UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

 

 

 

 

Form 10-K

 

 

 

 

(Address of Principal Executive Offices, Zip Code)

 

Registrant’s telephone number, including area code:

(877) 848-3866

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  þ      No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act.  Yes  o      No  þ

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  þ      Accelerated filer  o      Non-accelerated filer  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.  Yes  o      No  þ

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 30, 2006 (the last business day of the Company’s most recently completed second fiscal quarter) was approximately $1,055,222,564, based on the closing sale price as reported on the New York Stock Exchange.

 

As of May 15, 2007, 116,988,567 shares of the registrant’s no par value common shares were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A and relating to its 2007 annual meeting of shareholders are incorporated by reference into Part III.

 

 

FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases you can identify forward-looking statements by terms such as “may,” “intend,” “will,” “could,” “would,” “expects,” “believe,” “estimate,” or the negative of these terms, and similar expressions intended to identify forward-looking statements.

 

These forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. Also, these forward-looking statements present our estimates and assumptions only as of the date of this report. Except for our ongoing obligation to disclose material information as required by federal securities laws, we do not intend to update you concerning any future revisions to any forward-looking statements to reflect events or circumstances occurring after the date of this report.

 

Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors, including the substantial investment of capital required to produce and market films and television series, increased costs for producing and marketing feature films, budget overruns, limitations imposed by our credit facilities, unpredictability of the commercial success of our motion pictures and television programming, the cost of defending our intellectual property, difficulties in integrating acquired businesses, technological changes and other trends affecting the entertainment industry, and the risk factors found under the heading “Risk Factors” found elsewhere in this report.

 

Overview

 

Lions Gate Entertainment Corp. (“Lionsgate,” the “Company,” “we,” “us” or “our”) is a diversified independent producer and distributor of motion pictures, television programming, home entertainment, family entertainment, video-on-demand and music content. We release approximately 18 to 22 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 approximately 77 hours of television programming on average each of the last three years. Our disciplined approach to acquisition, production and distribution is designed to maximize our profit by balancing our financial risks against the probability of commercial success of each project. We currently distribute our library of approximately 8,100 motion picture titles and approximately 3,800 television episodes and programs directly to retailers, video rental stores, and pay and free television channels in the US, UK and Ireland, and indirectly to other international markets through third parties. We own a minority interest in CinemaNow, Inc. (“CinemaNow”), an internet video-on-demand provider. We also own a minority interest in Maple Pictures Corp. (“Maple Pictures”), a Canadian film and television distributor based in Toronto, Canada. We have an output arrangement with Maple Pictures through which we distribute our library and titles in Canada.

 

A key element of our strategy is to acquire individual properties, including films and television programs, libraries, and entertainment studios and companies, to enhance our competitive position and generate significant financial returns. During previous periods, we acquired and integrated into our business: Lionsgate UK (formerly Redbus) (October 2005), an independent United Kingdom film distributor, which provided us the ability to self-distribute our motion pictures in the UK and Ireland and included the acquisition of the Redbus library of approximately 130 films; certain of the film assets and accounts receivable of Modern Entertainment, Ltd. (August 2005), a licensor of film rights to DVD distributors, broadcasters and cable networks; Artisan Entertainment Inc. (December 2003), a diversified motion picture, family and home entertainment company; and Trimark Holdings, Inc. (October 2000), a worldwide distributor of entertainment content that distributed directly in the US and through third parties to the rest of the world. During fiscal 2007 (in July 2006), we acquired Debmar-Mercury, an independent syndicator of film and television packages.

 

The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on the Company’s website at http://www.lionsgate.com. The Company’s Corporate Governance Guidelines, Standards for Director Independence, Code of Business Conduct and Ethics for Directors, Officers and Employees, Code of Ethics for Senior Financial Officers, Charter of Audit Committee, Charter of Compensation Committee and Charter of the Nominating and Corporate Governance Committee are also available on the Company’s website, as well as in print to any stockholder who requests them.

 

Our Industry

 

Motion Pictures

 

General.   According to the Motion Picture Association’s U.S. Theatrical Market: 2006 Statistics , overall domestic box office grew to approximately $9.5 billion in 2006, compared to approximately $9.0 billion in 2005 (a 5.5% increase). Although it fluctuates from year to year, the domestic motion picture exhibition industry has grown in revenues and attendance over the past ten years, with box office receipts up 60.5% and admissions up 8.2% from 1996 to 2006. In 2006, domestic admissions rose to approximately 1.45 billion, ending a three year downward trend in ticket sales. Worldwide box office reached an all time high of approximately $25.8 billion in 2006, compared to approximately $23.3 billion in 2005 (an 11% increase).

 

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; Warner Bros.; Twentieth Century Fox; Sony Pictures Entertainment (“Sony”); Paramount Pictures; and The Walt Disney Company. Competitors less

diversified than the major studios include DreamWorks Pictures and DreamWorks Animation SKG, Metro-Goldwyn-Mayer Studios Inc. and New Line Cinema.

 

Independent films have gained wider market approval and increased share of overall box office receipts in recent years. Past successful independent films such as My Big Fat Greek Wedding, Bend It Like Beckham and Crash highlight moviegoers’ willingness to support high quality motion pictures despite limited pre-marketing and production budgets.

 

Product Life Cycle.   Successful motion pictures may continue to play in theaters for more than three months 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 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:

 

 

 

 

Home Video

 

Growth in the home video sector has been driven by increased DVD penetration. According to estimates from the DVD Entertainment Group (“DEG”), a non-profit trade consortium, of the $24.2 billion in overall home video industry revenues during 2006, about $24.1 billion came from DVD sales and rentals (with the remainder being VHS sales and rentals). According to the Motion Picture Association’s US Entertainment Industry: 2006 Market Statistics , DVD players were in 95.7 million U.S. households in 2006, an 85.9% penetration of the television households (up from 82.8% in 2005 and 76.9% in 2004). Declining prices of DVD players, enhanced video and audio quality and special features such as inclusion of previously-deleted scenes, film commentaries and “behind the scenes” footage have all helped increase the popularity of the DVD format, sparking increased home video sales and rentals in recent years.

 

Television Programming

 

Continued growth in the cable and satellite television markets has driven increased demand for nearly all genres of television programming. Veronis Suhler Stevenson (“VSS”) forecasted that overall consumer and advertiser spending on cable and satellite television will grow at 9.9% in 2006 (to $124.3 billion). This segment is forecast to grow at a compound annual growth rate of 8.4% from 2005 to 2010 (to $169.4 billion). Key drivers will include the success of the cable industry’s bundled services, increased average revenue per user, reduced number of participants discontinuing services and accelerated ad spend growth. Increased capacity for channels on upgraded digital cable systems and satellite television has led to the launch of new networks seeking programming to compete with traditional broadcast networks as well as other existing networks.

 

The Company

 

Recent Developments

 

Theatrical Slate Financing.   On May 25, 2007, the Company, through a series of agreements, closed a theatrical slate funding arrangement. Under this arrangement Pride Pictures LLC, an unrelated entity, will fund, generally, 50% of the Company’s production, acquisition, marketing and distribution costs of theatrical feature films up to an aggregate of approximately $204 million before transaction costs (consisting of $35 million of debt instruments, $35 million of equity and $134 million from a senior credit facility, which is subject to a borrowing base). The percentage of the contribution may vary on certain pictures. The slate of films covered by the arrangement is expected to be comprised of 23 films over the next three years. Pride Pictures LLC will participate in a pro rata portion of the pictures net profits or losses similar to a co production arrangement based on the portion of costs funded. The Company continues to distribute the pictures covered by the arrangement with a portion of net profits after all costs and the Company’s distribution fee being distributed to Pride Pictures LLC based on their pro rata contribution to the applicable costs similar to a back-end participation on a film.

 

Production

 

Motion Pictures.   Historically, we have primarily produced English-language motion pictures with production budgets of $35 million or less. Most of our productions have budgets of $20 million or less. Films intended for theatrical release are generally budgeted between $8 million and $35 million (although we are willing to consider larger budgets), and films intended for release directly to video or cable television are generally budgeted between $2.5 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, pay and free television and on-demand services, both domestically and internationally. In fiscal 2007, we produced, participated in the production of or completed or substantially completed principal photography (the phase of film production during which most of the filming takes place) on the following motion pictures:

 

 

The following motion pictures are currently in or slated for production in fiscal 2008:

 

 

 

Our production team has developed a track record for producing reasonably budgeted films with commercial potential. Our production division reviews hundreds of scripts, looking for material that will attract top talent (primarily actors and directors). 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. We believe the commercial and/or critical success of our films should enhance our reputation and continue to give us access to top talent, scripts and projects. We often develop films in targeted niche markets in which we can achieve a sustainable competitive advantage, as evidenced by the successes of our horror films, including the Saw franchise, and our urban films, such as Madea’s Family Reunion.

 

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, theatrical distribution, home entertainment, international distribution, 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 project 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 the projections and financing options, and the committee decides whether the picture is worth pursuing by balancing the risk of a production against its potential for financial success or failure. The final greenlight decision is made by our corporate senior management team, headed by our Chief Executive Officer.

 

We typically seek to mitigate the financial risk associated with film production by negotiating co-production agreements (which provide for joint efforts and cost-sharing between Lionsgate and one or more third-party production companies) and pre-selling international distribution rights on a selective basis (which refers to licensing the rights to distribute a film in one or more media, in one or more specific territories prior to completion of the film). 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 guaranteed amounts to be paid regardless of the film’s success (which we refer to as “up-front payments”). In addition, we use certain Canadian tax credits, German tax structures, United Kingdom subsidy programs, U.S. domestic tax incentives and other structures that may help reduce our financial risk.

