
There is no impact on net income under U.S. GAAP. Accounting for CineGroupe using the equity method under U.S. GAAP would reduce
the condensed consolidated statements of operations items to the following amounts:
Three Months
Ended
December 31,
2002
$
Revenues
Direct operating expenses
Distribution and marketing expenses
General and administration expenses
Three Months
Nine Months
Ended
Ended
December 31,
December 31,
2001
2002
$
$
(All amounts in thousands of US dollars)
57,005
25,391
23,142
7,973
61,707
33,860
21,350
8,381
209,410
99,108
77,265
22,392
Nine Months
Ended
December 31,
2001
$
152,047
79,415
47,699
22,851
The impact of using the equity method under U.S. GAAP on the consolidated balance sheet at December 31, 2002 would be a reduction in
total assets to $349.2 million (March 31, 2002 — $336.4 million) and a reduction in debt (including bank loans, production and distribution
loans, and long-term debt) to $184.9 million (March 31, 2002 — $188.6 million).
F-50
REPORT OF INDEPENDENT AUDITORS
The Members
Mandalay Pictures, LLC
We have audited the balance sheet of Mandalay Pictures, LLC as of March 31, 2002, and the related statements of operations, changes in
members’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Mandalay Pictures, LLC for
the year ended March 31, 2001 were audited by other auditors, whose report dated June 22, 2001, expressed an unqualified opinion on those
statements and included an explanatory paragraph that disclosed the change in the Company’s method of film accounting discussed in Note 1
to these financial statements.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Mandalay Pictures, LLC at March 31, 2002, and the consolidated results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming that Mandalay Pictures, LLC will continue as a going
concern. As more fully described in Note 1, the Company has incurred recurring operating losses and requires additional financing in order to
produce future films. Additionally, the Company has not successfully negotiated distribution arrangements for future films. These matters raise
substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Los Angeles, California
May 17, 2002
F-51
MANDALAY PICTURES, LLC
CONSOLIDATED BALANCE SHEETS
March 31
2002
2001
(All amounts in US dollars)
ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable
Other receivables
Film inventory
Due from (to) affiliates
Other assets
$
4,841,984
13,647,669
16,214,580
—
86,746,444
42,592
38,621
$
16,113,095
21,147,617
29,105,253
15,225,000
133,127,349
(32,806 )
113,815
Total assets
$
121,531,890
$
214,799,323
$
4,380,559
13,867,670
—
47,430,000
6,846,491
31,347,078
$
875,163
9,847,001
3,085,380
93,126,648
36,574,600
41,256,404
LIABILITIES
Accounts payable and accrued expenses
Accrued participations and residuals
Bank loan
Production loans
Contractual obligations
Deferred revenue
Total liabilities
Commitments and contingencies
Members’ equity:
Contributions from members
Accumulated deficit
Total members’ equity
Total liabilities and members’ equity
$
103,871,798
184,765,196
44,639,000
(26,978,908 )
50,001,000
(19,966,873 )
17,660,092
30,034,127
121,531,890
See accompanying notes.
F-52
$
214,799,323
MANDALAY PICTURES, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31
2002
2001
(All amounts in US dollars)
Revenues
Operating expenses:
Amortization of film costs
Write-off of abandoned film projects
General and administration
Depreciation
$
79,672,559
$
42,671,932
(79,944,752 )
(4,371,778 )
(4,020,597 )
(39,315 )
(42,448,780 )
(341,090 )
(5,769,015 )
(92,262 )
(88,376,442 )
(48,651,147 )
(8,703,883 )
(5,979,215 )
1,197,223
(524,227 )
1,042,515
1,972,026
(191,000 )
—
1,715,511
1,781,026
Loss before provision for income taxes and cumulative
change in accounting principle
Provision for income taxes
(6,988,372 )
(23,663 )
(4,198,189 )
(22,318 )
Loss before cumulative effect of change in accounting
principle
Cumulative effect of change in accounting principle
(7,012,035 )
—
(4,220,507 )
(3,784,000 )
Loss from operations
Other income (expense):
Interest income
Interest expense
Gain on contractual settlement
Net loss
$
(7,012,035 )
See accompanying notes.
F-53
$
(8,004,507 )
MANDALAY PICTURES, LLC
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY
Tigerstripes,
LLC
Balance at March 31, 2000
Net loss
$
Balance at March 31, 2001
Return of capital
Net loss
Balance at March 31, 2002
550
—
LG Pictures,
Inc.
(All amounts in US dollars)
$
550
—
—
$
550
See accompanying notes.
F-54
38,038,084
(8,004,507 )
Total
$
30,033,577
(5,362,000 )
(7,012,035 )
$
17,659,542
38,038,634
(8,004,507 )
30,034,127
(5,362,000 )
(7,012,035 )
$
17,660,092
MANDALAY PICTURES, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
2002
2001
(All amounts in U.S. dollars)
Operating activities
Net loss
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Cumulative effect of a change in accounting
principle
Gain on contractual settlement
Depreciation
Write-off of abandoned film projects
Amortization of film costs
Changes in operating assets and liabilities:
Restricted cash
Accounts receivable
Other receivables
Film inventory
Due to/from affiliates, net
Other assets
Accounts payable and accrued expenses
Accrued participations and residuals
Contractual obligations
Deferred revenue
$
(7,012,035 )
$
(8,004,507 )
—
(1,042,515 )
39,315
4,371,778
79,944,752
3,784,000
—
92,262
341,090
42,448,780
7,499,948
12,480,450
—
(86,040,522 )
(75,398 )
35,879
426,778
13,840,676
596,491
(211,894 )
10,865,134
(25,542,114 )
(11,400,966 )
(129,299,198 )
276,986
320,321
(6,630,295 )
6,647,001
20,402,652
36,150,110
31,865,738
(51,544,237 )
Net cash provided by (used in) operating activities
Financing activities
Proceeds (repayments) from bank loan, net
Repayments on production loans
Proceeds from production loans
Proceeds from other financing arrangements
Return of members’ capital contributions
Proceeds from contractual settlement
24,853,703
(59,548,744 )
53,465
(85,176,648 )
39,480,000
13,295,708
(5,362,000 )
1,584,661
284,196
(21,614,163 )
84,183,584
(433,352 )
—
—
Net cash (used in) provided by financing activities
(36,124,814 )
62,420,265
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
(11,271,111 )
16,113,095
2,871,521
13,241,574
Cash and cash equivalents, end of year
$
4,841,984
$
16,113,095
Supplemental disclosure of cash flow information
Interest paid
Income taxes paid
$
$
2,095,347
23,663
$
$
5,926,277
22,318
See accompanying notes.
F-55
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Summary of Significant Accounting Policies
Operations and Basis of Presentation
Mandalay Pictures, LLC (the Company) was incorporated on March 1, 1998 as a Delaware limited liability company. The Company
develops, finances, produces and distributes major motion pictures.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern. The
Company’s ability to continue as a going concern is dependent upon its ability to produce and distribute films. As of March 31, 2002, the
Company has arranged financing and distribution for two films that are currently in production. However, the Company has incurred recurring
operating losses, and has not arranged financing for production of any future films. In addition, although distribution arrangements are in place
for films currently in production, the Company’s current distribution arrangements have been terminated or have expired and the Company has
not successfully negotiated other distribution arrangements for future films. If the Company cannot produce future films, the Company will not
be able to continue as a going concern.
Management is actively pursuing other film financing and distribution options. However, there can be no assurance that the Company will
be successful in its efforts to identify additional financing or distribution arrangements on terms acceptable to the Company. The financial
statements do not include any adjustments relating to the recoverability of the carrying amount of the recorded assets or the amount of
liabilities that might result from the outcome of the Company’s inability to produce future films.
Change in Accounting Principle
In June 2000, the American Institute of Certified Public Accountants issued Statement of Position 00-2, “Accounting by Producers or
Distributors of Films” (the SOP). The SOP established new accounting standards for producers and distributors of films, including changes in
revenue recognition concepts and accounting for exploitation, development. The SOP requires that advertising costs be expensed in accordance
with SOP 93-7, “Reporting on Advertising Costs,” while all other exploitation costs are to be expensed as incurred. In addition, the SOP
provided that development costs for abandoned projects and indirect overhead costs are to be charged to expense instead of being capitalized to
film costs.
The Company adopted the SOP effective April 1, 2000 and recorded a charge for the initial adoption of $3,784,000, which has been
reflected as a cumulative effect of a change in accounting principle in the accompanying consolidated statements of operations. Also as a result
of the adoption, the Company recognized approximately $18,748,000 of revenue in fiscal year 2001, which was recognized in prior years. The
effect on net loss of recognizing these revenues was not material.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Actual results could
differ from those estimates.
Supplemental Cash Flow Information
During the year ended March 31, 2002, the Company entered into an agreement to settle various amounts owed between the Company and
third-party investors in certain films produced by the Company.
F-56
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As a result, contractual obligations of $16,767,000 were offset against film costs of $16,002,000, other receivables of $723,000 and accounts
payable of $42,000. In addition, accrued participation of $4,286,000, contractual obligations of $3,000,000 and film costs of $2,759,000 were
offset against other receivables of $10,045,000.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an original maturity of three months or less and investments in money
market funds to be cash equivalents. At times, cash balances held at financial institutions are in excess of the Federal Deposit Insurance
Corporation’s limits.
Restricted Cash
Restricted cash represents amounts on deposit with financial institutions as collateral for certain distribution agreements and for the
payment of interest and bank fees associated with loans made for the production of certain films. At March 31, 2002 and 2001, the amount of
restricted cash on deposit was $13,647,669 and $21,147,617, respectively. These deposits require third party approvals prior to the
disbursement of any funds. Any unused funds will be returned to the Company upon repayment of the underlying loan.
Fair Value of Financial Instruments
The fair value of cash and cash equivalents, accounts receivable, other assets, accounts payable and accrued expenses, bank and production
loans, contractual obligations, accrued participations and residuals, and amounts due from affiliates as reflected in the financial statements
approximate their carrying value at March 31, 2002 and 2001, respectively.
Film Costs
Film Inventory
Film inventory represents the unamortized cost of films which have been developed and produced by the Company or for which the
Company has acquired distribution rights. Such costs include all production costs, including an allocation of direct overhead and financing
costs. Included in film inventory costs are development costs representing expenditures directly attributable to projects which are incurred prior
to their production. Such inventory items are capitalized and, upon commencement of production, are charged to the production. Development
costs not charged to a production are written off when the project is abandoned or when more than three years has passed from the first
expenditure.
Film inventory is stated at the lower of cost, net of amortization, or fair value. Film inventory costs are amortized against revenues
generated by the delivery and subsequent exploitation of the film. Amortization is determined using the individual film forecast method,
whereby costs accumulated in the development and production of a film are amortized in the proportion that current gross revenues bear to
management’s estimate of the total gross revenues expected to be received from all sources within ten years of release. Where applicable,
unamortized inventory is written down to fair value using a discounted cash flow model based on this appraisal.
Participations and Residuals
Estimated liabilities for participations and residuals are amortized in the same manner as film inventory costs.
F-57
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Based on management’s estimates, approximately $6,934,000 of the balance of accrued participations and residuals at March 31, 2002 will
be paid during the year ending March 31, 2003.
Revenue Recognition
Revenue is recognized in accordance with the provisions of the SOP. The Company licenses certain film rights through international
distribution agreements that provide for the payment of minimum guaranteed license fees (MGs), usually payable on delivery of the respective
completed film, that are subject to further increase based on the actual distribution results in the respective territory. MGs related to contracts
which contain holdback provisions, precluding the distributor from exploiting secondary markets until certain time periods have lapsed, are
allocated across those markets and recognized as revenue when each holdback provision expires and the film is available for exploitation by the
distributor.
Revenue allocated to the primary market, usually the theatrical market, is recognized as revenue on the date the completed film is available
for exploitation in the related territory and certain other conditions of sale have been met pursuant to criteria specified by the SOP.
In March 1998, the Company entered into a financing and distribution agreement (the Paramount Agreement) with Paramount Pictures
Corporation (Paramount) that gave Paramount the option to acquire the distribution rights in all territories other than those covered by the
various international distribution agreements. Any amounts received from Paramount at the commencement of the license period are treated as
MGs with revenue being recognized in a manner similar to the international distribution agreements discussed above. See Note 6.
Deferred Revenue
Deferred revenue represents MGs received from distributors for which holdback provisions have not yet lapsed, thus precluding the
distributor from exploiting the film in markets covered by the holdback provisions. Revenue is recognized by the Company when the holdback
has lapsed and the film is available for exploitation by the distributor.
Income Taxes
For federal income tax purposes, profits and losses are passed through to the members. Accordingly, no provision has been made in these
financial statements for federal income taxes. For the years ended March 31, 2002 and 2001, the Company recorded a provision related to
California limited liability company taxes of $23,663 and $22,318, respectively.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133,
“Accounting for Derivative Instruments and Hedging Activities” (FAS 133). FAS 133 requires companies to record derivatives on their
balance sheets as assets or liabilities, measured at fair value. Under FAS 133, gains or losses resulting from changes in the values of derivatives
are to be reported in the statement of operations or as a deferred item, depending on the use of the derivatives and whether they qualify for
hedge accounting. The Company adopted FAS 133 on April 1, 2001. The impact on the financial statements of adopting this standard was not
material.
F-58
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2.
Film Inventory
Film inventory consists of the following at March 31:
2002
Projects released, net of amortization
Projects in production
Projects in development/pre-production
2001
$
34,711,370
50,310,244
1,724,830
$
56,885,456
64,948,138
11,293,755
$
86,746,444
$
133,127,349
The Company estimates that approximately 29% and 80% of its unamortized released film costs at March 31, 2002 will be amortized
within the next one and three year periods, respectively.
During the years ended March 31, 2002 and 2001, the Company capitalized to film inventory interest of $1,759,453 and $5,200,602,
respectively, and production overhead of $6,003,815 and $7,000,000, respectively.
3.
Bank Loan
On February 12, 1999, the Company entered into a credit facility, which provided a line of credit bearing interest at the rate of LIBOR plus
1.75%. Borrowings under this credit facility were guaranteed by a group of insurance companies, were non-recourse to the Company and were
collateralized by certain revenues and copyrights. The Company had $3,085,380 outstanding under this facility at March 31, 2001. In fiscal
year 2002, in conjunction with a settlement with Paramount (see Note 6), the Company repaid all amounts owed under this credit facility and
negotiated with the insurers for a refund of a portion of the premiums paid. As a result of these negotiated settlements, the Company recorded a
gain of approximately $1,043,000.
4.
Production Loans
In order to finance the production of its films, the Company has entered into various non-recourse production loans with its lenders. The
credit facilities each provide a line of credit up to an amount approximating the total budgeted costs of the underlying film and bear interest at
the rate of LIBOR, plus 1.5%. Borrowings under the production loans are collateralized by, and will be repaid from, contractual MGs due on
certain contracts entered into with foreign distributors for the distribution of the underlying film. The production loans are cancelled upon
repayment. The Company has entered into the following production loan arrangements:
2002
Production loan dated December 3, 2001, due
February 3, 2004
Production loan dated December 15, 2000, due
January 7, 2003
Production loan dated May 19, 2000, due July 3,
2002
Production loan dated October 15, 1999, due
February 27, 2002
$
$
2001
27,030,000
$
—
20,400,000
12,200,000
—
53,191,730
—
27,734,918
47,430,000
$
93,126,648
For each of the production loans discussed above, the bank has required the Company to enter into foreign exchange options to hedge the
Japanese yen translation fluctuation applicable to the distribution contracts entered into with the Japanese distributor. These options, which are
exercisable during 2002, had a fair value of $26,300 and $113,800 at March 31, 2002 and 2001, respectively.
F-59
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5.
Film Financing Transactions
In addition to the production loans described in Note 4, the Company has entered into arrangements with a third party (the Film Investor),
whereby the Film Investor contributed a portion of the budgeted costs of certain films in exchange for a share of all distribution proceeds, as
defined, generated by the underlying film. The proceeds of these transactions represent equity investments in the underlying film and were
recorded as a reduction to the costs of the film. During the years ended March 31, 2002 and 2001, the Company received approximately
$9,400,000 and $28,500,000, respectively, from the Film Investor pursuant to these arrangements.
In addition, during the year ended March 31, 2001, the Film Investor paid to the Company $9,250,000 toward the costs of a film, which
amount is collateralized by a subordinated security interest in the underlying film. The amount is guaranteed to be returned to the Film Investor
no later than July 2004, together with interest at LIBOR plus 0.4%. During the year ended March 31, 2002, the Company repaid $3,000,000 to
the Film Investor. The remaining obligation included in contractual obligations in the accompanying consolidated balance sheet.
The Company entered into arrangements with third parties whereby the Company sold its rights to certain films and immediately leased
back the attendant distribution rights for a specified term. Under the terms of these arrangements, the Company has agreed to make certain
fixed annual payments to the purchasers over the length of the term. These payments have been legally assumed by various banks, in exchange
for the Company depositing a certain amount in cash, and the purchasers have relinquished any claim against the Company for the payments.
Upon the payment of the final amount, all rights previously sold revert back to the Company. The deposits and corresponding fixed payment
obligations are not presented in the financial statements, as they are no longer the property nor the responsibility of the Company. During the
years ended March 31, 2002 and 2001, the Company received approximately $2,300,000 and $3,000,000, respectively, which were recorded as
reductions to film costs. In addition, during the year ended March 31, 2001, $10,558,000 was received by the Company and reflected as a
contractual obligation since the film project to which it related had not yet commenced production and certain refund provisions applied under
these circumstances. During the year ended March 31, 2002, the underlying film commenced production and, accordingly, the contractual
obligation was offset against film costs. The Company avails itself of government programs that are designed to assist film and television
production and distribution in Canada. During the years ended March 31, 2002 and 2001, the Company received approximately $1,000,000 and
$500,000, respectively, from these government programs. Such amounts were recorded as reductions to film costs.
6.
Commitments and Contingencies
Employment Agreements
The Company employs certain of its executives (who are also members of Tigerstripes, LLC) under formal employment agreements. In
January 2001, the executives and the parent company of LG Pictures, Inc., Lions Gate Entertainment Corp. (Lions Gate), entered into an
agreement whereby the executives agreed to defer a portion of their salaries. In November 2001, pursuant to the Reorganization Agreement
(see Note 7), the terms of these employment agreements were extended through December 31, 2004, subject to earlier termination under certain
circumstances. The Reorganization Agreement also provided for payment of a portion of the salaries that had been previously deferred. The
employment agreements provide for minimum annual base compensation of $4,280,000, of which $238,500 was deferred at March 31, 2002.
F-60
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Distribution Agreements
The Paramount Agreement (see Note 1) provided for a term of the shorter of five years, or commencement of production of 20 motion
pictures, subject to earlier termination under certain circumstances. Pursuant to the Paramount Agreement, Paramount made annual
contributions to the overhead expenses of the Company. These overhead contributions totaled $1,500,000 and $2,000,000 for the years ended
March 31, 2002 and 2001, respectively, and are presented as reductions to general and administration expenses in the accompanying
consolidated statements of operations.
In December 2001, the parties agreed to terminate the Paramount Agreement. The termination of the Paramount Agreement will have no
impact on its obligations with respect to the Company’s released films, nor with the two films currently in post-production.
Under the Paramount Agreement, the Company assumed responsibility for certain amounts payable to unions and actors based on the
performance in certain territories of one of its motion pictures. Paramount was the primary obligor of these obligations. In May 2001, in
conjunction with repayment of the underlying credit facility (see Note 3), the Company negotiated a settlement of this arrangement with
Paramount, which resulted in the Company transferring its rights in the motion picture to Paramount, in exchange for Paramount’s assumption
of all obligations to unions and actors.
7.
Members’ Equity
Mandalay is governed by an operating agreement (the Operating Agreement), between LG Pictures, Inc. and Tigerstripes, LLC (the
Members). As a limited liability company, the Members of Mandalay are not liable for debts or other obligations of Mandalay. The LLC
Agreement governs the relative rights and duties of the Members.
The ownership interests of the Members in Mandalay consist of 44,638,000 Class A Preferred Units, 450 Class B Common Units and 550
Class C Common Units.
Pursuant to the Operating Agreement, LG Pictures, Inc. shares in 100% of Mandalay’s losses and 100% of its earning until LG Pictures,
Inc. recovers its original $50,000,000 investment. Thereafter, Tigerstripes and LG Pictures, Inc. are entitled to 55% and 45%, respectively, of
the earnings of Mandalay.
In November 2001, Mandalay and Lions Gate entered into an agreement to reorganize Mandalay (the Reorganization Agreement).
Pursuant to the Reorganization Agreement, certain restrictions were placed on the amounts Mandalay can spend for overhead and development
expenses. In addition, the Reorganization Agreement modified the employment agreements of certain executives of Mandalay (see Note 6) and
provided for returns of capital to Lions Gate under certain circumstances. As security for the payment of all amounts owed to Lions Gate
provided for in the Reorganization Agreement, Mandalay agreed to grant to Lions Gate a security interest in all of its assets, including its films
and all proceeds from the production or exploitation thereof. During the year ended March 31, 2002, Mandalay returned capital of $5,362,000
to Lions Gate pursuant to the Reorganization Agreement.
The Reorganization Agreement also provides that under certain circumstances (as specified in the Reorganization Agreement), Lions Gate
will have the right to terminate the Reorganization Agreement and wind down the operations of Mandalay at December 31, 2003.
F-61
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8.
Related Parties
Due (to) from affiliates consists of the following at March 31:
2002
Lions Gate
Other Mandalay companies*
$
2001
5,258
37,334
$ (84,468 )
51,662
$ 42,592
$ (32,806 )
* Includes various Mandalay named companies in which members of the Company have significant interest.
LG Pictures, Inc. was required to compensate the Company for any interest income foregone on a required equity contribution that was
replaced by the establishment of the bank loan (see Note 3). During the year ended March 31, 2001, the Company received $190,000 under this
agreement, which amount was included in interest income.
F-62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of
Mandalay Pictures, LLC:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, change in members’
equity and cash flows present fairly, in all material respects, the financial position of Mandalay Pictures, LLC (the “Company”) at March 31,
2001 and 2000, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility of the Company’s management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally
accepted auditing standards in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of film accounting on April 1, 2000.