 

Television.   During fiscal 2007, we delivered approximately 74 episodes of domestic television programming, one movie of the week and three episodes of the sci-fi mini-series The Lost Room, which aired on The Sci-fi Network. Domestic television programming included one-hour and half-hour dramas, mini-series, animated series and reality and non-fiction programming. We remain a leading non-network affiliated independent producer of television product in the U.S. In fiscal 2008, we intend to have at least seven series on the air, and several mini-series and limited series slated for production.

 

Series.   In fiscal 2007 we delivered:

 

 

In addition to continuing to deliver Weeds (15 episodes) and Wildfire (13 episodes), in fiscal 2008 we intend to deliver the following projects:

 

 

Animation.   We are involved in the development, acquisition, production and distribution of a number of animation projects for full theatrical release, television and DVD release.

 

 

Television Movies, Mini-Series and Specials.   We are actively involved in the development, acquisition, production and distribution of television content in the movie-of-the-week, mini-series and reality special formats. During fiscal 2007, we produced and distributed one movie-of-the-week, The Staircase Murders , for Lifetime Network and three episodes of the sci-fi mini-series The Lost Room, which aired on The Sci-fi Network. In fiscal 2008, we plan to distribute a number of projects, including four celebrity roasts starring Bernie Mac for Comedy Central and Papillon , a four-hour mini-series remake of the classic film. We plan to continue to produce high quality television movies for various outlets, but we intend to focus on limited and mini-series going forward, as we believe that broadcast and cable outlets are re-directing development funds to those formats.

 

Music.   We have recently undertaken to grow the music portion of our business. We actively assess potential music copyright acquisitions. In addition, we service the music needs of other departments within the Company, including assistance with creative matters and licensing. We do not currently generate a significant amount of revenue from our music operations.

 

Distribution

 

Domestic Theatrical Distribution.   We distribute motion pictures directly to U.S. movie theaters. Over the past eight years our releases have included the following in-house productions: Monster’s Ball , starring Halle Berry and Billy Bob Thornton; The Punisher , starring John Travolta and Thomas Jane; Godsend , starring Robert DeNiro, Greg Kinnear and Rebecca Romijn Stamos; Tyler Perry’s Diary of a Mad Black Woman and Madea’s Family Reunion ; the horror film sequels Saw II and Saw III; Akeelah and the Bee , starring Keke Palmer, Laurence Fishburne and Angela Bassett; the documentary Grizzly Man; Crank , starring Jason Statham and Amy Smart; Employee of the Month , starring Dane Cook, Jessica Simpson and Dax Shepherd; the documentary The U.S. vs. John Lennon; and Pride , starring Bernie Mac and Terrence Howard.

 

Motion pictures 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 Cooler , starring Alec Baldwin, William H. Macy and Maria Bello; Girl With A Pearl Earring , starring Scarlett Johannson and Colin Firth; the highly successful horror film Saw; Michael Moore’s Fahrenheit 9/11 , the highest-grossing documentary of all time; Open Water; Lord of War , starring Nicholas Cage; Hostel; Hard Candy ; The Descent ; and Paul Haggis’ Best Picture Academy Award ^® winning tale of race relations in post-9/11 Los Angeles, Crash , starring Don Cheadle, Sandra Bullock, Matt Dillon and Brendan Fraser, among others.

 

In the last nine years, films we have distributed have earned 27 Academy Award ^® nominations and won seven Academy Awards ^® , and have been nominated for and won numerous Golden Globe, Screen Actors Guild, BAFTA and Independent Spirit Awards.

 

Our strategy is to release approximately 18 to 22 titles per year in theaters, which includes our in-house productions, co-productions and acquisitions. Our approach to acquiring films for theatrical release is similar to our approach to film production in that we generally seek to limit our financial exposure while adding films of quality and commercial viability to our release schedule and our video library. The decision 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 as well as corporate senior management. The team meets to discuss a film’s expected critical reaction, marketability, and potential for commercial success, as well as the cost to acquire the picture, the estimated distribution and marketing expenses (typically called “P&A” or “prints and advertising”) required to bring the film to its widest possible target audience and the ancillary market potential for the film after its theatrical release. We have recently begun to release more films on a wider basis, as demonstrated by the theatrical releases of such films as Fahrenheit 9/11, Open Water, the Saw franchise , Madea’s Family Reunion, Lord of War, Crash, Employee of the Month and Crank.

 

We generally prepare our marketing campaign and release schedules to minimize financial exposure while maximizing revenue potential. 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 on P&A for a given film than a major studio and we design our marketing plan to cost effectively reach a large audience.

 

Our remaining fiscal 2008 theatrical release schedule may include (in anticipated order of release):

 

 

 

 

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, that the film will ever be released, or that the motion pictures will necessarily involve any of the creative talent listed above.

 

International Distribution.   Our international division, Lions Gate International (“LGI”), distributes our in-house productions and third party acquisitions to the international marketplace, both on a territory by territory basis through third parties, and directly in the United Kingdom and Ireland through Lionsgate UK. International territories are often pre-sold to cover a significant portion of the production budget or acquisition cost on new releases, and we have licensed international rights for approximately 1,200 of the motion picture titles and television episodes in our library.

 

The primary components of our international business are (1) the licensing of rights in all media to our in-house theatrical titles on a territory by territory basis, and (2) the licensing of catalogue product or libraries of acquired titles (such as Modern). We have also leveraged our infrastructure to generate revenue through a sales agency business for third party product, and we have expanded our sales and distribution of original Lionsgate television series such as Weeds, Wildfire and Dresden Files.

 

As part of our ongoing effort to expand our global footprint in certain strategic markets, LGI now includes Lionsgate UK, a self-sustaining, full service distribution company serving the United Kingdom and Ireland. In addition to gaining greater control over releases and capturing incremental margin on our direct-to-video product such as Marvel’s The Invincible Iron Man , Lionsgate UK is expected to release 15-16 films theatrically in fiscal 2008, with titles including Best Foreign Picture Academy Award ^® Winner The Lives of Others and the documentary Earth. Lionsgate UK and Optimum Releasing/StudioCanal recently announced an executed letter of understanding to jointly acquire British home entertainment sales house Elevation Sales. Elevation Sales will handle the joint sales and distribution of DVD product for both Lionsgate UK and Optimum Home Entertainment.

 

Home Video Distribution.   Our U.S. video distribution operation aims to exploit our filmed and television content library of more than 10,000 motion picture titles and television episodes and programs. We have established a track record for building on the awareness generated from our theatrical releases and have developed strong positions in children’s, fitness, horror, urban, teen comedy and faith-based product. We increased our overall market share of combined sell-through and rental consumer spend to approximately 5.5%. In fiscal 2007, Lionsgate had two theatrical releases debut at number one with Crank and Saw III , along with the top two fitness releases of the year ( Dancing With The Stars: Cardio Dance and The Biggest Loser — The Workout, Vol. 2 ). Additionally, over the past year, our Saw franchise became the number one horror franchise in DVD history, and Lionsgate is currently the top studio in the genre with a horror DVD market share of approximately 33%.

 

Furthermore, Lionsgate is a part of the Blu-ray consortium, and during fiscal 2007 we held an 11.6% market share of Blu-ray revenue. Among the highlights for our Blu-ray product are the 50 gigabyte releases for The Descent and Crank , the latter being the top-selling Blu-ray title its opening week and at the time the second largest Blu-ray debut ever (subsequently surpassed).

 

In addition to our approximately 18 to 22 theatrical releases each year, we also acquire approximately 65 titles annually that have commercial potential in video and ancillary markets, adding a total of approximately 80 films to our library each year including National Lampoon’s Dorm Daze 2 — College @ Sea starring Vida Guerra, Stephen King’s Desperation , the sequel to the original Japanese horror classic, Ju-On 2 , and Man About Town

starring Ben Affleck and Rebecca Romijn. We distribute successful television product on video, including the Saturday Night Live product currently in our library, the first season of the popular Showtime series  Weeds , starring Mary-Louise Parker, Elizabeth Perkins and Kevin Nealon, the fourth and fifth seasons of the Bruce Willis and Cybill Shepherd hit comedy series  Moonlighting , and the fifth and sixth seasons of the NBC hit comedy series  Will and Grace. We also released a 15th Anniversary edition of Quentin Tarantino’s Reservoir Dogs , starring Michael Madsen and Harvey Keitel, special editions of the top-selling Saw I and Saw II releases, and a remastered Alfred Hitchcock Box Set from our recently acquired StudioCanal library.

 

In 2004, we entered into an agreement with Marvel Characters, Inc. to distribute up to eight original animated DVD features based on certain Marvel characters. We also have the right to exploit the pictures in other entertainment media domestically and internationally, including pay and free television and video-on-demand. In the past 12 months we released the second and third titles in the series — Ultimate Avengers 2 and The Invincible Iron Man  — which have sold approximately 1.3 million units.

 

We directly distribute to the rental market through Blockbuster, Inc., Netflix, Inc., Movie Gallery, Inc., and Rentrak Corporation. We also distribute or sell directly to mass merchandisers, such as Wal-Mart, K-Mart, Best Buy Co Inc., Target Corporation and Costco Wholesale Corporation, and others who buy large volumes of our videos and DVDs to sell directly to consumers. Sales to Wal-Mart account for over 10% of our gross revenues, the loss of which could have a material adverse effect on our financial results. This customer represented approximately 22% of the Company’s Consolidated Net Revenue for fiscal 2007.

 

Our Family Entertainment division, which targets the youth audience, recently acquired the home entertainment rights to the popular Bratz brand. In February we released the first title — Bratz Fashion Pixiez  — which outsold the previous two Bratz releases. We also continue to distribute the PBS series  Clifford the Big Red Dog from Scholastic Entertainment, The Doodlebops , the popular children’s band featured in its own series on the Disney Channel, along with a catalog of Care Bears and Teenage Mutant Ninja Turtles releases.