/s/ PRICEWATERHOUSE COOPERS LLP
June 22, 2001
F-63
MANDALAY PICTURES, LLC
CONSOLIDATED BALANCE SHEETS
As of March 31, 2001 and 2000
2001
2000
ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable — trade
Other receivables
Film inventory
Due (to) from affiliates
Other assets and prepaid expenses
TOTAL ASSETS
$
16,113,095
21,147,617
29,105,253
15,225,000
133,127,349
(32,806 )
113,815
$
13,241,574
32,012,751
3,563,139
3,824,034
50,060,931
244,180
434,136
$
214,799,323
$
103,380,745
$
875,163
9,847,001
3,085,380
93,126,648
36,574,600
41,256,404
$
7,505,458
3,200,000
2,801,184
30,557,227
16,171,948
5,106,294
LIABILITIES
Accounts payable and accrued expenses
Accrued participations and residuals
Bank loan
Production loans
Contractual obligations
Deferred revenue
TOTAL LIABILITIES
184,765,196
65,342,111
50,001,000
(19,966,873 )
50,001,000
(11,962,366 )
30,034,127
38,038,634
MEMBERS’ EQUITY
Contributions from members
Accumulated deficit
TOTAL MEMBERS’ EQUITY
$
TOTAL LIABILITIES and MEMBERS’ EQUITY
214,799,323
$
The accompanying notes are an integral part of these financial statements.
F-64
103,380,745
MANDALAY PICTURES, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 31, 2001 and 2000
2001
$
REVENUES
OPERATING EXPENSES
Amortization of film costs
General and administration
Depreciation
42,671,932
2000
$
87,033,801
(42,448,780 )
(6,110,105 )
(92,262 )
(87,988,812 )
(4,165,285 )
(98,494 )
LOSS FROM OPERATIONS
INTEREST INCOME
INTEREST EXPENSE
(5,979,215 )
1,972,026
(191,000 )
(5,218,790 )
2,520,559
—
LOSS BEFORE PROVISION FOR TAXES
PROVISION FOR TAXES
(4,198,189 )
(22,318 )
(2,698,231 )
(12,050 )
(4,220,507 )
(2,710,281 )
LOSS BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE
—
(3,784,000 )
$
NET LOSS
(8,004,507 )
$
The accompanying notes are an integral part of these financial statements.
F-65
(2,710,281 )
MANDALAY PICTURES, LLC
CONSOLIDATED STATEMENT OF CHANGES IN MEMBER’S EQUITY
For the Years Ended March 31, 2001 and 2000
Tigerstripes,
LLC
Balance at March 31, 1999
Net loss
$
$
550
—
Balance at March 31, 2000
Net loss
Balance at March 31, 2001
550
—
LG Pictures,
Inc.
$
550
40,748,365
(2,710,281 )
38,038,084
(8,004,507 )
$
30,033,577
The accompanying notes are an integral part of these financial statements.
F-66
Total
$
40,748,915
(2,710,281 )
38,038,634
(8,004,507 )
$
30,034,127
MANDALAY PICTURES, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2001 and 2000
2001
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in
operating activities:
Cumulative effect of a change in accounting
principle
Depreciation
Write off of abandoned film projects
Amortization of film costs
(Increase) decrease in assets:
Restricted cash
Accounts receivable — trade
Other receivables
Additions to film costs
Due to/from affiliates, net
Other assets and prepaid expenses
(Decrease) increase in liabilities:
Accounts payable and accrued expenses
Accrued participations and residuals
Contractual obligations
Deferred revenue
$
(8,004,507 )
2000
$
(2,710,281 )
3,784,000
92,262
341,090
42,448,780
—
98,494
—
87,988,812
10,865,134
(25,542,114 )
(11,400,966 )
(129,299,198 )
276,986
320,321
(29,310,552 )
(3,563,139 )
(3,452,857 )
(97,671,705 )
37,149
27,322
(6,630,295 )
6,647,001
20,402,652
36,150,110
(620,834 )
3,200,000
16,171,948
644,402
Total adjustments
(51,544,237 )
(26,450,960 )
Net cash used by operating activities
(59,548,744 )
(29,161,241 )
284,196
(21,614,163 )
84,183,584
(433,352 )
(1,153,795 )
(33,969,467 )
45,712,935
(518,122 )
62,420,265
10,071,551
2,871,521
13,241,574
(19,089,690 )
32,331,264
Cash flows from financing activities:
Proceeds (repayments) from bank loan, net
Repayments on production loans
Proceeds from production loans
Payments relating to financing costs and other assets
Net cash provided by financing activities
Net increase (decrease) in cash and cash
equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
16,113,095
$
13,241,574
Supplemental disclosure of cash flow information:
Interest paid
Income taxes paid
$
$
5,926,277
22,318
$
$
2,218,759
12,050
The accompanying notes are an integral part of these financial statements.
F-67
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization
Mandalay Pictures, LLC (the “Company”) was incorporated on March 1, 1998 as a Delaware corporation. The Company develops,
finances, produces and distributes major motion pictures.
2.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant
inter-company transactions and accounts have been eliminated.
Accounting Changes
In June 2000, the American Institute of Certified Public Accountants issued Statement of Position 00-2, “Accounting by Producers or
Distributors of Films” (SoP 00-2). SoP 00-2 established new accounting standards for producers and distributors of films, including changes in
revenue recognition concepts and accounting for exploitation, development and overhead costs. SoP 00-2 requires that advertising costs be
expensed in accordance with SoP 93-7, “Reporting on Advertising Costs” while all other exploitation costs are to be expensed as incurred.
Development costs for abandoned projects and indirect overhead costs are to be charged to expense instead of being capitalized to film costs. In
addition, methodology for determining net realizable value includes a discounted cash flow approach. The Company adopted the
pronouncement effective April 1, 2000 and recorded a one-time charge for the initial adoption totaling $3,784,000, which has been reflected as
a cumulative effect of a change in accounting principle in the Consolidated Statement of Operations for the year ended March 31, 2001. Also as
a result of the adoption, the Company recognized approximately $18,748,000 of revenue in the current year which was recognized last year. It
is estimated $6,250,000 of previously recognized revenue will be recorded in future periods. The effect on net income (loss) of recognizing
these revenues is not material.
In December 1999, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin 101, Revenue Recognition in
Financial Statements (“SAB 101”), which summarized the SEC staff’s view in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company has reviewed its revenue recognition policies and revised them to conform to SAB 101,
specifically with respect to distributor-for-hire arrangements. Accordingly, revenues in the prior year have been restated to conform to the
current period presentation, with no net effect on net loss.
Revenue Recognition.
Revenue is recognized in accordance with the provisions of SoP-02 and SAB 101. The Company licenses certain film rights through
international distribution agreements that provide for the payment of minimum license fees (“Minimum Guarantees” or “MG’s”), usually
payable on delivery of the respective completed film, that are subject to further increase based on the actual distribution results in the respective
territory. Minimum Guarantees related to contracts which contain hold-back provisions precluding the distributor from exploiting secondary
markets until certain time periods have lapsed are allocated across those markets and recognized as revenue when each hold-back provision
expires.
Revenue allocated to the primary market, usually the theatrical market, is recognized as revenue on the date the completed film is available
for exploitation in the related territory and certain other conditions of sale have been met pursuant to criteria specified by SoP-00-2.
The Company has entered into a first look financing and distribution agreement with Paramount Pictures Corporation (“Paramount”) that
gives Paramount the option to acquire the distribution rights in all territories other than those covered by the various international distribution
agreements, under terms
F-68
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
which are similar to the international agreements. Any amounts received from Paramount at the commencement of the license period are
treated as minimum guarantees with revenue being recognized in a manner similar to the international distribution agreements discussed above.
Paramount also pays annual overhead contribution fees to the Company to help offset the costs of operation of the Company. These fees are
presented as reductions to general and administration expenses in the Statement of Operations.
Deferred Revenue
Deferred revenue represents MG’s received from distributors for which holdback provisions have not yet lapsed, thus, precluding the
Company from recognizing revenue.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and
cash equivalents are carried at cost, which approximates fair value. At times, cash balances held at financial institutions are in excess of the
Federal Deposit Insurance Corporation’s limits.
Restricted Cash
Restricted cash represents amounts on deposit with financial institutions that are contractually designated for the production of certain films
and require third party approvals prior to the disbursement of any funds.
Film Costs
• Film inventory
Film inventory represents the unamortized cost of films which have been developed and produced by the Company or for which the
Company has acquired distribution rights. Film inventory costs are capitalized and amortized against revenues guaranteed by the delivery and
subsequent exploitation of the film. Such costs include all development and production costs (including an allocation of direct overhead and
financing costs).
Film inventory is stated at the lower of cost, net of amortization, or net realizable value. Amortization is determined using the individual
film forecast method, whereby costs accumulated in the development and production of a film are amortized in the proportion that current gross
revenues bear to management’s estimate of the total gross revenues expected to be received from all sources within ten years of release.
Revenue estimates on a film-by-film basis are reviewed periodically by management and are revised, if warranted, based on management’s
appraisal of current market conditions. Where applicable, unamortized inventory is written down to net realizable value using a discounted cash
flows model based on this appraisal.
Included in film inventory costs are development costs. Development costs represent expenditures directly attributable to projects which
are incurred prior to their production. Such inventory items are capitalized and, upon commencement of production, are charged to the
production. Development costs not charged to the production are written off when the project is abandoned or when more than three years has
passed from the first expenditure.
• Participations and Residuals
Estimated liabilities for participations and residuals are amortized in the same manner as film inventory costs.
F-69
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Based on management’s estimates, $5,534,001 of the balance of accrued participations and residuals at March 31, 2001 will be paid during
the year ending March 31, 2002.
Income Taxes
For federal income tax purposes, profits and losses are passed through to the members. Accordingly, no provision has been made in these
financial statements for federal income taxes. For the years ended March 31, 2001, and March 31, 2000, the Company recorded a provision
related to California Limited Liability Company taxes of $22,318 and $12,050, respectively.
Fair Value of Financial Instruments
The fair value of cash and cash equivalents, accounts receivable, other assets, accounts payable and accrued expenses, bank and production
loans, contractual obligations, accrued participations and residuals, and amounts due from affiliates as reflected in the financial statements
approximate their carrying value at March 31, 2001 and March 31, 2000, respectively.
New accounting standards
In June 1998, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities.” The new standard requires companies to record derivatives on their balance sheets as assets or liabilities, measured at fair
value. Under SFAS No. 133, gains or losses resulting from changes in the values of derivatives are to be reported in the statement of operations
or as a deferred item, depending on the use of the derivatives and whether they qualify for hedge accounting. The Company is required to adopt
SFAS No. 133 in the first quarter of fiscal 2002. The impact on the financial statements of adopting this standard is currently anticipated to be
immaterial.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates.
Reclassifications
Certain prior-year amounts have been reclassified to conform to the current-year presentation.
3.
Film inventory
Film inventory consist of the following at March 31:
2001
2000
Projects released, net of amortization
Projects in production
Projects in development/pre-production
$
56,885,456
64,948,138
11,293,755
$
7,020,184
37,773,547
5,267,200
Total
$
133,127,349
$
50,060,931
F-70
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company estimates that approximately 90% of unamortized costs of released films at March 31, 2001 will be amortized within the
next three years. Approximately $39,500,000 of released film inventory is expected to be amortized during the next twelve months.
During the years ended March 31, 2001 and 2000, the Company capitalized to film projects interest of approximately $5,200,602 and
$2,335,000, respectively, and production overhead of $7,000,000 in each of 2001 and 2000, respectively.
4.
Bank Loan
On February 12, 1999, the Company entered into a credit facility, which provided a line of credit of $32,500,000, which was reduced to
$6,000,000 during the current year, bearing an interest rate of LIBOR plus 1.75%. At March 31, 2001 and 2000, the Company had $414,620
and $26,500,000 of unused available credit with this facility. Borrowings under this credit facility are guaranteed by a group of insurance
companies, are non-recourse to the Company and are collateralized by certain revenues and copyrights. Amounts outstanding under this facility
at March 31, 2001 and 2000 were $3,085,380 and $2,801,184, respectively, and are due no later than November 19, 2002.
5.
Production Loans
On December 15, 2000, the Company entered into a non-recourse credit facility, which provides a line of credit of $20,614,797, bearing an
interest rate of LIBOR + 1.5%, with a final maturity of January 7, 2003. At March 31, 2001 the outstanding balance was $12,200,000, leaving
$8,414,797 of unused available credit with this facility. Borrowings under this facility are collateralized by, and will be paid from, contractual
MG’s due on certain distribution contracts entered into with foreign distributors. Approximately $6,000,000 of the available credit facility is
temporarily collateralized with the Company’s restricted cash and will be released to the general account of the Company as additional
distribution contracts are delivered to the bank.
On May 19, 2000, the Company entered into a non-recourse credit facility, which provides a line of credit of $57,458,000, bearing an
interest rate of LIBOR + 1.5%, with a final maturity of July 3, 2002. At March 31, 2001, the outstanding balance was $53,191,000, leaving
$4,267,000 of unused available credit with this facility. Borrowings under this facility are also collateralized by, and will be paid from,
contractual MG’s due on certain distribution contracts.
On October 15, 1999, the Company entered into a non-recourse credit facility, providing a line of credit of $46,336,190, bearing an interest
rate of LIBOR + 1.5%, with a final maturity of February 27, 2002. The Company had $27,734,918 and $27,534,590 outstanding on this facility
at March 31, 2001 and 2000, respectively. The unused available credit with this facility was $0 and $18,791,853 at March 31, 2001 and 2000,
respectively. Consistent with the credit facilities discussed above, borrowings under this facility are collaterized by, and are being repaid from,
contractual MG’s due on certain distribution contracts entered into with foreign distributors.
For each of the three production loans discussed above, the bank has required the Company to enter into foreign exchange options to hedge
the Japanese yen translation fluctuation applicable to the distribution contracts entered into with the Japanese distributor. These options, which
are exercisable during 2002, have a fair value of $113,800 at March 31, 2001.
On December 1, 1998, the Company entered into a credit facility which provided a line of credit of $36,993,000, bearing an interest rate of
LIBOR plus 1.25%. The Company had $0 and $3,022,638 outstanding on this facility at March 31, 2001 and 2000, respectively, and no unused
available credit at both March 31, 2001 and 2000. Borrowings under this credit facility were collateralized by certain distribution contracts
entered into with foreign distributors.
F-71
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For each of the credit facilities discussed above, the Company deposited cash into a restricted account from which the bank can withdraw
interest and related expenses over the term of the credit facilities. The amount of restricted cash on deposit with the bank was $11,547,999 and
$4,278,785 at March 31, 2001 and 2000, respectively. Any unused funds will be returned to the Company upon repayment of the related
facility.
6.
Film Financing Transactions
During the current fiscal year, the Company entered into three separate financing transactions with third parties to assist in the financing of
three of its films.
The first transaction provided for the third party to contribute approximately $23,750,000 in exchange for a share of all distribution
proceeds, as defined, generated by the film in perpetuity. Approximately $14,500,000 of the proceeds were recorded as a reduction to the costs
of the related film. The remaining amount of $9,250,000 is guaranteed to be returned to the investor, plus interest at LIBOR + 0.4%, through
the defined distribution proceeds of the film, but in no event later than 42 months after delivery of the completed film to Paramount. This
amount has been recorded as a contractual obligation in the balance sheet.
The second transaction provided for the third party to contribute approximately $15,560,000 in exchange for a share of the distribution
proceeds, as defined, generated by the film and was recorded as a reduction to the costs of the related film.
The third transaction utilized the same sale and leaseback structure used in December 1999 as discussed below. Proceeds of $10,558,000
received therefrom have been reflected as a contractual obligation at March 31, 2001, as the film project to which it related has not yet
commenced production and certain refund provisions apply if a film is not delivered by December 31, 2002.
In order for the unrelated third party in the first and second transactions to fulfill its obligations to fund these films, $14,500,000 of cash
deposited into the restricted cash account, plus interest earned thereon, at March 31, 2000 was lent to the investor and is repayable out of 100%
of the investor’s entitlement to proceeds from the distribution of its other films financed with the Company and a pledge against any money
raised through its ongoing fundraising efforts, but in no event later than September 30, 2001. Therefore, $14,500,000 plus interest has been
recorded as other receivables at March 31, 2001 and the restricted cash has been reduced accordingly.
During the prior fiscal year, the Company entered into three separate financing transactions with unrelated third parties to assist in the
financing of three of its films.
The first provided for the third party to contribute approximately $23,000,000 which was recorded as a reduction to the costs of the related
film, and provides for a contingent participation interest in the results of distribution.
The second was structured as a sale and leaseback arrangement whereby the Company sold all of its rights to one film and immediately
leased back the attendant distribution rights for a 17.5 year term. Under the terms of that arrangement, the Company has agreed to make certain
fixed annual payments to the purchaser over the length of the term. These payments have been legally assumed by a German bank, in exchange
for the Company depositing a certain amount in cash, and the purchaser has relinquished any claim against the Company for the payments.
Upon the payment of the final amount in the 18th year, all rights previously sold revert back to the Company.
The deposit and corresponding fixed payment obligations are not presented in the financial statements, as they are no longer the property
nor the responsibility of the Company. The net gain from the transaction of approximately $4,100,000 has been recorded as a reduction to film
costs.
F-72
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In the third, the Company received $16,000,000 from an investor related to the intended production of a motion picture, that as of
March 31, 2001, remains in development/pre-production. Of this amount, $14,500,000 was placed on restricted deposit with a German bank
and $1,500,000 was deposited into the general bank account of the Company to fund development costs. The amount placed in the restricted
cash account was subsequently loaned back to the investor to fund other financing commitments with the Company, as discussed above. Should
the project be abandoned, the Company must return these funds, plus all interest earned on the restricted deposit. At March 31, 2001 and 2000,
$16,766,600 and $16,171,948 are included in contractual obligations related thereto.
7.
Commitments and Contingencies
Employment Agreements
It has been the Company’s policy to employ all executives under formal employment agreements. The terms of these agreements have
generally terminated on or about February 28, 2001 and have been temporarily extended through December 31, 2001 while the Company
develops its long-term strategy. During the next fiscal year the Company plans to further extend the terms of employment of those executives
necessary to fulfill its business plan.
The employment and compensation agreements with the Company’s two most senior executives, who are also members, provided for
minimum annual base compensation of $4,444,000 and $1,280,000 respectively, through the year ending February 28, 2003. These executives
have agreed to defer 50% of these amounts to be conditionally recouped out of the results of future productions, under certain specific
instances, if at all. Based upon the results as of March 31, 2001, no such recoupment is expected.
The Company terminated the contract of its next ranking officer, which had an expiration date of December 31, 2001, and provided for no
mitigation offset, by paying the amount of $1,265,799. This amount has been included in general and administration expenses in the Statement
of Operations for the year ended March 31, 2001.
Distribution Agreements
Under the distribution agreements with Paramount related to the motion picture “Sleepy Hollow” the Company assumed responsibility for
certain amounts payable to unions and actors based on the performance of the motion picture in certain territories. Paramount is the primary
obligor of these obligations. Based upon the performance of the picture to date, the Company has accrued $5,534,001 at March 31, 2001 as an
estimate of this obligation. The Company is in the process of negotiating a settlement of this arrangement due to certain actions of Paramount
during the production and distribution of the film. Any formal relief of this obligation will be recorded as income when legally binding.
8.
Members’ Equity
The Company’s equity structure is as follows at each of March 31, 2001 and March 31, 2000:
Class A Preferred Membership Units
Class B Common Membership Units
Class C Common Membership Units
$
50,000,000
450
550
$
50,001,000
The Class A Preferred membership units have a pro-rata claim, with that of the two senior executives’ salary deferrals, on any non-tax
related distribution until fully redeemed.
F-73
MANDALAY PICTURES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9.
Related Parties
Due (to) from affiliates consists of the following at March 31:
Lions Gate Entertainment Corp.
Other Mandalay companies*
2001
2000
$ (84,466 )
51,662
$ 244,180
34,000
$ (32,806 )
$ 278,180
* Includes various Mandalay named companies in which members of the Company have significant interest.
LG Pictures, Inc., a wholly owned subsidiary of Lions Gate Entertainment Corp., the member that owns class A preferred and class B
common membership units, was required to compensate the Company for any interest income foregone on a required equity contribution that
was replaced by the establishment of the bank loan (see Note 4). During the current year, this obligation was terminated. During the years
ended March 31, 2001 and 2000, the Company received $190,000 and $1,237,000, respectively under this agreement, which amounts are
included in interest income.
F-74
Inside back cover:
Photo of Halle Berry accepting her Academy Award for Best Actress in Monster’s Ball.
No dealer, salesperson or any other person has been authorized to give any information or to make any representation other than
those contained in this prospectus, and, if given or made, such information or representation must not be relied upon as having been
authorized by the company or the underwriters. This prospectus does not constitute an offer to sell, or a solicitation of any offer to buy,
the common shares in any jurisdiction where, or to any person to whom, it is unlawful to make such an offer or solicitation. Neither the
delivery of this prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has not been
any change in the facts set forth in this prospectus or in the affairs of the company since the date hereof.
TABLE OF CONTENTS
Page
Prospectus Summary
Risk Factors
Use of Proceeds
Market Price of Common Shares
Holders
Dividend Policy
Capitalization
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Business
Intercorporate Relationships
Management
Beneficial Ownership
Change in Accountants
Description of Share Capital
Taxation
Underwriting
Legal Matters
Experts
Additional Information
Incorporation by Reference
Index to Financial Statements
15,000,000 Common Shares
Lions Gate
Entertainment Corp.
1
10
22
22
23
23
24
25
28
40
42
52
53
55
58
58
61
66
67
68
68
68
F-1
PROSPECTUS
SG Cowen
May
, 2003
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14.
Other Expenses of Issuance and Distribution
The following table sets forth the expenses, other than underwriting discounts and commissions, payable by the company in connection
with the issuance and distribution of the common shares being registered. All amounts are estimates except the Securities and Exchange
Commission registration fee and the NASD filing fee.
Securities and Exchange Commission registration fee
NASD filing fee
AMEX and TSX listing fees
Accounting fees and expenses
Legal fees and expenses
Blue Sky qualification fees and expenses
Printing and engraving expenses
Transfer agent and registrar fees
Miscellaneous
Total
Item 15.
$
2,652
3,778
75,000
250,000
350,000
1,000
67,000
5,000
10,570
$ 765,000
Indemnification of Directors and Officers
Under the Company Act (British Columbia), the company may indemnify a present or former director or officer or a person who acts or
acted at the company’s request as a director or officer of another corporation of which the company is or was a shareholder, and his heirs and
legal representatives, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably
incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of his position
with the company or such other corporation and provided that the director or officer acted honestly and in good faith with a view to the best
interests of the company or such other corporation, and, in the case of a criminal or administrative action or proceeding, had reasonable
grounds for believing that his conduct was lawful. Such indemnification may be made only with court approval.
Subject to the provisions of the Company Act (British Columbia), the Articles of the company direct that the company shall indemnify
every director or former director and Secretary of the company, or may indemnify every officer or former officer, and every person who acts or
acted at the company’s request as a director or officer of a body corporate of which the company is or was a shareholder (or a person who
undertakes or has undertaken any liability on behalf of the company or any such body corporate) and his heirs and legal representatives, from
and against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him in
respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director or
officer of the company or such body corporate if he acted honestly and in good faith with a view to the best interests of the company.
The company’s Articles permit the company, subject to the limitations contained in the Company Act (British Columbia), to purchase and
maintain insurance on behalf of any person mentioned in the preceding paragraph, as the board of directors may from time to time determine.
The company, however, only maintains directors and officers liability insurance and corporate reimbursement insurance.
The company has entered into an indemnity agreement with one individual who acts as an officer, representative and/or director of various
corporations that are directly or indirectly owned or controlled by the company, in which the company indemnifies and saves harmless said
individual from any and all claims of any nature whatsoever resulting from the personal guarantee or endorsement that said individual
II-1
has made or may in the future make, with the Consent of the company, on behalf of the various corporations that are directly or indirectly
owned or controlled by the company.
The Form of Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the underwriters
of the company and its directors and officers for certain liabilities arising under the Securities Act or otherwise.
Item 16.
Exhibits
Exhibit
Number
1 .1
3 .1(1)
3 .2(2)
3 .3(3)
4 .1(1)
4 .2(2)
5 .1**
10 .1(4)
10 .2**
10 .3(5)
10 .4
10 .5(6)
10 .6(5)
10 .7
10 .8(3)
10 .9(3)
10 .10(3)
10 .11**
10 .12**
10 .13**
10 .14(3)
10 .15(6)
10 .16(7)
10 .17(7)
Description of Documents
Form of Underwriting Agreement
Articles of Incorporation
Amendment to Articles of Incorporation to Provide Terms of the Series A Preferred Shares dated as of December 20,
1999
Amendment to Articles of Incorporation to Provide Terms of the Series B Preferred Shares dated as of September 26,
2000
Trust Indenture between the company and CIBC Mellon Trust Company dated as of April 15, 1998
Warrant Indenture between the company and CIBC Mellon Trust Company dated as of December 30, 1999
Opinion of Heenan Blaikie LLP, legal counsel for the company
Amended Employees’ and Directors’ Equity Incentive Plan
Form of Incentive Plan Stock Option Agreement
Registration Rights Agreement dated as of June 6, 2000, by and among the company, Mark Amin and Reza Amin
Registration Rights Agreement dated as of May 14, 2003, by and between the company and ENT Holding
Corporation
Amended and Restated Unanimous Shareholders Agreement of Corporation CinéGroupe dated as of July 10, 2001
Employment Agreement between the company and Mark Amin dated June 6, 2000
Amendment to the Employment Agreement between the company and Mark Amin
Employment Agreement between the company and Marni Wieshofer dated August 26, 2000
Employment Agreement between the company and Jon Feltheimer dated February 27, 2001
Employment Agreement between the company and John Dellaverson dated April 1, 2001
Employment Agreement between the company and Michael Burns dated April 1, 2002
Employment Agreement between the company and James Keegan dated April 16, 2002
Consulting Agreement between the company and Beaconsfield Management Services Ltd. f/s/o Gordon Keep dated
April 1, 2003
Ignite, LLC and Lions Gate Films Inc. deal memo dated February 15, 2001
Amendment #2 dated May 13, 2002 to Ignite, LLC and Lions Gate Films Inc. deal memo dated February 15, 2001
Credit, Security, Guaranty and Pledge Agreement by and among Lions Gate Entertainment Corp., Lions Gate
Entertainment Inc., the Guarantors referred to therein, the Lenders referred to therein, The Chase Manhattan Bank,
National Bank of Canada, and Dresdner Bank AG, New York and Grand Cayman Branches dated as of September 25,
2000
First Amendment dated as of April 4, 2001 to the Credit, Security, Guaranty and Pledge Agreement by and among
Lions Gate Entertainment Corp., Lions Gate Entertainment Inc., the Guarantors referred to therein, the Lenders
referred to therein, The Chase Manhattan Bank, National Bank of Canada, and Dresdner Bank AG, New York and
Grand Cayman Branches dated as of September 25, 2000
II-2
Exhibit
Number
10 .18(7)
10 .19(7)
10 .20(5)
10 .21**
10 .22
16 .1(8)
23 .1
23 .2
23 .3
23 .4
23 .5**
24 .1**
Description of Documents
Second Amendment dated as of May 30, 2001 to the Credit, Security, Guaranty and Pledge Agreement by and among
Lions Gate Entertainment Corp., Lions Gate Entertainment Inc., the Guarantors referred to therein, the Lenders
referred to therein, The Chase Manhattan Bank, National Bank of Canada, and Dresdner Bank AG, New York and
Grand Cayman Branches dated as of September 25, 2000
Third Amendment dated as of July 31, 2001 to the Credit, Security, Guaranty and Pledge Agreement by and among
Lions Gate Entertainment Corp., Lions Gate Entertainment Inc., the Guarantors referred to therein, the Lenders
referred to therein, The Chase Manhattan Bank, National Bank of Canada, and Dresdner Bank AG, New York and
Grand Cayman Branches dated as of September 25, 2000
Fourth Amendment dated as of February 6, 2002 to the Credit, Security, Guaranty and Pledge Agreement by and
among Lions Gate Entertainment Corp., Lions Gate Entertainment Inc., the Guarantors referred to therein, the Lenders
referred to therein, The Chase Manhattan Bank, National Bank of Canada, and Dresdner Bank AG, New York and
Grand Cayman Branches dated as of September 25, 2000
Fifth Amendment dated as of March 17, 2003 to the Credit, Security, Guaranty and Pledge Agreement by and among
Lions Gate Entertainment Corp., Lions Gate Entertainment Inc., the Guarantors referred to therein, the Lenders
referred to therein, The Chase Manhattan Bank, National Bank of Canada, and Dresdner Bank AG, New York and
Grand Cayman Branches dated as of September 25, 2000
Sixth Amendment dated as of April 24, 2003 to the Credit, Security, Guaranty and Pledge Agreement by and among
Lions Gate Entertainment Corp., Lions Gate Entertainment Inc., the Guarantors referred to therein, the Lenders
referred to therein, The Chase Manhattan Bank, National Bank of Canada, and Dresdner Bank AG, New York and
Grand Cayman Branches dated as of September 25, 2000
Letter from PricewaterhouseCoopers LLP regarding change in certifying accountants
Consent of PricewaterhouseCoopers LLP, independent accountants of the company
Consent of PricewaterhouseCoopers LLP, independent accountants of Mandalay Pictures, LLC
Consent of Ernst & Young LLP, independent accountants of the company
Consent of Ernst & Young LLP, independent accountants of Mandalay Pictures, LLC
Consent of Heenan Blaikie LLP, legal counsel for the company (included in Exhibit 5.1)
Power of Attorney (Contained on Signature Page)
**
Previously filed
(1)
Incorporated by reference to the company’s Annual Report on Form 20-F for the fiscal year ended March 31, 1998 (File No. 000-27730).
(2)
Incorporated by reference to the company’s Annual Report on Form 20-F for the fiscal year ended March 31, 2000 (File No. 000-27730).
(3)
Incorporated by reference to the company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2001 (File No. 1-14880).
(4)
Incorporated by reference to the company’s Definitive Proxy Statement dated August 13, 2001 (File No. 1-14880).
(5)
Incorporated by reference to the company’s Form F-4 Registration Statement under the Securities Act of 1933 dated August 2000.
(6)
Incorporated by reference to the company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2002 (File No. 1-14880).
(7)
Incorporated by reference to the company’s Quarterly Report on Form 10-Q for the period year ended December 31, 2001 (File
No. 1-14880).
II-3
(8)
Incorporated by reference to the company’s Current Report on Form 8-K/A filed with the SEC on September 4, 2001 (File No. 1-14880).
Item 17.
Undertakings
(h) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(i) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus
filed as part of a registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was
declared effective.
(2) For purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this amendment to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city of Los Angeles, state of California, on the 16th day of May,
2003.
LIONS GATE ENTERTAINMENT CORP.
By: /s/ WAYNE LEVIN
Wayne Levin
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, as amended, this amendment to registration statement has been signed by the
following persons in the capacities and on the dates indicated.
Signatures
Title
Date
Vice Chairman and Director
Mark Amin
*
Director
May 16, 2003
Vice Chairman and Director
May 16, 2003
Thomas Augsberger
*
Michael Burns
Director
Drew Craig
*
Director
May 16, 2003
Chief Executive Officer and Director (Principal
Executive Officer)
May 16, 2003
Arthur Evrensel
*
Jon Feltheimer
Director
David Doerksen
*
James Keegan
*
Chief Administrative Officer and
Chief Financial Officer (Principal
Accounting and Financial Officer)
May 16, 2003
Senior Vice President, Secretary and Director
May 16, 2003
Gordon Keep
Director
Morley Koffman
II-5
Signatures
Title
Date
*
Director
May 16, 2003
Chairman of the Board of Directors and President
May 16, 2003
Patrick Lavelle
*
André Link
Vice Chairman of the Board of Directors
Harald Ludwig
Director
Gary Newton
*
Director
May 16, 2003
G. Scott Paterson
Director
Jeff Sagansky
*
Director
May 16, 2003
Director
May 16, 2003
E. Duff Scott
*
Harry Sloan
Director
Mitchell Wolfe
*By
/s/ WAYNE LEVIN
Wayne Levin
Attorney-in-Fact
II-6
[NUMBER OF SHARES]
LIONS GATE ENTERTAINMENT CORP.
COMMON SHARES
UNDERWRITING AGREEMENT
, 2003
SG COWEN SECURITIES CORPORATION
As Representative of the several Underwriters c/o SG Cowen Securities Corporation
1221 Avenue of the Americas
New York, New York 10020
Dear Sirs:
1. Introductory. Lions Gate Entertainment Corp., a British Columbia corporation (the "Company") proposes to sell, pursuant to the terms of this
Agreement, to the several underwriters named in Schedule A hereto (the "Underwriters," or, each, an "Underwriter"), an aggregate of ____
common shares, no par value (the "Common Shares") of the Company. The aggregate of ____ Common Shares so proposed to be sold is
hereinafter referred to as the "Firm Shares". The Company and the Selling Shareholder listed in Schedule B hereto (the "Selling Shareholder")
also propose to sell to the Underwriters, upon the terms and conditions set forth in
Section 3 hereof, up to an additional ______ Common Shares (the "Optional Shares"). The Firm Shares and the Optional Shares are hereinafter
collectively referred to as the "Shares". SG Cowen Securities Corporation ("SG Cowen") is acting as representative of the several Underwriters
and in such capacity is hereinafter referred to as the "Representative."
2. (I) Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the several Underwriters
that:
(a) The Company meets the requirements under the Securities Act (British Columbia) (the "BCSA") and the rules, regulations and published
policy statements applicable in the Province of British Columbia, including the rules and procedures established for use of a short form
prospectus with respect to the Shares pursuant to National Instrument 44-101-Short Form Prospectus Distributions (collectively, "British
Columbia Securities Laws"); a preliminary short form prospectus relating to the distribution of the Shares in the United States has been filed
with the British Columbia Securities Commission in the Province of British Columbia (the "BCSC") (the "Canadian Preliminary Prospectus");
the BCSC has issued a preliminary receipt for the Canadian Preliminary Prospectus; a final short form prospectus relating to the distribution of
the Shares in the United States has been filed with the BCSC for which a final receipt has been received from the BCSC, (the "Canadian
Prospectus"); the Canadian Preliminary Prospectus and the Canadian Prospectus for which a preliminary receipt and a final receipt were issued
by the BCSC, respectively, were each in the form heretofore delivered to you and for each of the other Underwriters (including all documents
incorporated by reference in the prospectus contained therein) and no other document with respect to such Preliminary Canadian Prospectus or
Canadian Prospectus or document incorporated by reference therein has heretofore been filed or transmitted for filing with the BCSC; no order
having the effect of ceasing or suspending the
2
distribution of the Shares has been issued by the BCSC and no proceeding for that purpose has been initiated or, to the best of the Company's
knowledge, threatened by the BCSC.
(b) A registration statement on Form S-2 (File No. 333-104836) (the "Initial Registration Statement") in respect of the Shares has been filed
with the Securities and Exchange Commission (the "Commission"); the Initial Registration Statement and any post-effective amendment
thereto, each in the form heretofore delivered to you, and, excluding exhibits thereto, but including all documents incorporated by reference in
the prospectus contained therein, to you for each of the other Underwriters, have been declared effective by the Commission in such form;
other than a registration statement, if any, increasing the size of the offering (a "Rule 462(b) Registration Statement") filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended (the "Securities Act") and the rules and regulations (the "Rules and Regulations") of the
Commission thereunder, which became effective upon filing, no other document with respect to the Initial Registration Statement or document
incorporated by reference therein has heretofore been filed with the Commission; and no stop order suspending the effectiveness of the Initial
Registration Statement, any post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued and no
proceeding for that purpose has been initiated or, to the best of the Company's knowledge, threatened by the Commission (any preliminary
prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) of the Rules and Regulations, is
hereinafter called a "Preliminary Prospectus" and together with the Canadian Preliminary Prospectus, the "Preliminary Prospectuses"); the
various parts of the Initial Registration Statement and the Rule 462(b) Registration Statement, if any, including all exhibits thereto and
including (i) the information contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b) under the Securities
Act and deemed by virtue of Rule 430A under the Securities Act to be part of the Initial Registration Statement at the time it was declared
effective and (ii) the documents incorporated by reference in the prospectus contained in the Initial Registration Statement at the time such part
of the Initial Registration Statement became effective, each as amended at the time such part of the Initial Registration Statement became
effective or such part of the Rule
462(b) Registration Statement, if any, became or hereafter becomes effective, are hereinafter collectively called the "Registration Statements";
such final prospectus, in the form first filed pursuant to Rule 424(b) under the Securities Act, is hereinafter called the "Prospectus" and any
reference herein to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by
reference therein pursuant to Item 12 of Form S-2 under the Securities Act, as of the date of such Preliminary Prospectus or Prospectus, as the
case may be. No document has been or will be prepared or distributed in reliance on Rule 434 under the Securities Act. No order preventing or
suspending the use of any Preliminary Prospectus has been issued by the Commission.
(c) The Registration Statement conforms (and the Rule 462(b) Registration Statement, if any, the Prospectus and any amendments or
supplements to either of the Registration Statements or the Prospectus, when they become effective or are filed with the Commission, as the
case may be, will conform) in all material respects to the requirements of the Securities Act and the Rules and Regulations and do not and will
not, as of the applicable effective date (as to the Registration Statements and any amendment thereto) and as of the applicable filing date (as to
the Prospectus and any amendment or supplement thereto) contain any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the foregoing representations
and warranties shall not apply to information contained in or omitted from the Registration Statements or the Prospectus or any such
amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company through the
Representative by or on behalf of any Underwriter specifically for inclusion therein, which information the parties hereto agree is limited to the
Underwriters' Information (as defined in Section 16).
3
(d) No order preventing or suspending the use of the Canadian Preliminary Prospectus has been issued by the BCSC, and the Canadian
Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the British Columbia Securities
Laws, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this
representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished
in writing to the Company through the Representative by or on behalf of any Underwriter specifically for inclusion therein, which information
the parties hereto agree is limited to the Underwriters' Information (as defined in Section 16).
(e) The documents incorporated by reference in the Canadian Prospectus and the Prospectus (referred to collectively, as the "Prospectuses"),
when they were filed with the BCSC and the Commission, as the case may be, conformed in all material respects to the requirements of the
British Columbia Securities Laws, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of
the Commission thereunder, as the case may be, and none of such documents contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make the statements therein not misleading.
(f) The Company and each of its subsidiaries (as defined in Section 14) have been duly incorporated (or, with respect to subsidiaries that are
not corporations, duly organized) and are validly existing as corporations (or as such other entities, as applicable) in good standing under the
laws of their respective jurisdictions of incorporation (or organization, as applicable), are duly qualified to do business and are in good standing
as foreign corporations (or other foreign entities, as applicable) in each jurisdiction in which their respective ownership or lease of property or
the conduct of their respective businesses requires such qualification, and have all power and authority necessary to own or hold their
respective properties and to conduct the businesses in which they are engaged, except where the failure to so qualify or have such power or
authority would not reasonably be expected to have, singularly or in the aggregate, a material adverse effect on the condition (financial or
otherwise), results of operations or business of the Company and its subsidiaries taken as a whole (a "Material Adverse Effect"). With regard to
Lions Gate Television Corp. ("LGTC"):
(i) A trust (the "Trust") is, and since June 1999 has been, the sole registered shareholder of LGTC;
(ii) The Trust is, and since 1999 has been, a duly formed and validly existing trust under the laws of the Province of British Columbia;
(iii) Frank Giustra, is, and since 1999 has been, the sole trustee (the "Trustee") of the Trust;
(iv) The Company, LGTC and the Company's subsidiaries are, and since 1999, have been, the sole beneficiaries (the "Beneficiaries") of the
Trust; and
(v) Pursuant to the terms of the Trust, all economic benefit flowing from the ownership of the shares of LGTC is to be held by the Trustee for
and on behalf of the Beneficiaries.
(g) This Agreement has been duly authorized, executed and delivered by the Company.
4
(h) The Shares to be issued and sold by the Company to the Underwriters hereunder have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein (including, if applicable, pursuant to The Depository Trust Company's standard
procedures that include the electronic delivery of share capital), will be duly and validly issued, fully paid and non-assessable and free of any
preemptive or similar rights and will conform to the description thereof contained in the Prospectuses.
(i) The Company has an authorized capitalization as set forth in the Prospectuses, and all of the issued shares of the Company have been duly
and validly authorized and issued, are fully paid and non-assessable and conform to the description thereof contained in the Prospectuses.
(j) All the outstanding shares or other equity interests of each subsidiary of the Company have been duly authorized and validly issued, are
fully paid and non-assessable and, except to the extent set forth in the Prospectuses with respect to LGTC, are owned by the Company directly
or indirectly through one or more wholly-owned subsidiaries, free and clear of any claim, lien, encumbrance, security interest, restriction upon
voting or transfer or any other claim of any third party (except for pledges of shares or other equity interests of certain subsidiaries pursuant to
the Credit, Security, Guaranty and Pledge Agreement by and among the Company, the subsidiaries referred to therein, and the lenders referred
to therein, dated as of September 25, 2000, as amended to date).
(k) The execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated
hereby will not (i) conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries
is subject,
(ii) result in any violation of the provisions of the charter or by-laws (or other organizational documents, as applicable) of the Company or any
of its subsidiaries or (iii) result in any violation of any statute or any order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries or any of their properties or assets, other than, in the case of each of clauses (i)
and (iii), any such conflict, breach, violation or default that would not, singularly or in the aggregate, have a Material Adverse Effect.
(l) Except for the registration of the Shares under the Securities Act and such consents, approvals, authorizations, registrations or qualifications
as may be required under the Exchange Act, applicable state securities laws in the United States, and the British Columbia Securities Laws in
connection with the purchase and distribution of the Shares by the Underwriters, no consent, approval, authorization or order of, or filing or
registration with, any court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby.
(m) Each of Ernst & Young LLP and PricewaterhouseCoopers LLP, who have expressed their opinions on the audited financial statements and
related schedules included or incorporated by reference in the Registration Statements and the Prospectuses, are independent public accountants
as required by the Securities Act and the Rules and Regulations.
(n) The consolidated financial statements, together with the related notes and schedules, included or incorporated by reference in the
Prospectuses and in each Registration Statement fairly present the financial condition, results of operations and cash flows of the Company and
its consolidated subsidiaries and other consolidated entities at the respective dates or for the
5
respective periods therein specified. Such statements and related notes and schedules have been prepared in accordance with Canadian
generally accepted accounting principles applied on a consistent basis, except as may be set forth in the Prospectuses, and comply as to form
with all applicable accounting requirements of the Securities Act and the Rules and Regulations and the British Columbia Securities Laws, as
the case may be. No other financial statements or supporting schedules or exhibits are required by the Securities Act or the Rules and
Regulations, or the British Columbia Securities Laws, as the case may be, to be included in the Prospectuses.
(o) Neither the Company nor any of its subsidiaries has sustained, since the date of the latest audited financial statements included or
incorporated by reference in the Prospectuses, any material loss or interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth in
the Prospectus; and, since such date, there has not been any change in the share capital or long-term debt of the Company or any of its
subsidiaries or any material adverse change or, to the Company's knowledge, any development involving a prospective material adverse
change, in or affecting the business, general affairs, management, financial position, shareholders' equity or results of operations of the
Company and its subsidiaries taken as a whole, otherwise than as set forth in the Prospectuses.
(p) Except as set forth in the Prospectuses, there is no legal or governmental proceeding pending to which the Company or any of its
subsidiaries is a party or of which any property or assets of the Company or any of its subsidiaries is the subject which, singularly or in the
aggregate, if determined adversely to the Company or any of its subsidiaries, would reasonably be expected to have a Material Adverse Effect
or would prevent or adversely affect the ability of the Company to perform its obligations under this Agreement; and to the best of the
Company's knowledge, no such proceedings have been threatened by governmental authorities or others.
(q) Neither the Company nor any of its subsidiaries (i) is in violation of its charter or by-laws (or other organizational documents, as
applicable),
(ii) is in default in any respect, and no event has occurred which, with the giving of notice or lapse of time or both, would constitute such a
default, in the due performance or observance of any term, covenant or condition contained in any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its property or assets is subject or
(iii) is in violation in any respect of any law, ordinance, governmental rule, regulation or court decree to which it or its property or assets may
be subject except, in the case of each of clauses (ii) and (iii), any violations or defaults which, singularly or in the aggregate, would not have a
Material Adverse Effect.
(r) The Company and each of its subsidiaries possess all licenses, certificates, authorizations and permits issued by, and have made all
declarations and filings with, the appropriate federal, state, provincial or foreign regulatory agencies or bodies which are necessary for the
ownership of their respective properties or the conduct of their respective businesses as described in the Prospectuses except where any failures
to possess or make the same, singularly or in the aggregate, would not reasonably be expected to have a Material Adverse Effect, and the
Company has not received notification of any revocation or modification of any such license, authorization or permit and has no reason to
believe that any such license, certificate, authorization or permit will not be renewed except where such non-renewal, singularly or in the
aggregate, would not have a Material Adverse Effect.
(s) Neither the Company nor any of its subsidiaries is or, after giving effect to the offering of the Shares and the application of the proceeds
thereof as described in the Prospectuses will
6
become, an "investment company" within the meaning of the Investment Company Act of 1940, as amended and the rules and regulations of
the Commission thereunder.
(t) Neither the Company nor, to the Company's knowledge, any of its officers, directors or affiliates has taken, directly or indirectly, any action
designed or intended to stabilize or manipulate the price of any security of the Company, or which caused or resulted in, or which might in the
future reasonably be expected to cause or result in, stabilization or manipulation of the price of any security of the Company.