 

In the past year, Lionsgate has significantly increased its market share in faith-based product, buoyed by the successful Tyler Perry franchise, which has sold over 18 million DVDs in the past two years. In March, we increased our influence in this area through distribution deals with the world’s leading Christian publisher, Thomas Nelson , and leading Christian non-fiction author Lee Strobel.

 

With over 12% market share in fitness DVD revenue, Lionsgate has a lineup that includes top-sellers Denise Austin , The Biggest Loser and Dancing With The Stars.

 

Pay and Free Television Distribution.   We have approximately 480 titles in active distribution in the domestic cable, free and pay television markets. We sell our library titles and new product to major cable channels such as Lifetime, Showtime, HBO, FX, Turner Networks, Starz, Family Channel, Disney Channel, Cartoon Network and IFC. Commencing August 1, 2006, we began direct distribution of pay-per-view and video-on-demand to cable, satellite and internet providers. We also have an output contract with Showtime for pay television.

 

Canadian Distribution.   In April 2005, we entered into a library output and new picture output arrangement with Maple Pictures. When the 18 year term ends for titles which were distributed under the Motion Picture Distribution LP output agreement, we intend to distribute titles previously distributed in Canada by Motion Picture Distribution LP through Maple Pictures.

 

Electronic Distribution.   We own a minority interest in CinemaNow, a broadband video-on-demand company founded in 1999. CinemaNow offers licensed content from a library of more than 7,500 new and classic movies, television programs, music concerts and music videos via downloading or streaming. In 2006, CinemaNow introduced electronic-sell-through of media content, meaning users can purchase and take delivery of the content online. Lionsgate content is also available for electronic-sell-through on the Apple iTunes, Microsoft Xbox LIVE, Amazon, Fox Interactive, Direct2Drive, MovieLink, BitTorrent and Wal-Mart Online services. In October 2006, the Company, Sony and Comcast each purchased one-third of the membership interests in Horror Entertainment, LLC, a multiplatform programming and content service provider of horror genre films operating under the brand name of “FEARnet.” In addition, we entered into a five-year license agreement with FEARnet for the US territories and possessions, whereby the Company will license content to FEARnet for video-on-demand and broadband exhibition.

 

Studio Facilities

 

We rent studio space on an as-needed basis. We previously owned and operated Lions Gate Studios, a film and television production studio in North Vancouver, British Columbia, but sold such interest in March 2006. We may own and operate studio facilities in the future.

 

Intellectual Property

 

We are currently using a number of trademarks including “LIONS GATE ENTERTAINMENT,” “LIONS GATE HOME ENTERTAINMENT,” “ARTISAN HOME ENTERTAINMENT,” “FAMILY HOME ENTERTAINMENT,” “TRIMARK HOME VIDEO,” “DIRTY DANCING,” “THE BLAIR WITCH PROJECT” and “RESERVOIR DOGS” in connection with our domestic home video distribution, “LIONS GATE FILMS,” “LGF FILMS,” “ARTISAN ENTERTAINMENT” and “TRIMARK PICTURES” in connection with films distributed domestically and licensed internationally and “LIONS GATE TELEVISION,” “TRIMARK TELEVISION” and “DEBMAR/MERCURY” in connection with licenses to free, pay and cable television.

 

 

RISK FACTORS

 

You should carefully consider the following risks and other information in this Form 10-K before making an investment decision with respect to our common shares. The following risks and uncertainties could materially adversely affect our business, results of operations and financial condition. The risks described below are not the only ones facing the Company. Additional risks that we are not presently aware of or that we currently believe are immaterial may also impair our business operations.

 

We have had losses, and we cannot assure future profitability.

 

We have reported operating income for fiscal years 2003, 2005, 2006 and 2007 and operating losses for fiscal years 2002 and 2004. We have reported net income for fiscal 2005, 2006 and 2007 and net losses for the fiscal years 2002 through 2004. Our accumulated deficit was $149.7 million at March 31, 2007. We cannot assure you that we will operate profitably and, if we do not, we may not be able to meet our debt service requirements, working capital requirements, capital expenditure plans, anticipated production slate, acquisition and releasing plans 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 financing sources. Although we intend to continue to reduce the risks of our production exposure through financial contributions from broadcasters and distributors, tax shelters, government and industry programs, other studios and other sources, 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 (through internal growth or acquisition) our production slate or our production budgets, we may be required to increase overhead and/or 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 and financial condition.

 

The costs of producing and marketing feature films have steadily increased and may further increase in the future, which may make it more difficult for a film to generate a profit or compete against other films.   The costs of producing and marketing feature films have generally increased in recent years. These costs may continue to increase in the future, which may make it more difficult for our films to generate a profit or compete against other films. Historically, production costs and marketing costs have risen at a higher rate than increases in either the number of domestic admissions to movie theaters or admission ticket prices. A continuation of this trend would leave us more dependent on other media, such as home video, television, international markets and new media for revenue, and the revenues from such sources may not be sufficient to offset an increase in the cost of motion picture production. If we cannot successfully exploit these other media, it 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 the production of our motion pictures and television programs. Actual motion picture and television production costs often exceed their budgets, 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 and 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.

 

Our credit facility contains certain covenants and financial tests that limit the way we conduct business.   Our $215 million credit facility with J.P. Morgan Chase Bank, National Association 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, make acquisitions and sell assets. These covenants may prevent us from raising additional financing, competing effectively or taking advantage of new business opportunities. Under our 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 a default under our credit facility, and unless we are able to negotiate an amendment, forbearance or waiver, we could be required to repay all amounts then outstanding, which could have a material adverse effect on our business, results of operations and financial condition depending upon our outstanding balance at the time.

 

Borrowings under our credit facility also are secured by liens on substantially all of our assets and the assets of our subsidiaries. If we are in default under our credit facility, the lenders could foreclose upon all or 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.

 

Substantial leverage could adversely affect our financial condition.   Historically, we have been highly leveraged and may be highly leveraged in the future. We have access to capital through our $215 million credit facility with J.P. Morgan Chase Bank, National Association. In addition, we have $325 million Convertible Senior Subordinated Notes outstanding, with $150 million maturing October 15, 2024 and $175 million maturing March 15, 2025. At March 31, 2007, we had approximately $51.5 million in cash and cash equivalents and $237.4 million in highly liquid investments, principally auction rate preferreds. While the outstanding balance under our credit facility is currently zero, we could borrow some or all of the permitted amount in the future. 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 held in collateral accounts. If several of our larger motion picture releases 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 and financial condition. For example, it could:

 

 

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. Furthermore, largely as a result of these predictive difficulties, we may not be able to achieve our publicly projected earnings. In fiscal 2006, we revised our projected earnings downward twice. Future revisions to projected earnings could cause investors to lose confidence in us, which in turn could materially and adversely affect our business, our financial condition and the market value of our securities.

 

In addition, historically, our revenues and results of operations have been significantly impacted by the success of critically acclaimed and award 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 (including any films in the Saw or Tyler Perry franchises) as successfully as we have done with these recent critically acclaimed, award winning and/or commercially popular films or that we will produce or acquire motion pictures that will receive similar critical acclaim or perform as well commercially. Any inability to achieve such commercial success 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 had an agreement with one cable broadcast channel to exhibit our films, but that agreement does not cover films released theatrically after 2003. We have an output arrangement with another cable broadcast channel that covers some but not all of our films that are theatrically released through December 31, 2008. 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 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 and financial condition.

 

We rely on a few major retailers and distributors for a material portion of our business and the loss of any of those retailers or distributors could reduce our revenues and operating results.   Wal-Mart represented over 10% of our revenues in fiscal 2007. In addition, a small number of other retailers and distributors account for a significant percentage of our revenues. We do not have long-term agreements with the retailers. We cannot assure you that we will continue to maintain favorable relationships with our retailers and distributors or that they will not be adversely affected by economic conditions. If any of these retailers or distributors reduces or cancels a significant order, it could have a material adverse effect on our business, results of operations and 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 is earned outside of the United States. Our principal currency exposure is between Canadian and U.S. dollars. We enter into forward foreign exchange contracts to hedge future production expenses. We cannot accurately predict the impact of future exchange rate fluctuations on revenues and operating margins, and fluctuations could have a material adverse effect on our business, results of operations and 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 U.S. 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 asset to its 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.

 

Failure to manage future growth may adversely affect our business.

 

We are subject to risks associated with possible acquisitions, business combinations, or joint ventures.   From time to time we engage in discussions and activities with respect to possible acquisitions, business combinations, or joint ventures intended to complement or expand our business. We may not realize the anticipated benefit from any of the transactions we pursue. Regardless of whether we consummate any such transaction, the negotiation of a potential transaction (including associated litigation and proxy contests), as well as the integration of the acquired business, could require us to incur significant costs and cause diversion of management’s time and resources. Any such transaction could also result in impairment of goodwill and other intangibles, development write-offs and other related expenses. Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.

 

We may be unable to integrate any business that we acquire or have acquired or with which we combine or have combined.   Integrating any business that we acquire or have acquired or with which we combine or have combined is distracting to our management and disruptive to our business and may result in significant costs to us. We could face challenges in consolidating functions and integrating procedures, information technology and accounting systems, personnel and operations in a timely and efficient manner. If any such integration is unsuccessful, or if the integration takes longer than anticipated, there could be a material adverse effect on our business, results of operations and financial condition. We may have difficulty managing the combined entity in the short term if we experience a significant loss of management personnel during the transition period after the significant acquisition.

 

Claims against us relating to any acquisition or business combination may necessitate our seeking claims against the seller for which the seller may not indemnify us or that may exceed the seller’s indemnification obligations.   There may be liabilities assumed in any acquisition or business combination that we did not discover or that we underestimated in the course of performing our due diligence investigation. Although a seller generally will have indemnification obligations to us under an acquisition or merger agreement, these obligations usually will be subject to financial limitations, such as general deductibles and maximum recovery amounts, as well as time limitations. We cannot assure you that our right to indemnification from any seller will be enforceable, collectible or sufficient in amount, scope or duration to fully offset the amount of any undiscovered or underestimated liabilities that we may incur. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, results of operations and financial condition.

 

We may not be able to obtain additional funding to meet our requirements.   Our ability to grow 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 and financial condition.

 

We face risks related to our theatrical slate financing arrangement.

 

On May 25, 2007, the Company, through a series of agreements, closed a theatrical slate financing arrangement whereby Pride Pictures LLC, an unrelated entity, will provide the Company with an aggregate of up to $204 million before transaction costs (consisting of $35 million of debt instruments, $35 million of equity and $134 million from a senior credit facility, which is subject to a borrowing base) of the production, acquisition,

marketing and distribution costs of certain theatrical feature films. The slate covered by the arrangement is expected to be comprised of 23 films over the next three years. Amounts contributed by Pride Pictures LLC will generally represent approximately 50% of the production, acquisition, marketing and distribution costs of each qualifying theatrical feature film. The percentage of the contribution may vary on certain pictures. Pride Pictures LLC will participate in a pro rata portion of the pictures’ net profits or losses similar to a co-production arrangement based on the portion of costs funded.

 

The funding obligations are subject to a borrowing base calculation and certain conditions precedent. In addition, the fund may have insufficient capacity to finance its share of all pictures in the slate. Some of the investors may default. If for any reason Pride Pictures LLC does not meeting its funding requirements under the arrangement, the Company will have to use other financial resources to satisfy the shortfall, which could have a material adverse effect on our business, results of operations and financial condition.

 

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 the 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 and 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 that any failure to renew titles generating a significant portion of our revenue would not have a material adverse effect on our 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 inherently 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. 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 programs or related products or to promote our competitors’ motion pictures, television programs or related products to a greater extent than they promote ours could have a material adverse effect on our business, results of operations and financial condition.

 

We could be adversely affected by strikes or other union job actions.   We are directly or indirectly dependent upon highly specialized union members who are essential to the production of motion pictures and television programs. A strike by, or a lockout of, 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 and financial condition.

 

We face substantial competition in all aspects of our business.

 

We are smaller and less diversified than many of our competitors.   As 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 the 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. Our inability to compete successfully 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 theater 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 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 and financial condition.

 

We must successfully respond to rapid technological changes and alternative forms of delivery or storage to remain competitive.

 

The entertainment industry in general and the motion picture and television industries in particular continue to undergo significant technological developments. Advances in technologies or alternative methods of product delivery or storage or certain changes in consumer behavior driven by these or other technologies and methods of delivery and storage could have a negative effect on our business. Examples of such advances in technologies include video-on-demand, new video formats and downloading and streaming from the internet. An increase in video-on-demand could decrease home video rentals. In addition, technologies that enable users to fast-forward or skip advertisements, such as Digital Video Recorders (DVRs), may cause changes in consumer behavior that could affect the attractiveness of our products to advertisers, and could therefore adversely affect our revenues. Similarly, further increases in the use of portable digital devices that allow users to view content of their own choosing while avoiding traditional commercial advertisements could adversely affect our revenues. Other larger entertainment distribution companies will have larger budgets to exploit these growing trends. While we have a minority interest in CinemaNow, its 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 and financial condition.

 

In addition, the technologies we choose to invest in could prove to be less successful than we expect. For example, we have released and will continue to release titles in high-definition Blu-ray Disc format, which could negatively impact our business if that format is not generally accepted by the public.

 

We face risks from doing business internationally.

 

We distribute motion picture and television productions outside the United States directly in the UK and Ireland through Lionsgate UK and through third party licensees elsewhere 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:

 

 

Events or developments related to these and other risks associated with international trade could adversely affect our revenues from non-U.S. sources, which could have a material adverse effect on our business, financial condition and results of operations.

 

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 or 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 and 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 and financial condition. We cannot assure you that infringement or invalidity claims will not materially adversely affect our business, results of operations and 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 and financial condition.

 

Others may assert intellectual property infringement claims against us.

 

One of the risks of the film production business is the possibility that others may claim that our productions and production techniques misappropriate or infringe the intellectual property rights of third parties with respect to their previously developed films, stories, characters, other entertainment or intellectual property. We are likely to receive in the future claims of infringement or misappropriation of other parties’ proprietary rights. Any such assertions or claims may materially adversely affect our business, financial condition or results of operations. Irrespective of the validity or the successful assertion of such claims, we could incur significant costs and diversion of resources in defending against them, which could have a material adverse effect on our business, financial condition or results of operations. If any claims or actions are asserted against us, we may seek to settle such claim by obtaining a license from the plaintiff covering the disputed intellectual property rights. We cannot provide any assurances, however, that under such circumstances a license, or any other form of settlement, would be available on reasonable terms or at all.

 

Our business involves risks of liability claims for media content, which could adversely affect our business, results of operations and financial condition.

 

As a distributor of media content, we may face potential liability for:

 

 

These types of claims have been brought, sometimes successfully, against producers and distributors of media content. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on our business, results of operations and 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, and is made easier by technological advances and the conversion of motion pictures into digital formats. This trend facilitates the creation, transmission and sharing of high quality unauthorized copies of motion pictures in theatrical release, on videotapes and DVDs, from pay-per-view through set top boxes and other devices and through unlicensed broadcasts on free television and the internet. The proliferation of unauthorized copies of these products has had and will likely continue to have an

adverse effect on our business, because these products reduce the revenue we received from our products. Additionally, in order to contain this problem, we may have to implement elaborate and costly security and anti-piracy measures, which could result in significant expenses and losses of revenue. We cannot assure you that even the highest levels of security and anti-piracy measures will prevent piracy.

 

In particular, unauthorized copying and piracy are prevalent in countries outside of the U.S., Canada and Western Europe, whose legal systems may make it difficult for us to enforce our intellectual property rights. While the U.S. government has publicly considered implementing trade sanctions against specific countries that, in its opinion, do not make appropriate efforts to prevent copyright infringements of U.S. produced motion pictures, there can be no assurance that any such sanctions will be enacted or, if enacted, will be effective. In addition, if enacted, such sanctions could impact the amount of revenue that we realize from the international exploitation of motion pictures. If no embargoes or sanctions are enacted, or if other measures are not taken, we may lose revenue as a result of motion picture piracy.

 

An investment by non-Canadians in our business is potentially reviewable under the ICA, which could adversely affect our results.

 

The Investment Canada Act (Canada) or ICA is administered by the Minister of Industry and, in the case of investments in a Canadian cultural business, by the Minister of Canadian Heritage (both referred to herein as the “Minister”). A “Canadian cultural business” is defined in the ICA as a business activity relating to Canada’s cultural heritage or national identity, and includes a business engaged in the production, distribution, sale or exhibition of film or video products.

 

The ICA contains rules, the application of which determines whether an entity (as the term is defined in the ICA) is Canadian-controlled and whether it carries on a Canadian cultural business. We may or may not be operating a Canadian cultural business for the purposes of the ICA. Under the ICA, the Minister 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 Canadian 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.

 

If the Minister exercises such 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, some of which restrict or prohibit investments by non-Canadians in certain types of Canadian cultural businesses.

 

Our success depends on certain key employees.

 

Our success depends to a significant extent on the performance of a number of senior management personnel and other key employees, including production and creative personnel. We do not currently have significant “key person” life insurance policies for any of our employees. We have entered into employment agreements with many (but not all) of our top executive officers and production executives. However, although it is standard in the motion picture industry to rely on employment agreements as a method of retaining the services of key employees, these agreements cannot assure us of the continued services of such employees. In addition, competition for the limited number of business, production and creative personnel necessary to create and distribute our entertainment content is intense and may grow in the future. Our inability to retain or successfully replace where necessary members of our senior management and other key employees could have a material adverse effect on our business, results of operations and financial condition.

 

To be successful, we need to attract and retain qualified personnel.

 

Our success continues to depend to a significant extent on our ability to identify, attract, hire, train and retain qualified professional, creative, technical and managerial personnel. Competition for the caliber of talent required to produce our motion pictures and television programs continues to increase. We cannot assure you that we will be successful in identifying, attracting, hiring, training and retaining such personnel in the future. If we were unable to hire, assimilate and retain qualified personnel in the future, such inability would have a material adverse effect on our business, results of operations and financial condition.

 

Not applicable.

 

The Company is involved in certain claims and legal proceedings which have arisen in the normal course of business. Management does not believe that the outcome of any currently pending claims or legal proceedings in which the Company is currently involved will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flow.

 

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2007.

PART II

 

Our common shares are listed on the New York Stock Exchange, or NYSE, and trades under the symbol “LGF.”

 

 

Holders

 

As of May 15, 2007, there were 116,988,567 shares issued and outstanding and 430 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 amended credit facility 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 may be limited in our ability to pay dividends on our common shares by restrictions under the Business Corporations Act (British Columbia) relating to the satisfaction of solvency tests.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The information required by this item is contained under the caption “Equity Compensation Plan Information for 2007” in a definitive Proxy Statement, which we will file with the Securities and Exchange Commission no later than 120 days after March 31, 2007 (the “Proxy Statement”), and such information is incorporated herein by reference.

 

Recent Sales of Unregistered Securities

 

On March 31, 2006, Lionsgate completed a private exchange with certain shareholders of Image Entertainment, Inc. whereby Lionsgate issued 218,746 common shares with a value as of March 31, 2006 of approximately $2,220,272, or $10.15 per share (the “IM Shares”), in consideration of the purchase of certain of their shares in Image Entertainment, Inc. The IM Shares were not registered under the Securities Act and were issued in reliance on an exemption from registration provided by Rule 506 of Regulation D of the Securities Act.