(u) The Company and its subsidiaries own or possess the right to use all patents, trademarks, trademark registrations, service marks, service
mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights (including all rights to market, sell, distribute, exhibit,
commercially exploit and otherwise use all material film and television titles) material to the conduct of their respective businesses, singularly
and in the aggregate, and the Company is not aware of any claim to the contrary or any challenge by any other person to the rights of the
Company or any of its subsidiaries with respect to the foregoing, except any such claim or challenge that would not have a Material Adverse
Effect. The business of the Company and its subsidiaries as now conducted and as proposed to be conducted does not and will not infringe or
conflict with any patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses or other intellectual property or franchise
right of any person, except as would not have a Material Adverse Effect. No claim has been made against the Company or any of its
subsidiaries alleging the infringement by the Company or any of its subsidiaries of any patent, trademark, service mark, trade name, copyright,
trade secret, license in or other intellectual property right or franchise right of any person, except as would not have a Material Adverse Effect.
(v) The Company and each of its subsidiaries have good and marketable title in fee simple to, or have valid rights to lease or otherwise use, all
items of real or personal property, whether tangible or intangible, which are material to the business of the Company and its subsidiaries taken
as a whole, in each case free and clear of all liens, encumbrances, claims and defects that would reasonably be expected to have a Material
Adverse Effect.
(w) No labor disturbance by the employees of the Company or any of its subsidiaries exists or, to the best of the Company's knowledge, is
imminent which would reasonably be expected to have a Material Adverse Effect. Except as set forth in the section in the Prospectus entitled
"Risk Factors -- The loss of key personnel could adversely affect our business", the Company is not aware that any key employee of the
Company plans to terminate employment with the Company.
(x) No "prohibited transaction" (as defined in Section 406 of the Employee Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA"), or Section 4975 of the Internal Revenue Code of 1986, as amended from time
to time (the "Code")) or "accumulated funding deficiency" (as defined in Section 302 of ERISA) or any of the events set forth in Section
4043(b) of ERISA (other than events with respect to which the 30-day notice requirement under Section 4043 of ERISA has been waived) has
occurred with respect to any employee benefit plan which would reasonably be expected to have a Material Adverse Effect; each employee
benefit plan is in compliance in all material respects with applicable law, including ERISA and the Code; the Company has not incurred and
does not expect to incur any material liability under Title IV of ERISA with respect to the termination of, or withdrawal from, any "pension
plan"; and each "pension plan" (as defined in ERISA) for which the Company would have any liability that is intended to be qualified under
Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which could
cause the loss of such qualification.
7
(y) There has been no storage, generation, transportation, handling, treatment, disposal, discharge, emission, or other release of any kind of
toxic or other wastes or other hazardous substances by, due to, or caused by the Company or any of its subsidiaries (or, to the best of the
Company's knowledge, any other entity for whose acts or omissions the Company or any of its subsidiaries is or may be liable) upon any of the
property now or previously owned or leased by the Company or any of its subsidiaries, or upon any other property, in violation of any statute or
any ordinance, rule (including rule of common law), regulation, order, judgment, decree or permit or which would, under any statute or any
ordinance, rule (including rule of common law), regulation, order, judgment, decree or permit, give rise to any liability, except for any violation
or liability which would not have, singularly or in the aggregate with all such violations and liabilities, a Material Adverse Effect; there has
been no disposal, discharge, emission or other release of any kind onto such property or into the environment surrounding such property of any
toxic or other wastes or other hazardous substances with respect to which the Company or any of its subsidiaries have knowledge, except for
any such disposal, discharge, emission, or other release of any kind which would not have, singularly or in the aggregate with all such
discharges and other releases, a Material Adverse Effect.
(z) Each of the Company and each of its Significant Subsidiaries (as defined below) and LGTC (i) has filed all necessary federal, state,
provincial and foreign income and franchise tax returns, (ii) has paid all material federal state, provincial, local and foreign taxes due and
payable for which it is liable, and (iii) does not have any tax deficiency or claims outstanding or assessed or, to the best of the Company's
knowledge, proposed against it which such deficiency or claim could reasonably be expected to have a Material Adverse Effect. Each of the
Company's subsidiaries (other than the Significant Subsidiaries and LGTC) (A) has filed all necessary federal, state, provincial and foreign
income and franchise tax returns, (B) has paid all material federal state, provincial, local and foreign taxes due and payable for which it is
liable, and (C) does not have any tax deficiency or claims outstanding or assessed or, to the best of the Company's knowledge, proposed against
it which, in the case of any of (A), (B) or (C), could reasonably be expected to have a Material Adverse Effect.
(aa) The Company and each of its subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is customary for
companies engaged in similar businesses in similar industries.
(bb) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurances
that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with Canadian generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any
differences.
(cc) The minute books of the Company, each of the Principal U.S. Subsidiaries and Principal Canadian Subsidiaries and LGTC have been made
available to the Underwriters and counsel for the Underwriters, and such books (i) contain a complete summary in all material respects of all
meetings and actions of the board of directors (including each board committee) and shareholders of the Company and each of such
subsidiaries since the time of its respective incorporation through the date of the latest meeting and action, and
(ii) accurately in all material respects reflect all transactions referred to in such minutes. For purposes of this Agreement, the "Principal U.S.
Subsidiaries" are Lions Gate Entertainment Inc., Lions Gate Films Inc., Lions Gate Television
8
Inc., and LG Pictures Inc., and the "Principal Canadian Subsidiaries" are Lions Gate Films Corp. and 408376 BC Ltd.
(dd) There is no franchise, lease, contract, agreement or document required by British Columbia Securities Laws, the Securities Act or by the
Rules and Regulations to be described in the Prospectuses or to be filed as an exhibit to the Registration Statements which is not described or
filed therein as required; and all descriptions of any such franchises, leases, contracts, agreements or documents contained in the Registration
Statements are accurate and complete descriptions of such documents in all material respects. No such franchise, lease, contract or agreement
has been suspended or terminated for convenience or default by the Company or any of the other parties thereto except as would not, singularly
or in the aggregate, have a Material Adverse Effect, and the Company has not received notice and has no other knowledge of any such pending
or threatened suspension or termination, except for such pending or threatened suspensions or terminations that would not reasonably be
expected to, singularly or in the aggregate, have a Material Adverse Effect.
(ee) No relationship, direct or indirect, exists between or among the Company on the one hand, and the directors, officers, shareholders,
customers or suppliers of the Company on the other hand, which is required to be described in the Prospectuses and which is not so described.
(ff) No person or entity has the right to require registration of any shares or other securities of the Company because of the filing or
effectiveness of the Registration Statements or otherwise, except for persons and entities who have expressly waived such right (including, if
applicable, the right to timely and proper notice) or who have been given timely and proper notice and have failed to exercise such right within
the time or times required under the terms and conditions of such right.
(gg) Neither the Company nor any of its subsidiaries owns any "margin securities" as that term is defined in Regulation U of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), and none of the proceeds of the sale of the Shares will be used,
directly or indirectly, for the purpose of purchasing or carrying any margin security, for the purpose of reducing or retiring any indebtedness
which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Shares to be
considered a "purpose credit" within the meanings of Regulation T, U or X of the Federal Reserve Board.
(hh) Neither the Company nor any of its subsidiaries is a party to any contract, agreement or understanding with any person or entity that would
give rise to a valid claim against the Company or the Underwriters for a brokerage commission, finder's fee or like payment in connection with
the offering and sale of the Shares.
(ii) No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained in
the Prospectuses has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.
(jj) The Shares have been approved for listing subject to notice of issuance on the American Stock Exchange (which exchange is the primary
exchange market for the Company's common shares) and on the Toronto Stock Exchange.
(kk) The Company is in compliance with all applicable corporate governance requirements set forth in the American Stock Exchange (AMEX)
- AMEX Company Guide.
9
(ll) The Company is in compliance with all applicable requirements of the Toronto Stock Exchange, including corporate governance
requirements.
(mm) The Company is in compliance with all applicable provisions of the Sarbanes-Oxley Act of 2002 and all rules and regulations
promulgated thereunder or implementing the provisions thereof (the "Sarbanes-Oxley Act") that are currently in effect.
(II) Representations and Warranties and Agreements of the Selling Shareholder. The Selling Shareholder represents and warrants to, and agrees
with, the several Underwriters that Selling Shareholder:
(a) Has, and immediately prior to each Closing Date (as defined in Section 3 hereof) the Selling Shareholder will have, good and valid title to
the Shares to be sold by the Selling Shareholder hereunder on such date, free and clear of all liens, encumbrances, equities or claims; and upon
delivery of such shares and payment therefor pursuant hereto, good and valid title to such Shares, free and clear of all liens, encumbrances,
equities or claims, will pass to the several Underwriters.
(b) Has duly and irrevocably executed and delivered a power of attorney, in substantially the form heretofore delivered by the Representative
(the "Power of Attorney"), appointing [insert name of attorney-in-fact] as attorney-in-fact (the "Attorney-in-fact") with authority to execute and
deliver this Agreement on behalf of the Selling Shareholder, to authorize the delivery of the Shares to be sold by the Selling Shareholder
hereunder and otherwise to act on behalf of the Selling Shareholder in connection with the transactions contemplated by this Agreement.
(c) Has duly and irrevocably executed and delivered a custody agreement, in substantially the form heretofore delivered by the Representative
(the "Custody Agreement"), with [insert name of custodian] as custodian (the "Custodian"), pursuant to which certificates in negotiable form
for the Shares to be sold by the Selling Shareholder hereunder have been placed in custody for delivery under this Agreement.
(d) Has full right, power and authority to enter into this Agreement, the Power of Attorney and the Custody Agreement; the execution, delivery
and performance of this Agreement, the Power of Attorney and the Custody Agreement by the Selling Shareholder and the consummation by
the Selling Shareholder of the transactions contemplated hereby and thereby will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to
which the Selling Shareholder is a party or by which the Selling Shareholder is bound or to which any of the property or assets of the Selling
Shareholder is subject, nor will such actions result in any violation of any statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Selling Shareholder or the property or assets of the Selling Shareholder; and, except for the
registration of the Stock under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required
under the Exchange Act and applicable state securities laws in connection with the purchase and distribution of the Stock by the Underwriters,
no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the
execution, delivery and performance of this Agreement, the Power of Attorney or the Custody Agreement by such Selling Shareholder and the
consummation by the Selling Shareholder of the transactions contemplated hereby and thereby.
(e) The Registration Statements do not, and the Prospectus and any further amendments or supplements to the Registration Statements or the
Prospectus will not, as of the applicable
10
effective date (as to the Registration Statements and any amendment thereto) and as of the applicable filing date (as to the Prospectus and any
amendment or supplement thereto) contain any untrue statement of a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. The preceding sentence applies only to the extent that any information contained in
or omitted from the Registration Statements or Prospectus was in reliance upon and in conformity with written information furnished to the
Company by such Selling Shareholder specifically for inclusion therein.
3. Purchase Sale and Delivery of Offered Shares. On the basis of the representations, warranties and agreements herein contained, but subject
to the terms and conditions herein set forth, the Company agrees to sell to each Underwriter, and each Underwriter agrees, severally and not
jointly, to purchase from the Company that number of Firm Shares (rounded up or down, as determined by SG Cowen in its discretion, in order
to avoid fractions) obtained by multiplying [ ] Firm Shares by a fraction the numerator of which is the number of Firm Shares set forth opposite
the name of such Underwriter in Schedule A hereto and the denominator of which is the total number of Firm Shares.
The purchase price per share to be paid by the Underwriters to the Company for the Shares will be $_____ per share (the "Purchase Price").
The Company will deliver the Firm Shares to the Representative for the respective accounts of the several Underwriters in either (i) the form of
definitive certificates, issued in such names and in such denominations (and including such legends as may be required pursuant to British
Columbia Securities Laws for those certificates representing any Shares sold in Canada) as the Representative may direct by notice in writing
to the Company given at or prior to 12:00 Noon, New York time, on the second full business day preceding the First Closing Date (as defined
below) or (ii) in accordance with The Depository Trust Company's standard procedures that include the electronic delivery of share capital,
against payment of the aggregate Purchase Price therefor by wire transfer to an account at a bank acceptable to SG Cowen, payable to the order
of the Company, all at the offices of SG Cowen, 1221 Avenue of the Americas, New York, New York 10020. Time shall be of the essence, and
delivery at the time and place specified pursuant to this Agreement is a further condition of the obligations of each Underwriter hereunder. The
time and date of the delivery and closing shall be at 10:00 A.M., New York time, on _________________, 2003, in accordance with Rule
15c6-1 of the Exchange Act. The time and date of such payment and delivery are herein referred to as the "First Closing Date". The First
Closing Date and the location of delivery of, and the form of payment for, the Firm Shares may be varied by agreement between the Company
and SG Cowen.
If physical certificates are used, the Company shall make the certificates for the Shares available to the Representative for examination on
behalf of the Underwriters in New York, New York at least twenty-four hours prior to the First Closing Date. If electronic delivery is used in
accordance with The Depository Trust Company's standard procedures, the Company shall make the certificates to be deposited in the name of
The Depository Trust Company's nominee, Cede & Co., available to the Representative for examination on behalf of the Underwriters in New
York, New York at least twenty-four hours prior to the First Closing Date.
For the purpose of covering any over-allotments in connection with the distribution and sale of the Firm Shares as contemplated by the
Prospectuses, the Underwriters may purchase all or less than all of the Optional Shares. The price per share to be paid for the Optional Shares
shall be the Purchase Price. The Company agrees to sell to the Underwriters the number of Optional Shares specified in the written notice by
SG Cowen described below and the Underwriters agree, severally and not jointly, to purchase such Optional Shares. The Company and the
Selling Shareholder agree, severally and not jointly, to sell to the Underwriters the respective numbers of Optional Shares obtained by
multiplying the number of Optional Shares specified in such notice by a fraction the numerator of which is 1,250,000 shares in the
11
case of the Company and 1,000,000 shares in the case of the Selling Shareholder and the denominator of which is the total number of Optional
Shares (subject to adjustment by SG Cowen to eliminate fractions). Such Optional Shares shall be purchased from the Company and the Selling
Shareholder for the account of each Underwriter in the same proportion as the number of Firm Shares set forth opposite such Underwriter's
name bears to the total number of Firm Shares (subject to adjustment by SG Cowen to eliminate fractions). The option granted hereby may be
exercised as to all or any part of the Optional Shares at any time, and from time to time, not more than thirty (30) days subsequent to the date of
this Agreement. No Optional Shares shall be sold and delivered unless the Firm Shares previously has been, or simultaneously is, sold and
delivered. The right to purchase the Optional Shares or any portion thereof may be surrendered and terminated at any time upon notice by SG
Cowen to the Company and the Selling Shareholder.
The option granted hereby may be exercised by written notice being given to the Company and the Selling Shareholder by SG Cowen setting
forth the number of the Optional Shares to be purchased by the Underwriters and the date and time for delivery of and payment for the Optional
Shares. Each date and time for delivery of and payment for the Optional Shares (which may be the First Closing Date, but not earlier) is herein
called the "Option Closing Date" and shall in no event be earlier than two (2) business days nor later than five (5) business days after written
notice is given. (The Option Closing Date and the First Closing Date are herein together called the "Closing Dates".)
The Company and the Selling Shareholder will deliver the Optional Shares to the Underwriters either (i) in the form of definitive certificates,
issued in such names and in such denominations as the Representative may direct by notice in writing to the Company given at or prior to
12:00 Noon, New York time, on the second full business day preceding the Option Closing Date or (ii) in accordance with The Depository
Trust Company's standard procedures that include the electronic delivery of share capital, against payment of the aggregate Purchase Price
therefor in federal (same day) funds by certified or official bank check or checks or wire transfer to an account at a bank acceptable to SG
Cowen payable to the order of the Company [insert name of custodian] as Custodian for the Selling Shareholder all at the offices of SG Cowen,
1221 Avenue of the Americas, New York, New York 10020. Time shall be of the essence, and delivery at the time and place specified pursuant
to this Agreement is a further condition of the obligations of each Underwriter hereunder. The Company and the Selling Shareholder shall
make the certificates for the Optional Shares available to the Representative for examination on behalf of the Underwriters in New York, New
York not later than 10:00 A.M., New York Time, on the business day preceding the Option Closing Date. The Option Closing Date and the
location of delivery of, and the form of payment for, the Optional Shares may be varied by agreement among the Company, the Selling
Shareholder, and SG Cowen.
The several Underwriters propose to offer the Shares for sale upon the terms and conditions set forth in the Prospectuses.
4. (I) Further Agreements of the Company. The Company agrees with the several Underwriters that:
(a) The Company will prepare the Rule 462(b) Registration Statement, if necessary, in a form approved by the Representative and file such
Rule
462(b) Registration Statement with the Commission on the date hereof; prepare the Prospectus in a form approved by the Representative and
file such Prospectus pursuant to Rule 424(b) under the Securities Act not later than the second business day following the execution and
delivery of this Agreement; make no further amendment or any supplement to the Registration Statements or to the Prospectuses to which the
Representative shall reasonably object by notice to the Company after a reasonable period to review; advise the Representative, promptly after
it receives notice thereof, of the time when any amendment to either Registration Statement has been filed or becomes effective or any
12
supplement to the Prospectuses or any amended Prospectuses have been filed and to furnish the Representative with copies thereof; advise the
Representative, promptly after it receives notice thereof, of the issuance by the BCSC or the Commission of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectuses or the Prospectuses, of the suspension of the qualification of the Shares for
offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the BCSC or the
Commission, as the case may be, for the amending or supplementing of the Registration Statements or the Prospectuses or for additional
information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any of the Preliminary
Prospectuses or the Prospectuses or suspending any such qualification, use promptly its best efforts to obtain its withdrawal.
(b) If at any time prior to the expiration of nine months after the effective date of the Initial Registration Statement when a prospectus relating
to the Shares is required to be delivered any event occurs as a result of which the Prospectus as then amended or supplemented would include
any untrue statement of a material fact, or omit to state any material fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Securities Act, the
Company will promptly notify the Representative thereof and upon their request will prepare an amended or supplemented Prospectus which
will correct such statement or omission or effect such compliance. The Company will furnish without charge to each Underwriter and to any
dealer in securities as many copies as the Representative may from time to time reasonably request of such amended or supplemented
Prospectus; and in case any Underwriter is required to deliver a prospectus relating to the Shares nine months or more after the effective date of
the Initial Registration Statement, the Company upon the request of the Representative and at the expense of such Underwriter will prepare
promptly an amended or supplemented Prospectus as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the
Securities Act.
(c) To furnish promptly to the Representative and to counsel for the Underwriters a signed copy of each of the Registration Statements as
originally filed with the Commission, and each amendment thereto filed with the Commission, including all consents and exhibits filed
therewith.
(d) To deliver promptly to the Representative in New York City such number of the following documents as the Representative shall
reasonably request:
(i) conformed copies of the Registration Statements as originally filed with the Commission and each amendment thereto (in each case
excluding exhibits); (ii) each of the Preliminary Prospectuses; (iii) the Prospectuses (not later than 10:00 A.M., New York time, of the business
day following the execution and delivery of this Agreement) and any amended or supplemented Prospectuses (not later than 10:00 A.M., New
York City time, on the business day following the date of such amendment or supplement); and (iv) any document incorporated by reference in
the Prospectuses (excluding exhibits thereto).
(e) To make generally available to its shareholders as soon as practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Securities Act), an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with Section 11(a) of the Securities Act and the Rules and Regulations (including, at the
option of the Company, Rule 158).
(f) The Company will promptly take from time to time such actions as the Representative may reasonably request to qualify the Shares for
offering and sale under the securities or Blue Sky laws of such jurisdictions as the Representative may designate and to continue such
13
qualifications in effect for so long as required for the distribution of the Shares; provided that the Company and its subsidiaries shall not be
obligated to qualify as foreign corporations (or other foreign entities) in any jurisdiction in which they are not so qualified or to file a general
consent to service of process in any jurisdiction.
(g) During the period of three years from the date hereof, the Company will deliver to the Representative (i) as soon as they are available,
copies of all reports or other communications furnished to shareholders and (ii) as soon as they are available, copies of any reports and financial
statements furnished or filed with the Commission pursuant to the Exchange Act, filed in Canada through the System for Electronic Document
Analysis and Retrieval (SEDAR), or any national securities exchange or automatic quotation system on which the Shares are listed or quoted.
(h) The Company will not directly or indirectly offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of any Common Shares
or securities convertible into or exercisable or exchangeable for Common Shares for a period of 180 days from the date of the Prospectus
without the prior written consent of SG Cowen other than the Company's sale of the Shares hereunder and the issuance of shares pursuant to
employee benefit plans, qualified option plans or other employee compensation plans existing on the date hereof or pursuant to currently
outstanding options, warrants or rights. The Company will cause each officer, director and shareholder listed in Schedule C to furnish to the
Representative, prior to the First Closing Date, a letter, substantially in the form of Exhibit I hereto, pursuant to which each such person shall
agree not to directly or indirectly offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of any Common Shares or securities
convertible into or exercisable or exchangeable for Common Shares for a period of 180 days from the date of the Prospectuses, without the
prior written consent of SG Cowen.
(i) The Company will supply the Representative with copies of all correspondence to and from, and all documents issued to and by, the
Commission in connection with the registration of the Shares under the Securities Act, or the BCSC in connection with the filing of the
Canadian Prospectus.
(j) Prior to each of the Closing Dates the Company will furnish to the Representative, as soon as they have been prepared, copies of any
unaudited interim consolidated financial statements of the Company for any periods subsequent to the periods covered by the financial
statements appearing in the Registration Statement and the Prospectuses.
(k) Prior to each of the Closing Dates, except for routine communications in the ordinary course of business and consistent with the past
practices of the Company, the Company will not issue any press release or other communication directly or indirectly or hold any press
conference with respect to the Company, its condition, financial or otherwise, or earnings, business affairs or business prospects, without the
prior written consent of the Representative, unless in the judgment of the Company and its counsel, and after notification to the Representative,
such press release or communication is required by law or by an applicable stock exchange.
(l) In connection with the offering of the Shares, until SG Cowen shall have notified the Company of the completion of the resale of the Shares,
the Company will not, and will cause its affiliated purchasers (as defined in Regulation M under the Exchange Act) not to, either alone or with
one or more other persons, bid for or purchase, for any account in which it or any of its affiliated purchasers has a beneficial interest, any
Shares, or attempt to induce any person to purchase any Shares; and not to, and to cause its affiliated purchasers not to, make bids or purchase
for the purpose of creating actual, or apparent, active trading in or of raising the price of the Shares.