 

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, 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 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. Canadian withholding tax applies to dividends that are formally declared and paid by the Company and also to deemed dividends that may be triggered by a cancellation of common shares if the cancellation occurs otherwise than as a result of a simple open market transaction. For either deemed or actual dividends, 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%.

 

In addition to the Canadian withholding tax on actual or deemed dividends, a U.S. holder also needs to consider the potential application of Canadian capital gains tax. 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 on the open market) unless at the time of disposition such shares constitute taxable Canadian property of the holder for purposes of the Income Tax Act (Canada) and such U.S. Holder is not entitled to relief under the Convention. 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, she or it 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.

Comparison of 5 Year Cumulative Total Shareholder Return

 

The following graph compares our cumulative total shareholder return with those of the NYSE Composite Index and the S&P Movies & Entertainment Index for the period commencing March 31, 2002 and ending March 31, 2007. All values assume that $100 was invested on March 31, 2002 in our common shares and each applicable index and all dividends were reinvested.

 

The comparisons shown in the graph below are based on historical data and we caution that the stock price performance shown in the graph below is not indicative of, and is not intended to forecast, the potential future performance of our common shares.

 

 

 

The consolidated financial statements for all periods presented in this Form 10-K are prepared in conformity with U.S. generally accepted accounting principles.

 

The Selected Consolidated Financial Data below include the results of Artisan, Lionsgate UK (formerly Redbus) and Debmar from their acquisition dates of December 16, 2003, October 17, 2005 and July 3, 2006, respectively, onwards. Due to the acquisitions, the Company’s results of operations for the year ended March 31, 2007, 2006 and 2005 and financial positions as at March 31, 2007, 2006, 2005 and 2004 are not directly comparable to prior reporting periods.

 

The information presented in the table below has been adjusted to reflect the Studio Facility as a discontinued operation as described in note 12 of our Notes to the Financial Statements included in this Form 10-K.

 

 

Revision to Present the Studio Facility as a Discontinued Operation

 

The Company’s consolidated statements of income for all years presented have been revised to reflect the gain on sale of the studio facility and all revenues and expenses of the studio facility net within the discontinued operations section of the consolidated statements of income. Similarly, the Company’s statements of cash flows have been revised to distinguish the cash flows of continuing operations from cash flows from discontinued operations.

 

There is no change to reported net income or loss, retained earnings or equity as previously reported for any period presented.

 

Overview

 

Lions Gate Entertainment Corp. (“Lionsgate,” the “Company,” “we,” “us” or “our”) is a diversified independent producer and distributor of motion pictures, television programming, home entertainment, family entertainment, video-on-demand and music content. We release approximately 18 to 22 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 approximately 77 hours of television programming on average each of the last three years. Our disciplined approach to acquisition, production and distribution is designed to maximize our profit by balancing our financial risks against the probability of commercial success of each project. We currently distribute our library of more than 10,000 motion picture titles and television episodes and programs directly to retailers, video rental stores, and pay and free television channels in the US, UK and Ireland, and indirectly to other international markets through third parties. We own a minority interest in CinemaNow, Inc. (“CinemaNow”), an internet video-on-demand provider. We also own a minority interest in Maple Pictures Corp. (“Maple Pictures”), a Canadian film and television distributor based in Toronto, Canada. We have an output arrangement with Maple Pictures through which we distribute our library and titles in Canada.

 

A key element of our strategy is to acquire individual properties, including films and television programs, libraries, and entertainment studios and companies, to enhance our competitive position and generate significant financial returns. During previous periods, we acquired and integrated into our business: Lionsgate UK (formerly Redbus) (October 2005), an independent United Kingdom film distributor, which provided us the ability to self-distribute our motion pictures in the UK and Ireland and included the acquisition of the Redbus library of approximately 130 films; certain of the film assets and accounts receivable of Modern Entertainment, Ltd. (August 2005), a licensor of film rights to DVD distributors, broadcasters and cable networks; Artisan Entertainment Inc. (December 2003), a diversified motion picture, family and home entertainment company; and Trimark Holdings, Inc. (October 2000), a worldwide distributor of entertainment content that distributed directly in the US and through third parties to the rest of the world. During fiscal 2007 (in July 2006), we acquired Debmar-Mercury, an independent syndicator of film and television packages.

 

Our revenues are derived from the following business segments:

 

 

Our primary operating expenses include the following:

 

 

Our financial results include the results of Artisan, Lionsgate UK (formerly Redbus) and Debmar from their acquisition dates of December 16, 2003, October 17, 2005 and July 3, 2006, respectively, onwards. Due to the acquisitions, the Company’s results of operations for the years ended March 31, 2007, 2006 and 2005 and financial positions as at March 31, 2007 and 2006 are not directly comparable to prior reporting periods.

 

Recent Developments

 

Theatrical Slate Financing.   On May 25, 2007, the Company, through a series of agreements, closed a theatrical slate funding arrangement. Under this arrangement Pride Pictures LLC, an unrelated entity, will fund, generally, 50% of the Company’s production, acquisition, marketing and distribution costs of theatrical feature films up to an aggregate of approximately $204 million before transaction costs (consisting of $35 million of debt instruments, $35 million of equity and $134 million from a senior credit facility, which is subject to a borrowing base). The percentage of the contribution may vary on certain pictures. The slate of films covered by the arrangement is expected to be comprised of 23 films over the next three years. Pride Pictures LLC will participate in a pro rata portion of the pictures net profits or losses similar to a co production arrangement based on the portion of costs funded. The Company continues to distribute the pictures covered by the arrangement with a portion of net profits after all costs and the Company’s distribution fee being distributed to Pride Pictures LLC based on their pro rata contribution to the applicable costs similar to a back-end participation on a film.

 

Horror Entertainment, LLC.   On October 10, 2006, the Company purchased 300 membership interests in Horror Entertainment, LLC (“FEARnet”), a multiplatform programming and content service provider of horror genre films operating under the branding of “FEARnet.” In addition, the Company entered into a five-year license agreement with FEARnet for the US territories and possessions whereby the Company will license content to FEARnet for video-on-demand and broadband exhibition. The Company has agreed not to compete in the area of a channel within the horror genre and the Company cannot license to a horror genre competitor more than 25 titles in any year during the term of the license agreement. The Company made a capital contribution to FEARnet of $5.1 million at the date of acquisition, which includes direct transaction costs of $0.1 million, and has committed to a total capital contribution of $13.3 million, which is expected to be fully funded over the next two-year period. Under certain circumstances, if the Company defaults on any of its funding obligations, then the Company could forfeit its equity and its license agreement with FEARnet could be terminated. The Company is accounting for the investment in FEARnet using the equity method because of the Company’s ownership percentage of 33.33%. Due to the timing in availability of financial statements from FEARnet, the Company will record its share of the FEARnet results on a one quarter lag. The Company recorded a $1.5 million loss in its equity interests associated with FEARnet’s operations through December 31, 2006 in the consolidated statement of operations for the fiscal year ended March 31, 2007. The investment in FEARnet is $3.6 million as of March 31, 2007.

 

4.875% Notes Conversion.   On December 15, 2006, in response to our optional redemption notice, all of the noteholders of the 4.875% Convertible Senior Subordinated Notes (“4.875% Notes”) voluntarily elected to convert their notes into the Company’s common shares. A total of $60 million of principal was converted into 11,111,108 common shares at a conversion price of $5.40 per share. In connection with this conversion, the principal amount net of the unamortized portion of the financing costs of approximately $2.1 million associated with the original issuance of the 4.875% Convertible Senior Subordinated Notes was recorded as an increase to common shares. The shares issued pursuant to the conversion were previously reserved for such issuance pursuant to the conversion.

 

Debmar.   On July 3, 2006, the Company acquired all of the capital stock of Debmar-Mercury LLC (“Debmar”), an independent distributor of film and television packages. Consideration for the Debmar acquisition was $27.0 million, comprised of a combination of $24.5 million in cash paid on July 3, 2006 and up to $2.5 million in common shares of the Company to be issued on January 1, 2008 if there are no breaches requiring indemnification by the seller of certain representations and warranties made by the seller. An additional $0.2 million has been incurred in acquisition costs. In addition, the Company assumed other obligations (including accounts payable and accrued liabilities and film obligations) of $10.5 million. The $2.5 million of shares to be issued has been recorded as part of the purchase consideration and reflected as a liability. If no incremental liabilities become known by January 1, 2008, then the shares will be issued and the $2.5 million will be reclassified to equity. The purchase price may be adjusted for the payment of additional consideration contingent on the financial performance of Debmar for the five-year period ending June 30, 2011. The Debmar acquisition provides the Company with the

rights to distribute certain television properties, such as the television series  South Park, and provides the Company with an experienced management team to further enhance its capacity to syndicate its own and others’ television programming and feature film packages.

 

The Debmar acquisition was accounted for as a purchase, with the results of operations of Debmar consolidated from July 3, 2006. Goodwill of $8.7 million represents the excess of purchase price over the fair value of the net identifiable tangible and intangible assets acquired.

 

CinemaNow.   At March 31, 2006, the Company had a 30% equity interest on an undiluted basis in CinemaNow, Inc. (“CinemaNow”). The investment in CinemaNow is accounted for using the equity method. The investment in CinemaNow on our consolidated balance sheet was nil at March 31, 2006. In June 2006, the Company purchased $1.0 million Series E Preferred Stock as part of a $20.3 million round of financing secured by CinemaNow. At March 31, 2007, the Company’s equity interest in CinemaNow is 18.8% on a fully diluted basis and 21.1% on an undiluted basis. The Company recorded a $1.0 million loss in its equity interests associated with CinemaNow’s operations through December 31, 2006. The investment in CinemaNow on our consolidated balance sheet was nil as of March 31, 2007.

 

Maple Pictures Corp.   On April 8, 2005, we entered into library and output agreements with Maple Pictures, a Canadian corporation, for the distribution of Lionsgate’s motion picture, television and home video product in Canada. Maple Pictures was formed by two former Lionsgate executives and a third-party equity investor. We also acquired a minority interest in Maple Pictures. The investment in Maple Pictures on our consolidated balance sheet was $1.8 million as of March 31, 2007.

 

Modern Entertainment.   On August 17, 2005, the Company acquired certain of the film assets, which included approximately 300 titles, and accounts receivable of Modern, a licensor of film rights to DVD distributors, broadcasters and cable networks, for total consideration of $7.3 million, comprised of $3.5 million in cash and 399,042 of the Company’s common shares valued at $3.8 million. In addition, the Company recorded $0.2 million in direct transaction costs comprised primarily of legal costs incurred in connection with the purchased assets. The allocation of the Modern purchase price to the tangible assets acquired was $5.3 million to investment in films and television programs and $2.2 million to accounts receivable.

 

Image.   During the fiscal year ended March 31, 2006, the Company purchased 4,033,996 common shares of Image Entertainment, Inc. (“Image”) at an average cost of $3.72 and a total cost of $15.0 million. In October 2005, the Company proposed to purchase 100% of Image’s outstanding common shares for $4.00 per share in cash. This proposal was rejected by a special committee of Image’s board of directors. The Company also engaged in a proxy contest with Image through its nomination of independent nominees to replace Image board members. Image’s stockholders did not elect the Company’s independent nominees. The Company subsequently made the following sales of Image common shares, resulting in the sale of all 4,033,996 common shares: (1) on March 13, 2007, the Company sold 112,500 shares at an average price of $3.17; (2) on March 14, 2007, the Company sold 11,000 shares at an average price of $3.09; and (3) on March 30, 2007, the Company sold 3,910,496 shares at an average price of $4.21. The Company’s total sale price for the Image common shares was approximately $16.7 million, resulting in a gain of approximately $1.7 million.

 

Redbus.   On October 17, 2005, the Company acquired all outstanding shares of Redbus, an independent film distributor located in the United Kingdom. Consideration for the Redbus acquisition was $35.5 million, comprised of a combination of $28.0 million in cash, $6.4 million in Lionsgate common shares and direct transaction costs of $1.1 million. In addition, the Company assumed other obligations (including accounts payable and accrued liabilities and film obligations) of $18.1 million. At the closing of the transaction the Company issued 643,460 common shares to the seller, Redbus Group Limited (“RGL”), valued at approximately $5.6 million, or $8.77 per share. The Company issued an additional 94,937 common shares to RGL valued at approximately $0.8 million upon satisfaction of the terms of the escrow agreement, which terminated in May 2007. This acquisition provided the Company with a library of approximately 130 films. In addition the acquisition provided the Company the capability to distribute its product directly to each market in the United Kingdom and Ireland rather than selling to distributors in those markets. Effective October 17, 2005, the Company’s credit facility was amended in connection with the acquisition of Redbus, to make available a portion of the credit facility for borrowing by Redbus in either U.S. dollars or British pounds sterling.

 

The Redbus acquisition was accounted for as a purchase, with the results of operations of Redbus consolidated from October 17, 2005. Goodwill of $26.3 million represents the excess of purchase price over the fair value of the net identifiable tangible and intangible assets acquired.

 

Lionsgate Studios.   On March 15, 2006, the Company sold its studio facilities located in Vancouver, British Columbia. The purchase price of $35.3 million (net of commissions) was paid in cash. Certain assets, including, cash and accounts receivable, were excluded from the transaction. At March 15, 2006, the carrying value of studios’ property and equipment sold in the agreement was $28.3 million and was comprised primarily of land and buildings, with carrying values of $12.6 million and $14.8 million, respectively. At March 15, 2006, the carrying value of the goodwill within the studios reporting unit was $1.9 million. The agreement also required the Company to repay the remaining balances of its mortgages payable at the close of the transaction. On March 15, 2006, the Company paid the remaining mortgages balances of $16.8 million. The Company incurred mortgage penalty costs of less than $0.1 million in connection with the repayment of the mortgages which reduced the gain on sale of studio facilities recorded during the year ended March 31, 2006 in the consolidated statements of income. In connection with the repayment of the remaining balances of its mortgages payable on its studio facilities, the Company terminated its CDN$20 million interest rate swap. The close-out value of the CDN$20 million interest rate swap was approximately $0.1 million, which the Company paid on March 15, 2006. The Company recorded a gain on the sale of the studio facilities of $4.9 million, before tax effect of approximately $1.7 million, during the year ended March 31, 2006 included in the discontinued operations line item within the consolidated statements of income. The studio facilities had revenues of nil for the year ended March 31, 2007 (2006 — $5.8 million; 2005 — $4.5 million) and segment profit of nil for the year ended March 31, 2007 (2006 — $3.5 million; 2005 — $2.2 million). The revenues and expenses of the studio facilities are reported net within the discontinued operations line item in the consolidated statements of income.

 

CRITICAL ACCOUNTING POLICIES

 

The application of the following accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management. As described more fully below, these estimates bear the risk of change due to the inherent uncertainty attached to the estimate. For example, accounting for films and television programs requires the Company to estimate future revenue and expense amounts which, due to the inherent uncertainties involved in making such estimates, are likely to differ to some extent from actual results. For a summary of all of our accounting policies, including the accounting policies discussed below, see note 2 to our audited consolidated financial statements.

 

Generally Accepted Accounting Principles.   Our consolidated financial statements have been prepared in accordance with U.S. GAAP.

 

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 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 capitalize costs of production and acquisition, including financing costs and production overhead, to investment in films and television programs. These costs are amortized to direct operating expenses in accordance with SoP 00-2. These costs are stated at the lower of unamortized films or television program costs or estimated fair value. These costs for an individual film or television program are amortized and participation and residual costs are accrued in the proportion that current year’s revenues bear to management’s estimates of the ultimate revenue at the beginning of the year expected to be recognized from exploitation, exhibition or sale of such film or television program over a period not to exceed ten years from the date of initial release. For previously released film or television programs acquired as part of a library, ultimate revenue includes estimates over a period not to exceed twenty years from the date of acquisition.

 

Management regularly reviews and revises when necessary its ultimate revenue and cost estimates, which may result in a change in the rate of amortization of film costs and participations and residuals and/or write-down of all or a portion of the unamortized costs of the film or television program to its estimated fair value. Management

estimates the ultimate revenue based on experience with similar titles or title genre, the general public appeal of the cast, actual performance (when available) at the box office or in markets currently being exploited, and other factors such as the quality and acceptance of motion pictures or programs that our competitors release into the marketplace at or near the same time, critical reviews, general economic conditions and other tangible and intangible factors, many of which we do not control and which may change. In the normal course of our business, some films and titles are more successful than anticipated and some are less successful. Accordingly, we update our estimates of ultimate revenue and participation costs based upon the actual results achieved or new information as to anticipated revenue performance such as (for home video revenues) initial orders and demand from retail stores when it becomes available. An increase in the ultimate revenue will generally result in a lower amortization rate while a decrease in the ultimate revenue will generally result in a higher amortization rate and periodically results in an impairment requiring a write down of the film cost to the title’s fair value. These write downs are included in amortization expense within direct operating expenses in our consolidated statements of income.

 

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 feature films is recognized at the time of exhibition based on the Company’s participation in box office receipts. Revenue from the sale of videocassettes and DVDs in the retail market, net of an allowance for estimated returns and other allowances, is recognized on the later of receipt by the customer or “street date” (when it is available for sale by the customer). Under revenue sharing arrangements, rental revenue is recognized when the Company is entitled to receipts and such receipts are determinable. Revenues from television licensing are recognized when the feature film or television program is available to the licensee for telecast. For television licenses that include separate availability “windows” during the license period, revenue is allocated over the “windows.” Revenue from sales to international territories are recognized when access to the feature film or television program has been granted or delivery has occurred, as required under the sales contract, and the right to exploit the feature film or television program has commenced. For multiple media rights contracts with a fee for a single film or television program where the contract provides for media holdbacks (defined as contractual media release restrictions), the fee is allocated to the various media based on management’s assessment of the relative fair value of the rights to exploit each media and is recognized as each holdback is released. For multiple-title contracts with a fee, the fee is allocated on a title-by-title basis, based on management’s assessment of the relative fair value of each title.

 

Cash payments received are recorded as deferred revenue until all the conditions of revenue recognition have been met. Long-term, non-interest bearing receivables are discounted to present value.

 

Reserves.   Revenues are recorded net of estimated returns and other allowances. We estimate reserves for video returns based on previous returns and our estimated expected future returns related to current period sales on a title-by-title basis in each of the video businesses. Factors affecting actual returns include limited retail shelf space at various times of the year, success of advertising or other sales promotions, the near term release of competing titles, among other factors. We believe that our estimates have been materially accurate in the past; however, due to the judgment involved in establishing reserves, we may have adjustments to our historical estimates in the future.

 

We estimate provisions for accounts receivable based on historical experience and relevant facts and information regarding the collectability of the accounts receivable. In performing this evaluation, significant judgments and estimates are involved, including an analysis of specific risks on a customer-by-customer basis for our larger customers and an analysis of the length of time receivables have been past due. The financial condition of a given customer and its ability to pay may change over time and could result in an increase or decrease to our allowance for doubtful accounts, which, when the impact of such change is material, is disclosed in our discussion on direct operating expenses elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Income Taxes.   The Company is subject to federal and state income taxes in the United States, and in several foreign jurisdictions in which we operate. We account for income taxes according to Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” SFAS No. 109 requires the recognition of deferred tax assets, net of applicable reserves, related to net operating loss carryforwards and certain temporary differences. The standard requires recognition of a future tax benefit to the extent that realization of such benefit is more likely than not or a valuation allowance is applied. Because of our historical operating losses, we have

provided a valuation allowance against our net deferred tax assets. When we have a history of profitable operations sufficient to demonstrate that it is more likely than not that our deferred tax assets will be realized, the valuation allowance will be reversed. However, this assessment of our planned use of our deferred tax assets is an estimate which could change in the future depending upon the generation of taxable income in amounts sufficient to realize our deferred tax assets.