14
(m) The Company shall comply with all applicable provisions of the Sarbanes-Oxley Act at all times after the effectiveness of such provisions.
(n) The Company will apply the net proceeds from the sale of the Shares as set forth in the Prospectuses under the heading "Use of Proceeds".
(o) The Company will use its best efforts to ensure that the Company's common shares remain listed on the Toronto Stock Exchange and the
American Stock Exchange.
(II) Further Agreements of the Selling Shareholder. The Selling Shareholder agrees with the several Underwriters that:
(a) The Selling Shareholder will not directly or indirectly offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of any
Common Shares or securities convertible into or exercisable or exchangeable for Common Shares other than the sale of the Shares hereunder
for a period of 180 days from the date of the Prospectus, without the prior written consent of SG Cowen.
(b) The Shares represented by the certificates held in custody under the Custody Agreement are for the benefit of and coupled with and subject
to the interests of the Underwriters, and that the arrangement for such custody and the appointment of the Attorney-in-fact are irrevocable; that
the obligations of the Selling Shareholder hereunder shall not be terminated by operation of law, whether by the death or incapacity, liquidation
or distribution of the Selling Shareholder, or any other event, that if the Selling Shareholder should die or become incapacitated or is liquidated
or dissolved or any other event occurs, before the delivery of the Shares hereunder, certificates for the Shares to be sold by the Selling
Shareholder shall be delivered on behalf of the Selling Shareholder in accordance with the terms and conditions of this Agreement and the
Custody Agreement, and action taken by the Attorney-in-fact or any of them under the Power of Attorney shall be as valid as if such death,
incapacity, liquidation or dissolution or other event had not occurred, whether or not the Custodian, the Attorney-in-fact or any of them shall
have notice of such death, incapacity, liquidation or dissolution or other event.
(c) The Selling Shareholder will deliver to SG Cowen on or prior to the applicable Closing Date a properly completed and executed United
States Treasury Department Form W-8 (if the Selling Shareholder is a non-United States person) or Form W-9 (if the Selling Shareholder is a
United States person) or such other applicable form or statement specified by Treasury Department regulations in lieu thereof.
5. Payment of Expenses. The Company agrees with the Underwriter to pay: (a) the costs incident to the authorization, issuance, sale,
preparation and delivery (including electronic delivery) of the Shares and any taxes payable in that connection; (b) the costs incident to the
Registration of the Shares under the Securities Act; (c) the costs incident to the preparation, printing and distribution of the Registration
Statement, Preliminary Prospectuses, Prospectuses, any amendments and exhibits thereto or any document incorporated by reference therein,
the costs of printing, reproducing and distributing, the "Agreement Among Underwriters" between the Representative and the Underwriters, the
Master Selected Dealers' Agreement, the Underwriters' Questionnaire and this Agreement by mail, telex or other means of communications and
the costs of preparing, printing, reproducing and distributing the additional Canadian supplement prepared in connection with the offering of
the Shares in Canada on a private placement basis; (d) the fees and expenses (including related fees and expenses of counsel for the
Underwriters) incurred in connection with filings made with the National Association of Securities Dealers, Inc.; (e) any applicable listing or
other fees; (f) the fees and expenses of qualifying the Shares under the securities laws of the several jurisdictions as provided in
Section 4(f) and of preparing, printing
15
and distributing Blue Sky Memoranda and Legal Investment Surveys (including related fees and expenses of counsel to the Underwriters); (g)
all fees and expenses of the registrar and transfer agent of the Shares; and (h) all other costs and expenses incident to the performance of the
obligations of the Company under this Agreement (including, without limitation, the fees and expenses of the Company's counsel and the
Company's independent accountants); provided that, except as otherwise provided in this Section 5 and in Section 10, the Underwriters shall
pay their own costs and expenses, including the fees and expenses of their counsel, any transfer taxes on the Shares which they may sell and the
expenses of advertising any offering of the Shares made by the Underwriters.
6. Conditions of Underwriters' Obligations. The respective obligations of the several Underwriters hereunder are subject to the accuracy, when
made and on each of the Closing Dates, of the representations and warranties of the Company and the Selling Shareholder contained herein, to
the accuracy of the statements of the Company and the Selling Shareholder made in any certificates pursuant to the provisions hereof, to the
performance by the Company and the Selling Shareholder of their obligations hereunder, and to each of the following additional terms and
conditions:
(a) No stop order suspending the effectiveness of either the Registration Statements or the Canadian Prospectus shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the Commission or the BCSC, and any request for additional
information on the part of the Commission or the BCSC (to be included in the Registration Statements or the Prospectuses or otherwise) shall
have been complied with to the reasonable satisfaction of the Representative. The Rule 462(b) Registration Statement, if any, and the
Prospectus shall have been timely filed with the Commission in accordance with Section 4(a), and a final short form prospectus relating to the
distribution of the Shares in the United States shall have been timely filed with the BCSC for which a final receipt shall have been received
from the BCSC.
(b) None of the Underwriters shall have discovered and disclosed to the Company on or prior to the Closing Date that the Registration
Statement or any of the Prospectuses or any amendment or supplement thereto contains an untrue statement of a fact which, in the opinion of
counsel for the Underwriters, is material or omits to state any fact which, in the opinion of such counsel, is material and is required to be stated
therein or is necessary to make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident to the authorization, form and validity of each of this Agreement, the Custody
Agreements, the Powers of Attorney, the Shares, the Registration Statement and the Prospectuses and all other legal matters relating to this
Agreement and the transactions contemplated hereby shall be reasonably satisfactory in all material respects to counsel for the Underwriters,
and the Company and the Selling Shareholder shall have furnished to such counsel all documents and information that they may reasonably
request to enable them to pass upon such matters.
(d) O'Melveny & Myers LLP (the Company's United States counsel) shall have furnished to the Representatives such counsel's written opinion,
as counsel to the Company, addressed to the Underwriters and dated the Closing Date, in form and substance reasonably satisfactory to the
Representatives, to the effect that:
(i) Lions Gate Entertainment Inc., Lions Gate Films Inc., Lions Gate Television Inc. and LG Pictures Inc. (the "Principal U.S. Subsidiaries")
have each been duly incorporated and each is a corporation validly existing under the laws of the State of Delaware, with corporate power to
own its properties and assets and to carry on its business as described in the Prospectus.
16
(ii) Based solely on a review of good standing certificates, the Principal U.S. Subsidiaries are qualified as foreign corporations to do business in
the States of ________, ________ and _________ and are in good standing in the States of ___________, ___________ and ______________.
(iii) The outstanding shares of capital stock of each Principal U.S. Subsidiary have been duly authorized by all necessary corporate action on
the part of such corporation, are validly issued, fully paid and nonassessable. Based solely on a review of records certified to such counsel as
the charter documents of the Principal U.S. Subsidiaries and their respective corporate minute books, to the best of such counsel's knowledge,
the shares of capital stock are owned free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity, except under
the Credit, Security, Guaranty and Pledge Agreement by and among the Company, the subsidiaries referred to therein, and the lenders referred
to therein, dated as of September 25, 2000, as amended to date (as described in the Prospectus).
(iv) The execution and delivery by the Principal U.S.
Subsidiaries of the Agreement do not, and the Principal U.S. Subsidiaries' performance of their obligations under the Agreement will not, (x)
violate the Principal U.S. Subsidiaries' Certificates of Incorporation or Bylaws, (y) violate, breach, or result in a default under, any existing
obligation of or restriction on the Principal U.S. Subsidiaries under any other agreement identified in Exhibit A to the opinion, which Exhibit A
shall list all agreements listed in Item 16 of the Registration Statements and which are governed by California, New York or U.S. federal law
(the "Other Agreements"), or (z) breach or otherwise violate any existing obligation of or restriction on the Principal U.S. Subsidiaries under
any order, judgment or decree of any California, New York or U.S. federal court or governmental authority binding on the Principal U.S.
Subsidiaries identified in the Company Certificate. We express no opinion as to the effect of the Principal U.S. Subsidiaries' performance of
their obligations in the Agreement on the Principal U.S. Subsidiaries' compliance with financial covenants in the Other Agreements.
(v) The execution and delivery by the Principal U.S.
Subsidiaries of the Agreement do not, and the Principal U.S. Subsidiaries' performance of their obligations under the Agreement will not,
violate the current Delaware General Corporation Law or any current California, New York or U.S. federal statute, rule or regulation that we
have, in the exercise of customary professional diligence, recognized as applicable to the Company or to transactions of the type contemplated
by the Agreement.
(vi) No order, consent, permit or approval of, or filing or registration with, any California, New York or U.S. federal governmental authority is
required on the part of the Company for the execution and delivery of the Agreement or for the issuance and sale of the Shares, except such as
have been obtained under the Securities Act and such as may be required under applicable Blue Sky or state securities laws.
(vii) The statements in the Prospectus under the caption "Taxation," insofar as they summarize provisions of U.S. federal law, fairly present the
information required by Form S-2 and fairly summarize the matters described therein in all material respects.
17
(viii)There are no actions, suits or proceedings pending or threatened against the Company or any of its subsidiaries, with respect to which such
counsel has given substantive attention on behalf of the Company or any of its subsidiaries.
(ix) The Registration Statement has been declared effective under the Securities Act and, to our knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued or threatened by the Commission.
(x) The Registration Statement, and each amendment thereto, and the 462(b) Registration Statement, on their respective filing dates, appeared
on its face to comply in all material respects with the requirements as to form for registration statements on Form S-2 under the Securities Act
and the related rules and regulations in effect at the date of filing, except that we express no opinion concerning the financial statements and
other financial information contained or incorporated by reference therein.
(xi) The documents incorporated by reference in the prospectus contained in the Registration Statements (the "Incorporated Documents"), on
the respective dates they were filed, appeared on their face to comply in all material respects with the requirements as to form for reports on
Form 10-K, Form 10-Q and Form 8-K, as the case may be, under the Securities Exchange Act of 1934, as amended, and the related rules and
regulations in effect at the respective dates of their filing, except that we express no opinion concerning the financial statements and other
financial information contained or incorporated by reference therein.
(xii) The Company is not investment companies required to register under the Investment Company Act of 1940, as amended.
O'Melveny & Myers LLP shall also have furnished to the Representatives a written statement, addressed to the Representatives and dated the
Closing Date, in form and substance satisfactory to the Representatives, to the effect that: (x) O'Melveny & Myers LLP has acted as counsel to
the Company in connection with the preparation of the Registration Statements; (y) such counsel has participated in conferences in connection
with the preparation of the Registration Statements and the Prospectuses, and has also reviewed such documents and the Incorporated
Documents but has not independently verified the accuracy, completeness or fairness of the statements contained or incorporated in those
documents, and although such counsel is unable to assume, and does not assume, any responsibility for such accuracy, completeness or fairness
(except as otherwise specifically stated in paragraph (vii) above), on the basis of such participation and review, such counsel does not believe
that the Registration Statements, as of the effective date of the applicable Registration Statements, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and does not
believe that the Prospectuses, on the Closing Date, contain any untrue statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in light of the circumstances under which they were made, not misleading; and (z) such counsel expresses
no opinion or belief as to any document filed by the Company under the Securities Exchange Act of 1934, as amended, whether before or after
the effective date of the applicable Registration Statements, except to the extent that any such document is an Incorporated Document read
together with the Registration Statements or the Prospectuses and considered as a whole and as specifically stated in paragraph (xi) above, nor
does such counsel express any opinion or belief as to the financial statements and other financial information contained or incorporated by
reference in the Registration Statements, the Prospectuses or the Incorporated Documents.
18
(e) Heenan Blaikie LLP (the Company's Canadian counsel) shall have furnished to the Representative such counsel's written opinion, as
counsel to the Company, addressed to the Underwriters and dated the Closing Date, in form and substance reasonably satisfactory to the
Representative, to the effect that:
(i) The Company, LGTC and each of the Principal Canadian Subsidiaries have been duly incorporated and are validly existing in good standing
under the laws of their respective jurisdictions of incorporation, are duly qualified to do business and are in good standing as foreign
corporations in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires
such qualification, and have all power and authority necessary to own or hold their respective properties and to conduct the businesses in which
they are engaged, except where the failure to so qualify or have such power or authority would not have, singularly or in the aggregate, a
Material Adverse Effect.
(ii) The Company has an authorized capitalization as set forth in the Prospectuses, and all of the outstanding shares of the Company, including
the Shares being delivered on the Closing Date, have been duly and validly authorized and issued, are fully paid and non-assessable and
conform to the description thereof contained in the Prospectuses.
(iii) All the outstanding shares of LGTC and each Principal Canadian Subsidiary have been duly authorized and validly issued, are fully paid
and non-assessable and, except to the extent set forth in the Prospectuses, are owned by the Company directly or indirectly through one or more
wholly-owned subsidiaries, free and clear of any claim, lien, encumbrance, security interest, restriction upon voting or transfer or any other
claim of any third party.
(iv) The Company is a reporting issuer or the equivalent in each of the provinces of British Columbia, Alberta, Manitoba, ONTARIO and
Quebec and is not on the list of defaulting issuers maintained by any securities regulatory authorities in any such jurisdiction; and the Company
is a "qualifying issuer" as such term is defined in Multilateral Instrument 45-102 - Resale of Securities.
(v) To the best of such counsel's knowledge and other than as set forth in the Prospectus, there are no Canadian federal or provincial legal or
governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property or asset of the Company
or any of its subsidiaries is the subject which, singularly or in the aggregate, if determined adversely to the Company or any of its subsidiaries,
might have a Material Adverse Effect or would prevent or adversely affect the ability of the Company to perform its obligations under this
Agreement; and, to the best of such counsel's knowledge, no such proceedings have been threatened by governmental authorities or others.
(vi) To the best of such counsel's knowledge, none of the Company, LGTC or any of the Principal Canadian Subsidiaries (a) is in violation of
its charter or by-laws, (b) is in default, and no event has occurred, which, with notice or lapse of time or both, would constitute a default, in the
due performance or observance of any term, covenant or condition contained in any agreement or instrument to which it is a party or by which
it is bound or to which any of its properties or assets is subject or (c) is in violation of any law, ordinance, governmental rule, regulation
19
or court decree to which it or its property or assets may be subject or has failed to obtain any license, permit, certificate, franchise or other
governmental authorization or permit necessary to the ownership of its property or to the conduct of its business except, in the case of clauses
(b) and (c), for those defaults, violations or failures which, either singularly or in the aggregate, would not have a Material Adverse Effect.
(vii) There are no preemptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any Shares
pursuant to the Company's charter or by-laws or any agreement or other instrument known to such counsel.
(viii) There are no restrictions of the corporate power and capacity of the Company to enter into this Agreement or to carry out its obligations
under this Agreement; and this Agreement has been duly authorized, and executed and delivered by the Company.
(ix) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby by the
Company, LGTC and the Principal Canadian Subsidiaries will not conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any of the Other Agreements, nor will such actions result in any violation of the charter or by-laws
of the Company or the charter or by-laws of LGTC or any of the Principal Canadian Subsidiaries or any statute or any order, rule or regulation
of any Canadian federal or provincial court or governmental agency or body or court having jurisdiction over the Company, LGTC or any of
the Principal Canadian Subsidiaries or any of their properties or assets.
(x) The offering, issuance, sale and delivery of the Shares by the Company to qualified purchasers in British Columbia, Alberta, Manitoba,
Ontario and Quebec (the "Private Placement Provinces") pursuant to the Company's Canadian offering memorandum (the "Offering
Memorandum"), are exempt from the prospectus requirements of the securities laws of each of the Private Placement Provinces and no
prospectus is required nor are other documents required to be filed, proceedings taken or approvals, permits, consents or authorizations of
regulatory authorities obtained under the securities laws of any of the Private Placement Provinces to permit the offering, issue, sale and
delivery of the Shares by the Company to qualified purchasers in the Private Placement Provinces, except for the requirements that the
Company file the required trade reports, accompanied by the prescribed fees and deliver a copy of the Offering Memorandum, in each of the
Private Placement Provinces, as applicable.
(xi) No prospectus is required nor are other documents required to be filed (other than the filing with the Ontario Securities Commission by the
seller of a report on Form 45-501F2, prepared and executed in accordance with section 7.2 of Ontario Securities Commission Rule 45-501 Exempt Distributions, accompanied by the prescribed fee, or the equivalent provisions of applicable securities laws in any of the other Private
Placement Provinces), proceedings taken, or approvals, permits, consents or authorizations of regulatory authorities obtained under the
securities laws of the Private Placement Provinces to permit a holder of Shares, to trade such securities in the Private Placement Provinces,
either through registrants or dealers registered under applicable laws who comply with such applicable laws
20
or in circumstances in which there is an exemption from the registration requirements of the applicable laws, provided that:
(a) at the time of such trade, the Company is, and has been, a reporting issuer in one or more of the Provinces of Alberta, British Columbia,
Manitoba, Ontario or Quebec, within the meaning of the securities laws of that province, for at least four months;
(b) at the time of such trade, at least four months have elapsed from the date of this opinion letter;
(c) a certificate evidencing the Shares being traded was issued that carried a legend in the form prescribed by Multilateral Instrument 45-102 Resale of Securities to the effect that, unless permitted under securities legislation, the holder shall not trade them before the date which is four
months and one day from the date of this opinion letter;
(d) no unusual effort is made to prepare the market or to create a demand for the securities that are the subject of the trade;
(e) no extraordinary commission or consideration is paid to a person or company in respect of the trade;
(f) the trade is not a control distribution within the meaning of Multilateral Instrument 45-102 - Resale of Securities; and
(g) if the holder is an insider or officer of the Company, the holder has no reasonable grounds to believe that the Company is in default of
securities legislation.
(xii) Except for consents, approvals, authorizations, registrations or qualifications as may be required under British Columbia Securities Laws
and the Toronto Stock Exchange with the purchase and distribution of the Shares by the Underwriters, no consent, approval, authorization or
order of, or filing or registration with, any Canadian federal or provincial court or governmental agency or body is required for the execution,
delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby.
(xiii) The form of share certificate for the Shares has been duly approved by the Company and complies with the provisions of the charter and
by-laws of the Company and the Company Act (British Columbia).
(xiv) The statements in the Prospectuses under the heading "Taxation" to the extent that they constitute summaries of matters of Canadian
federal or provincial law or regulation or legal conclusions, have been reviewed by such counsel and fairly summarize the matters described
therein in all material respects.
(xv) The statements contained in the Prospectuses under the caption "Risk Factors - We may lose investment funds, tax credits and other
benefits if we fail to meet Canadian regulatory requirements"; "Risk Factors - We may not be eligible to receive certain British Columbia
refundable tax credits"; "Risk Factors - We may lose certain benefits by failing to meet certain regulatory standards"; "Risk
21
Factors - We face other risks in obtaining production financing from private and other international sources"; "Risk Factors - An Investment by
non-Canadians in our business is potentially reviewable by the Minister of Canadian Heritage"; "Risk Factors - A failure to meet Canadian
programming restrictions may decrease the time slots or amount of license fees and incentive programs available to us"; "Business Government Incentives and Regulation - Regulation by CRTC"; "Business - Government Incentives and Regulation - Government Financial
Support"; "Business - Government Incentives and Regulation - Tax Credits"; "Business - Co-Production Treaties"; "Business - Government
Incentives and Regulation - Investment Canada Act (Canada)"; "Description of Share Capital"; "Canadian Statutory Rights of Withdrawal and
Rescission"; and in Part II of the Registration Statement - Information Not Required in Prospectus - Item 15 - "Indemnification of Directors and
Officers"; insofar as such statements purport to summarize the laws of the Provinces of Ontario or British Columbia and the federal laws of
Canada applicable therein, are fair descriptions of those laws.
(xvi) The Toronto Stock Exchange has conditionally approved the listing of the Shares in accordance with the requirements of such exchange
on or before [INSERT DATE].
(xvii) The Registration Statements, as of the respective effective dates and the Prospectuses, as of their respective dates, and any further
amendments or supplements thereto, as of their respective dates, made by the Company prior to the Closing Date (other than the financial
statements and other financial data contained therein, as to which such counsel need express no opinion) complied as to form in all material
respects with the requirements of the British Columbia Securities Laws; and the documents incorporated by reference in the Prospectuses
(other than the financial statements and related schedules therein, as to which such counsel need express no opinion), when they were filed with
the BCSC complied as to form in all material respects with the requirements of applicable securities laws of Canada and the rules and
regulations of the BCSC.
(xviii) To the best of such counsel's knowledge, except as set forth in the Prospectus under the caption "Description of Share Capital Registration Rights Agreements", no person or entity has the right to require registration of any Common Shares or other securities of the
Company because of the filing or effectiveness of the Registration Statements or otherwise, except for persons and entities who have expressly
waived such right or who have been given proper notice and have failed to exercise such right within the time or times required under the terms
and conditions of such right.
(xix) The choice of the laws of the State of New York ("New York Law") as the governing law of this Agreement will be upheld as a valid
choice of law by a court of competent jurisdiction of the Province of Ontario (an "Ontario Court") and by a court of competent jurisdiction of
the Province of British Columbia (a "British Columbia Court", and together with an Ontario Court, the "Relevant Canadian Courts") provided
that such choice of law is bona fide (in the sense that it was not made with a view to avoiding the consequences of the law of any other
jurisdiction) and is not contrary to public policy as this term is understood under the laws of the Province of Ontario ("Ontario Law") or the
laws of British Columbia ("British Columbia Law"), as the case may be. We have no reason to
22
believe that the choice of New York Law in this Agreement is not bona fide or is contrary to public policy under Ontario Law or British
Columbia Law.
(xx) In the event that this Agreement is sought to be enforced in either an Ontario court or a British Columbia court, those courts would, subject
to subparagraph (xix) above, apply New York Law, upon proper proof of those laws, except to the extent that the provisions of this Agreement
or New York Law are contrary to public policy as that term is understood under Ontario Law or BC Law, as the case may be, or those laws are
foreign revenue, expropriatory or penal laws; provided, however, that:
(a) a Relevant Canadian Court would not apply New York Law in matters of procedure or applicable laws in force which are applicable by
reason of their particular object; and
(b) a Relevant Canadian Court may not enforce an obligation enforceable under New York Law where performance of the obligation would be
illegal by the laws of the place of performance.
(xxi) A final and conclusive civil judgment for a sum certain obtained in a court of competent jurisdiction of the State of New York ("a New
York Court") against the parties hereto in connection with any action arising out of or relating to this Agreement would be recognized and
could be sued upon in a Relevant Canadian Court and such court would grant a judgment which would be enforceable against the parties hereto
in the Province of Ontario or the Province of British Columbia, as the case may be, provided that:
(a) the New York Court had jurisdiction over the judgment debtor in the action according to the applicable law in the Relevant Canadian Court;
(b) such judgment was not obtained by fraud on the New York Court or in any manner contrary to natural justice and the enforcement thereof
would not be inconsistent with public policy as such term is understood under the applicable law in the Relevant Canadian Court;
(c) enforcement of such judgment would not be inconsistent with public policy as such term is understood under the applicable law in the
Relevant Canadian Court and, in particular, would not constitute, directly or indirectly, the enforcement of foreign revenue, expropriatory or
penal laws;
(d) a dispute between the same parties based on the same subject matter has not given rise to a decision rendered by a Relevant Canadian Court
or been decided by a foreign authority and that decision meets the necessary conditions for recognition under the applicable law in the Relevant
Canadian Court;
(e) no new admissible evidence is discovered after the New York Court has rendered judgment which could not have been discovered by the
exercise of due diligence prior to the New York Court rendering judgment and no new facts have arisen which once presented before a
Relevant Canadian
23
Court would give rise to a finding in the Relevant Canadian Court contrary to subparagraphs (a), (b) or (c) above;
(f) a judgment of a Relevant Canadian Court will be denominated in Canadian currency in accordance with, in the case of the Province of
Ontario, the Courts of Justice Act (Ontario), and in the case of the Province of British Columbia, the Foreign Money Claims Act (British
Columbia); and
(g) the action in the Relevant Canadian Court commenced within the time limits set out in the Limitations Act (Ontario) or the Limitation Act
(British Columbia), as the case may be.
Heenan Blaikie LLP shall also have furnished to the Representative a written opinion in form acceptable to the Representative with respect to
the formation and operation of the Trust, the ownership by the Trust of all shares of LGTC for the Beneficiaries, and such other matters as may
be requested by the Representative.
Heenan Blaikie LLP shall also have furnished to the Representative a written statement, addressed to the Underwriters and dated the Closing
Date, in form and substance satisfactory to the Representative, to the effect that (x) such counsel has acted as counsel to the Company in
connection with the preparation of the Registration Statements and (y) based on such counsel's examination of the Registration Statements and
such counsel's investigations made in connection with the preparation of the Registration Statements and conferences with certain officers and
employees of and with auditors for and counsel to the Company, such counsel has no reason to believe that (I) the Registration Statements, as
of the respective effective dates, contained any untrue statement of a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading, or that the Prospectuses contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading or (II) any document incorporated by reference in the Prospectuses, when they
were filed with the Commission, contained any untrue statement of a material fact or omitted to state any material fact necessary in order to
make the statements therein, in light of the circumstances under which they were made, not misleading; it being understood that such counsel
need express no opinion as to the financial statements or other financial data contained or incorporated by reference in the Registration
Statement or the Prospectuses.
The foregoing opinions and statements may be qualified by a statement to the effect that such counsel has not independently verified the
accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectuses and takes no responsibility
therefor except to the extent set forth in the opinion described in clauses (e)(xiv) and (e)(xv) above.
(f) [insert the name of counsel to the Selling Shareholder] shall have furnished to the Representative such counsel's written opinion, as counsel
to the Selling Shareholder, addressed to the Underwriters and dated the Closing Date, in form and substance reasonably satisfactory to the
Representative, to the effect that:
(i) The Selling Shareholder has full right, power and authority to enter into this Agreement, the Power of Attorney and the Custody Agreement;
the execution, delivery and performance of this Agreement, the Power of Attorney and the
24
Custody Agreement by the Selling Shareholder and the consummation by the Selling Shareholder of the transactions contemplated hereby and
thereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any statute, any
indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which the Selling Shareholder is
a party or by which the Selling Shareholder is bound or to which any of the property or assets of the Selling Shareholder is subject, nor will
such actions result in any violation of any statute or any order, rule or regulation known to such counsel of any court or governmental agency or
body having jurisdiction over the Selling Shareholder or the property or assets of the Selling Shareholder; and, except for the registration of the
Stock under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the
Exchange Act and applicable state securities laws in connection with the purchase and distribution of the Stock by the Underwriters, no
consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the
execution, delivery and performance of this Agreement, the Power of Attorney or the Custody Agreement by the Selling Shareholder and the
consummation by the Selling Shareholder of the transactions contemplated hereby and thereby.
(ii) This Agreement has been duly executed and delivered by or on behalf of the Selling Shareholder.
(iii) A Power-of-Attorney and a Custody Agreement have been duly executed and delivered by the Selling Shareholder and constitute valid and
binding agreements of the Selling Shareholder.
(iv) Upon payment for, and delivery of, the shares of Stock to be sold by the Selling Shareholder under this Agreement in accordance with the
terms hereof, the Underwriters will acquire good and valid title to such shares, free and clear of all liens, encumbrances, equities or claims.
(g) The Representative shall have received from Paul, Hastings, Janofsky & Walker LLP and Osler, Hoskin & Harcourt LLP, counsel for the
Underwriters, such opinions, dated the Closing Date, with respect to such matters as the Underwriters may reasonably require, and the
Company shall have furnished to such counsel such documents as they request for enabling them to pass upon such matters.
(h) At the time of the execution of this Agreement, the Representative shall have received from each of Ernst & Young LLP and
PricewaterhouseCoopers LLP a letter, addressed to the Underwriters and dated such date, in form and substance satisfactory to the
Representative
(i) confirming that they are independent certified public accountants with respect to the Company and its subsidiaries within the meaning of the
Securities Act and the Rules and Regulations and (ii) stating the conclusions and findings of such firm with respect to the financial statements
and certain financial information contained or incorporated by reference in the Prospectuses.
(i) On the Closing Date, the Representative shall have received a letter (the "bring-down letter") from each of Ernst & Young LLP and
PricewaterhouseCoopers LLP addressed to the Underwriters and dated the Closing Date confirming, as of the date of the bring-down letter (or,
with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the
Prospectuses as of a date not more than three
25
business days prior to the date of the bring-down letter), the conclusions and findings of such firm with respect to the financial information and
other matters covered by its letter delivered to the Representative concurrently with the execution of this Agreement pursuant to Section 6(h).
(j) The Company shall have furnished to the Representative a certificate, dated the Closing Date, of its Chairman of the Board, its President or
a Vice President and its Chief Financial Officer stating that (i) such officers have carefully examined the Registration Statements and the
Prospectuses and, in their opinion, the Registration Statements as of their respective effective dates and the Prospectuses, as of each such
effective date, did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) since the effective date of the Initial Registration Statement no event has occurred
which should have been set forth in a supplement or amendment to the Registration Statements or the Prospectuses, (iii) to the best of their
knowledge after reasonable investigation, as of the Closing Date, the representations and warranties of the Company in this Agreement are true
and correct and the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at
or prior to the Closing Date, and (iv) subsequent to the date of the most recent financial statements included or incorporated by reference in the
Prospectuses, there has been no material adverse change in the financial position or results of operation of the Company and its subsidiaries, or
any change, or, to the knowledge of the Company, any development including a prospective change, in or affecting the condition (financial or
otherwise), results of operations or business of the Company and its subsidiaries taken as a whole, except as set forth in the Prospectuses.
(k) The Selling Shareholder shall have furnished to the Representative on the Closing Date a certificate, dated the such date, signed by, or on
behalf of, the Selling Shareholder stating that the representations, warranties and agreements of the Selling Shareholder contained herein are
true and correct as of the Closing Date and that the Selling Shareholder has complied with all agreements contained herein to be performed by
the Selling Shareholder at or prior to the Closing Date.
(l) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included or
incorporated by reference in the Prospectuses any loss or interference with its business from fire, explosion, flood or other calamity, whether or
not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectuses, (ii) since such date there shall not have been any change in the equity or long-term debt of the Company or
any of its subsidiaries or any change, or, to the knowledge of the Company, any development involving a prospective change, in or affecting
the business, general affairs, management, financial position, shareholders' equity or results of operations of the Company and its subsidiaries,
otherwise than as set forth or contemplated in the Prospectuses, the effect of which, in any such case described in clause
(i) or (ii), is, in the judgment of the Representative, so material and adverse as to make it impracticable or inadvisable to proceed with the sale
or delivery of the Shares on the terms and in the manner contemplated in the Prospectuses.
(m) No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any governmental
agency or body or any stock exchange in Canada or the United States which would, as of the Closing Date, prevent the issuance or sale of the
Shares or materially and adversely affect or potentially materially and adversely affect the business or operations of the Company; and no
injunction, restraining order or order of any other nature by any federal or state court of competent jurisdiction shall have been issued as of the
Closing Date which would prevent the issuance or sale of the Shares or materially and adversely affect or potentially materially and adversely
affect the business or operations of the Company.
26
(n) Subsequent to the execution and delivery of this Agreement there shall not have occurred or be existing any of the following: (i) trading in
securities generally on the New York Stock Exchange or the American Stock Exchange or the Toronto Stock Exchange or in the
over-the-counter market, or trading in any securities of the Company on any exchange or in the over-the-counter market, shall have been
suspended or minimum or maximum prices or maximum range for prices shall have been established on any such exchange or such market by
the Commission, by such exchange or by any other regulatory body or governmental authority having jurisdiction; (ii) a banking moratorium
shall have been declared by United States Federal or state authorities, or Canadian federal or provincial authorities, or a material disruption has
occurred in commercial banking or securities settlement or clearance services in the United States or Canada; (iii) (A) a declaration of a
national emergency or war by the United States, or an outbreak or escalation of hostilities between the United States and any foreign power,
(B) an outbreak or escalation of any other insurrection or armed conflict, or act of terrorism involving the United States, or any other national
or international crisis, calamity or emergency or (C) any material change in the political conditions, financial markets or economic conditions
in the United States which, in the case of (A), (B) or (C) above, in the sole judgment of the Representative, makes it impracticable or
inadvisable to proceed with the sale or the delivery of the Shares on the terms and in the manner contemplated in the Prospectuses; or (iv) there
shall have occurred such a material adverse change in general economic, political or financial conditions (or the effect of international
conditions on the financial markets in the United States shall be such) as to make it, in the sole judgment of the Representative, impracticable
or inadvisable to proceed with the sale or delivery of the Shares on the terms and in the manner contemplated in the Prospectuses.
(o) The American Stock Exchange, Inc. and the Toronto Stock Exchange shall have each approved the Shares for listing, subject only to
official notice of issuance.
(p) SG Cowen shall have received the written agreements, substantially in the form of Exhibit I hereto, of the officers, directors and
shareholders of the Company listed in Schedule C to this Agreement.
(q) SG Cowen shall have received an officer's certificate of the General Counsel of the Company, certifying as to the following:
(i) To the best of such officer's knowledge, neither the Company nor any of its subsidiaries (A) is in violation of its charter or by-laws, (B) is in
default, and no event has occurred, which, with notice or lapse of time or both, would constitute a default, in the due performance or
observance of any term, covenant or condition contained in any agreement or instrument to which it is a party or by which it is bound or to
which any of its properties or assets is subject or (C) is in violation of any law, ordinance, governmental rule, regulation or court decree to
which it or its property or assets may be subject or has failed to obtain any license, permit, certificate, franchise or other governmental
authorization or permit necessary to the ownership of its property or to the conduct of its business except, in the case of clauses (B) and (C), for
those defaults, violations or failures which, either individually or in the aggregate, would not have a Material Adverse Effect.
(ii) To the best of such counsel's knowledge and other than as set forth in the Prospectus, there are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a party or of which any property or asset of the Company or any of its subsidiaries
is the subject which, singularly or in the aggregate, if determined adversely to the Company or any of its subsidiaries,
27
would reasonably be expected to have a Material Adverse Effect or would prevent or adversely affect the ability of the Company to perform its
obligations under this Agreement; and, to the best of such counsel's knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others.
(iii) For purposes of such certificate, "subsidiary" shall not include any of CinemaNow, Inc., Christal Films Distribution Inc. or CineGroupe
Inc.
All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Underwriters.
7. Indemnification and Contribution.
(a) The Company and the Principal U.S. Subsidiaries and the Principal Canadian Subsidiaries (collectively, the "Principal Subsidiaries"),
jointly and severally, shall indemnify and hold harmless each Underwriter, its officers, employees, representatives and agents and each person,
if any, who controls any Underwriter within the meaning of the Securities Act (collectively the "Underwriter Indemnified Parties" and , each an
"Underwriter Indemnified Party") against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which that
Underwriter Indemnified Party may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or
action arises out of or is based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any of the Preliminary
Prospectuses, any of the Registration Statements or the Prospectuses or in any amendments or supplements thereto or (ii) the omission or
alleged omission to state in any of the Preliminary Prospectuses, any of the Registration Statements or the Prospectuses or in any amendments
or supplements thereto a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall
reimburse each Underwriter Indemnified Party promptly upon demand for any legal or other expenses reasonably incurred by that Underwriter
Indemnified Party in connection with investigating or preparing to defend or defending against or appearing as a third party witness in
connection with any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company and the
Principal Subsidiaries shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is
based upon (i) an untrue statement or alleged untrue statement in or omission or alleged omission from any of the Preliminary Prospectuses,
any of the Registration Statements or the Prospectuses or any such amendments or supplements in reliance upon and in conformity with written
information furnished to the Company through the Representative by or on behalf of any Underwriter specifically for use therein, which
information the parties hereto agree is limited to the Underwriters' Information. This indemnity agreement is not exclusive and will be in
addition to any liability which the Company and Principal Subsidiaries might otherwise have and shall not limit any rights or remedies which
may otherwise be available at law or in equity to each Underwriter Indemnified Party.
(b) The Selling Shareholder shall indemnify and hold harmless each Underwriter Indemnified Party, against any loss, claim, damage or
liability, joint or several, or any action in respect thereof, to which that Underwriter Indemnified may become subject, under the Securities Act
or otherwise, insofar as such loss, claim, damage, liability or action arises out of or is based upon (i) any untrue statement or alleged untrue
statement of a material fact contained in the Preliminary Prospectus, either of the Registration Statements or the Prospectus or in any
amendment or supplement thereto or (ii) the omission or alleged omission to state in any Preliminary Prospectus, either of the Registration
Statements or the Prospectus or in any
28
amendment or supplement thereto a material fact required to be stated therein or necessary to make the statements therein not misleading, but
in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon
and in conformity with written information furnished to the Company by or on behalf of the Selling Shareholder specifically for inclusion
therein, and shall reimburse each Underwriter Indemnified Party promptly upon demand for any legal or other expenses reasonably incurred by
that Underwriter Indemnified Party in connection with investigating or preparing to defend or defending against or appearing as a third party
witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred. This indemnity agreement is not
exclusive and will be in addition to any liability which the Selling Shareholder might otherwise have and shall not limit any rights or remedies
which may otherwise be available at law or in equity to each Underwriter Indemnified Party.
(c) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company its officers, employees, representatives and
agents, each of its directors and each person, if any, who controls the Company within the meaning of the Securities Act (collectively the
"Company Indemnified Parties" and each a "Company Indemnified Party") and the Selling Shareholder, against any loss, claim, damage or
liability, joint or several, or any action in respect thereof, to which the Company Indemnified Parties may become subject, under the Securities
Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of or is based upon (i) any untrue statement or alleged untrue
statement of a material fact contained in any of the Preliminary Prospectuses, any of the Registration Statements or the Prospectuses or in any
amendments or supplements thereto or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company
through the Representative by or on behalf of that Underwriter specifically for use therein, and shall reimburse the Company Indemnified
Parties for any legal or other expenses reasonably incurred by such parties in connection with investigating or preparing to defend or defending
against or appearing as third party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred;
provided that the parties hereto hereby agree that such written information provided by the Underwriters consists solely of the Underwriters'
Information. This indemnity agreement is not exclusive and will be in addition to any liability which the Underwriters might otherwise have
and shall not limit any rights or remedies which may otherwise be available at law or in equity to the Company Indemnified Parties.
(d) Promptly after receipt by an indemnified party under this Section 7 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 7, notify the indemnifying
party in writing of the claim or the commencement of that action; provided, however, that the failure to notify the indemnifying party shall not
relieve it from any liability which it may have under this Section 7 except to the extent it has been materially prejudiced by such failure; and,
provided, further, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified
party otherwise than under this Section 7. If any such claim or action shall be brought against an indemnified party, and it shall notify the
indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice
from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall
not be liable to the indemnified party under this
Section 7 for any legal or other expenses subsequently incurred by the indemnified party in connection with the
29
defense thereof other than reasonable costs of investigation; provided, however, that any indemnified party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the employment thereof has been specifically authorized by the indemnifying party in writing, (ii) such
indemnified party shall have been advised in writing by such counsel that there may be one or more legal defenses available to it which are
different from or additional to those available to the indemnifying party and in the reasonable judgment of such counsel it is advisable for such
indemnified party to employ separate counsel or (iii) the indemnifying party has failed to assume the defense of such action and employ
counsel reasonably satisfactory to the indemnified party, in which case, if such indemnified party notifies the indemnifying party in writing that
it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the
defense of such action on behalf of such indemnified party, it being understood, however, that the indemnifying party shall not, in connection
with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for all such
indemnified parties, which firm shall be designated in writing by SG Cowen, if the indemnified parties under this Section 7 consist of any
Underwriter Indemnified Party, or by the Company if the indemnified parties under this Section 7 consist of any Company Indemnified Parties.
Each indemnified party, as a condition of the indemnity agreements contained in Sections 7(a) and 7(b), shall use all reasonable efforts to
cooperate with the indemnifying party in the defense of any such action or claim. No indemnifying party shall be liable for any settlement of
any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with its written consent
or if there be a final judgment for the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of such settlement or judgment.
(e) If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under Section 7(a)
or 7(b), then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such
indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate
to reflect the relative benefits received by the Company and the Principal Subsidiaries on the one hand and the Underwriters on the other from
the offering of the Shares, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Principal
Subsidiaries on the one hand and the Underwriters on the other with respect to the statements or omissions which resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the
Company and the Principal Subsidiaries on the one hand and the Underwriters on the other with respect to such offering shall be deemed to be
in the same proportion as the total net proceeds from the offering of the Shares purchased under this Agreement (before deducting expenses)
received by the Company and the Principal Subsidiaries bear to the total underwriting discounts and commissions received by the Underwriters
with respect to the Shares purchased under this Agreement, in each case as set forth in the table on the cover page of the Prospectuses. The
relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information supplied by the Company and the Principal Subsidiaries on the one
hand or the Underwriters on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission; provided that the parties hereto agree that the written information furnished to the Company
30
through the Representative by or on behalf of the Underwriters for use in any of the Preliminary Prospectuses, any of the Registration
Statements or any of the Prospectuses consists solely of the Underwriters' Information. The Company and the Principal Subsidiaries and the
Underwriters agree that it would not be just and equitable if contributions pursuant to this
Section 7(e) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an
indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 7(e) shall be
deemed to include, for purposes of this Section 7(e), any legal or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7(e), no Underwriter shall be required
to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public
were offered to the public less the amount of any damages which such Underwriter has otherwise paid or become liable to pay by reason of any
untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
The Underwriters' obligations to contribute as provided in this Section 7(e) are several in proportion to their respective underwriting obligations
and not joint.
8. Termination. The obligations of the Underwriters hereunder may be terminated by SG Cowen, in its absolute discretion by notice given to
and received by the Company prior to delivery (including electronic delivery) of and payment for the Firm Shares if, prior to that time, any of
the events described in Sections
6(l), 6(m) or 6(n) have occurred or if the Underwriters shall decline to purchase the Shares for any reason permitted under this Agreement.
9. Reimbursement of Underwriters' Expenses. If (a) this Agreement shall have been terminated pursuant to Section 8, (b) the Company shall
fail to tender the Shares for delivery (including electronic delivery) to the Underwriters for any reason permitted under this Agreement, or (c)
the Underwriters shall decline to purchase the Shares for any reason permitted under this Agreement the Company shall reimburse the
Underwriters for the fees and expenses of their counsel and for such other out-of-pocket expenses as shall have been reasonably incurred by
them in connection with this Agreement and the proposed purchase of the Shares, and within thirty (30) days of demand the Company shall pay
the full amount thereof to the SG Cowen.
10. Substitution of Underwriters. If any Underwriter or Underwriters shall default in its or their obligations to purchase Shares hereunder and
the aggregate number of shares which such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed ten percent
(10%) of the total number of shares underwritten, the other Underwriters shall be obligated severally, in proportion to their respective
commitments hereunder, to purchase the shares which such defaulting Underwriter or Underwriters agreed but failed to purchase. If any
Underwriter or Underwriters shall so default and the aggregate number of shares with respect to which such default or defaults occur is more
than ten percent (10%) of the total number of shares underwritten and arrangements satisfactory to the Representative and the Company for the
purchase of such shares by other persons are not made within forty-eight (48) hours after such default, this Agreement shall terminate.
If the remaining Underwriters or substituted Underwriters are required hereby or agree to take up all or part of the Shares of a defaulting
Underwriter or Underwriters as provided in this Section 10, (i) the Company and the Selling Shareholder shall have the right to postpone the
Closing Dates for a period of not more than five (5) full business days in order that the Company and the Selling Shareholder may
31
effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectuses, or in any other documents or
arrangements, and the Company agrees promptly to file any amendments to the Registration Statement or supplements to the Prospectuses
which may thereby be made necessary, and (ii) the respective numbers of shares to be purchased by the remaining Underwriters or substituted
Underwriters shall be taken as the basis of their underwriting obligation for all purposes of this Agreement. Nothing herein contained shall
relieve any defaulting Underwriter of its liability to the Company, the Selling Shareholder or the other Underwriters for damages occasioned by
its default hereunder. Any termination of this Agreement pursuant to this Section 10 shall be without liability on the part of any non-defaulting
Underwriter, the Selling Shareholder or the Company, except expenses to be paid or reimbursed pursuant to Sections 5 and 9 and except the
provisions of Section 7 shall not terminate and shall remain in effect.
11. Successors; Persons Entitled to Benefit of Agreement. This Agreement shall inure to the benefit of and be binding upon the several
Underwriters, the Company and the Selling Shareholder and their respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person other than the persons mentioned in the preceding sentence any legal or equitable right,
remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person; except that the
representations, warranties, covenants, agreements and indemnities of the Company and the Selling Shareholder contained in this Agreement
shall also be for the benefit of the Underwriter Indemnified Parties, and the indemnities of the several Underwriters shall also be for the benefit
of the Company Indemnified Parties and the Selling Shareholder Indemnified Parties. It is understood that the Underwriters' responsibility to
the Company is solely contractual in nature and the Underwriters do not owe the Company, or any other party, any fiduciary duty as a result of
this Agreement.
12. Survival of Indemnities, Representations, Warranties, etc. The respective indemnities, covenants, agreements, representations, warranties
and other statements of the Company, the Selling Shareholder and the several Underwriters, as set forth in this Agreement or made by them
respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation made by or on behalf of any
Underwriter, the Selling Shareholder, the Company or any person controlling any of them and shall survive delivery (including electronic
delivery) of and payment for the Shares.