 

Goodwill.   On April 1, 2001, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Goodwill is reviewed annually for impairment within each fiscal year or between the annual tests if an event occurs or circumstances change that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. The Company performs its annual impairment test as of December 31 in each fiscal year. The Company performed its annual impairment test on its goodwill as of December 31, 2006. No goodwill impairment was identified in any of the Company’s reporting units. Determining the fair value of reporting units requires various assumptions and estimates. The estimates of fair value include consideration of the future projected operating results and cash flows of the reporting unit. Such projections could be different than actual results. Should actual results be significantly less than estimates, the value of our goodwill could be impaired in the future.

 

Business Acquisitions.   The Company accounts for its business acquisitions as a purchase, whereby the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair value. The excess of the purchase price over estimated fair value of the net identifiable assets is allocated to goodwill. Determining the fair value of assets and liabilities requires various assumptions and estimates. These estimates and assumptions are refined with adjustments recorded to goodwill as information is gathered and final appraisals are completed over the allocation period allowed under SFAS No. 141. The changes in these estimates could impact the amount of assets, including goodwill and liabilities, ultimately recorded on our balance sheet as a result of an acquisition and could impact our operating results subsequent to such acquisition. We believe that our estimates have been materially accurate in the past.

 

Recent Accounting Pronouncements

 

Statement of Financial Accounting Standards No. 123(R).   In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123(R)). SFAS No. 123(R) revises SFAS No. 123 and eliminates the alternative to use the intrinsic value method of accounting under APB No. 25. SFAS No. 123(R) requires accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments, to account for these types of transactions using a fair-value-based method. Effective April 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment,” (SFAS No. 123(R)) using the modified-prospective transition method. Under such transition method, compensation cost recognized in the year ended March 31, 2007 includes: (a) compensation cost for all stock options granted prior to, but not yet vested as of, April 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted on or after April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). See note 11 for further discussion of the Company’s stock-based compensation in accordance with SFAS No. 123(R).

 

FASB Issued Interpretation No. 48.   In July 2006, the FASB issued Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of SFAS No. 109,” which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In particular, this interpretation requires uncertain tax positions to be recognized only if they are “more-likely-than-not” to be upheld based on their technical merits. Additionally, the measurement of the tax position will be based on the largest amount that is determined to have greater than a 50% likelihood of realization upon ultimate settlement. Any resulting cumulative effect of applying the provisions of FIN 48 upon adoption would be reported as an adjustment to the beginning balance of retained earnings in the period of adoption. FIN 48 will be effective as of the beginning of fiscal year 2008. The Company is evaluating the impact, if any, the adoption of FIN 48 will have on our operating income, net earnings or retained earnings.

Statement of Financial Accounting Standards No. 157.   In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. As a result of SFAS No. 157 there is now a common definition of fair value to be used throughout GAAP. This new standard will make the measurement for fair value more consistent and comparable and improve disclosures about those measures. The statement does not require any new fair value measurement but will result in increased disclosures. This interpretation is effective for fiscal years beginning after November 15, 2007.

 

The following table sets forth the titles contributing significant motion pictures revenue for the fiscal year ended March 31, 2007 and 2006:

 

 

Theatrical revenue of $107.9 million decreased $37.6 million or 25.8% in fiscal 2007 as compared to fiscal 2006 primarily due to the performance during fiscal 2007 as compared to the performance during fiscal 2006 of the theatrical releases listed in the above table. In fiscal 2007, the titles listed in the above table as contributing significant theatrical revenue represented individually between 5% and 32% of total theatrical revenue and in the aggregate approximately 92% of total theatrical revenue. In fiscal 2006, the titles listed in the above table as contributing significant theatrical revenue represented individually between 5% and 26% of total theatrical revenue and in the aggregate approximately 90% of total theatrical revenue.

 

Video revenue of $528.3 million increased $1.1 million or 0.2% in fiscal 2007 as compared to fiscal 2006. The increase is primarily due to an increase in revenue contributed by titles that individually make up less than 2% of total video revenue as compared to fiscal 2006, which was partially offset by a decrease in revenue generated from the titles listed in the above table. In fiscal 2007, $300.4 million, or 57%, of total video revenue was contributed by titles that individually make up less than 2% of total video revenue, and in fiscal 2006 this amounted to $284.2 million or 54% of total video revenue. The titles listed above as contributing significant video revenue in fiscal 2007 represented individually between 2% to 8% of total video revenue and in the aggregate 43% or $227.9 million of total video revenue for the year. In fiscal 2006, the titles listed above as contributing significant video revenue represented individually between 2% to 9% of total video revenue and in the aggregate 46% or $243.0 million of total video revenue for the year.

 

Television revenue included in motion pictures revenue of $109.3 million in fiscal 2007 increased $36.4 million, or 49.9%, compared to fiscal 2006. The increase is due to more theatrical titles with television windows opening in fiscal 2007 as compared to fiscal 2006. In fiscal 2007, the titles listed above as contributing significant television revenue represented individually between 5% to 12% of total television revenue and in the aggregate 49% or $53.8 million of total television revenue for the year. In fiscal 2006, the titles listed above as contributing significant television revenue represented individually between 5% to 16% of total television revenue and in the aggregate 59% or $43.1 million of total television revenue for the year.

 

International revenue of $105.2 million increased $44.0 million or 71.9% in fiscal 2007 as compared to fiscal 2006. Lionsgate UK, established from the acquisition of Redbus in fiscal 2006, contributed $45.0 million, or 42.8%, of international revenue in fiscal 2007, which included revenues from An American Haunting, Dirty Dancing, Hard Candy, Revolver, Saw 3 and Wicker Man , compared to $5.3 million, or 8.6%, of total international revenue in fiscal 2006. In fiscal 2007, the titles listed in the table above as contributing significant international revenue, which does not include revenue generated from Lionsgate UK, represented individually between 2% to 10% of total international revenue and in the aggregate 29% of total international revenue for the year. In fiscal 2006, the titles listed in the table above as contributing significant revenue represented individually between 4% to 14% of total international revenue and in the aggregate 51% of total international revenue for the year.

 

The following table sets forth the number of television episodes and hours delivered in the fiscal year ended March 31, 2007 and 2006, respectively:

 

 

Television revenue of $118.5 million in fiscal 2007 decreased by $14.4 million, or 10.8%, compared to $132.9 million in fiscal 2006, due primarily to decreases in revenue from domestic series licensing and international revenue offset by an increase in revenue from domestic television movies and miniseries and video releases of television production. Domestic series licensing decreased mainly due to a decrease in the number of television episodes delivered in fiscal 2007 as compared to fiscal 2006. Domestic series licensing for fiscal 2007 includes $14.8 million of revenue from the July 3, 2006 acquisition of Debmar. Domestic series deliveries of one-hour series in fiscal 2007 included 13 one-hour episodes of The Dresden Files , 8 one-hour episodes of Hidden Palms , 8 one-hour episodes of Dirty Dancing Reality TV Series , 13 one-hour episodes of Wildfire Season 3 , 1 one-hour episode of Wildfire Season 2 , 13 half-hour episodes of Lovespring International , 12 half-hour episodes of Weeds Season 2 , and 6 half-hour episodes of I Pity the Fool. In fiscal 2006, domestic series deliveries of one-hour drama series included Wildfire, Missing, The Dead Zone, and The Cut, and of half-hour series included Weeds.

 

Television movies and miniseries revenue increased in fiscal 2007 mainly due to the delivery of The Lost Room miniseries and The Staircase Murders movie, as compared to the delivery of Three Wise Guys movie in fiscal 2006. Revenue from video releases of television production of $8.4 million in fiscal 2007 increased by $6.0 million or 250%, compared to revenue of $2.4 million in fiscal 2006. The increase is primarily due to the success of the release of Weeds Season 1 in fiscal 2007 which individually made up more than 75% of total video revenue from television production.

 

International and other revenue of $11.0 million decreased by $8.0 million or 42.1% in fiscal 2007 mainly due to decreases in international revenue from Missing , The Dead Zone, and The Cut offset by increases in international revenue from The Lost Room, The Dresden Files , and Wildfire , compared to international and other revenue of $19.0 million in fiscal 2006.

 

Direct operating expenses include amortization, participation and residual expenses and other expenses. Direct operating expenses of the motion pictures segment of $330.5 million for fiscal 2007 were 38.5% of motion pictures revenue, compared to $337.5 million, or 41.5% of motion pictures revenue for fiscal 2006. The decrease in direct operating expense of the motion pictures segment in fiscal 2007 as a percent of revenue is due to the change in the mix of titles and performance of the titles generating revenue compared to fiscal 2006 and to a lesser extent the benefit in other expense in the current year, as compared to a $5.2 million charge in other expense for fiscal 2006. The benefit in other expense in fiscal 2007 resulted primarily from the collection of accounts receivable previously reserved of approximately $1.5 million as compared to a charge in other expense for the prior period primarily related to bad debt expense associated with the bankruptcy of a large retail customer. Direct operating expenses of the motion pictures segment included charges for write downs of investment in film costs of $13.1 million and $14.8 million in fiscal 2007 and fiscal 2006, respectively, due to the lower than anticipated actual performance or previously expected performance of certain titles. In fiscal 2007, approximately $5.6 million of the write down related to the unanticipated poor performance at the box office of one motion picture and there were no other individual title write downs in fiscal 2007 that exceeded $1.0 million. In fiscal 2006 there were four motion picture write downs which exceeded $1.0 million and in the aggregate these four write downs totaled $8.3 million.