13. Notices. All statements, requests, notices and agreements hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail, telex or facsimile transmission to SG Cowen Securities Corporation, Attention:
General Counsel, 1221 Avenue of the Americas, New York, New York 10020 (Fax: 212-278-7995);
(b) if to the Company shall be delivered or sent by mail, telex or facsimile transmission to Lions Gate Entertainment Corp., Attention: Wayne
Levin, 4553 Glencoe Ave., Suite 200, Marina del Rey, California 90292 (Fax: 310-452-8934);
(c) if to any Selling Shareholder, shall be delivered or sent by mail, telex or facsimile transmission to such Selling Shareholder at the address
set forth on Schedule B hereto;
provided, however, that any notice to an Underwriter pursuant to Section 7 shall be delivered or sent by mail, telex or facsimile transmission to
such Underwriter at its address set forth in its acceptance telex to the Representative, which address will be supplied to any other party hereto
by the Representative upon request. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof.
32
14. Definition of Certain Terms. For purposes of this Agreement: (a) "business day" means any day on which the New York Stock Exchange,
Inc. is open for trading; (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules and Regulations; provided, however, that solely for
purposes of this Agreement the term "subsidiary" shall include LGTC; and (c) "Significant Subsidiary" has the meaning set forth in Section
1-02(w) of Regulation S-X of the Commission.
15. GOVERNING LAW AND SUBMISSION TO JURISDICTION. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO ANY CONFLICTS OF LAWS
PRINCIPLES THAT WOULD RESULT IN THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION. EACH OF THE
PARTIES HERETO WAIVES THE RIGHT TO TRIAL BY JURY.
16. Underwriters' Information. The parties hereto acknowledge and agree that, for all purposes of this Agreement, the term "Underwriters'
Information" consists solely of the following information in the Prospectuses: (i) the last paragraph on the front cover page [AND
EQUIVALENT PAGE IN THE CANADIAN PROSPECTUS] concerning the terms of the offering by the Underwriters; and (ii) the statements
concerning the Underwriters contained in the table below the first paragraph and contained in the third paragraph under the heading
"Underwriting."
17. Authority of the Representative. In connection with this Agreement, you will act for and on behalf of the several Underwriters, and any
action taken under this Agreement by the Representative, will be binding on all the Underwriters; and any action taken under this Agreement
by any of the Attorneys in fact will be binding on all the Selling Shareholder.
18. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for
any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as
are necessary to make it valid and enforceable.
19. General. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. In this Agreement, the masculine,
feminine and neuter genders and the singular and the plural include one another. The section headings in this Agreement are for the
convenience of the parties only and will not affect the construction or interpretation of this Agreement. This Agreement may be amended or
modified, and the observance of any term of this Agreement may be waived, only by a writing signed by the Company, the Selling
Shareholder, and the Representative.
20. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
[Signature page follows]
33
If the foregoing is in accordance with your understanding of the agreement between the Company, the Selling Shareholder and the several
Underwriters, kindly indicate your acceptance in the space provided for that purpose below.
Very truly yours,
LIONS GATE ENTERTAINMENT CORP.
By:
Name:
Title:
SELLING SHAREHOLDER
By: [Attorney-in-Fact]
By:
[Attorney-in-fact] Acting on [his own behalf and] on behalf of the Selling Shareholder
Accepted as of
the date first above written:
SG COWEN SECURITIES CORPORATION
Acting on its own behalf
and as Representative of several
Underwriters referred to in the
foregoing Agreement.
By: SG COWEN SECURITIES CORPORATION
By:
Name: William B. Buchanan, Jr.
Title: Head of Equity Capital Markets
34
SCHEDULE A
Name
---SG Cowen Securities Corporation
Total
Number
of Firm
Shares
to be
Purchased
---------
Number of
Optional
Shares
to be
Purchased
---------
----------
---------
==========
=========
35
SCHEDULE B
Selling Shareholder
------------------Mark Amin
Number of
Firm
Shares to
be Sold
------0
Number of
Optional
Shares to
be Sold
------1,000,000
0
1,000,000
[Address]
Total
36
SCHEDULE C
David Doerksen
Gary Newton
Harry Sloan
Marni Wieshofer
Thomas Augsberger
Telemunchen
Wayne Levin
Michael Burns
Douglas Holtby
Scott Patterson
Harald Ludwig
Joe Houssian
Patrick Lavelle
Mark Amin
Morley Koffman
Arthur Evrensel
Drew Craig
James Keegan
Jon Feltheimer
Jeff Sagansky
Frank Giustra
Mitchell Wolfe
ENT Holding Corporation
Gordon Keep
SBS Broadcasting S.A.
Telemunchen Fernseh GmbH & Co.
37
EXHIBIT I
[Form of Lock-Up Agreement]
[Date]
SG Cowen Securities Corporation
As representative of the
several Underwriters
c/o SG Cowen Securities Corporation
1221 Avenue of the Americas
New York, New York 10020
Re: Lions Gate Entertainment Corp. 15,000,000 Common Shares
Dear Sirs:
In order to induce SG Cowen Securities Corporation ("SG Cowen") to enter in to a certain underwriting agreement with Lions Gate
Entertainment Corp., a British Columbia corporation (the "Company"), with respect to the public offering of common shares, no par value
("Common Shares") of the Company, the undersigned hereby agrees that for a period commencing with the printing and distribution of the red
herring and ending 180 days following the date of the final prospectus filed by the Company with the Securities and Exchange Commission in
connection with such public offering (the "Offering"), the undersigned will not, without the prior written consent of SG Cowen, directly or
indirectly, (i) offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of, any Common Shares (including, without limitation,
Common Shares which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations promulgated
under the Securities Act of 1933, as the same may be amended or supplemented from time to time (such shares, the "Beneficially Owned
Shares")) or securities convertible into or exercisable or exchangeable in Common Shares (such securities, together with the Common Shares
and Beneficially Owned Shares, the "Relevant Securities"), (ii) enter into any swap, hedge or similar agreement or arrangement that transfers in
whole or in part, the economic risk of ownership of the Relevant Securities or
(iii) engage in any short selling of the Common Shares (all collectively, the "Lock-Up").
Notwithstanding the foregoing, the undersigned may transfer Relevant Securities (i) by bona fide gift, will or intestate succession and (ii) to
any trust for the direct or indirect benefit of the undersigned or the immediate family of the undersigned, provided as to each of (i) and (ii)
above, each resulting transferee of Relevant Securities executes and delivers to you an agreement certifying that such transferee is bound by the
terms of this letter agreement, and provided further that any such transfer not involve a disposition for value. For the purposes of this letter
agreement, "immediate family" means any relationship by blood, marriage or adoptions, not more remote than first cousin.
In addition, the undersigned hereby waives, from the date hereof until the expiration of the 180 day period following the date of the Company's
final prospectus filed by the Company with the Securities and Exchange Commission in connection with the Offering, any and all rights, if any,
to request or demand registration pursuant to the Securities Act of any Common Shares that are registered in the name of the undersigned or
that are Beneficially Owned Shares. In order to enable the aforesaid covenants to be enforced, the undersigned hereby consents to the placing
of stop transfer orders with the transfer agent of the Common Shares with respect to any Common Shares or Beneficially Owned Shares.
38
Delivery of a signed copy of this letter agreement by facsimile transmission shall be effective as delivery of the original hereof.
By:
Name:
Title:
Exhibit 10.4
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION AGREEMENT (this "Agreement") is made as of May 14, 2003 (the "Effective Date") by and between LIONS GATE
ENTERTAINMENT CORP., a British Columbia corporation (the "Company"), and ENT Holding Corporation, a Delaware corporation
("Holder").
RECITALS
A. Holder is entering into a Stock Purchase Agreement as of the date of this Agreement (the "Stock Purchase Agreements") with an existing
shareholder of the Company for the purchase of an aggregate of 2,500,000 common shares of the Company, no par value per share (the
"Common Shares").
B The Company believes it will benefit from having Holder as a shareholder that will contribute to and support the growth of the Company's
business; and
C. To induce Holder to become a shareholder and to enter into a lock-up agreement with respect to the Common Shares in the form attached as
Exhibit A, the Company is willing to extend to Holder the rights set forth in this Agreement.
In consideration of the foregoing, the parties agree as follows:
1. OPTIONAL REGISTRATIONS
1.1 Optional Registrations. If at any time or times after the date hereof, the Company determines to register any of its equity securities for its
own account or the account of any of its shareholders (whether in connection with a primary offering, a secondary offering or any combination
thereof) under the Securities Act of 1933, as amended (the "Securities Act") (other than in connection with (a) a registration effected solely to
implement an employee benefit plan or a business combination transaction or any other similar transaction for which a registration statement on
Form S-4 under the Securities Act or any comparable successor form is applicable and (b) the registration statement on Form S-2 (file no.
333-104836 filed by the Company on April 30, 2003), the Company will promptly give written notice thereof to Holder. In connection with
any such registration, if within 30 days after receipt by Holder of such notice, the Company receives a written request from Holder for the
inclusion of some or all of the Registrable Securities (as defined in Section 1.2) owned by it in such registration (such request to state the
number of Registrable Securities intended to be disposed of by Holder), the Company will use its reasonable best efforts to include in such
registration under the Securities Act all Registrable Securities that Holder requested to be registered.
1.2 "Registrable Securities" means (i) the Common Shares held by Holder, and
(ii) any other common shares of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security that
is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares listed in (i). Such securities will
cease to be Registrable Securities: (A) when a registration statement with respect to
the sale of such securities has become effective under the Securities Act and such securities have been disposed of in accordance therewith; or
(B) when such securities may be distributed pursuant to the provisions of Rule
144(k) (or any successor provisions thereto) under the Securities Act.
1.3 Underwriting. Notwithstanding the foregoing, in the case of an underwritten offering under this Section 1, the Company will not be
required to include any of Holder's securities in the underwritten offering unless Holder accepts the terms of the underwriting as agreed upon
between the Company and the underwriters.
1.4 Limitations on Amount. Notwithstanding any other provision of this Agreement, if the managing underwriter, if any, advises Holder and
the Company in writing that marketing factors require a limitation of the number of securities to be underwritten in any offering effected
pursuant to this Section 1, then the number of securities that may be included in the underwriting will be allocated: first, to the Company
(unless the registration is initiated by a Prior Holder (as defined in Section 2.2) in which case the Company may not include any shares in such
registration); second, to the Prior Holders; third, to the Holder and all other holders of registration rights with respect to Company common
shares (which rights must have been granted at least 30 days before the Company gives the written notice specified in Section 1.1 to the
Holder) pro rata among the holders of such registration rights (including Holder) in proportion to the number of shares owned by such holders;
and thereafter any additional shares that may be included in the offering will be allocated pro rata among other shareholders in proportion to the
number of shares proposed to be included in the registration. Notwithstanding the foregoing, if the registration is initiated by a third party
shareholder with registration rights, then the number of securities that may be included in the underwriting will be allocated: first, to the Prior
Holder; second, to such third party shareholder; third to the Company; and thereafter any additional shares that may be included in the offering
will be allocated pro rata among other shareholders (including Holder) in proportion to the number of shares proposed to be included in the
registration. The references to the Prior Holders in this Section 1.4 will be effective only so long as the Prior Holders have registration rights
under the Prior Agreement (as defined in Section 2.2).
1.5 Withdrawal. Holder will have the right to withdraw its request for inclusion of its Registrable Securities in any registration statement
pursuant to this Section 1 by giving written notice to the Company of its request to withdraw; provided, however, that such election will be
irrevocable and, after making such election, Holder will no longer have any right to include Registrable Securities in the registration as to
which such election was made. The Company may withdraw the registration statement at any time before it becomes effective, provided that
the Company gives prompt notice to Holder.
1.6 Expenses. All expenses incurred by the Company in complying with this
Section 1 (other than underwriting and selling commissions or discounts attributable to, and transfer taxes assessed on, the Registrable
Securities), including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements
of
counsel for the Company, Blue Sky fees and expenses and the expense of any special audits incident to or required by any such registration,
will be borne by the Company.
1.7 Miscellaneous. Without in any way limiting the types of registrations to which this Section 1 will apply, if the Company effects a "shelf
registration" under Rule 415 promulgated under the Securities Act, or any other similar rule or regulation ("Rule 415") (other than a shelf
registration effected solely to implement an employee benefit plan or a transaction to which Rule 145 or any other similar rule of the Securities
and Exchange Commission (the "Commission") under the Securities Act is applicable), the Company will take all reasonable actions,
including, without limitation, the prompt filing of post-effective amendments, to permit Holder to dispose of its Registrable Securities in such
registration in accordance with the terms of this Section 1, provided, that the Company will not have any obligation to keep such "shelf
registration" effective after such time as all other securities available under such registration are sold.
2. REQUIRED REGISTRATIONS
2.1 Required Registrations. If the Company receives from Holder a written request that the Company effect the registration of Registrable
Securities under the Securities Act having an aggregate offering price of not less than $2,500,000, the Company will use its reasonable best
efforts to effect and maintain the registration under the Securities Act of such Registrable Securities (including at the option of the Holder a
registration statement pursuant to Rule 415 of the Securities Act), provided, that the Company (i) is not required to maintain the effectiveness
of a registration statement under Rule 415 of the Securities Act for longer than 120 days after it is declared effective, and (ii) may use a
registration statement on Form S-3, if available, that includes only those items and that information that is required to be included in Parts I and
II of such Form, and does not include any additional or extraneous items or information (e.g., a description of the Company or the Company's
business) except to the extent market standards otherwise require to market the offering and if Form S-3 is not available, a registration
statement on Form S-2 containing only the items required on such Form except to the extent market standards otherwise require to market the
offering. Notwithstanding the foregoing, the Company will not be obligated to take any action to effect any registration pursuant to this Section
2.1
(i) prior to the second anniversary of the Effective Date, (ii) after the Company has effected two registrations pursuant to this Section 2.1, and
such registrations have been declared or ordered effective, (iii) during the period starting with the date 90 days prior to the Company's good
faith estimate of the date of filing of, and ending on a date 180 days after the effective date of, a Company- or a Prior Holder-initiated
registration; provided, that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to
become effective, or (iv) in any particular jurisdiction in which the Company would be required to execute a general consent to service of
process in effecting such registration unless the Company is already subject to service in such jurisdiction and except as may be required by the
Securities Act.
2.2 Underwriting. If Holder intends to distribute by means of an underwritten offering the Registrable Securities that, at its request, are to be
registered, the right of Holder to
include its Registrable Securities in such registration will be conditioned upon Holder's participation in such underwriting and the inclusion of
Holder's Registrable Securities in the underwriting. Holder will enter into an underwriting agreement in customary form with the underwriter or
underwriters that the Company selects for such underwriting. Except for Mark Amin and Reza Amin or their permitted transferees (the "Prior
Holders"), who are parties to that certain Registration Rights Agreement, dated June 6, 2000 (the "Prior Agreement"), no other shareholder of
the Company may include shares in a registration filed pursuant to this Section 2 without the prior written consent of Holder.
2.3 Limitations on Amount. Notwithstanding any other provision of this Agreement, if the managing underwriter, if any, advises Holder and
the Company in writing that marketing factors require a limitation of the number of securities to be underwritten in any offering effected
pursuant to this Section 2, then the number of securities that may be included in the underwriting will be allocated: first, to the Holder; second
to the Prior Holders; and thereafter any additional shares that may be included in the offering shall be allocated to the Company (or at the
Company's discretion to other shareholders), provided, that if the Company, in its sole discretion (after consultation with its legal advisors),
determines that this provision is inconsistent with any provision of the Prior Agreement, the Prior Holders shall be allocated shares for
inclusion in such registration statement first and the Holders shall be second or pro rata as the Prior Agreement shall require. The references to
the Prior Holders in this Section 2.3 will be effective only so long as the Prior Holders have registration rights under the Prior Agreement.
2.4 Expenses. All expenses incurred by the Company in complying with this
Section 2 (other than underwriting and selling commissions or discounts attributable to, and transfer taxes assessed on, the Registrable
Securities), including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements
of counsel for the Company, Blue Sky fees and expenses and the expense of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of the Company, which will be paid in any event by the Company), will be borne by
Holder; provided, however, that if the Company or the Prior Holders include any shares in a registration the Company will be responsible for
the pro rata share of such expenses based on the percentage of the total shares registered that the shares that the Company and the Prior Holders
included in the registration represented.
2.5 Postponement. The Company may postpone the filing of any registration statement requested under this Section 2 for a reasonable period of
time, not to exceed an aggregate of 90 days during any 12 month period, if the Company has made a good faith, reasonable determination that
such filing would either: (A) require the disclosure of a material transaction and such disclosure would have a material adverse effect on the
Company; or (B) otherwise have a material adverse effect on the Company because of unusual market conditions or other circumstances. The
Company will not be required to cause a registration statement requested pursuant to this
Section 2 to become effective prior to 180 days following the effective date of a registration statement initiated by the Company
or a Prior Holder, if the request of Holder for registration pursuant to this Section 2 has been received by the Company subsequent to the giving
of written notice by the Company, pursuant to Section 1 hereof, to Holder to the effect that the Company is commencing to prepare a Company
or a Prior Holder-initiated registration statement; provided, however, that the Company will use its reasonable best efforts to achieve such
effectiveness promptly following (a) such 180 day period if the request pursuant to this
Section 2 has been made prior to the expiration of such 180 day period or
(b) the withdrawal by the Company of the registration statement. Any registration effected pursuant to this Section 2 and so designated by
Holder will be subject to this Section 2, regardless of the Securities Act form on which such registration is effected.
3. FURTHER OBLIGATIONS OF THE COMPANY
Whenever under the preceding sections of this Agreement the Company is required to register any Registrable Securities, it agrees that it will
also:
3.1 Diligently prepare and file with the Commission a registration statement on the appropriate form under the Securities Act, which
registration statement will comply as to form in all material respects with the requirements of the applicable form and will include all financial
statements required by the Commission to be filed therewith, and diligently prepare and file such amendments and supplements to said
registration statement and the prospectus used in connection therewith as may be necessary to cause such registration statement to become
effective and remain effective for so long as such registration is required to remain effective pursuant to the terms hereof.
3.2 Furnish to Holder without charge such number of copies of each preliminary and final prospectus and such other documents as Holder may
reasonably request to facilitate the public offering of his Registrable Securities.
3.3 Make reasonably available for inspection by a representative of, and counsel for, any underwriter participating in any disposition pursuant
to a registration statement, all relevant financial and other records, pertinent corporate documents and properties of the Company and cause the
officers, directors and employees of the Company to supply all relevant information reasonably requested by such representative, counsel or
any such underwriter in connection with any such registration statement.
3.4 Use its reasonable best efforts to register or qualify the securities covered by said registration statement under the securities or "blue-sky"
laws of such jurisdictions as Holder may reasonably request, provided that the Company will not be required to register or qualify the securities
in any jurisdictions that require it to qualify to do business or subject itself to general service of process therein.
3.5 Immediately notify Holder, at any time when a prospectus relating to his Registrable Securities is required to be delivered under the
Securities Act, of the happening of any event as a result of which such prospectus contains an untrue statement of a material fact or omits any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and, at the request of Holder, prepare a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain any untrue
statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
3.6 Use its reasonable best efforts to cause all such Registrable Securities to be quoted on the market or listed on each securities exchange, as
applicable, on which similar securities issued by the Company are then quoted or listed.
3.7 If requested by Holder in connection with any Required Registration, the Company will use its reasonable best efforts to cause (a) counsel
for the Company to deliver an opinion relating to the registration statement and Registrable Securities, in customary form, (b) its officers to
execute and deliver all customary documents and certificates requested by a representative of Holder or any underwriter, as applicable, and (c)
its independent public accountants to provide a comfort letter in customary form.
3.8 Otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the Commission.
4. INDEMNIFICATION; CONTRIBUTION
4.1 By the Company. The Company will indemnify and hold harmless Holder, its stockholders, officers and directors, any underwriter (as
determined in the Securities Act) for Holder and each person, if any, who controls Holder or underwriter within the meaning of the Securities
Act or the Securities Exchange Act of 1934, as amended, (the "Exchange Act") against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, to which they may
become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such expenses, claims, losses, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a
"Violation"): (i) any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus,
offering circular or other document, or any amendment or supplement thereto, incident to any registration, qualification or compliance, (ii) the
omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light
of the circumstances in which they were made, not misleading, or
(iii) any violation by the Company of the Securities Act or any rule or regulation promulgated under the Securities Act applicable to the
Company in connection with a registration, qualification or compliance, and the Company will reimburse such Holder, stockholder, officer or
director, underwriter or controlling person for any legal and any other expenses reasonably incurred in connection with investigating, preparing
or defending any claim, loss, damage, liability or action, provided that the Company will not be liable in any case to the extent that any claim,
loss, damage, liability or expense arises
out of or is based on any Violation made in reliance upon and in conformity with written information furnished to the Company by such
Holder, stockholder, officer, director, underwriter or controlling person of such Holder and stated to be specifically for use therein; provided
further that the indemnity agreement contained in this Section 4.1 shall not apply to amounts paid in settlement of any such claim, loss,
damage, liability or expense if such settlement is effected without the consent of the Company (which consent shall not be unreasonably
withheld).
4.2 By Holder. Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the
registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other
person selling securities under such registration statement or any of such other person's stockholders, directors or officers or any person who
controls such other person within the meaning of the Securities Act or the Exchange Act against all expenses, claims, losses, damages and
liabilities (or actions in respect thereof) to which they may become subject under the Securities Act, the Exchange Act or other federal or state
law, insofar as such expenses, claims, losses, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation,
in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information
furnished by Holder expressly for use in connection with such registration; and Holder will pay, as incurred, the Company or any such director,
officer, controlling person, underwriter or other person selling securities under such registration statement, stockholder, officer, director or
controlling person of such other person for any legal or any other expenses reasonably incurred in connection with investigating, preparing or
defending any claim, loss, damage, liability or action; provided that the indemnity agreement contained in this Section 4.2 shall not apply to
amounts paid in settlement of any such claim, loss, damage, liability or expense if such settlement is effected without the consent of Holder
(which consent shall not be unreasonably withheld). Notwithstanding the foregoing, the liability of Holder under this subsection (b) shall be
limited in an amount equal to the net proceeds from the shares sold by Holder.
4.3 Indemnification Procedures. Promptly after receipt by an indemnified party under this Section 4 of notice of the commencement of any
action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying
party under this Section 4, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party will
have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed,
to assume the defense thereof with counsel mutually satisfactory to the parties, and the indemnified party may participate in such defense at
such party's expense; provided, however, that an indemnified party (together with all other indemnified parties that may be represented without
conflict by one counsel) will have the right to retain one separate counsel, with the reasonable fees and expenses to be paid by the indemnifying
party, if representation of such indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in
such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such
action, if materially prejudicial to its ability to defend such action, will relieve such indemnifying party of any liability to the indemnified party
under this Section 4, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to
any indemnified party otherwise than under this Section 4.
4.4 Contribution. If the indemnification provided for in Section 4.1 or
Section 4.2 above for any reason is held by a court of competent jurisdiction to be unavailable to an indemnified party in respect of any losses,
claims, damages, expenses or liabilities, then each indemnifying party under this Section 4, in lieu of indemnifying such indemnified party
thereunder, will contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, expenses or
liabilities: (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and Holder from the offering (and the
relative benefits received by the Holder shall be deemed to be an amount equal to the net proceeds from the shares sold by Holder); or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the Company and Holder in connection with the Violation(s) that resulted in
such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. The relative benefits received by
the Company and Holder will be deemed to be in the same respective proportions as the net proceeds from the offering (before deducting
expenses) received by the Company and Holder, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the
aggregate public offering price. The relative fault of the Company and Holder will be determined by reference to, among other things, whether
the Violation relates to information supplied by the Company or Holder and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and Holder agree that it would not be just and equitable if
contribution pursuant to this Section 4.3 were determined by pro rata or per capita allocation or by any other method of allocation that does not
take account of the equitable considerations referred to in the immediately preceding paragraph. No person found guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
4.5 Survival. The obligations of the Company and Holder under this Section 4 will survive until the fifth anniversary of the completion of any
offering of Registrable Securities in a registration statement, regardless of the expiration of any statutes of limitation or extensions of such
statutes.
4.6 Miscellaneous. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in
this
Section 4 will be deemed to
include, subject to the limitations set forth above, any reasonable legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
5. TERMINATION.
The registration rights provided in this Agreement will terminate once, in the opinion of counsel to the Company, all Registrable Securities
may be sold under Rule 144 of the Securities Act in a continuous three month period.
6. RULE 144 REQUIREMENTS
For so long as it remains subject to the reporting requirements of either
Section 13 or 15(d) of the Exchange Act, the Company will use its reasonable best efforts to file with the Commission such information as the
Commission may require under either of said Sections; and in such event, the Company will use its reasonable best efforts to provide such
current public information as may be required as a condition to the availability of Rule 144 under the Securities Act (or any successor or similar
exemptive rules hereafter in effect).
7. TRANSFER OF REGISTRATION RIGHTS
The registration rights of Holder under this Agreement may not be transferred to any transferee of the Registrable Securities without the prior
written consent of the Company.
8. MARKET STAND-OFF
Holder agrees, if requested by any underwriter, not to sell or otherwise transfer or dispose of any securities of the Company held by it for up to
90 days (unless the managing underwriter (if any) reasonably requests a longer period not to exceed 180 days) following the effective date of
any registration statement of the Company filed under the Securities Act and in which Holder participates pursuant to this Agreement, subject
to the condition that all directors and executive officers of the Company enter into similar agreements.
9. REPRESENTATIONS AND WARRANTIES
9.1 The Company represents and warrants to Holder as follows:
9.1.1 the Company is duly organized, validly existing and in good standing in its jurisdiction of organization and has all requisite power and
authority to enter into and perform this Agreement;
9.1.2 the execution, delivery and performance of this Agreement by the Company has been duly authorized by all necessary action on the part
of the Company;
9.1.3 this Agreement has been duly executed and delivered; and
9.1.4 the execution, delivery and performance by the Company of this Agreement does not and will not result in any violation of and will not
conflict with or result in a breach of any of the terms of or constitute a default under (i) any provision of law, rule or regulation to which the
Company is subject, (ii) the charter or other organizational documents of the Company, (iii) any mortgage, indenture, agreement, instrument,
judgment, decree, order or other restriction to which the Company is a party or by which its assets are bound.
9.2 Holder represents and warrants to the Company that:
9.2.1 Holder is duly organized, validly existing and in good standing in its jurisdiction of organization and has all requisite power and authority
to enter into and perform this Agreement;
9.2.2 the execution, delivery and performance of this Agreement by Holder has been duly authorized by all necessary action on the part of
Holder;
9.2.3 this Agreement has been duly executed and delivered; and
9.2.4 the execution, delivery and performance by Holder of this Agreement does not and will not result in any violation of and will not conflict
with or result in a breach of any of the terms of or constitute a default under (i) any provision of law, rule or regulation to which Holder is
subject, (ii) the charter or other organizational documents of Holder,
(iii) any mortgage, indenture, agreement, instrument, judgment, decree, order or other restriction to which Holder is a party or by which its
assets are bound.
10. MISCELLANEOUS
10.1
Future Registration Rights Agreements. The Company agrees that it will not
after the date of this Agreement grant any registration rights to any
other person on terms more favorable than those granted to the Holder
hereunder.
10.2
Survival of Covenants. All covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto will bind and inure
to the benefit of the respective permitted successors and assigns of the
parties hereto whether so expressed or not.
10.3
Notices and Demands. Any notice, request, demand or other communication
which is required or permitted under this Agreement will be in writing and
will be deemed to have been duly given (a) when received if personally
delivered, (b) when transmitted if transmitted by facsimile only during
the recipient's normal business hours unless arrangements have otherwise
been made to receive such notice by telex or telecopy outside of normal
business hours, with confirmation of successful transmission received by
the sender, (c) the day after it is sent, if sent for next day delivery to
a domestic address by recognized overnight delivery service (e.g., DHL,
UPS or Federal Express); and (d) upon receipt, if sent by certified or
registered mail, return receipt requested. In each case notice will be
sent as indicated below:
If to Holder, to:
ENT Holding Corporation
2049 Century Park East Suite 2700
Los Angeles, California 90067
Attention: Heather McCormick
Facsimile: (310) 228-9602
With a copy to:
Riordan & McKinzie
300 South Grand Avenue Suite 2900
Los Angeles, California 90071
Attention: Cynthia Dunnett
Facsimile: (213) 229-8550
If to the Company, to:
Lions Gate Entertainment Corp.
4553 Glencoe Avenue, Suite 200
Marina del Rey, CA 90292
Attention: Wayne Levin
Facsimile: (310) 452-8934
With a copy to:
O'Melveny & Myers LLP
1999 Avenue of the Stars, Suite 700
Los Angeles, CA 90067
Attention: Allison M. Keller
Facsimile: (310) 246-6779
10.4
Governing Law. This Agreement will be deemed to be a contract made under,
and will be construed in accordance with, the internal laws of the State
of Delaware.
10.5
Severability. If any provision of this Agreement will be held to be
illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability will attach only to such provision and will not in any
manner affect or render illegal, invalid or unenforceable any other
provision of this Agreement, and this Agreement will be carried out as if
any such illegal, invalid or unenforceable provision were not contained
herein.
10.6
Successors and Assigns. This Agreement will inure to the benefit and be
binding on the permitted successors, assigns and transferees of each of
the parties.
10.7
Amendment. This Agreement may be amended only with the prior written
consent of the Company and Holder.
10.8
Counterparts. This Agreement may be executed in any number of counterparts
and by the parties hereto in separate counterparts, each of which when so
executed will be deemed to be an original and all of which taken together
will constitute one and the same agreement.
10.9
Headings. The headings in this Agreement are for convenience of reference
only and do not limit or otherwise affect the meaning hereof.
10.10 Interpretation. The parties acknowledge that each party has been represented by counsel in connection with this Agreement and the
transactions contemplated by this Agreement. No provision of this Agreement will be construed against or interpreted to the disadvantage of
any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or
dictated such provision.
10.11 Further Assurances. Each party agrees to cooperate fully with the other party, to take such actions, to execute such further instruments,
documents and agreements, and to give such further written assurances, as may be reasonably requested by the other party to evidence and
reflect the transactions described herein and contemplated hereby, and to carry into effect the intents and purposes of this Agreement.
10.12 Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and is intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto with respect to their registration rights with respect to any
securities of the Company or any of its subsidiaries or affiliates. There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein with respect to the Registrable Securities.
[SIGNATURE PAGES FOLLOW]
IN WITNESS WHEREOF, the undersigned have executed this Registration Rights Agreement that will be effective as of the Effective Date.
Lions Gate Entertainment Corp.
By:__________________________
Name:
Title:
ENT Holding Corporation
By:__________________________
Name:
Title:
Exhibit 10.7
Amendment Agreement
Reference is hereby made to that certain agreement (the "Agreement") dated as of June 6, 2000 between Lions Gate Entertainment Corp.
("Lions Gate") and Mark Amin ("Amin") with respect to the employment of Amin by Lions Gate.
Notwithstanding the provisions of paragraph 2, Term, of the Agreement, the parties hereby agree that the Term, as defined in the Agreement,
shall mean and shall be for an aggregate period of five and one-half (5.5) years (rather than three years as set forth in the Agreement), unless
earlier terminated in accordance with provisions of Section 9 of the Agreement.
Paragraph 7(b) of the Agreement currently states in sum and substance that Amin shall not engage in the Restricted Activities for a period of
four years following the closure of the Merger. By way of this amendment, Amin agrees that he shall not engage in the Restricted Activities
until the earlier of the conclusion of the Term or the Termination of this Agreement.
Company shall have the right to terminate this Agreement in its entirety during the first four and half years of the Term at any point in time that
Amin owns less than 500,000 shares of common stock of Company.
Except as specifically amended hereby, the Agreement shall remain in full force and effect without modification. Capitalized terms used herein
and not otherwise defined shall have the meaning ascribed to them in the Agreement except as modified hereby. This instrument may be
executed in counter-parts and/or via electronic facsimile and all such counter-parts and/or facsimile copies shall be deemed one and the same
and an original of this instrument. This letter constitutes the entire agreement among the parties with respect to modification of the Agreement
and any other matters related thereto, and supersedes all prior negotiations and understandings of the parties in connection therewith.
Agreed and Accepted:
Mark Amin
Lions Gate Entertainment Corp
By Wayne Levin,
Executive Vice President
Exhibit 10.22
AMENDMENT NO. 6 dated as of April 24, 2003 to the Credit, Security, Guaranty and Pledge Agreement dated as of September 25, 2000
among Lions Gate Entertainment Corp. and Lions Gate Entertainment Inc. (together, the "Borrowers"), the Guarantors named therein, the
Lenders referred to therein, JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as Administrative Agent and as Issuing
Bank for the Lenders (the "Agent"), National Bank of Canada as Canadian Facility Agent and Dresdner Bank AG as Syndication Agent (as the
same may be amended, supplemented or otherwise modified, the "Credit Agreement").
INTRODUCTORY STATEMENT
The Lenders have made available to the Borrowers a credit facility pursuant to the terms of the Credit Agreement.
The Borrowers have notified the Lenders and the Agent that they desire to refinance the existing mortgages on their Vancouver studio facility
with the Bank of Montreal.
The Borrowers have notified the Lenders and the Agent that Lions Gate Films Corp. intends to sell its Equity Interest in Locatrak Inc.
The Borrowers have notified the Lenders and the Agent that Lions Gate Entertainment Corp. ("LGEC") desires to issue additional shares of its
common stock pursuant to a Registration Statement on Form S-2 (the "Issuance") and that it may use the net proceeds of the Issuance to
repurchase all or a portion of its Series A Preferred Shares.
Therefore, the parties hereto hereby agree as follows:
Section 1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meaning given them in the Credit
Agreement.
Section 2. Amendments to the Credit Agreement. Subject to the satisfaction of the conditions precedent set forth in Section 4 hereof, the Credit
Agreement is hereby amended as of the Effective Date (as hereinafter defined) as follows:
(A) Section 6.1 of the Credit Agreement is hereby amended by adding the following clause (m) at the end thereof that reads as follows:
"(m) Indebtedness to the Bank of Montreal in an amount no greater than C$30,000,000 which Indebtedness shall refinance the existing
Indebtedness to the Bank of Montreal listed on Schedule 6.1 hereto provided, that (i) either (x) such Indebtedness is recourse only to the Lions
Gate Vancouver studio listed on Schedule 3.24 hereto or (y) the Credit Party who is the borrower of such Indebtedness is treated as an
Unrestricted Subsidiary for purposes of Sections 6.4, 6.5, 6.7 and 6.12 hereof and (ii) any additional proceeds of such Indebtedness remaining
after the existing Indebtedness to the Bank of Montreal is
refinanced is paid to a Credit Party and provided, further, that such Indebtedness is otherwise on terms and conditions acceptable to the
Administrative Agent."
(B) Section 6.2 of the Credit Agreement is hereby amended by adding the following clause (s) at the end thereof that reads as follows:
"(s) Liens to secure the Indebtedness permitted by Section 6.1(m) hereof provided that such Liens are limited solely to the Lions Gate
Vancouver studio listed on Schedule 3.24 hereto."
(C) Section 6.3 of the Credit Agreement is hereby amended by adding the following clause (viii) at the end thereof that reads as follows:
"(viii) a Guarantee by Lions Gate Entertainment Corp. guaranteeing the Indebtedness permitted by Section 6.1(m) hereof provided that such
Guarantee is limited to an amount no greater than C$15,000,000 and is otherwise on terms and conditions acceptable to the Administrative
Agent."
(D) Section 6.5 of the Credit Agreement is hereby amended by adding the following clause (ix) at the end thereof that reads as follows:
"(ix) payments of up to the lesser of (x)U.S.$20,000,000 and (y) U.S.$5,000,000 less than the proceeds received by LGEC from the Issuance
(net of underwriting discount and offering expenses), made by LGEC to repurchase all or a portion of its Series A Preferred Shares using net
proceeds from the Issuance provided that at the time of such payment no Default or Event of Default shall have occurred and be continuing."
(E) Section 6.7(a) of the Credit Agreement is hereby amended by adding the following clause at the end of the proviso at the end thereof that
reads as follows:
"or issuing new common shares."
Section 3. Consent. The Borrowers have requested that the Agent and the Lenders consent to a waiver of compliance by the Credit Parties with
(i) Section 2.8(b) which states that the Commitments be reduced in an amount equal to 100% of all Net Cash Proceeds (other than certain listed
exceptions) received by any Credit Party from any sale or disposition of any asset pursuant to Section 6.7(iv) of the Credit Agreement and (ii)
Section 2.11(c) which states that all such Net Cash Proceeds be used to prepay the Loans. At the request of the Borrowers, each Lender by its
signature hereto hereby waives the requirements of Sections 2.8(b) and 2.11(c) in connection with the Net Cash Proceeds from the sale of Lions
Gate Films Corp's Equity Interest in Locatrak Inc. in accordance with the Share Purchase Agreement between Lions Gate Films Corp. and
Christal Films Distribution Inc. and to which Locatrak Inc. and Rentrak Corporation intervene made and entered into on April 10, 2003 with an
effective date of April 1, 2003.
2
Section 4. Conditions to Effectiveness. The effectiveness of this Amendment is subject to the satisfaction of all of the following conditions
precedent (the date on which all such conditions have been satisfied being herein called the "Effective Date"):
(A) the receipt by the Agent of counterparts of this Amendment which, when taken together, bear the signatures of the Borrowers, each
Guarantor, the Agent and the Required Lenders;
(B) the payment of all fees and expenses (including, without limitation, fees and disbursements of counsel and consultants retained by the
Agent) due and payable by any Credit Party to the Agent and/or the Lenders; and
(C) all legal matters incident to this Amendment shall be satisfactory to Morgan, Lewis & Bockius LLP, counsel for the Agent.
Section 5. Representations and Warranties. Each Credit Party represents and warrants that:
(A) after giving effect to this Amendment, the representations and warranties contained in the Credit Agreement are true and correct in all
material respects on and as of the date hereof as if such representations and warranties had been made on and as of the date hereof (except to
the extent that any such representations and warranties specifically relate to an earlier date); and
(B) after giving effect to this Amendment, no Event of Default or Default will have occurred and be continuing on and as of the date hereof.
Section 6. Further Assurances. At any time and from time to time, upon the Agent's request and at the sole expense of the Credit Parties, each
Credit Party will promptly and duly execute and deliver any and all further instruments and documents and take such further action as the
Agent reasonably deems necessary to effect the purposes of this Amendment.
Section 7. Fundamental Documents. This Amendment is designated a Fundamental Document by the Agent.
Section 8. Full Force and Effect. Except as expressly amended hereby, the Credit Agreement and the other Fundamental Documents shall
continue in full force and effect in accordance with the provisions thereof on the date hereof. As used in the Credit Agreement, the terms
"Agreement", "this Agreement", "herein", "hereafter", "hereto", "hereof", and words of similar import, shall, unless the context otherwise
requires, mean the Credit Agreement as amended by this Amendment.
Section 9. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.
3
Section 10. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of
which when taken together shall constitute but one instrument.
Section 11. Expenses. The Borrowers agree to pay all out-of-pocket expenses incurred by the Agent in connection with the preparation,
execution and delivery of this Amendment, including, but not limited to, the reasonable fees and disbursements of counsel for the Agent.
Section 12. Headings. The headings of this Amendment are for the purposes of reference only and shall not affect the construction of or be
taken into consideration in interpreting this Amendment.
4
IN WITNESS WHEREOF, the parties hereby have caused this Amendment to be duly executed as of the date first written above:
BORROWERS:
LIONS GATE ENTERTAINMENT CORP.
LIONS GATE ENTERTAINMENT INC.
By:
Name:
Title:
GUARANTORS:
LIONS GATE FILMS CORP.
LIONS GATE FILMS INC.
LIONS GATE MUSIC CORP.
LIONS GATE FILMS PRODUCTION CORP./PRODUCTIONS
FILMS LIONS GATE S.A.R.F.
LIONS GATE TELEVISION CORP.
408376 B.C. LIMITED
LIONS GATE STUDIO MANAGEMENT LTD.
LIONS GATE TELEVISION INC.
LIONS GATE RECORDS
CINEPIX FILMS INC./FILMS CINEPIX INC.
CINEPIX ANIMATION INC./ANIMATION CINEPIX INC.
PRISONER OF LOVE PRODUCTIONS CORP.
PSYCHO PRODUCTIONS SERVICES CORP.
AM PSYCHO PRODUCTIONS, INC.
SHUTTERSPEED PRODUCTIONS CORP.
HIGHER GROUND PRODUCTIONS CORP.
M WAYS PRODUCTIONS CORP.
HIGH CONCEPT PRODUCTIONS INC.
LG PICTURES INC.
CIVIL PRODUCTIONS, INC.
TRIMARK MUSIC, INC.
FRAILTY PRODUCTIONS, INC.
DEAD ZONE PRODUCTION CORP.
TERRESTRIAL PRODUCTIONS CORP.
TRACKER PRODUCTIONS CORP.
VOID PRODUCTIONS CORP.
PRESSURE PRODUCTIONS CORP.
MONSTER PRODUCTIONS, INC.
PROFILER PRODUCTIONS CORP.
5
M WAYS II PRODUCTIONS CORP.
HYPERCUBE PRODUCTIONS CORP.
ATTRACTION PRODUCTIONS LLC
CONFIDENCE PRODUCTIONS, INC.
BLUE PRODUCTIONS INC.
SHATTERED PRODUCTIONS INC./LES PRODUCTIONS
SHATTERED INC.
WRITERS ON THE WAVE, INC.
MISSING PRODUCTIONS CORP.
PLANETARY PRODUCTIONS LLC
By:
Name:
Title:
LENDERS:
JPMORGAN CHASE BANK (formerly known as the Chase Manhattan Bank), individually and as Administrative Agent
By:
Name:
Title:
6
NATIONAL BANK OF CANADA
individually and as Canadian Agent
By:
Name:
Title:
DRESDNER KLEINWORT BENSON BANK AG
By:
Name:
Title:
UNION BANK OF CALIFORNIA, N.A.
By:
Name:
Title:
BNP PARIBAS
By:
Name:
Title:
By:
Name:
Title:
WESTLB AG (formerly Westdeutsche Landesbank
Girozentrale), NEW YORK BRANCH
By:
Name:
Title:
7
THE BANK OF NOVA SCOTIA
By:
Name:
Title:
FLEET NATIONAL BANK
By:
Name:
Title:
U.S. BANK NATIONAL ASSOCIATION
By:
Name:
Title:
VEREINS-UND WESTBANK AG
By:
Name:
Title:
By:
Name:
Title:
DEXIA BANQUE INTERNATIONALE A LUXEMBOURG
By:
Name:
Title:
8
MIZUHO CORPORATE BANK, LTD.
By:
Name:
Title:
ISRAEL DISCOUNT BANK OF NEW YORK
By:
Name:
Title:
NATEXIS BANQUES POPULAIRES
By:
Name:
Title:
By:
Name:
Title:
FAR EAST NATIONAL BANK
By:
Name:
Title:
COMERICA BANK - CALIFORNIA
By:
Name:
Title:
9
JPMORGAN CHASE BANK,
TORONTO BRANCH
By:
Name:
Title:
10
EXHIBIT 23.1
[PRICEWATERHOUSECOOPERS LLP LETTERHEAD]
SECURITIES & EXCHANGE COMMISSION
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the reference to our firm under the caption "Experts" and to the use in this Registration Statement on Form S-2 (No.
333-104836) and related Prospectus of Lions Gate Entertainment Corp. of our report dated June 22, 2001, except for note 2(a) which is at April
28, 2003, relating to the consolidated financial statements of Lions Gate Entertainment Corp. which appears in such Registration Statement and
related Prospectus.
/s/ PricewaterhouseCoopers LLP
Toronto, Canada
May 14, 2003
EXHIBIT 23.2
[PRICEWATERHOUSECOOPERS LOGO]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 1 to the Registration Statement and related prospectus on Form S-2 (No. 333-104836) of
Lions Gate Entertainment Corp. of our report dated June 22, 2001 relating to the financial statements of Mandalay Pictures, LLC for the year
ended March 31, 2001, which appear in this Amendment No. 1 to the Registration Statement and related prospectus.
/s/ PricewaterhouseCoopers
Century City, California
May 14, 2003
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the use of our report dated July 1, 2002 (except Notes 2(a) and 4(a),
as to which the date is April 24, 2003), with respect to the consolidated financial statements of Lions Gate Entertainment Corp., included in
Amendment No. 1 to the Registration Statement (Form S-2 No. 333-104836) and related Prospectus of Lions Gate Entertainment Corp. dated
May 15, 2003.
/s/
Los Angeles, California
May 12, 2003
Ernst & Young LLP
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated May 17, 2002, with respect to the financial statements of Mandalay Pictures, LLC, included in
Amendment No. 1 to the Registration Statement (Form S-2 No. 333-104836) and related Prospectus of Lions Gate Entertainment Corp. dated
May 15, 2003.
/s/
Los Angeles, California
May 12, 2003
Ernst & Young LLP