 

Direct operating expenses of the television segment of $106.3 million for fiscal 2007 were 89.7% of television revenue, compared to $121.5 million, or 91.4% of television revenue for fiscal 2006. The slight decrease in direct operating expense of the television segment in fiscal 2007 is due to the mix of television production revenue in fiscal 2007 compared to fiscal 2006.

 

 

The majority of distribution and marketing expenses relate to the motion pictures segment. Theatrical prints and advertising (“P&A”) in the motion pictures segment in fiscal 2007 of $149.7 million decreased $20.3 million, or 11.9%, compared to $170.0 million in fiscal 2006. Domestic theatrical P&A from the motion pictures segment in fiscal 2007 included P&A incurred on the release of titles such as Akeelah and the Bee, Crank, Daddy’s Little Girls, Employee of the Month, Saw III, See No Evil, and The Descent , which individually represented between 7% and 16% of total theatrical P&A and in the aggregate accounted for 91% of the total theatrical P&A. Theatrical P&A in fiscal 2006 included P&A incurred on the release of titles such as Saw II, Crash, Lord of War, Madea’s Family Reunion, In the Mix, The Devil’s Rejects, High Tension, Rize, Undiscovered , and Waiting , which individually represented between 3% and 15% of total theatrical P&A and in the aggregate accounted for 92% of total theatrical P&A. Undiscovered, Rize, High Tension and In the Mix , released theatrically during fiscal 2006 represented $44.8 million or 26% of theatrical P&A in fiscal 2006 and each individually contributed less than 3% and in the aggregate approximately 5% of total theatrical revenue in fiscal 2006.

 

Video distribution and marketing costs on motion pictures and television product in fiscal 2007 of $204.8 million decreased $6.6 million, or 3.1% , compared to $211.4 million in fiscal 2006. Video distribution and marketing costs as a percentage of video revenues was 38.2% and 39.9% in fiscal 2007 and fiscal 2006, respectively. This

small decrease is mainly due to slightly higher performance in relation to distribution and marketing cost of the video releases in fiscal 2007 as compared to fiscal 2006.

 

International distribution and marketing expenses in fiscal 2007 includes $31.3 million of distribution and marketing costs from Lionsgate UK as a result of the acquisition of Redbus, compared to $3.9 million in fiscal 2006. Distribution and marketing expenses of the television segment includes $3.4 million as a result of the July 3, 2006 acquisition of Debmar in fiscal 2007.

 

 

The increase in general and administrative expenses is primarily due to corporate general and administration expenses of $56.8 million which increased by $13.9 million or 32.4% compared to $42.9 million in fiscal 2006. The increase in corporate general and administrative expenses is primarily due to an increase in stock based compensation of approximately $7.0 million, an increase in salaries and related expenses of approximately $4.8 million, and an increase in professional fees of $1.5 million, offset by a decrease in other general overhead costs. Compensation from our restricted share units amounted to $4.2 million and $1.7 million for the fiscal year ended March 31, 2007 and 2006, respectively. In addition, due to the adoption of SFAS No. 123(R), we recorded additional compensation expense related to our stock options amounting to $2.6 million in the fiscal year ended March 31, 2007 with no comparable expense in fiscal 2006. We incurred additional costs of $1.7 million recorded in the fiscal year ended March 31, 2007 compared to a benefit of $0.3 million recorded in the fiscal year ended March 31, 2006 related to stock appreciation rights which are revalued each reporting period. In fiscal 2007, $5.9 million of production overhead was capitalized compared to $5.2 million in fiscal 2006. At March 31, 2007, as disclosed in note 11 to the consolidated financial statements, there was unrecognized compensation costs of approximately $21.7 million related to stock options and restricted stock units previously granted which will be expensed over the remaining vesting periods. In addition, in fiscal 2007 the Company agreed to issue 653,332 shares of restricted stock units to two key executive officers. These restricted stock units will vest in four annual installments assuming annual performance targets to be set by the Company’s compensation committee have been met. The fair value of all of these shares as of March 31, 2007 was $7.5 million based on the market price of the Company’s common stock as of March 31, 2007. The market value will be remeasured when the performance criteria are set and the value will be expensed over the remaining vesting periods once it becomes probable that the performance targets will be satisfied.

 

The increase in general and administrative expenses of the motion pictures segment of $4.3 million or 16.2% is primarily due to general and administrative costs associated with Lionsgate UK. The increase in general and administrative expenses of the television segment is primarily due to the July 3, 2006 acquisition of Debmar.

 

Depreciation and Other Expenses (Income)

 

Depreciation of $2.8 million in fiscal 2007 increased $1.0 million, or 55.6%, from $1.8 million in fiscal 2006.

 

Fiscal 2007 interest expense of $17.8 million decreased $1.1 million, or 5.8%, from $18.9 million in fiscal 2006, mainly due to the conversion of the 4.875% senior subordinated notes on December 15, 2006, which resulted in $1.0 million less interest expense in the current fiscal year compared to the prior fiscal year.

 

Interest rate swaps mark-to-market was nil in fiscal 2007 as compared to a charge of $0.1 million in fiscal 2006. There were no interest rate swaps outstanding during fiscal 2007.

 

Interest and other income of $11.9 million for the fiscal year ended March 31, 2007 increased $7.6 million, or 176.7% compared to $4.3 million for the year ended March 31, 2006. Interest and other income in fiscal 2007 was earned on the cash balance and available-for-sale investments held during the fiscal year ended March 31, 2007.

 

Gain on sale of equity securities of $1.7 million for the fiscal year ended March 31, 2007 resulted from the sale of the Company’s investment of 4,033,996 common shares of Image Entertainment, Inc., as compared to nil for the fiscal year ended March 31, 2006.

 

The equity interests in fiscal 2007 included a $1.5 million loss from the Company’s 33.33% equity interests in Horror Entertaiment, LLC, a $1.0 million loss from the Company’s 18.8% equity interests in CinemaNow, and a $0.1 million loss from the Company’s 10% equity interest in Maple. The Company’s equity interests from Horror Entertainment, LLC related to its $5.1 million investment during fiscal 2007, and the Company’s equity interests from CinemaNow related to its $1.0 million investment during fiscal 2007. Equity interests of $0.1 million for the fiscal year ended March 31, 2006 includes $0.1 million equity interest in the loss of Maple Pictures consisting of 10% of the losses of Maple Pictures.

 

The Company had an income tax expense of $7.7 million in fiscal 2007, compared to an income tax benefit of $1.0 million in fiscal 2006. The tax expense reflected in the current period is primarily attributable to U.S. federal and state taxes. In fiscal 2007 the tax provision includes a non-cash deferred tax charge of $6.8 million resulting from the utilization of pre-acquisition net operating losses. The valuation allowance associated with the pre-acquisition net operating losses was reduced with a corresponding reduction in goodwill. The Company’s actual annual effective tax rate will differ from the statutory federal rate as a result of several factors, including changes in the valuation allowance against net deferred tax assets, non-temporary differences, foreign income taxed at different rates, state and local income taxes and the utilization of acquired net operating losses. Income tax loss carryforwards amount to approximately $116.4 million for U.S. federal income tax purposes available to reduce income taxes over twenty years, $80.4 million for US state income tax purposes available to reduce income taxes over future years with varying expirations, $29.2 million for Canadian income tax purposes available to reduce income taxes over eight years, $13.7 million for United Kingdom income tax purposes available indefinitely to reduce future income taxes and $0.9 million for Australian income tax purposes available indefinitely to reduce future income taxes.

 

Income before discontinued operations for the fiscal year ended March 31, 2007 was $27.5 million, or basic earnings per common share from continuing operations of $0.25 on 108.4 million weighted average common shares outstanding. This compares to income before discontinued operations for the fiscal year ended March 31, 2006 of $1.6 million, or basic income per common share from continuing operations of $0.02 on 103.1 million weighted average common shares. Diluted earnings per common share from continuing operations for the fiscal year ended March 31, 2007 was $0.25 on 111.2 million weighted average dilutive common shares. Diluted earnings per common share from continuing operations for the fiscal year ended March 31, 2006 was $0.02 on 106.1 million weighted average dilutive common shares.

 

Income from discontinued operations for the fiscal year ended March 31, 2007 and 2006, respectively, was nil and $4.5 million. Basic and dilutive income per share from discontinued operations was $0.00 and $0.04, for the fiscal year ended March 31, 2007 and 2006, respectively. Income from discontinued operations for the year ended March 31, 2006 includes a gain of $4.9 million, before tax effect of approximately $1.7 million, on the sale of its studio facilities located in Vancouver, British Columbia. The transaction was completed on March 15, 2006. Studio facilities previously comprised the Company’s studio facilities reporting segment.

 

Net income for the fiscal year ended March 31, 2007 was $27.5 million, or basic net income per share of $0.25, on 108.4 million weighted average common shares outstanding. This compares to net income for the year ended March 31, 2006 of $6.1 million, or basic net income per share of $0.06, on 103.1 million weighted average common shares outstanding. Diluted net income per share for the year ended March 31, 2007 was $0.25 on 111.2 million weighted average dilutive common shares. Diluted net income per share for the year ended March 31, 2006 was $0.06 on 106.1 million weighted average dilutive common shares.

 

Fiscal 2006 Compared to Fiscal 2005

 

Consolidated revenues in fiscal 2006 of $945.4 million increased $107.3 million, or 12.8%, compared to $838.1 million in fiscal 2005. Motion pictures revenue of $812.4 million in fiscal 2006 increased $57.1 million, or 7.6%, compared to $755.3 million in fiscal 2005. Television revenues of $132.9 million in fiscal 2006 increased by $50.1 million, or 60.5%, compared to $82.8 million in fiscal 2005.

 

The following table sets forth the titles contributing significant motion pictures revenue for the fiscal year ended March 31, 2006 and 2005: