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Lions Gate Entertainment 10-K 2008
e10vk
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended March 31, 2008
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to
 
Commission File No. 1-14880
 
LIONS GATE ENTERTAINMENT CORP.
 
     
British Columbia, Canada
(State or Other Jurisdiction of
Incorporation or Organization)
  N/A
(I.R.S. Employer
Identification No.)
 
 
     
1055 West Hastings Street, Suite 2200
Vancouver, British Columbia V6E 2E9
(877) 848-3866
  2700 Colorado Avenue, Suite 200
Santa Monica, California 90404
(310) 449-9200
(Address of Principal Executive Offices, Zip Code)
 
Registrant’s telephone number, including area code:
(877) 848-3866
 
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Shares, without par value   New York Stock Exchange
 
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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
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, 2007 (the last business day of the Company’s most recently completed second fiscal quarter) was approximately $1,240,477,451, based on the closing sale price as reported on the New York Stock Exchange.
 
As of May 15, 2008, 118,701,875 shares of the registrant’s no par value common shares were outstanding.
 
 
Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A and relating to the registrant’s 2008 annual meeting of shareholders are incorporated by reference into Part III.
 


 

                 
        Page
 
      Business     4  
      Risk Factors     19  
      Unresolved Staff Comments     29  
      Properties     29  
      Legal Proceedings     29  
      Submission of Matters to a Vote of Security Holders     29  
 
PART II
      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     29  
      Selected Consolidated Financial Data     34  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     36  
      Quantitative and Qualitative Disclosures About Market Risk     60  
      Financial Statements and Supplementary Data     62  
      Changes In and Disagreements with Accountants on Accounting and Financial Disclosure     62  
      Controls and Procedures     62  
      Other Information     65  
 
PART III
      Directors, Executive Officers and Corporate Governance     65  
      Executive Compensation     65  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     65  
      Certain Relationships and Related Transactions, and Director Independence     65  
      Principal Accounting Fees and Services     65  
 
PART IV
      Exhibits, Financial Statement Schedules     65  
 EXHIBIT 10.7
 EXHIBIT 18.1
 EXHIBIT 21.1
 EXHIBIT 23.1
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 
 
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terms such as “may,” “intend,” “will,” “could,” “would,” “expect,” “anticipate,” “potential,” “believe,” “estimate,” or the negative of these terms, and similar expressions intended to identify forward-looking statements.
 
These forward-looking statements reflect Lions Gate Entertainment Corp.’s (the “Company,” “Lionsgate,” “we,” “us” or “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.


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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.
 
Investors should also be aware that while we, from time to time, do communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential commercial information. Investors should not assume that we agree with any report issued by any analyst or with any statements, projections, forecasts or opinions contained in any such report.
 
Unless otherwise indicated, all references to the “Company,” “Lionsgate,” “we,” “us,” and “our” include reference to our subsidiaries as well.


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PART I
 
ITEM 1.   BUSINESS.
 
 
Lions Gate Entertainment Corp. (“Lionsgate,” the “Company,” “we,” “us” or “our”) is a leading next generation filmed entertainment studio with a diversified presence in motion pictures, television programming, home entertainment, family entertainment, video-on-demand and digitally delivered content. We release approximately 18 to 20 motion pictures theatrically per year, which include films we develop and produce in-house, as well as films that we acquire from third parties. We also have produced approximately 76 hours of television programming on average for the last three years, primarily prime time television series for the cable and broadcast networks. 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 8,000 motion picture titles and approximately 4,000 television episodes and programs directly to retailers, video rental stores, and pay and free television channels in the United States (the “U.S.”), Canada, the United Kingdom (the “UK”) and Ireland, through various digital media platforms, and indirectly to other international markets through our subsidiaries and various third parties.
 
We own interests in CinemaNow, Inc., an internet video-on-demand provider (“CinemaNow”), Horror Entertainment, LLC, a multiplatform programming and content service provider (“FEARnet”), NextPoint, Inc., an online video entertainment service provider (“Break.com”), Roadside Attractions, LLC, an independent theatrical distribution company (“Roadside”), Elevation Sales Limited, a UK based home entertainment distributor (“Elevation”), and Maple Pictures Corp., a Canadian film, television and home video distributor (“Maple Pictures”).
 
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. As part of this strategy, we have acquired and integrated into our business the following:
 
  •  Mandate Pictures, LLC (“Mandate Pictures”), a worldwide independent film producer, financier and distributor (acquired in September 2007);
 
  •  Debmar-Mercury, LLC (“Debmar-Mercury”), a leading independent syndicator of film and television packages (acquired in July 2006);
 
  •  Redbus Film Distribution Ltd. and Redbus Pictures (collectively, “Redbus” and currently, Lions Gate UK Ltd. (“Lionsgate UK”)), an independent UK 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 (acquired in October 2005);
 
  •  certain of the film assets and accounts receivable of Modern Entertainment, Ltd., a licensor of film rights to DVD distributors, broadcasters and cable networks (acquired in August 2005);
 
  •  Artisan Entertainment, Inc. (“Artisan Entertainment”), a diversified motion picture, family and home entertainment company (acquired in December 2003); and
 
  •  Trimark Holdings, Inc., a worldwide distributor of entertainment content (acquired in October 2000).
 
 
 
General.  According to the Motion Picture Association’s U.S. Theatrical Market: 2007 Statistics, domestic box office grew to approximately $9.6 billion in 2007, compared to approximately $9.2 billion in 2006, a 5.4% 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. In 2007, domestic admissions were approximately $1.4 billion, compared to approximately $1.39 billion in 2006. Additionally, worldwide box office reached an all time high of approximately $26.7 billion in 2007, compared to approximately $25.5 billion in 2006, a 4.9% increase. The total cost for an average “major studio” release (for Motion Picture Association of America member companies) was approximately


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$106.6 million (average negative costs of $70.8 million and average marketing costs of $35.9 million) in 2007, compared to approximately $100.3 million (average negative costs of $65.8 million and average marketing costs of $34.9 million) in 2006.
 
Competition.  Major studios have historically dominated the motion picture industry. The term “major studios” is generally regarded in the entertainment industry to mean Paramount Pictures, Sony Pictures Entertainment Inc. (“Sony”), Twentieth Century Fox Film Corporation, NBC Universal, Walt Disney Studios Motion Pictures and Warner Bros. Entertainment Inc. These studios have historically produced and distributed the majority of theatrical motion pictures released annually in the U.S.
 
Competitors less diversified than the “major studios” include DreamWorks Animation SKG and Metro-Goldwyn-Mayer Studios Inc. These “independent” motion picture production companies, however, including many smaller production companies, have also played an important role in the worldwide feature film market. Independent films have gained wider market approval and increased share of overall box office receipts in recent years. Lionsgate is a diversified “mini-major” studio that competes directly with both major studios and independents in its various businesses, although it operates with a different business model and cost structure than the major studios.
 
Product Life Cycle.  In general, the economic life of a motion picture consists of its exploitation in theaters and in ancillary markets such as home video, pay-per-view, pay television, broadcast television, foreign and other markets. Successful motion pictures may continue to play in theaters for more than three months following their initial release. Concurrent with their release in the U.S., 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:
 
 
                 
    Months After
    Approximate
 
Release Period
  Initial Release     Release Period  
 
Theatrical
          0-3 months  
Home video/DVD (1st cycle)
    3-6 months       1-3 months  
Video-on-demand and pay-per-view
    4-8 months       3-4 months  
Pay television
    9-12 months **     18 months  
Network (free and basic)
    27-30 months       48-72 months  
Licensing and merchandising
    Concurrent       Ongoing  
All international releasing
    Concurrent       Ongoing  
 
 
* These patterns may not be applicable to every film, and may change with the emergence of new technologies.
 
** First pay television window.
 
 
Home video distribution involves the marketing, promotion and sale and/or lease of videocassettes and DVDs to wholesalers and retailers that then sell or rent the videocassettes and DVDs to consumers for private viewing. 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 $23.7 billion in overall home video industry revenues during 2007, about $23.4 billion came from DVD sales and rentals (with the remainder being VHS sales and rentals). Additionally, according to the Motion Picture Association’s US Entertainment Industry: 2007 Market Statistics, DVD players were in 98.0 million U.S. households in 2007, an 86.9% penetration of television households (up from 83.8% in 2006 and 76.2% in 2005). 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


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video sales and rentals in recent years. Additionally, further growth is anticipated in coming years from the Blu-ray high definition video disk and other technological enhancements.
 
 
The market for television programming is composed primarily of the broadcast television networks (such as ABC, CBS, Fox and NBC), syndicators of first-run programming (such as Columbia TriStar Television Distribution and Buena Vista Television) which license programs on a station-by-station basis, and basic and pay cable networks (such as HBO, Showtime and, USA Network). Continued growth in the cable and satellite television markets has driven increased demand for nearly all genres of television programming. 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.
 
 
Growth in the digital market has been driven, in part, by broadband penetration. According to the Motion Picture Association’s U.S. Theatrical Market: 2007 Statistics, over 60 million American households use broadband to access the Internet. Industry-wide revenue from digital delivery and electronic sell-through is projected to grow dramatically as broadband technology proliferates, consumer acceptance increases, and content distributors refine their models.
 
The Company
 
 
Joint Venture with Eros International.  In May 2008, we announced a joint venture with Eros International Ltd., a London Stock Exchange listed leading Indian filmed entertainment studio with a global distribution network (“Eros”), for distribution of our and other English language content in original as well as dubbed language versions within South Asia including India, across all distribution formats such as cinemas, home entertainment, television and new media. The joint venture will also explore the production of Indian formats and remakes based on our and third-party film catalogues and create crossover films that will tap into India’s booming local language market as well as wider audiences outside of India. We will also acquire North American home entertainment distribution rights to 20 select titles (including Oscar nominated Eklavya and the critically acclaimed Gandhi My Father) from Eros’s library of over 1,900 film titles.
 
Premium Television Channel.  In April 2008, we announced a joint venture with Viacom Inc. (“Viacom”), its Paramount Pictures unit (“Paramount Pictures”), and Metro-Goldwyn-Mayer Studios Inc. (“MGM”) to create a premium television channel and video on demand service. The new venture will have access to our titles released theatrically on or after January 1, 2009. Viacom Inc. will provide operational support to the venture, including marketing and affiliate services through its MTV Networks division. Upon its expected launch in the fall of 2009, the joint venture will provide us with an additional platform to distribute our library of motion picture titles and television episodes and programs.
 
Mandate Pictures, LLC.  On September 10, 2007, we purchased all of the membership interests of Mandate Pictures, a worldwide independent film producer, financier and distributor, responsible for such recent hits as Juno and The Grudge franchise. The aggregate cost of the acquisition was approximately $128.8 million, including liabilities assumed of $70.2 million, with amounts paid or to be paid to the selling shareholders of $58.6 million, comprised of $46.8 million in cash and 1,282,999 million in our common shares, 169,879 of which have been issued and delivered and the balance to be issued and delivered in September 2008 and March 2009, pursuant to certain holdback provisions. Of the $46.8 million cash portion of the purchase price, $44.3 million was paid at closing, $0.9 million represented estimated direct transaction costs (paid to lawyers, accountants and other consultants), and $1.6 million represented the remaining estimated cash consideration that will be paid within the next six-month period. In addition, immediately prior to the transaction, we loaned Mandate Pictures $2.9 million. The value assigned to the shares for purposes of recording the acquisition was $11.8 million and was based on the closing price


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of our common shares on the date of the acquisition. In addition, we may be obligated to pay additional amounts should certain films or derivative works meet certain target performance thresholds.
 
Société Générale de Financement du Québec.  On July 30, 2007, we entered into a four-year filmed entertainment slate financing agreement with Société Générale de Financement du Québec (“SGF”), the Québec provincial government’s investment arm. SGF will finance up to 35% of production costs of television and feature film productions produced in Québec for a four-year period for an aggregate investment of up to $140 million, and we will advance all amounts necessary to fund the remaining budgeted costs. The maximum aggregate of budgeted costs over the four-year period will be $400 million, including our portion, but no more than $100 million per year. In connection with this agreement, we and SGF will proportionally share in the proceeds derived from the funded productions after we deduct a distribution fee, recoup all distribution expenses and releasing costs, and pay all applicable participations and residuals. To date, the feature film Punisher: War Zone, slated for a December 2008 release, and the sixth broadcast season of the television series The Dead Zone, have been produced in Montreal, Quebec under the terms of the SGF financing arrangement.
 
Maple Pictures Corp.  Represents the Company’s interest in Maple Pictures, a Canadian film, television and home video distributor. Maple Pictures was formed by a director of the Company, a former Lionsgate executive and a third-party equity investor. Through July 17, 2007, the Company owned 10% of the common shares of Maple Pictures and accounted for its investment in Maple Pictures under the equity method of accounting. For the period from April 1, 2007 through July 17, 2007, the Company recorded 10% of the loss incurred by Maple Pictures amounting to approximately $0.1 million. On July 18, 2007, Maple Pictures repurchased all of the outstanding shares held by a third party investor, which increased the Company’s ownership of Maple Pictures requiring the Company to consolidate Maple Pictures for financial reporting purposes beginning on July 18, 2007.
 
NextPoint, Inc.  On June 29, 2007, we purchased a 42% equity interest or 21,000,000 shares of the Series B Preferred Stock of Break.com. The aggregate purchase price was approximately $21.4 million, which included $0.5 million of transaction costs, by issuing 1,890,189 of our common shares. We have a call option which is exercisable at any time from June 29, 2007 until the earlier of (i) 30 months after June 29, 2007 or (ii) a year after a change of control, as narrowly defined, to purchase all, but not less than all, of the remaining 58% equity interests (excluding any subsequent dilutive events of Break.com), including in-the-money stock options, warrants and other rights, of Break.com for $58 million in cash or common stock, at our option.
 
Roadside Attractions, LLC.  On June 26, 2007, the Company acquired a 43% equity interest in Roadside, an independent theatrical releasing company. The Company has a call option which is exercisable for a period of 90 days commencing on the receipt of certain audited financial statements for the period beginning on January 1, 2010 and ending on the third anniversary of the investment to purchase all of the remaining 57% equity interests of Roadside, at a price representative of the then fair value of the remaining interest.
 
Theatrical Slate Financing.  On May 25, 2007, we closed a theatrical slate funding arrangement, as amended on January 30, 2008. Under this arrangement, Pride Pictures LLC (“Pride”), an unrelated entity, will fund, generally, 50% of our production, acquisition, marketing and distribution costs of theatrical feature films up to an aggregate of approximately $196 million, net of transaction costs. The funds available from Pride were generated from the issuance by Pride of $35 million of subordinated debt instruments, $35 million of equity and $134 million from a senior credit facility, which is subject to a borrowing base. We are not a party to the Pride debt obligations or their senior credit facility, and we provide no guarantee of repayment of these obligations. The percentage of the contribution may vary on certain pictures. Pride 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. We will continue to distribute the pictures covered by the arrangement with a portion of net profits after all costs and our distribution fee being distributed to Pride based on their pro rata contribution to the applicable costs similar to a back-end participation on a film. To date, nine films have been theatrically released that were included in the Pride fund.
 
Production
 
Motion Pictures.  Compared to the Motion Picture Association of America (the “MPAA”) major studio average production budget of $70.8 million in 2007, we have historically produced motion pictures with production budgets of $35 million or less. In fact, most of our productions have budgets of $20 million or less. Films intended


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for theatrical release are generally budgeted between $5 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 $1 million and $5 million. We take a disciplined approach to film production with the goal of producing content that we can distribute to theatrical and ancillary markets, which include home video, pay and free television on-demand services and digital media platforms, both domestically and internationally. In fiscal 2008, 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:
 
  •  Tyler Perry’s Meet the Browns — When the kooky Brown family gathers to bury Brown’s 107-year-old father, it’s a foot-stomping, soul-stirring send-off and a great reminder that in the end, there is nothing like family (released March 2008).
 
  •  The Eye — A blind woman undergoes a corneal transplant that restores her sight. When she is haunted by the sight of ghosts, she sets out to uncover the origins of her cornea and the mysterious history of its donor (released February 2008).
 
  •  Tyler Perry’s Why Did I Get Married? — A number of couples who go away every year to examine their marriages in a group setting find trouble when one of the wives brings along a sexy young temptress (released October 2007).
 
  •  Midnight Meat Train — When a struggling photographer’s latest collection of provocative, nighttime studies of the city gains interest from a prominent art gallery owner, he is propelled into the grittier and darker side of humanity and straight into the path of a serial killer, a subway murderer who stalks late-night commuters and ultimately butchers them in the most gruesome ways imaginable.
 
  •  Thomas Kinkade’s The Christmas Cottage — Inspiring true story of Thomas Kinkade, one of the most famous American painters, who was motivated to become an artist when his mother fell in danger of losing the family home.
 
  •  The Burrowers — After finding a family brutally killed in their home, a group of cowboys in the Dakota Territory set out to hunt down those they believe responsible. They slowly come to realize that the plains are infested by creatures that bury and eat their victims alive.
 
  •  My Best Friend’s Girl — A man who specializes in taking recently broken-up women on the worst date of their lives so they will run back to their ex-boyfriends offers to provide this service for his best friend, but ends up falling in love with the girl.
 
  •  Punisher: War Zone — The sequel to The Punisher brings Frank Castle face to face with a lethal mobster in the form of “Jigsaw.”
 
  •  Will Eisner’s The Spirit — The screen adaptation of the comic book. Down these mean streets a man must come, a hero born, murdered, and born again.
 
  •  Game — In the near-future, mind control technology has taken society by storm and a mutiplayer on-line game called “Slayers” allows humans control of other humans in mass-scale.
 
  •  Chilled in Miami — A Miami businesswoman is transferred to rural Minnesota, and while there, she re-evaluates her big-city values.
 
The following motion pictures are currently in or slated for production in fiscal 2009:
 
  •  Tyler Perry’s The Family That Preys — Two matriarchs attempt to hold their respective families together in the face of betrayal and hidden secrets that come to light.
 
  •  Saw V — The next installment in the most successful horror franchise of all time.
 
  •  Crank 2: High Voltage — The further adventures of Chev Chelios. Chev is revived via a synthetic heart that needs to be recharged to stay beating , all while he tries to find who implanted it.
 
  •  My Bloody Valentine — A remake of the 1980’s cult classic in state-of-the-art 3D. Ten years after a devastating coal mining accident, a string of gruesome murders plague a small Montana town.


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  •  Tyler Perry’s Madea Goes To Jail — Madea is at it again, but this time, the judges have had enough forcing Madea to learn her lesson behind bars. Regardless of the circumstances, Madea gives her riotous, trademark, never-fail advice and wisdom to her new prison friends as they learn how to let go, move on and forgive.
 
  •  Warrior — Two estranged brothers enter a mixed-martial arts tournament that each must win.
 
  •  Five Killers — A former hitman’s seemingly perfect life is thrown upside down when someone from his past puts a hit out on him. Catch is: the hit was put out three years ago to become active on his 35th birthday; everyone in his seemingly perfect life is suspect.
 
  •  Kane & Lynch — Based on the video game.  Kane is a mercenary. Lynch is a schizophrenic. They meet while being transported to death row. When they are attacked and kidnapped by Kane’s former team, the unlikely duo is forced to retrieve a stolen figure.
 
  •  Conan — The epic tale of a child sold into slavery who grows into a man who seeks revenge against the warlord who massacred his tribe.
 
  •  Addicted — Zoe is a successful entrepreneur, wife and mother, but soon finds herself in the grips of a sexual addiction that threatens to undo everything as her extra marital affairs get more and more dangerous.
 
Our production team has developed a track record for producing reasonably budgeted films with commercial potential. First, 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 Tyler Perry’s Why Did I Get Married?
 
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 then 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 agreements 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, UK subsidy programs, domestic state tax incentives (in such states as New Mexico, Massachusetts and Pennsylvania) and other structures that may help reduce our financial risk.
 
Television.  During fiscal 2008, we delivered approximately 63 episodes of domestic television programming. Domestic television programming may include one-hour and half-hour dramas, mini-series, animated series and reality and non-fiction programming. We believe we are a leading non-network affiliated independent producer of television product in the U.S. In fiscal 2009, we intend to have at least eight series on the air, and several mini-series and limited series slated for production.


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Series.  In fiscal 2008, we delivered:
 
  •  13 episodes of Dead Zone, a one-hour drama series for the USA Network and distributed by Paramount International Television internationally;
 
  •  12 episodes of the Golden Globe and Peabody Award-winning series Mad Men, a one-hour drama for the AMC Network;
 
  •  8 episodes of The Kill Point, an eight-hour drama limited series for Spike Network;
 
  •  15 episodes of the comedy series Weeds, airing on Showtime;
 
  •  2 episodes of the sci-fi thriller Dresden Files, airing on The Sci-fi Network; and
 
  •  13 episodes of the teen drama Wildfire, airing on the ABC Family Network.
 
In addition to continuing to deliver Weeds (13 episodes) and Mad Men (13 episodes), in fiscal 2009, we intend to deliver the following projects:
 
  •  13 episodes of Fear Itself, a one-hour fright anthology series airing on NBC and FEARNet.com;
 
  •  13 episodes of Crash, a one-hour drama series based on the Academy Award winning Best Picture Crash, for Starz Entertainment; and
 
  •  8 episodes of Scream Queens, a reality show airing on VH1.
 
Further, in April 2008, we entered into a joint venture with Ish Entertainment, LLC to produce original entertainment for television. Under the arrangement, we intend to deliver the following projects in fiscal 2009:
 
  •  10 episodes of Paris Hilton: My New BFF, a reality show airing on MTV;
 
  •  8 episodes of 50 Cent: The Urban Apprentice, a reality show airing on MTV; and
 
  •  8 episodes of a yet unnamed reality show starring rapper T.I., airing on MTV.
 
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.
 
  •  DVD Production — We have delivered four direct-to-home video animated movies with Marvel Characters Inc. (“Marvel Characters”), Dr. Strange, Next Avengers: Heroes of Tomorrow, Ultimate Avengers and Ultimate Avengers 2, and are in production on three additional titles with Marvel Characters, Hulk Vs., Thor: Tales of Asgard, and Planet Hulk. Heroes of Tomorrow is scheduled to be released in the fourth quarter of fiscal 2008, Hulk Vs. is scheduled to be released in the first quarter of fiscal 2009, Thor: Tales of Asgard is scheduled to be released in the fourth quarter of fiscal 2009 and Planet Hulk is scheduled to be released in the first quarter of 2010. An additional production, to be delivered in the first quarter of fiscal 2009, will be the DVD sequel to the theatrical animated film Happily Never After, which we released in fiscal 2007.
 
  •  Television Production — We are in production on a new comedic action adventure series (based on the well-known franchise Speed Racer) for the Nickelodeon Networks for 26 half-hours and five films. We will be handling international sales, overseeing merchandising and licensing and distributing DVD and video. The series is being produced by Animation Collective of New York City.
 
  •  Theatrical Films — We are currently in production on our first animated film, Alpha and Omega, starring Justin Long, Hayden Panettiere, Christina Ricci, Danny Glover and Dennis Hopper. The film is the first picture developed under a previously announced co-finance deal with Crest Animation and is from the creator of Open Season, a Sony CGI film.
 
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 2008, we produced and distributed a 40-minute presentation of Hindsight for Lifetime Network. In fiscal 2009, we plan to distribute a number of projects, including two 90-minute comedy specials for Comedy Central starring Kat Williams, Street Dogs of LA, a two-hour documentary for Animal Planet, Guys and Divas:


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Battle of the High School Musical, a two-hour documentary for Showtime, and Facing Ali, a two hour documentary for Spike Network. 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.
 
Music.  We continue to grow the music portion of our business by actively assessing potential music copyright acquisitions and extending our label’s releases beyond soundtracks from the Company’s productions. In addition, we service the music needs of other departments within the Company, including assistance with creative matters and licensing. While revenue is expected to increase, it is not significant in comparison to core business operations.
 
Distribution
 
Domestic Theatrical Distribution.  We distribute motion pictures directly to U.S. movie theaters. Over the past nine years, our releases have included the following in-house productions:
 
     
Title
 
Principal Actors
The Eye
  Jessica Alba
Good Luck Chuck
  Jessica Alba, Dane Cook
War
  Jet Li, Jason Statham
Pride
  Bernie Mac, Terrence Howard
The U.S. vs. John Lennon
  Documentary
Employee of the Month
  Dane Cook, Jessica Simpson, Dax Shepherd
Crank
  Jason Statham, Amy Smart
Grizzly Man
  Documentary
Akeelah and the Bee
  Keke Palmer, Laurence Fishburne, Angela Bassett
Saw II
  Donnie Wahlberg, Tobin Bell, Shawnee Smith
Saw III
  Tobin Bell, Shawnee Smith, Bahar Soomekh, Angus MacFayden
Saw IV
  Tobin Bell
Tyler Perry’s Diary of a Mad Black Woman
  Tyler Perry, Steve Harris, Shemar Moore
Tyler Perry’s Madea’s Family Reunion
  Tyler Perry
Tyler Perry’s Meet The Browns
  Tyler Perry, Angela Bassett
Tyler Perry’s Why Did I Get Married?
  Tyler Perry, Janet Jackson
Godsend
  Robert DeNiro, Greg Kinnear, Rebecca Romijn Stamos
The Punisher
  John Travolta, Thomas Jane
Monster’s Ball
  Halle Berry, Billy Bob Thornton


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Motion pictures that we have acquired and distributed in this same time period include the following:
 
     
Title
 
Principal Actors
The Forbidden Kingdom
  Jet Li, Jackie Chan
The Bank Job
  Jason Statham
3:10 to Yuma
  Russell Crowe, Christian Bale
Rambo
  Sylvester Stallone
Sicko
  Documentary
Crash
  Don Cheadle, Sandra Bullock, Matt Dillon, Brendan Fraser
The Descent
  Shauna Macdonald, Natalie Jackson Mendoza, Alex Reid, Saskia Mulder
Hard Candy
  Patrick Wilson, Ellen Page
Lord of War
  Nicolas Cage, Ethan Hawke, Jared Leto, Bridget Moynahan
Fahrenheit 9/11
  Documentary
Open Water
  Blanchard Ryan, Daniel Travis
Saw
  Danny Glover, Monica Potter, Cary Elwes
Girl With A Pearl Earring
  Scarlett Johannson, Colin Firth
The Cooler
  Alec Baldwin, William H. Macy, Maria Bello
O
  Julia Stiles, Mekhi Phifer
Dogma
  Ben Affleck, Matt Damon, Chris Rock
 
In the last nine years, films we have distributed have earned 31 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 20 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, typically to more than 2,000 screens nationwide, as demonstrated by the theatrical releases of such films as 3:10 to Yuma, Rambo, Forbidden Kingdom, War, Good Luck Chuck, the Saw franchise and Tyler Perry’s Why Did I Get Married?
 
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 significantly 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.


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Our remaining fiscal 2009 theatrical release schedule may include (in anticipated order of release):
 
                 
            Produced*
  Approximate
Title
 
Summary
 
Principal Actors
 
or Acquired
 
Release Date
 
The Perfect Game
  Based on a true story of a rag-tag team of boys from poverty stricken Monterrey, Mexico, who defy extraordinary odds to become the first foreign team to win the Little League World Series, their miracle changed not only their lives, but also the destiny of an entire city.   Cheech Marin, Emilie de Ravin   Acquired   August 2008
Disaster Movie
  A group of young friends embark on a wacky, life-changing adventure.   Kim Kardashian, Carmen Electra, Vanessa Minnillo   Acquired   August 2008
Midnight Meat Train
  When a struggling photographer’s latest collection of provocative, nighttime studies of the city gains interest from a prominent art gallery owner, he is propelled into the grittier and darker side of humanity and straight into the path of a serial killer, a subway murderer who stalks late-night commuters and ultimately butchers them in the most gruesome ways imaginable.   Vinnie Jones, Bradley Cooper   Produced   August 2008
Bangkok Dangerous
  The life of an anonymous assassin takes an unexpected turn when he travels to Bangkok to complete a series of contract killings.   Nicolas Cage   Acquired   September 2008
Tyler Perry’s The Family That Preys
  Two matriarchs attempt to hold their respective families together in the face of betrayal and hidden secrets that come to light.   Tyler Perry, Alfre Woodard, Kathy Bates   Produced   September 2008
My Best Friend’s Girl
  A man who specializes in taking recently broken-up women on the worst date of their lives so they will run back to their ex-boyfriends offers to provide this service for his best friend, but ends up falling in love with the girl.   Dane Cook, Kate Hudson   Produced   September 2008
Religulous
  A documentary that follows the indomitable Bill Maher as he travels around the globe interviewing people about God and religion.   Bill Maher   Acquired   October 2008
W
  Oliver Stone’s biopic about the 43rd President of the U.S., George W. Bush.   Josh Brolin, Elizabeth Banks, Ellen Burstyn, James Cromwell and Thandie Newton   Acquired   October 2008


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            Produced*
  Approximate
Title
 
Summary
 
Principal Actors
 
or Acquired
 
Release Date
 
Saw V
  The latest chapter in one of the most successful horror franchises of all time.   Tobin Bell, Scott Patterson   Produced   October 2008
The Lucky Ones
  A timely drama about life in America today, which follows three soldiers on leave trying to make sense of their lives during an unexpected road trip across the U.S.   Rachel McAdams, Tim Robbins, Michael Pena   Acquired   October 2008
Punisher: War Zone
  The sequel to The Punisher brings Frank Castle face to face with a lethal mobster in the form of “Jigsaw.”   Ray Stevenson, Julie Benz, Dominic West   Produced   December 2008
Will Eisner’s The Spirit
  Screen adaptation of the comic book. Down these mean streets a man must come, a hero born, murdered, and born again.   Gabriel Macht, Samuel L. Jackson, Eva Mendez, Scarlett Johansson   Produced   December 2008
My Bloody Valentine
  Remake of the 1980’s cult classic in state-of-the-art 3D. Ten years after a devastating coal mining accident, a string of gruesome murders plague a small Montana town.   Jamie King   Produced   January 2009
Tyler Perry’s Madea Goes To Jail
  Madea is at it again, but this time, the judges have had enough forcing Madea to learn her lesson behind bars. Regardless of the circumstances, Madea gives her riotous, trademark, never-fail advice and wisdom to her new prison friends as they learn how to let go, move on and forgive.   Tyler Perry, Keshia Knight Pulliam   Produced   February 2009
 
 
* Includes significant participation in production.
 
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.
 
Mandate Pictures.  On September 10, 2007, we purchased all of the membership interests of Mandate Pictures, a worldwide independent film producer, financier and distributor. In fiscal 2008, Mandate Pictures’ completed projects included Harold & Kumar Escape from Guantanamo Bay, the follow-up to the 2004 comedy hit released by New Line, as well as the box office and critical sensation Juno, starring Ellen Page, Michael Cera, Jennifer Garner and Jason Bateman. The film, distributed through Fox Searchlight, has garnered a host of accolades, including an Academy Award for Best Original Screenplay (Diablo Cody) and three Academy Award nominations for Best Motion Picture, Best Actress (Ellen Page), and Best Director (Jason Reitman). Previous films released by Mandate include Zach Helm’s Mr. Magorium’s Wonder Emporium, starring Dustin Hoffman and Natalie Portman, and Marc Forster’s Stranger Than Fiction, starring Will Ferrell, Maggie Gyllenhaal and Emma Thompson. Mandate Pictures is currently in production on Peacock with Cillian Murphy, Ellen Page and Susan Sarandon.

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Mandate Pictures also maintains a partnership with Ghost House Pictures, formed with filmmakers Sam Raimi and Rob Tapert as a production label dedicated to the financing, development and production of films in the horror/thriller genre. Under this partnership, Mandate Pictures is currently in production on leading filmmaker Sam Raimi’s (Spider-Man franchise, The Evil Dead) Drag Me To Hell for Universal Studios, starring Allison Lohman and Justin Long. Films previously released under the Ghost House banner include 30 Days of Night, The Grudge I and II, The Messengers and Boogeyman, all of which opened at number one at the box office. Mandate Pictures’ other filmmaker relationships include production deals with Oscar winner Steven Zaillian’s Film Rites and writer/director Zach Helm’s Gang of Two production company.
 
International Sales and Distribution.  The primary components of our international business are, both on a territory by territory basis through third parties or directly through our international divisions, (i) the licensing and sale of rights in all media of our in-house theatrical titles, (ii) the licensing and sale of catalogue product or libraries of acquired titles (such as those of Artisan Entertainment and Modern Times Group), and (iii) direct distribution.
 
  •  Mandate International — We sell rights in all media on a territory by territory basis through our subsidiary, Mandate International, LLC (“Mandate International”), of (i) Mandate Pictures, Ghost House and our in-house theatrical titles, (ii) our catalogue product or libraries of acquired titles, and (iii) theatrical product produced by third parties such as Gold Circle Films, LLC and other independent producers. We often pre-sell international territories to cover a significant portion of the production budget or acquisition cost on new releases. We also leverage our infrastructure to generate revenue through a sales agency business for third party product. We continue to expand our sales and distribution of original Lionsgate television series. Recent high profile films sold by Mandate International were Saw IV, Juno — Academy Award winner for Best Original Screenplay, and the highly anticipated Drag Me To Hell, directed by Sam Raimi.
 
  •  Lionsgate UK — We self-distribute our motion pictures in the UK and Ireland through our subsidiary, Lionsgate UK. Lionsgate UK is expected to release approximately 17 films theatrically in fiscal 2009. Elevation, our joint acquisition with Optimum Releasing/StudioCanal, handles the joint sales and distribution of DVD product for Lionsgate UK.
 
  •  Lionsgate Australia — Our recently formed Australian subsidiary, Lionsgate Australia Pty Ltd. (“Lionsgate Australia”), will oversee distribution of productions and third party acquisitions in Australia and New Zealand.
 
  •  Canada — We distribute our motion picture, television and home video product in Canada through Maple Pictures.
 
Home Video Distribution.  Our U.S. video distribution operation aims to exploit our filmed and television content library of approximately 12,000 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 6%, including a market share of 9.1% for the fourth quarter of fiscal 2008. In fiscal 2008, Lionsgate had six theatrical releases on DVD debut at number one or two with 3:10 to Yuma, Tyler Perry’s Why Did I Get Married?, War, Good Luck Chuck, Saw IV and Daddy’s Little Girls, and the top three fitness releases of the year, Dancing With The Stars 1, The Biggest Loser — The Workout, Vol. 3 (Cardio Max) and The Biggest Loser — The Workout, Vol. 4 (Power Sculpt). Additionally, over the past year, our Saw franchise continued as the number one horror franchise in DVD history, and we are currently the top studio in the genre with a horror DVD market share of approximately 20%. We also continue to have the highest box-office to DVD conversion rate in the industry, at a nearly 33% premium over our competition.
 
Lionsgate is a part of the Blu-ray consortium, and during fiscal 2008, we held a 7% market share of Blu-ray revenue. Among the highlights for our Blu-ray product was the release of 3:10 to Yuma, which was the second best selling Blu-ray title during our 2008 fiscal year.
 
In addition to our approximately 18 to 20 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. We also distribute successful television product on video, including the Saturday Night Live product currently in our library, the first and second seasons 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


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series Moonlighting, the fifth, sixth and seventh seasons of the NBC hit comedy series Will and Grace, the first season of the TBS hit series Tyler Perry’s House of Payne, and the entire catalog of Little House on the Prairie. We also released the following direct to video titles: Chaos, starring Jason Statham, Ryan Phillippe and Wesley Snipes; Tyler Perry’s What’s Done In The Dark; Stir of Echoes 2: The Homecoming, starring Rob Lowe; Highlander 5: The Source; and our Horrorfest titles (Gravedancers, Wicked Little Things, Unrest, Dark Ride, Reincarnation, Penny Dreadful, Hamiltons and The Abandoned), which included seven of the top 10 direct-to-video horror titles for the year.
 
We continued our relationship with Marvel Studios pursuant to which we were granted the right 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 2008 fiscal year, we released the fourth title in the series — Dr. Strange: The Sorcerer Supreme, which followed our previous releases of the second and third titles in the series — Ultimate Avengers 2 and The Invincible Iron Man. To date, we have sold over 3 million units of the Marvel animated features.
 
We are also adding to our growing library of Spanish-language titles by entering into an agreement with Xenon Pictures, Inc. (“Xenon”). Under the agreement, we will distribute more than 300 DVD titles from Xenon and the labels it operates in the U.S., including Spanish-language market leader Televisa Home Entertainment, as well as a number of theatrical features in the Xenon pipeline.
 
We are growing our direct-to-video horror genre with our arrangement with Ghost House. We will release approximately 12 to 20 films through the venture, which will include the launch of Ghost House Underground, a new film acquisitions company that extends the Ghost House brand to home entertainment.
 
Our family entertainment division, which targets the youth audience, recently acquired the home entertainment rights to HIT Entertainment’s extensive portfolio of award-winning children’s programming, including iconic franchises such as Thomas & Friends, Bob the Builder, Barney, Angelina Ballerina and Fireman Sam, newly acquired brands such as Fifi & the Flowertots and Roary the Racing Car from Chapman Entertainment, Aardman Animations’ award-winning Wallace & Gromit which includes four television half-hour episodes, and Shaun the Sheep, as well as The Jim Henson Company’s Fraggle Rock and additional family titles from the Henson library. Additionally, we recently entered into an agreement with educational toy maker LeapFrog Enterprises, Inc. to produce and distribute direct-to-DVD family-oriented feature films. Moreover, we will be distributing the new action-packed Speed Racer, The Next Generation, a 26 episode television series which we produced for Nickelodeon Networks, and continue to distribute the Bratz brand, 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, Classic Speed Racer 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 27 million DVDs and VHS in the past three years. In March 2007, 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 15% market share in fitness DVD revenue, Lionsgate has a lineup that includes top-sellers Denise Austin, The Biggest Loser and Dancing With The Stars. In fact, Denise Austin is the largest fitness franchise in the DVD era. Additionally, Dancing with the Stars 1 has sold more units during its first year than any other fitness DVD.
 
We directly distribute to the rental market through Blockbuster, Inc. (“Blockbuster”), Netflix, Inc. (“Netflix”), Movie Gallery, Inc., and Rentrak Corporation. We also distribute or sell directly to mass merchandisers, such as Wal-Mart Stores Inc. (“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 accounted for approximately 19% of our revenues in fiscal 2008, the loss of which could have a material adverse effect on our financial results. No other customer accounted for more than 10% of our revenues in fiscal 2008.
 
Television Syndication.  We distribute television programming through our subsidiary, Debmar-Mercury. Acquired in 2006, Debmar-Mercury was initially founded in 2003 to facilitate the domestic distribution of the Comedy Central hit South Park. Since then, Debmar-Mercury has acquired the Family Feud show from Fremantle Media of North America, which produces 170 new episodes each year. Additionally, Debmar-Mercury launched Tyler Perry’s House of Payne in 2007, in a groundbreaking 100 episode deal with TBS and the Fox television stations. Most recently, Debmar-


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Mercury launched Trivial Pursuit:America Plays, in a joint venture with the Hasbro Corporation, set to air beginning in the fall of 2008, to be distributed both domestically and internationally through Debmar-Mercury’s international division. Also set to air in the fall of 2008 are two new shows acquired from The Discovery Channel, American Chopper and Deadliest Catch. Additionally, Debmar-Mercury continues to represent the Company’s and Revolution Studio’s films as well as syndication of the Lionsgate television drama series The Dead Zone.
 
Pay and Free Television Distribution.  We have approximately 672 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 Showtime, USA Network, FX, Turner Networks, Starz Entertainment, Family Channel, Disney Channel, Cartoon Network and IFC, through which we have an agreement for a package of 70 of our feature films. 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, which expires on December 31, 2008. Additionally, in April 2008, we formed a joint venture with Viacom, Paramount Pictures and MGM to create a premium television channel and video on demand service. Upon its expected launch in the fall of 2009, the joint venture will provide us with an additional platform to distribute our library of motion picture titles and television episodes and programs.
 
Electronic Distribution.  We also deliver our content through a broad spectrum of digital media platforms. We own a minority interest in CinemaNow, a company which offers licensed content from a library of approximately 12,000 new and classic movies, television programs, music concerts and music videos via downloading or streaming. Additionally, we have digital delivery arrangements for television and movie library product with Apple iTunes, as well as such other digital platforms as Amazon.com, Inc., Microsoft Corporation, Blockbuster, Netflix, Movielink, LLC, Hulu LLC and Vudu, Inc. We also operate FEARnet in connection with partners Comcast Corp. and Sony, a branded multiplatform programming and content service provider of horror genre films. We entered into a five-year license agreement with FEARnet for U.S. territories and possessions, whereby we license content to FEARnet for video-on-demand and broadband exhibition. Further, we own an interest in Break.com, a leading viral marketing company that creates new opportunities for showcasing the Company’s feature films and television programming.
 
 
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.
 
 
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,” “TRIMARK PICTURES,” “GHOST HOUSE PICTURES,” “GRINDSTONE ENTERTAINMENT GROUP,” “MANDATE PICTURES” and “MANDATE INTERNATIONAL” 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.
 
The trademarks “LIONSGATE,” “LIONS GATE HOME ENTERTAINMENT,” “LIONS GATE SIGNATURE SERIES,” “ARTISAN ENTERTAINMENT,” “FAMILY HOME ENTERTAINMENT” “F.H.E. FAMILY HOME ENTERTAINMENT KIDS,” “TRIMARK PICTURES,” “DIRTY DANCING,” “THE BLAIR WITCH PROJECT” and “RESERVOIR DOGS” and “GHOST HOUSE PICTURES,” among others, are registered with the United States Patent and Trademark Office. We regard our trademarks as valuable assets and believe that our trademarks are an important factor in marketing our products.
 
Copyright protection is a serious problem in the videocassette and DVD distribution industry because of the ease with which cassettes and DVDs may be duplicated. In the past, certain countries permitted video pirating to such an extent that we did not consider these markets viable for distribution. Video piracy continues to be prevalent across the entertainment industry. We and other video distributors have taken legal actions to enforce copyright protection when necessary.


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Television and motion picture production and distribution are highly competitive businesses. We face competition from companies within the entertainment business and from alternative forms of leisure entertainment, such as travel, sporting events, outdoor recreation, video games, the internet and other cultural and computer-related activities. We compete with the major studios, numerous independent motion picture and television production companies, television networks and pay television systems for the acquisition of literary and film properties, the services of performing artists, directors, producers and other creative and technical personnel and production financing, all of which are essential to the success of our entertainment businesses. In addition, our motion pictures compete for audience acceptance and exhibition outlets with motion pictures produced and distributed by other companies. Likewise, our television product faces significant competition from independent distributors as well as major studios. As a result, the success of any of our motion pictures and television product is dependent not only on the quality and acceptance of a particular film or program, but also on the quality and acceptance of other competing motion pictures or television programs released into the marketplace at or near the same time.
 
 
As of May 15, 2008 we had 444 full-time employees in our worldwide operations. We also utilize many consultants in the ordinary course of our business and hire additional employees on a project-by-project basis in connection with the production of our motion pictures and television programming. We believe that our employee and labor relations are good.
 
None of our full-time employees are members of unions.
 
 
We are a corporation organized under the laws of the Province of British Columbia, resulting from the merger of Lions Gate Entertainment Corp. and Beringer Gold Corp. on November 13, 1997. Beringer Gold Corp. was incorporated under the Company Act (British Columbia) on May 26, 1986 as IMI Computer Corp. Lions Gate Entertainment Corp. was incorporated under the Canada Business Corporations Act using the name 3369382 Canada Limited on April 28, 1997, amended its articles on July 3, 1997 to change its name to Lions Gate Entertainment Corp., and on September 24, 1997, continued under the Company Act (British Columbia).
 
 
Financial and other information by reporting segment and geographic area as of March 31, 2008 and 2007 and for the three years ended March 31, 2008 is set forth in Note 16 to our consolidated financial statements.
 
 
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, on our website at www.lionsgate.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). 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. The information posted on our website is not incorporated into this Annual Report on Form 10-K.
 
The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.


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RISK FACTORS
 
Item 1A.  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 reported operating income for fiscal years 2003 and 2005 through 2007, and operating losses for fiscal years 2004 and 2008. We have reported net income for fiscal years 2005, 2006, and 2007, and net losses for the fiscal years 2003, 2004 and 2008. Our accumulated deficit was $223.6 million at March 31, 2008. 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.
 
 
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


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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. Additionally, our credit facility expires on December 31, 2008. While we intend to renew the facility prior to such date and with similar or greater availability, we cannot assure you that additional financing will be available on terms favorable to us, or at all. Accordingly, 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 and a balance under letters of credit for $22.7 million. 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, 2008, we had approximately $371.6 million in cash and cash equivalents. While we have not currently drawn down on our credit facility, 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:
 
  •  require us to dedicate a substantial portion of our cash flow to the repayment of our indebtedness, reducing the amount of cash flow available to fund motion picture and television production, distribution and other operating expenses;
 
  •  limit our flexibility in planning for or reacting to downturns in our business, our industry or the economy in general;
 
  •  limit our ability to obtain additional financing, if necessary, for operating expenses, or limit our ability to obtain such financing on terms acceptable to us; and
 
  •  limit our ability to pursue strategic acquisitions and other business opportunities that may be in our best interests.


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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, for instance, 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, our revenues and results of operations may be 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 have few 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. In April 2008, we announced a joint venture with Viacom, Paramount Pictures and MGM to create a premium television channel and video on demand service. The joint venture will provide for certain output agreements with each partner, including us. We cannot assure you, however, that the joint venture will be successful. Additionally, 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 approximately 19% of our revenues in fiscal 2008. 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 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 U.S. Our principal currency exposure is between Canadian and U.S. dollars. 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


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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.
 
 
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. For instance, in May 2008, we announced a joint venture with Eros for distribution of our and other English language content in original as well as dubbed language versions within South Asia including India, across all distribution formats such as cinemas, home entertainment, television and new media. Additionally, in April 2008, we announced a joint venture with Viacom, Paramount Pictures and MGM to create a premium television channel and video on demand service. 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.


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On May 25, 2007, the Company closed a theatrical slate funding agreement through a series of agreements, as amended on January 30, 2008. Under this arrangement, Pride, 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 $196 million, net of transaction costs. The funds available from Pride were generated from the issuance by Pride of $35 million of subordinated 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. Pride 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 based on their pro rata contribution to the applicable costs similar to a back-end participation on a film.
 
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 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.
 
 
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.
 
 
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 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


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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.
 
Changes in the United States, global or regional economic conditions could adversely affect the profitability of our business.  A decrease in economic activity in the U.S. or in other regions of the world in which we do business could adversely affect demand for our films, thus reducing our revenue and earnings. A decline in economic conditions could reduce performance of our theatrical, television and home entertainment releases. In addition, an increase in price levels generally, or in price levels in a particular sector such as the energy sector, could result in a shift in consumer demand away from the entertainment we offer, which could also adversely affect our revenues and, at the same time, increase our costs.
 
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. In November 2007, the members of the Writer’s Guild of America went on strike, and a new agreement was not approved until February 2008. Additionally, the Directors Guild of America and Screen Actors Guild collective bargaining agreements expire in 2008, and while an agreement has been reached with the Directors Guild, negotiations with the Screen Actors Guild, which agreement expires on June 30, 2008, are ongoing. 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 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


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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.
 
 
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, 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 distribute motion picture and television productions outside the United States in the UK and Ireland through Lionsgate UK, in Australia and New Zealand through Lionsgate Australia, 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:
 
  •  laws and policies affecting trade, investment and taxes, including laws and policies relating to the repatriation of funds and withholding taxes, and changes in these laws;
 
  •  changes in local regulatory requirements, including restrictions on content;
 
  •  differing cultural tastes and attitudes;
 
  •  differing degrees of protection for intellectual property;
 
  •  financial instability and increased market concentration of buyers in foreign television markets, including in European pay television markets;
 
  •  the instability of foreign economies and governments;


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  •  fluctuating foreign exchange rates;
 
  •  the spread of communicable diseases; and
 
  •  war and acts of terrorism.
 
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.
 
 
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.
 
 
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.
 
 
As a distributor of media content, we may face potential liability for:
 
  •  defamation;
 
  •  invasion of privacy;
 
  •  negligence;
 
  •  copyright or trademark infringement (as discussed above); and
 
  •  other claims based on the nature and content of the materials distributed.


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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.
 
 
Motion picture piracy is extensive in many parts of the world, including South America, Asia, and 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.
 
 
The Investment Canada Act (Canada) or ICA is administered by the Minister of Industry of Canada 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.


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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 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.
 
 
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.
 
 
The market price of our common shares may be influenced by many factors, some of which are beyond our control, including changes in financial estimates by analysts, announcements by us or our competitors of significant contracts, productions, acquisitions or capital commitments, variations in quarterly operating results, general economic conditions, terrorist acts, future sales of our common shares and investor perception of us and the filmmaking industry. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance.
 
While we believe we currently have adequate internal control over financial reporting, we are required to assess our internal control over financial reporting on an annual basis and any future adverse results from such assessment could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.
 
Section 404 of the Sarbanes-Oxley Act of 2002 and the accompanying rules and regulations promulgated by the SEC to implement it require us to include in our Form 10-K an annual report by our management regarding the effectiveness of our internal control over financial reporting. The report includes, among other things, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. During this process, if our management identifies one or more material weaknesses in our internal control over financial reporting that cannot be remediated in a timely manner, we will be unable to assert such internal control is effective. While we currently believe our internal control over financial reporting is effective, the effectiveness of our internal controls in future periods is subject to the risk that our controls may become inadequate because of changes in conditions, and, as a result, the degree of compliance of our internal control over financial reporting with the applicable policies or procedures may deteriorate. If we are unable to conclude that our internal control over financial reporting is effective (or if our independent auditors disagree with our conclusion), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price.


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ITEM 1B.   UNRESOLVED STAFF COMMENTS.
 
Not applicable.
 
ITEM 2.   PROPERTIES.
 
Our corporate head office is located at 1055 West Hastings Street, Suite 2200, Vancouver, British Columbia V6E 2E9. Our principal executive offices are located at 1055 West Hastings Street, Suite 2200 and 2700 Colorado Avenue, Suite 200, Santa Monica, California, 90404. At the Santa Monica address, we occupy approximately 125,000 square feet, including an approximately 4,000 square foot screening room. Our lease expires in August 2011.
 
In March 2006, the Company sold its studio facilities located at 555 Brooksbank Avenue, North Vancouver, British Columbia.
 
We believe that our current facilities are adequate to conduct our business operations for the foreseeable future. We believe that we will be able to renew these leases on similar terms upon expiration. If we cannot renew, we believe that we could find other suitable premises without any material adverse impact on our operations.
 
ITEM 3.   LEGAL PROCEEDINGS.
 
From time to time, the Company is involved in certain claims and legal proceedings arising in the normal course of business. While the resolution of these matters cannot be predicted with certainty, we do not believe, based on current knowledge, 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.
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2008.
 
 
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
 
Our common shares are listed on the New York Stock Exchange (the “NYSE”) and trades under the symbol “LGF.”
 
On May 15, 2008, the closing sales price of our common shares on the NYSE was $10.00.
 
The following table sets forth the range of high and low closing sale prices for our common shares, as reported by the NYSE in U.S. dollars, for our two most recent fiscal years:
 
                 
    High     Low  
 
Year ended March 31, 2009
               
First Quarter (through May 15, 2008)
  $ 10.41     $ 9.79  
Year ended March 31, 2008
               
Fourth Quarter
  $ 9.85     $ 8.64  
Third Quarter
    10.79       8.94  
Second Quarter
    11.51       9.00  
First Quarter
    11.93       10.84  
Year ended March 31, 2007
               
Fourth Quarter
  $ 12.01     $ 10.23  
Third Quarter
    11.47       9.71  
Second Quarter
    10.44       8.52  
First Quarter
    10.17       8.55  


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Holders
 
As of May 15, 2008, there were 573 registered holders of our common shares.
 
 
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 with JP Morgan Chase Bank, National Association 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.
 
 
We currently maintain two equity compensation plans: the Lions Gate Entertainment Corp. 2004 Performance Incentive Plan (the “2004 Plan”) and the Lionsgate Employees’ and Directors’ Equity Incentive Plan (the “Equity Incentive Plan”), each of which has been approved by our shareholders. In addition, as described below, we granted certain equity-based awards that were not under shareholder-approved plans in connection with our acquisition of Mandate Pictures in 2007.
 
The following table sets forth, for each of our equity compensation plans, the number of common shares subject to outstanding options and rights, the weighted-average exercise price of outstanding options, and the number of shares remaining available for future award grants as of March 31, 2008.
 
                         
                Number of Common Shares
 
                Remaining Available for
 
                Future Issuance Under
 
    Number of Common
          Equity
 
    Shares to be Issued
    Weighted-Average
    Compensation Plans
 
    Upon Exercise of
    Exercise Price of
    (Excluding Shares
 
    Outstanding Options,
    Outstanding Options,
    Reflected in
 
Plan Category
  Warrants and Rights     Warrants and Rights     the First Column)  
 
Equity compensation plans approved by shareholders
    7,244,529 (1)   $ 8.20 (2)     6,858,655 (3)
Equity compensation plans not approved by shareholders
    1,150,000 (4)   $ 9.22 (4)     0  
Total
    8,394,529     $ 8.32       6,858,655  
 
 
(1) Of these shares, 3,495,668 were subject to options then outstanding under the 2004 Plan and 1,041,695 were subject to options then outstanding under the Equity Incentive Plan. In addition, this number includes 2,037,125 shares that were subject to outstanding stock unit awards granted under the 2004 Plan. Of these stock unit awards, 670,041 represent units subject to satisfaction of certain performance targets.
 
(2) This number does not reflect the 2,037,125 shares that were subject to outstanding stock unit awards granted under the 2004 Plan.
 
(3) All of these shares were available for award grant purposes under the 2004 Plan. The shares available under the 2004 Plan are, subject to certain other limits under that plan, generally available for any type of award authorized under the 2004 Plan including options, stock appreciation rights, restricted stock, restricted share units, stock bonuses and performance shares. No new awards may be granted under the Equity Incentive Plan.
 
(4) On September 10, 2007, pursuant to the acquisition of Mandate Pictures, Joseph Drake entered into an employment agreement with Lions Gate Films, Inc., a wholly-owned subsidiary of the Company (“LGF”), to serve as its Co-Chief Operating Officer and President of the Motion Picture Group, and Nathan Kahane entered into an employment agreement with LGF to serve as the President of Mandate Pictures. Pursuant to the terms of his employment agreement, Mr. Drake was granted 525,000 restricted share units (payable upon vesting in an equal number of shares of our common stock) which are scheduled to vest over four years based on his


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continued employment with LGF and half of which are also subject to the satisfaction of certain performance targets, and options to purchase 500,000 shares of our common stock which are scheduled to vest over five years based on his continued employment with LGF. Pursuant to the terms of his employment agreement, Mr. Kahane was granted 25,000 restricted share units (payable upon vesting in an equal number of shares of our common stock) and options to purchase 100,000 shares of our common stock, all of which are scheduled to vest over three years based on his continued employment with LGF. The per share exercise price of each option is the closing price of our common stock on September 10, 2007, the date of grant of the options.
 
 
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 U.S. 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 U.S. limited liability company in some circumstances may not be considered to be a resident of the U.S. 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. In particular, this summary does not consider the proposed changes to the Convention that are contained in the Fifth Protocol to the Convention, which has not yet been ratified by the U.S. Senate.
 
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%.


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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 designated 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.
 
 
The following table sets forth information with respect to shares of our common stock purchased by us during the three months ended March 31, 2008:
 
 
                                 
                      (d) Approximate
 
                (c) Total Number of
    Dollar Value of
 
                Shares Purchased as
    Shares that May Yet
 
                Part of Publicly
    Be Purchased Under
 
    (a) Total Number of
    (b) Average Price
    Announced Plans or
    the Plans or
 
Period
  Shares Purchased     Paid per Share     Programs     Programs  
 
January 1, 2008 - January 31, 2008
                    $ 31,600,000  
February 1, 2008 - February 29, 2008
    213,600     $ 8.96       213,600     $ 29,700,000  
March 1, 2008 - March 31, 2008
                    $ 29,700,000  
Total
    213,600     $ 8.96       213,600     $ 29,700,000  
 
 
(1) On May 31, 2007, our Board of Directors authorized the repurchase of up to $50 million of our common shares, with the timing, price, quantity, and manner of the purchases to be made at the discretion of management, depending upon market conditions. Such purchases are structured as permitted by securities laws and other legal requirements. During the period from the authorization date through March 31, 2008, 2,198,635 million shares have been repurchased at a cost of approximately $20.3 million (including commission costs). The share repurchase program has no expiration date.


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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, 2003 and ending March 31, 2008. All values assume that $100 was invested on March 31, 2003 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.
 
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Lions Gate Entertainment Corporation, The NYSE Composite Index
and the S&P Movies & Entertainment Index
 
(PERFORMANCE GRAPH)
 
                                                             
 Company/Index     3/31/03     3/31/04     3/31/05     3/31/06     3/31/07     3/31/08
Lions Gate Entertainment Corp. 
      100.00         327.23         578.53         531.41         597.91         510.47  
NYSE Composite Index
      100.00         142.52         158.13         185.71         213.48         207.39  
S&P Movies & Entertainment Index
      100.00         132.97         134.09         128.75         158.09         132.56  
                                                             
 
* $100 invested on 3/31/03 in stock or index-including reinvestment of dividends.
 
Fiscal year ending March 31.
 
* The graph and related information are being furnished solely to accompany this Form 10-K pursuant to Item 201(e) of Regulation S-K. They shall not be deemed “soliciting materials” or to be “filed” with the Securities and Exchange Commission (other than as provided in Item 201), nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate it by reference into such filing.


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ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA.
 
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 includes the results of Artisan Entertainment, Lionsgate UK, Debmar-Mercury, and Mandate Pictures from their acquisition dates of December 16, 2003, October 17, 2005, July 3, 2006 and September 10, 2007, respectively, onwards. The Selected Consolidated Financial Data below also includes the results of Maple Pictures from the date of consolidation of July 18, 2007, onwards. Due to the acquisitions and the consolidation of Maple Pictures, the Company’s results of operations for the years ended March 31, 2008, 2007, 2006, 2005 and 2004 and financial positions as at March 31, 2008, 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.
 
                                         
    Year Ended March 31,  
    2008     2007     2006     2005     2004  
    (Amounts in thousands, except per share amounts)  
 
Statement of Operations Data:
                                       
Revenues
  $ 1,361,039     $ 976,740     $ 945,385     $ 838,097     $ 369,636  
Expenses:
                                       
Direct operating
    662,450       436,818       458,990       353,790       179,268  
Distribution and marketing
    635,666       404,410       399,299       364,281       207,045  
General and administration
    119,080       90,782       69,936       69,258       42,603  
Severance and relocation costs
                            5,575  
Write-down of other assets
                            11,686  
Depreciation
    3,974       2,786       1,817       2,370       2,451  
                                         
Total expenses
    1,421,170       934,796       930,042       789,699       448,628  
                                         
Operating income (loss)
    (60,131 )     41,944       15,343       48,398       (78,992 )
                                         
Other expenses (income):
                                       
Interest expense
    16,432       17,832       18,860       25,318       13,154  
Interest rate swaps mark-to-market
                123       (2,453 )     (833 )
Interest and other income
    (11,276 )     (11,930 )     (4,304 )     (3,440 )     (136 )
Gain on sale of equity securities
    (2,909 )     (1,722 )                  
Minority interests
                      107        
                                         
Total other income, net
    2,247       4,180       14,679       19,532       12,185  
                                         
Income (loss) before equity interests and income taxes
    (62,378 )     37,764       664       28,866       (91,177 )
Equity interests income (loss)
    (7,559 )     (2,605 )     (74 )     (200 )     (2,169 )
                                         
Income (loss) before income taxes
    (69,937 )     35,159       590       28,666       (93,346 )
Income tax provision (benefit)
    4,031       7,680       (1,030 )     8,747       (203 )
                                         
Income (loss) before discontinued operations
    (73,968 )     27,479       1,620       19,919       (93,143 )
Income (loss) from discontinued operations (including gain on sale in 2006 of $4,872), net of tax of nil, nil, $2,464, $200, and $576
                4,476       362       1,047  
                                         
Net income (loss)
    (73,968 )     27,479       6,096       20,281       (92,096 )
Modification of warrants
                            (2,031 )
Dividends on Series A preferred shares
                            (387 )
Accretion and amortization on Series A preferred shares
                            (643 )
                                         
Net income (loss) available to common shareholders
  $ (73,968 )   $ 27,479     $ 6,096     $ 20,281     $ (95,157 )
                                         


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    Year Ended March 31,  
    2008     2007     2006     2005     2004  
    (Amounts in thousands, except per share amounts)  
 
Basic Per Share Data:
                                       
Basic Income (Loss) Per Common Share From Continuing Operations
  $ (0.62 )   $ 0.25     $ 0.02     $ 0.20     $ (1.36 )
Basic Income (Loss) Per Common Share From Discontinued Operations
                0.04       0.01       0.01  
                                         
Basic Net Income (Loss) Per Common Share
  $ (0.62 )   $ 0.25     $ 0.06     $ 0.21     $ (1.35 )
                                         
Diluted Per Share Data:
                                       
Diluted Income (Loss) Per Common Share From Continuing Operations
  $ (0.62 )   $ 0.25     $ 0.02     $ 0.19     $ (1.36 )
Diluted Income (Loss) Per Common Share From Discontinued Operations
                0.04       0.01       0.01  
                                         
Diluted Net Income (Loss) Per Common Share
  $ (0.62 )   $ 0.25     $ 0.06     $ 0.20     $ (1.35 )
                                         
Weighted average number of common shares outstanding:
                                       
Basic
    118,427       108,398       103,066       97,610       70,656  
Diluted
    118,427       111,164       106,102       103,375       70,656  
Balance Sheet Data (at end of period):
                                       
Cash and cash equivalents
    371,589       51,497       46,978       112,839       7,089  
Investments — auction rate securities
    6,927       237,379       167,081              
Investment in films and television programs
    608,942       493,140       417,750       367,376       406,170  
Total assets
    1,537,758       1,137,095       1,053,249       854,629       762,683  
Bank loans
                      1,162       326,174  
Subordinated notes and other financing obligations
    328,718       325,000       385,000       390,000       65,000  
Total liabilities
    1,349,520       889,205       903,979       737,490       693,074  
Shareholders’ equity
    188,238       247,890       149,270       117,139       69,609  

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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
 
Lions Gate Entertainment Corp. (“Lionsgate,” the “Company,” “we,” “us” or “our”) is a leading next generation filmed entertainment studio with a diversified presence in motion pictures, television programming, home entertainment, family entertainment, video-on-demand and digitally delivered content. We release approximately 18 to 20 motion pictures theatrically per year, which include films we develop and produce in-house, as well as films that we acquire from third parties. We also have produced approximately 76 hours of television programming on average for the last three years, primarily prime time television series for the cable and broadcast networks. 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 8,000 motion picture titles and approximately 4,000 television episodes and programs directly to retailers, video rental stores, and pay and free television channels in the United States (the “U.S.”), Canada, the United Kingdom (the “UK”) and Ireland, through various digital media platforms, and indirectly to other international markets through our subsidiaries and various third parties.
 
We own interests in CinemaNow, Inc., an internet video-on-demand provider (“CinemaNow”), Horror Entertainment, LLC, a multiplatform programming and content service provider (“FEARnet”), NextPoint, Inc., an online video entertainment service provider (“Break.com”), Roadside Attractions, LLC, an independent theatrical distribution company (“Roadside”), Elevation Sales Limited, a UK based home entertainment distributor (“Elevation”), and Maple Pictures Corp., a Canadian film, television and home video distributor (“Maple Pictures”).
 
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. As part of this strategy, we have acquired and integrated into our business the following:
 
  •  Mandate Pictures, LLC (“Mandate Pictures”), a worldwide independent film producer, financier and distributor (acquired in September 2007);
 
  •  Debmar-Mercury, LLC (“Debmar-Mercury”), a leading independent syndicator of film and television packages (acquired in July 2006);
 
  •  Redbus Film Distribution Ltd. and Redbus Pictures (collectively, “Redbus” and currently, Lions Gate UK Ltd. (“Lionsgate UK”)), an independent UK 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 (acquired in October 2005);
 
  •  certain of the film assets and accounts receivable of Modern Entertainment, Ltd., a licensor of film rights to DVD distributors, broadcasters and cable networks (acquired in August 2005);
 
  •  Artisan Entertainment, Inc. (“Artisan Entertainment”), a diversified motion picture, family and home entertainment company (acquired in December 2003); and
 
  •  Trimark Holdings, Inc., a worldwide distributor of entertainment content (acquired in October 2000).
 
Our revenues are derived from the following business segments:
 
  •  Motion Pictures, which includes “Theatrical,” “Home Entertainment,” “Television” and “International Distribution.”
 
Theatrical revenues are derived from the theatrical release of motion pictures in the U.S. and Canada which are distributed to theatrical exhibitors on a picture by picture basis. The financial terms that we negotiate with our theatrical exhibitors generally provide that we receive a percentage of the box office results and are negotiated on a picture by picture basis.
 
Home Entertainment revenues are derived primarily from the sale of video and DVD releases of our own productions and acquired films, including theatrical releases and direct-to-video releases, to retail stores and through digital media platforms. In addition, we have revenue sharing arrangements with certain rental stores which


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generally provide that in exchange for a nominal or no upfront sales price we share in the rental revenues generated by each such store on a title by title basis.
 
Television revenues are primarily derived from the licensing of our productions and acquired films to the domestic cable, free and pay television markets.
 
International revenues include revenues from our international subsidiaries from the licensing and sale of our productions, acquired films, our catalog product or libraries of acquired titles and revenue from our direct distribution to international markets on a territory-by-territory basis. Our revenues are derived from the U.S., Canada, UK, Australia and other foreign countries; none of the foreign countries individually comprised greater than 10% of total revenue. (See Note 16 of our accompanying consolidated financial statements.)
 
  •  Television Productions, which includes the licensing and syndication to domestic and international markets of one-hour and half-hour drama series, television movies and mini-series and non-fiction programming and revenues from the sale of television production movies or series in other media, including home entertainment and through digital media platforms.
 
Our primary operating expenses include the following:
 
  •  Direct Operating Expenses, which include amortization of production or acquisition costs, participation and residual expenses and provision for doubtful accounts. Participation costs represent contingent consideration payable based on the performance of the film to parties associated with the film, including producers, writers, directors or actors, etc. Residuals represent amounts payable to various unions or “guilds” such as the Screen Actors Guild, Directors Guild of America, and Writers Guild of America, based on the performance of the film in certain ancillary markets or based on the individual’s (i.e., actor, director, writer) salary level in the television market.
 
  •  Distribution and Marketing Expenses, which primarily include the costs of theatrical “prints and advertising” and of video and DVD duplication and marketing. Theatrical print and advertising represent the costs of the theatrical prints delivered to theatrical exhibitors and advertising includes the advertising and marketing cost associated with the theatrical release of the picture. Video and DVD duplication represent the cost of the video and DVD product and the manufacturing costs associated with creating the physical products. Video and DVD marketing costs represent the cost of advertising the product at or near the time of its release or special promotional advertising.
 
  •  General and Administration Expenses, which include salaries and other overhead.
 
Our financial results include the results of Artisan Entertainment, Lionsgate UK, Debmar-Mercury and Mandate Pictures from their acquisition dates of December 16, 2003, October 17, 2005, July 3, 2006, and September 10, 2007, respectively, onwards. Our financial results also include the results of Maple Pictures from the date of consolidation of July 18, 2007, onwards. Due to the acquisitions, the Company’s results of operations for the years ended March 31, 2008, 2007, and 2006 and financial positions as at March 31, 2008 and 2007 are not directly comparable to prior reporting periods.
 
 
Mandate Pictures, LLC.  On September 10, 2007, the Company purchased all of the membership interests in Mandate Pictures, a worldwide independent film producer and distributor. The Mandate Pictures acquisition brings to the Company additional experienced management personnel working within the motion picture business segment. The aggregate cost of the acquisition was approximately $128.8 million including liabilities assumed of $70.2 million, with amounts paid or to be paid to the selling shareholders of $58.6 million, comprised of $46.8 million in cash and 1,282,999 in the Company’s common shares, 169,879 of which have been issued during the quarter ended March 31, 2008 and delivered and the balance of 1,113,120 to be issued and delivered in September 2008 and March 2009, pursuant to certain holdback provisions. Of the $46.8 million cash portion of the purchase price, $44.3 million was paid at closing, $0.9 million represented estimated direct transaction costs (paid to lawyers, accountants and other consultants), and $1.6 million represented the remaining estimated cash consideration that will be paid within the next six-month period. In addition, immediately prior to the transaction,


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the Company loaned Mandate Pictures $2.9 million. The value assigned to the shares for purposes of recording the acquisition was $11.8 million and was based on the closing price of the Company’s common shares on the date of the acquisition. In addition, the Company may be obligated to pay additional amounts pursuant to the purchase agreement should certain films or derivative works meet certain target performance thresholds.
 
The acquisition was accounted for as a purchase, with the results of operations of Mandate Pictures consolidated from September 10, 2007. Goodwill of $37.1 million represents the excess of purchase price over the preliminary estimate of fair value of the net identifiable tangible and intangible assets acquired.
 
Société Générale de Financement du Québec.  On July 30, 2007, the Company entered into a four-year filmed entertainment slate financing agreement with Société Générale de Financement du Québec (“SGF”), the Québec provincial government’s investment arm. SGF will finance up to 35% of production costs of television and feature film productions produced in Québec for a four-year period for an aggregate investment of up to $140 million, and the Company will advance all amounts necessary to fund the remaining budgeted costs. The maximum aggregate of budgeted costs over the four-year period will be $400 million, including the Company’s portion, but no more than $100 million per year. In connection with this agreement, the Company and SGF will proportionally share in the proceeds derived from the funded productions after the Company deducts a distribution fee, recoups all distribution expenses and releasing costs, and pays all applicable participations and residuals.
 
Maple Pictures Corp.  Represents the Company’s interest in Maple Pictures, a Canadian film, television and home video distributor. Maple Pictures was formed by a director of the Company, a former Lionsgate executive and a third party equity investor. Through July 17, 2007, the Company owned 10% of the common shares of Maple Pictures and accounted for its investment in Maple Pictures under the equity method of accounting. For the period from April 1, 2007 through July 17, 2007, the Company recorded 10% of the loss incurred by Maple Pictures amounting to approximately $0.1 million. On July 18, 2007, Maple Pictures repurchased all of the outstanding shares held by a third party investor, which increased the Company’s ownership of Maple Pictures requiring the Company to consolidate Maple Pictures for financial reporting purposes beginning on July 18, 2007. The Company had been reporting the results of Maple Pictures on a one quarter lag given its December 31 year end and the timing of the availability of its financial information. During the quarter ended March 31, 2008, Maple Pictures changed its year end to March 31 and its financial information is now available on a more timely basis; accordingly, the Company eliminated the lag in reporting the results of Maple Pictures such that the consolidated financial statements for the year ended March 31, 2008 include the results of Maple Pictures on a consolidated basis from July 18, 2007 through March 31, 2008. In accordance with EITF Issue No. 06-09, the Company has applied the change on a retrospective basis and has adjusted the results of the quarters ended December 31, 2007 and September 30, 2007, as presented in the unaudited quarterly data (see Note 20 of our accompanying consolidated financial statements) to eliminate the lag in reporting the results of Maple Pictures. For the periods prior to the quarter ended September 30, 2007, Maple Pictures was accounted for under the equity method and the impact of eliminating the lag was not material to the prior periods.
 
NextPoint, Inc.  On June 29, 2007, the Company purchased a 42% equity interest or 21,000,000 shares of the Series B Preferred Stock of NextPoint, Inc. (“Break.com”), an online video entertainment service provider operating under the branding of “Break.com.” The aggregate purchase price was approximately $21.4 million, which included $0.5 million of transaction costs, by issuing 1,890,189 of the Company’s common shares. The Company has a call option which is exercisable at any time from June 29, 2007 until the earlier of (i) 30 months after June 29, 2007 or (ii) a year after a change of control, as narrowly defined, to purchase all, but not less than all, of the remaining 58% equity interests (excluding any subsequent dilutive events of Break.com), including in-the-money stock options, warrants and other rights, of Break.com for $58 million in cash or common stock, at the Company’s option. The Company is recording its share of the Break.com results on a one quarter lag and, accordingly, during the year ended March 31, 2008, the Company recorded 42% of the loss incurred by Break.com from the date of investment through December 31, 2007.
 
Roadside Attractions, LLC.  Represents the Company’s 43% equity interest acquired on July 26, 2007 in Roadside Attractions, LLC (“Roadside”), an independent theatrical releasing company. The Company has a call option which is exercisable for a period of 90 days commencing on the receipt of certain audited financial statements for a period ending on the third anniversary of the investment to purchase all of the remaining 57%


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equity interests of Roadside, at a price representative of the then fair value of the remaining interest. The Company is recording its share of the Roadside results on a one quarter lag and, accordingly, during the year ended March 31, 2008, the Company recorded 43% of the loss incurred by Roadside from the date of investment through December 31, 2007.
 
Theatrical Slate Financing.  On May 25, 2007, the Company closed a theatrical slate funding arrangement, as amended on January 30, 2008. Under this arrangement, Pride Pictures LLC (“Pride”), 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 $196 million, net of transaction costs. The funds available from Pride were generated from the issuance by Pride of $35 million of subordinated debt instruments, $35 million of equity and $134 million from a senior credit facility, which is subject to a borrowing base. The Company is not a party to the Pride debt obligations or their senior credit facility, and provides no guarantee of repayment of these obligations. The percentage of the contribution may vary on certain pictures. Pride 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 based on their pro rata contribution to the applicable costs similar to a back-end participation on a film. The $134 million senior credit facility is a revolving facility for print and advertising costs, other releasing costs, and direct production and acquisition costs. Funding of direct production and acquisition cost is subject to a borrowing base calculation generally based on 90% of the estimated ultimate amounts due to Pride on previously released films, as defined in the appropriate agreements.
 
 
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 (“GAAP”).  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 20 years from the date of acquisition.
 
The Company’s management regularly reviews and revises when necessary its ultimate revenue and cost estimates, which may result in a change in the rate of amortization of film costs and participations and residuals and/or write-down of all or a portion of the unamortized costs of the film or television program to its estimated fair value. The Company’s 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


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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 operations.
 
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 U.S., 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”). 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


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valuation allowance will be reversed. However, this assessment of our planned use of our deferred tax assets is an estimate which could change in the future depending upon the generation of taxable income in amounts sufficient to realize our deferred tax assets.
 
Goodwill.  Goodwill is reviewed annually for impairment within each fiscal year or between the annual tests if an event occurs or circumstances change that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. 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, 2007. 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, “Business Combinations.” 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.
 
 
Statement of Financial Accounting Standards No. 123(R).  Effective April 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R) using the modified-prospective transition method. Under such transition method, compensation cost recognized in the years ended March 31, 2008 and 2007 includes: (a) compensation cost for all stock options granted prior to, but not yet vested as of, April 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted on or after April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). See Note 11 for further discussion of the Company’s stock-based compensation in accordance with SFAS No. 123(R).
 
FASB Issued Interpretation No. 48.  On July 13, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN No. 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN No. 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted the provisions of FIN 48 effective April 1, 2007. Upon adoption, the Company recognized no adjustment of unrecognized tax benefits.
 
Statement of Financial Accounting Standards No. 157.  In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. The Company will be required to adopt the provisions on SFAS No. 157 on April 1, 2008. The Company is currently evaluating the impact of adopting the provisions of SFAS No. 157 but does not believe that the adoption of SFAS No. 157 will materially impact its financial position, cash flows, or results of operations.


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Consolidated revenues in fiscal 2008 of $1.36 billion increased $384.3 million, or 39.3%, compared to $976.7 million in fiscal 2007. Motion pictures revenue of $1.15 billion in fiscal 2008 increased $292.7 million, or 34.1%, compared to $858.2 million in fiscal 2007. Television revenues of $210.1 million in fiscal 2008 increased $91.6 million, or 77.3%, compared to $118.5 million in fiscal 2007.
 
Motion Pictures Revenue
 
The increase in motion pictures revenue in fiscal 2008 was attributable to increases in theatrical, video, television, international, Mandate Pictures and other revenue. The following table sets forth the components of revenue for the motion pictures reporting segment for the fiscal year ended March 31, 2008 and 2007:
 
                                 
    Year Ended
    Year Ended
             
    March 31,
    March 31,
    Increase (Decrease)  
    2008     2007     Amount     Percent  
    (Amounts in millions)  
 
Motion Pictures
                               
Theatrical
  $ 191.7     $ 107.9     $ 83.8       77.7 %
Video
    623.5       528.3       95.2       18.0 %
Television
    115.9       109.3       6.6       6.0 %
International
    158.7       105.2       53.5       50.9 %
Mandate Pictures
    52.3             52.3       100.0 %
Other
    8.8       7.5       1.3       17.3 %
                                 
    $ 1,150.9     $ 858.2     $ 292.7       34.1 %
                                 


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The following table sets forth the titles contributing significant motion pictures revenue for the fiscal year ended March 31, 2008 and 2007:
 
             
Year Ended March 31,
2008   2007
    Theatrical and Video
      Theatrical and Video
Title   Release Date   Title   Release Date
 
Theatrical:
      Theatrical:    
3:10 to Yuma
  September 2007     Akeelah and the Bee   April 2006
Good Luck Chuck
  September 2007     Crank   September 2006
Meet The Browns
  March 2008     Daddy’s Little Girls   February 2007
Rambo
  January 2008     Employee of the Month   October 2006
Saw IV
  October 2007     Happily N’Ever After   January 2007
The Eye
  February 2008     Saw III   October 2006
The Bank Job
  March 2008     See No Evil   May 2006
War
  August 2007     The Descent   August 2006
Why Did I Get Married? — Feature
  October 2007        
Video:
      Video:    
3:10 to Yuma
  January 2008     Akeelah and the Bee   August 2006
Bratz: The Movie
  November 2007     An American Haunting   October 2006
Daddy’s Little Girls
  June 2007     Crank   January 2007
Delta Farce
  September 2007     Crash   September 2005
Good Luck Chuck
  January 2008     Employee of the Month   January 2007
Happily N’Ever After
  May 2007     Madea Goes to Jail   June 2006
Pride
  June 2007     Madea’s Family Reunion   June 2006
Saw IV
  January 2008     Saw III   January 2007
The Condemned
  September 2007     See No Evil   November 2006
War
  January 2008     The Descent   December 2006
Why Did I Get Married? — Feature
  February 2008        
     
Television:   Television:
Crank
  Akeelah and the Bee
Daddy’s Little Girls
  Hostel
Employee of the Month
  Larry the Cable Guy: Health Inspector
Saw III
  Lord of War
The Descent
  Madea’s Family Reunion
Saw II
     
International:
  International:
Good Luck Chuck
  Crank
Saw III
  Saw
Saw IV
  Saw II
The Condemned
  Saw III
War
  The Lost City
 
Theatrical revenue of $191.7 million increased $83.8 million, or 77.7%, in fiscal 2008 as compared to fiscal 2007 primarily due to the performance of the theatrical releases listed in the above table during fiscal 2008 as compared to the performance during fiscal 2007. In fiscal 2008, the titles listed in the above table as contributing significant theatrical revenue represented individually between 5% and 16% of total theatrical revenue and, in the aggregate, approximately 81% of total theatrical revenue. 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.
 
Video revenue of $623.5 million increased $95.2 million, or 18.0%, in fiscal 2008 as compared to fiscal 2007. The increase is primarily due to an increase in the amount of DVDs sold. The amount of DVDs sold increased primarily due to the performance of the theatrical releases in fiscal 2008 that were also subsequently released as home entertainment product in the current fiscal year. In fiscal 2008, the titles listed above as contributing significant video revenue represented individually between 2% to 9% of total video revenue and, in the aggregate, 48%, or $300.8 million of total video revenue for the year. In fiscal 2007, the titles listed above as contributing significant video revenue 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 2008, $322.8 million, or 52%, of total video


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revenue was contributed by titles that individually make up less than 2% of total video revenue, and in fiscal 2007, this amounted to $300.4 million, or 57%, of total video revenue for the year.
 
Television revenue included in motion pictures revenue of $115.9 million in fiscal 2008 increased $6.6 million, or 6.0%, compared to fiscal 2007. In fiscal 2008, the titles listed above as contributing significant television revenue represented individually between 5% to 12% of total television revenue and, in the aggregate, 44%, or $50.7 million of total television revenue for the year. 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 2008, $65.5 million, or 56%, of total television revenue was contributed by titles that individually make up less than 5% of total video revenue, and in fiscal 2007, this amounted to $55.5 million, or 51%, of total video revenue for the year.
 
International revenue of $158.7 million increased $53.5 million, or 50.9%, in fiscal 2008 as compared to fiscal 2007. Lionsgate UK, established from the acquisition of Redbus in fiscal 2006, contributed $64.6 million, or 40.7% of international revenue in fiscal 2008, which included revenues from 3:10 to Yuma, Dirty Dancing, Good Luck Chuck, Saw III and Saw IV, compared to $45.0 million, or 42.8%, of total international revenue in fiscal 2007. In fiscal 2008, the titles listed in the table above as contributing significant international revenue, excluding revenue generated from these titles by Lionsgate UK, represented individually between 2% to 12% of total international revenue and, in the aggregate, 28%, or $44.5 million, of total international revenue for the year. In fiscal 2007, the titles listed in the table above as contributing significant revenue represented individually between 2% to 10% of total international revenue and, in the aggregate, 29%, or $30.8 million, of total international revenue for the year.
 
Mandate Pictures revenue includes revenue from the sales and licensing of domestic and worldwide rights of titles developed or acquired by Mandate Pictures to third-party distributors as well as various titles sold by Mandate International, LLC, one of the Company’s international divisions, to international sub-distributors. International revenue from Mandate titles is included in the Mandate Picture revenue in the table above. In the current fiscal year, Mandate Pictures revenue amounted to $52.3 million, which included the titles 30 Days of Night, Boogeyman II, Harold and Kumar Escape From Guantanamo Bay and Passengers.
 
Television Revenue
 
The following table sets forth the components and the changes in the components of revenue that make up television production revenue for the fiscal year ended March 31, 2008 and 2007:
 
                                 
    Year Ended
    Year Ended
             
    March 31,
    March 31,
    Increase (Decrease)  
    2008     2007     Amount     Percent  
    (Amounts in millions)  
 
Television Production
                               
Domestic series licensing
  $ 134.4     $ 82.4     $ 52.0       63.1 %
Domestic television movies and miniseries
    16.1       16.0       0.1       0.6 %
International
    37.6       11.0       26.6       241.8 %
Video releases of television production
    21.6       8.4       13.2       157.1 %
Other
    0.4       0.7       (0.3 )     (42.9 )%
                                 
    $ 210.1     $ 118.5     $ 91.6       77.3 %
                                 


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Revenues included in domestic series licensing from Debmar-Mercury increased $35.4 million to $50.2 million from $14.8 million in fiscal 2007 due to revenue from television series such as House of Payne, Family Feud and South Park. In addition, the following table sets forth the number of television episodes and hours delivered in the fiscal year ended March 31, 2008 and 2007, respectively, excluding television episodes delivered by the Company’s television syndication subsidiary, Debmar-Mercury:
 
                                             
        Year Ended
            Year Ended
 
        March 31, 2008             March 31, 2007  
        Episodes     Hours             Episodes     Hours  
 
The Dead Zone Season 5
  1hr     13       13.0     Dirty Dancing Reality TV Series   1hr     8       8.0  
The Dresden Files
  1hr     2       2.0     The Dresden Files   1hr     13       13.0  
Mad Men
  1hr     12       12.0     Wildfire Season 2   1hr     1       1.0  
Wildfire Season 4
  1hr     13       13.0     Wildfire Season 3   1hr     13       13.0  
Weeds Season 3
  1/2hr     15       7.5     Hidden Palms   1hr     8       8.0  
Pilots
  1/2hr     2       1.0     Lovespring International   1/2hr     13       6.5  
                        I Pity The Fool   1/2hr     6       3.0  
                        Weeds Season 2   1/2hr     12       6.0  
                                             
          57       48.5               74       58.5  
                                             
 
In fiscal 2008, the television episodes, not including pilot episodes, listed in the table above represented individually between 1% to 17% of domestic series revenue and, in the aggregate, 57%, or $76.8 million of total television revenue for the year. In fiscal 2007, the television episodes listed above represented individually between 1% to 21% of domestic series revenue and, in the aggregate, 79%, or $65.0 million of total television revenue for the year. Pilot episodes delivered in the current fiscal year represented approximately $4.1 million of domestic series licensing compared to less than $0.1 million in fiscal 2007.
 
Domestic television movies and miniseries revenue increased slightly in fiscal 2008 as compared to fiscal 2007 mainly due to the delivery of eight episodes of the miniseries The Kill Point in fiscal 2008, as compared to the delivery of The Lost Room miniseries and The Staircase Murders movie in fiscal 2007.
 
International revenue of $37.6 million increased by $26.6 million, or 241.8%, in fiscal 2008 mainly due to international revenue from Hidden Palms, Mad Men, The Dresden Files, The Dead Zone, The Kill Point, Weeds Season 3, Wildfire Season 3, and increased revenue from Weeds Season 2, compared to international revenue of $11.0 million in fiscal 2007 from The Lost Room, The Dresden Files, Wildfire Seasons 1 and 2, and Weeds Seasons 1 and 2.
 
The increase in revenue from video releases of television production is primarily driven by video revenue from Weeds Seasons 1 and 2, House of Payne, and The Dresden Files television series, and The Lost Room miniseries.


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The following table sets forth direct operating expenses by segment for the fiscal year ended March 31, 2008 and 2007:
 
                                                 
    Year Ended
    Year Ended
 
    March 31, 2008     March 31, 2007  
    Motion
                Motion
             
    Pictures     Television     Total     Pictures     Television     Total  
    (Amounts in millions)  
 
Direct operating expenses
                                               
Amortization of films and television programs
  $ 257.9     $ 145.5     $ 403.4     $ 147.9     $ 93.7     $ 241.6  
Participation and residual expense
    212.7       44.3       257.0       184.5       12.2       196.7  
Amortization of acquired intangible assets
    1.5             1.5       0.9             0.9  
Other expenses
    0.5       0.1       0.6       (2.8 )     0.4       (2.4 )
                                                 
    $ 472.6     $ 189.9     $ 662.5     $ 330.5     $ 106.3     $ 436.8  
                                                 
Direct operating expenses as a percentage of segment revenues
    41.1 %     90.4 %     48.7 %     38.5 %     89.7 %     44.7 %
 
Direct operating expenses include amortization, participation and residual expenses and other expenses. Direct operating expenses of the motion pictures segment of $472.6 million for fiscal 2008 were 41.1% of motion pictures revenue, compared to $330.5 million, or 38.5% , of motion pictures revenue for fiscal 2007. The increase in direct operating expense of the motion pictures segment in fiscal 2008 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 2007. The benefit in other expense in fiscal 2007 resulted primarily from the collection of accounts receivable previously reserved of approximately $1.5 million. Direct operating expenses of the motion pictures segment included charges for write downs of investment in film costs of $23.7 million and $13.1 million in fiscal 2008 and fiscal 2007, respectively, due to the lower than anticipated actual performance or previously expected performance of certain titles. In fiscal 2008 there were seven write downs over $1.0 million aggregating $18.5 million. Approximately $4.8 million of the write downs related to underperformance on released titles and approximately $13.7 million of the write downs related to a change in expected performance and release plans due to review of the film and the test market results. 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.
 
Direct operating expenses of the television segment of $189.9 million for fiscal 2008 were 90.4% of television revenue, compared to $106.3 million, or 89.7% of television revenue for fiscal 2007. The increase in direct operating expense of the television segment in fiscal 2008 is due primarily to the increase in television production revenue compared to fiscal 2007, and, in part to, the write off of film costs associated with two television pilots of approximately $2.0 million, and the write off of approximately $3.3 million of film costs associated with a television series in fiscal 2008. The increase in direct operating expense of the television segment in fiscal 2008 as a percent of revenue is due to the change in the mix of titles generating revenue compared to fiscal 2007.


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The following table sets forth distribution and marketing expenses by segment for the fiscal year ended March 31, 2008 and 2007:
 
                                                 
    Year Ended
    Year Ended
 
    March 31, 2008     March 31, 2007  
    Motion
                Motion
             
    Pictures     Television     Total     Pictures     Television     Total  
    (Amounts in millions)  
 
Distribution and marketing expenses
                                               
Theatrical
  $ 326.3     $     $ 326.3     $ 149.7     $     $ 149.7  
Home Entertainment
    238.7       7.4       246.1       202.0       2.8       204.8  
Television
    3.3       4.4       7.7       2.3       3.6       5.9  
International
    49.5       4.7       54.2       40.8       2.0       42.8  
Other
    1.3       0.1       1.4       1.2             1.2  
                                                 
    $ 619.1     $ 16.6     $ 635.7     $ 396.0     $ 8.4     $ 404.4  
                                                 
 
The majority of distribution and marketing expenses relate to the motion pictures segment. Theatrical prints and advertising (“P&A”) in the motion pictures segment in fiscal 2008 of $326.3 million increased $176.6 million, or 118.0%, compared to $149.7 million in fiscal 2007. Domestic theatrical P&A from the motion pictures segment in fiscal 2008 included P&A incurred on the release of titles such as 3:10 to Yuma, Bratz: The Movie, Bug, Hostel 2, Good Luck Chuck, Meet the Browns, Rambo, The Eye, Saw IV, War, and Why Did I Get Married?, which individually represented between 5% and 13% of total theatrical P&A and, in the aggregate, accounted for 80% of the total theatrical P&A. 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. In fiscal 2008, Bug, Hostel 2, and Bratz: The Movie, individually represented between 5% and 7% of total theatrical P&A and, in the aggregate, accounted for 18% of total theatrical P&A, and individually contributed less than 5% of total theatrical revenue, and, in the aggregate, contributed less than 10% of total theatrical revenue.
 
Home entertainment distribution and marketing costs on motion pictures and television product in fiscal 2008 of $246.1 million increased $41.3 million, or 20.2%, compared to $204.8 million in fiscal 2007. The increase in home entertainment distribution and marketing costs is mainly due to the increase in the volume and the size of marketing campaigns in the current fiscal year compared to the prior fiscal year and increase in distribution costs associated with the increase in revenue. Home entertainment distribution and marketing costs as a percentage of video revenues was 38.1% and 38.2% in fiscal 2008 and fiscal 2007, respectively.
 
International distribution and marketing expenses in fiscal 2008 includes $42.4 million of distribution and marketing costs from Lionsgate UK as a result of the acquisition of Redbus, compared to $31.3 million in fiscal 2007.


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The following table sets forth general and administrative expenses by segment for the fiscal year ended March 31, 2008 and 2007:
 
                                 
    Year Ended
    Year Ended
             
    March 31,
    March 31,
    Increase (Decrease)  
    2008     2007     Amount     Percent  
    (Amounts in millions)  
 
General and Administrative Expenses
                               
Motion Pictures
  $ 43.0     $ 31.1     $ 11.9       38.3 %
Television
    6.7       3.7       3.0       81.1 %
Corporate
    69.4       56.0       13.4       23.9 %
                                 
    $ 119.1     $ 90.8     $ 28.3       31.2 %
                                 
 
The increase in general and administrative expenses of the motion pictures segment of $11.9 million, or 38.3%, is primarily due to general and administrative expenses of Mandate Pictures which was acquired in September 2007, of approximately $3.1 million, general and administrative expense of Maple Pictures of $2.6 million consolidated since July 18, 2007, increases in general and administrative expenses from Lionsgate U.K. of approximately $1.2 million associated with the growth in revenue in our U.K. operations, and $0.6 million associated primarily with legal fees from our Australian subsidiary. The remaining increase of $4.4 million is primarily due to increases in salaries and related expenses related to additional personnel associated with the growth in revenue. In fiscal 2008, $4.1 million of motion picture production overhead was capitalized compared to $2.5 million in fiscal 2007.
 
The increase in general and administrative expenses of the television segment of $3.0 million, or 81.1%, is primarily due to an increase in salaries and related expenses of approximately $2.6 million associated with higher salaries and an increase in the number of full-time employees, an increase in professional fees of approximately $0.3 million and an increase in other general overhead costs of approximately $0.1 million. Approximately $1.6 million of the increase is from our Debmar-Mercury subsidiary which was acquired in July 2006. The remaining increase in salary and related expenses is primarily related to additional personnel associated with the growth in revenue. In fiscal 2008, $3.9 million of television production overhead was capitalized compared to $3.4 million in fiscal 2007.
 
The increase in corporate general and administrative expenses of $13.4, or 23.9%, is primarily due to an increase in stock-based compensation of approximately $3.4 million, an increase in salaries and related expenses of approximately $8.6 million, an increase in professional fees of approximately $0.4 million and an increase in other general overhead costs of approximately $1.0 million. The increase in salaries and related expenses of $8.6 million was partly due to higher salaries and increases in the number of full-time employees, and also includes a $1.5 million special bonus related to the closing of the Company’s theatrical slate financing agreement on May 25, 2007, as amended.
 
The following table sets forth stock-based compensation expense (benefit) for the fiscal year ended March 31, 2008 and 2007:
 
                                 
    Year Ended
    Year Ended
             
    March 31,
    March 31,
    Increase (Decrease)  
    2008     2007     Amount     Percent  
    (Amounts in millions)  
 
Stock Based Compensation Expense (Benefit):
                               
Stock options
  $ 3.4     $ 2.6     $ 0.8       30.8 %
Restricted share units
    10.4       4.4       6.0       136.4 %
Stock appreciation rights
    (1.7 )     1.7       (3.4 )     (200.0 )%
                                 
    $ 12.1     $ 8.7     $ 3.4       39.1 %
                                 


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At March 31, 2008, as disclosed in Note 11 to the consolidated financial statements, there were unrecognized compensation costs of approximately $24.7 million related to stock options and restricted stock units previously granted, including the first annual installment of share grants that were subject to performance targets, which will be expensed over the remaining vesting periods. At March 31, 2008, 828,542 shares of restricted stock units have been awarded to four key executive officers, the vesting of which will be subject to performance targets to be set annually by the Compensation Committee of the Board of Directors of the Company. These restricted stock units will vest in three, four, and five annual installments assuming annual performance targets to be set annually have been met. The fair value of the 828,542 shares whose future annual performance targets have not been set was $8.1 million, based on the market price of the Company’s common shares as of March 31, 2008. The market value will be remeasured when the annual performance criteria are set and the value will be expensed over the remaining vesting periods once it becomes probable that the performance targets will be satisfied.
 
 
Depreciation of $4.0 million in fiscal 2008 increased $1.2 million, or 42.9%, from $2.8 million in fiscal 2007, primarily due to purchases of property and equipment in the prior year of $8.3 million that were depreciated for an entire year in the current fiscal year compared to $5.6 million in purchases in fiscal 2006.
 
Fiscal 2008 interest expense of $16.4 million decreased $1.4 million, or 7.9%, from $17.8 million in fiscal 2007, mainly due to the conversion of the 4.875% senior subordinated notes on December 15, 2006, which resulted in $1.9 million less interest expense in the current fiscal year compared to the prior fiscal year, offset by an increase of $0.5 million attributable to $0.4 million in interest expense from certain production loans from Mandate Pictures and $0.1 million attributable to the addition of $3.7 million in other financing obligations in the current fiscal year.
 
Interest and other income was $11.3 million for the fiscal year ended March 31, 2008, compared to $11.9 million for the year ended March 31, 2007. Interest and other income in fiscal 2008 was earned on the cash balance and available-for-sale investments held during fiscal 2008.
 
Gain on sale of equity securities of $2.9 million for the fiscal year ended March 31, 2008 resulted primarily from the sale of shares held and purchased in Magna Pacific (Holdings) Limited, an Australian film distributor. 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 (“Image”).
 
The Company’s equity interests in fiscal 2008 included a $5.4 million loss from the Company’s 33.33% equity interests in FEARnet, a $0.1 million loss from the Company’s 10% equity interest in Maple Pictures prior to July 18, 2007, a loss of $1.0 million from the Company’s 42% equity interest in Break.com, a $0.9 million loss from the Company’s 43% equity interest in Roadside, and a loss of $0.2 million from the Company’s 50% equity interest in Elevation. The equity interests in fiscal 2007 consisted of a $1.5 million loss from the Company’s 33.33% equity interests in FEARnet, a $1.0 million loss from the Company’s 18.8% equity interest (on a fully diluted basis) in CinemaNow, and a $0.1 million loss from the Company’s 10% equity interest in Maple Pictures.
 
The Company had an income tax expense of $4.0 million, or (5.8%) of loss before income taxes in fiscal 2008, compared to an expense of $7.7 million, or 21.8%, of income before income taxes in fiscal 2007. The tax expense reflected in the current year is primarily attributable to U.S. state taxes. 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, and state and local income taxes. Income tax loss carryforwards amount to approximately $87.5 million for U.S. federal income tax purposes available to reduce income taxes over twenty years, $73.3 million for U.S. state income tax purposes available to reduce income taxes over future years with varying expirations, $21.6 million for Canadian income tax purposes available to reduce income taxes over 19 years with varying expirations, and $19.8 million for UK income tax purposes available indefinitely to reduce future income taxes.
 
Net loss for the fiscal year ended March 31, 2008 was $74.0 million, or basic net loss per share of $0.62, on 118.4 million weighted average common shares outstanding. This compares to net income for the year ended March 31, 2007 of $27.5 million, or basic net income per share of $0.25, on 108.4 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 common shares outstanding.


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Consolidated revenues in fiscal 2007 of $976.7 million represent an increase of $31.3 million, or 3.3%, compared to $945.4 million in fiscal 2006. Motion pictures revenue of $858.2 million in fiscal 2007 increased $45.8 million, or 5.6%, compared to $812.4 million in fiscal 2006. Television revenues of $118.5 million in fiscal 2007 decreased by $14.4 million, or 10.8%, compared to $132.9 million in fiscal 2006.
 
Motion Pictures Revenue
 
The increase in motion pictures revenue in fiscal 2007 was mainly attributable to increases in television and international revenue, offset by a decrease in theatrical revenue. The following table sets forth the components of revenue for the motion pictures reporting segment for the fiscal year ended March 31, 2007 and 2006:
 
                                 
    Year Ended
    Year Ended
             
    March 31,
    March 31,
    Increase (Decrease)  
    2007     2006     Amount     Percent  
    (Amounts in millions)  
 
Motion Pictures
                               
Theatrical
  $ 107.9     $ 145.5     $ (37.6 )     (25.8 )%
Video
    528.3       527.2       1.1       0.2 %
Television
    109.3       72.9       36.4       49.9 %
International
    105.2       61.2       44.0       71.9 %
Other
    7.5       5.6       1.9       33.9 %
                                 
    $ 858.2     $ 812.4     $ 45.8       5.6 %
                                 


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The following table sets forth the titles contributing significant motion pictures revenue for the fiscal year ended March 31, 2007 and 2006:
 
             
Year Ended March 31,
2007   2006
    Theatrical and Video
      Theatrical and Video
Title   Release Date   Title   Release Date
 
Theatrical:
      Theatrical:    
Akeelah and the Bee
  April 2006     Crash   May 2005
Crank
  September 2006     Hostel   January 2006
Daddy’s Little Girls
  February 2007     Lord of War   September 2005
Employee of the Month
  October 2006     Madea’s Family Reunion   February 2006
Happily N’Ever After
  January 2007     Saw II   October 2005
Saw III
  October 2006     The Devil’s Rejects   July 2005
See No Evil
  May 2006     Waiting   October 2005
The Descent
  August 2006        
Video:
      Video:    
Akeelah and the Bee
  August 2006     Barbie and the Magic of Pegasus   September 2005
An American Haunting
  October 2006     Barbie Mermaidia   March 2006
Crank
  January 2007     Crash   September 2005
Crash
  September 2005     Diary of a Mad Black Woman   June 2005
Employee of the Month
  January 2007     Lord of War   January 2006
Madea Goes to Jail
  June 2006     Saw   February 2005
Madea’s Family Reunion
  June 2006     Saw II   February 2006
Saw III
  January 2007     The Devil’s Rejects   November 2005
See No Evil
  November 2006     Waiting   February 2006
The Descent
  December 2006        
     
Television:
  Television:
Akeelah and the Bee
  Crash
Hostel
  Diary of a Mad Black Woman
Larry the Cable Guy: Health Inspector
  Open Water
Lord of WarSaw
       
Madea’s Family Reunion
  The Cookout
Saw II
       
International:
  International:
Crank
  Dirty Dancing
Saw
  Happy Endings
Saw II
  Hotel Rwanda
Saw III
  In the Mix
The Lost City
  Saw
             
        Saw II
 
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


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$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.
 
Television Revenue
 
The following table sets forth the components of revenue that make up television production revenue for the fiscal year ended March 31, 2007 and 2006:
 
                                 
    Year Ended
    Year Ended
             
    March 31,
    March 31,
    Increase (Decrease)  
    2007     2006     Amount     Percent  
    (Amounts in millions)  
 
Television Production
                               
Domestic series licensing
  $ 82.4     $ 107.6     $ (25.2 )     (23.4 )%
Domestic television movies and miniseries
    16.0       3.9       12.1       NM  
International
    11.0       19.0       (8.0 )     (42.1 )%
Video releases of television production
    8.4       2.4       6.0       250.0 %
Other
    0.7             0.7       100.0 %
                                 
    $ 118.5     $ 132.9     $ (14.4 )     (10.8 %)
                                 
 
 
(NM) Percentage not meaningful.


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The following table sets forth the number of television episodes and hours delivered in the fiscal year ended March 31, 2007 and 2006, respectively, excluding television episodes delivered by Debmar-Mercury:
 
                                             
        Year Ended
            Year Ended
 
        March 31, 2007             March 31, 2006  
        Episodes     Hours             Episodes     Hours  
 
Dirty Dancing Reality TV Series
  1hr     8       8.0     The Dead Zone Season 4   1hr     23       23.0  
The Dresden Files
  1hr     13       13.0     Wildfire Season 1   1hr     13       13.0  
Wildfire Season 2
  1hr     1       1.0     Wildfire Season 2   1hr     12       12.0  
Wildfire Season 3
  1hr     13       13.0     Missing Season 3   1hr     19       19.0  
Hidden Palms
  1hr     8       8.0     The Cut   1hr     13       13.0  
Lovespring International
  1/2hr     13       6.5     Weeds Season 1   1/2hr     10       5.0  
I Pity The Fool
  1/2hr     6       3.0                          
Weeds Season 2
  1/2hr     12       6.0                          
                                             
          74       58.5               90       85.0  
                                             
 
In addition to the above, domestic series licensing for fiscal 2007 includes $14.8 million of revenue from the July 3, 2006 acquisition of Debmar-Mercury.
 
Domestic 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.
 
International 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 revenue of $19.0 million 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.
 
 
The following table sets forth direct operating expenses by segment for the fiscal year ended March 31, 2007 and 2006:
 
                                                 
    Year Ended
    Year Ended
 
    March 31, 2007     March 31, 2006  
    Motion
                Motion
             
    Pictures     Television     Total     Pictures     Television     Total  
    (Amounts in millions)  
 
Direct operating expenses
                                               
Amortization of films and television programs
  $ 147.9     $ 93.7     $ 241.6     $ 135.7     $ 117.6     $ 253.3  
Participation and residual expense
    184.5       12.2       196.7       194.6       3.2       197.8  
Amortization of acquired intangible assets
    0.9             0.9       2.0             2.0  
Other expenses
    (2.8 )     0.4       (2.4 )     5.2       0.7       5.9  
                                                 
    $ 330.5     $ 106.3     $ 436.8     $ 337.5     $ 121.5     $ 459.0  
                                                 
Direct operating expenses as a percentage of segment revenues
    38.5 %     89.7 %     44.7 %     41.5 %     91.4 %     48.6 %


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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 following table sets forth distribution and marketing expenses by segment for the fiscal year ended March 31, 2007 and 2006:
 
                                                 
    Year Ended
    Year Ended
 
    March 31, 2007     March 31, 2006  
    Motion
                Motion
             
    Pictures     Television     Total     Pictures     Television     Total  
                (Amounts in millions)              
 
Distribution and marketing expenses
                                               
Theatrical
  $ 149.7     $     $ 149.7     $ 170.0     $ 0.3     $ 170.3  
Home Entertainment
    202.0       2.8       204.8       209.4       2.0       211.4  
Television
    2.3       3.6       5.9       2.1       0.1       2.2  
International
    40.8       2.0       42.8       10.5       0.8       11.3  
Other
    1.2             1.2       4.1             4.1  
                                                 
    $ 396.0     $ 8.4     $ 404.4     $ 396.1     $ 3.2     $ 399.3  
                                                 
 
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.
 
Home entertainment 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. Home entertainment distribution and marketing costs as a percentage of video revenues was 38.2% and 39.9% in fiscal 2007 and fiscal


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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-Mercury in fiscal 2007.
 
 
The following table sets forth general and administrative expenses by segment for the fiscal year ended March 31, 2007 and 2006:
 
                                 
    Year Ended
    Year Ended
             
    March 31,
    March 31,
    Increase (Decrease)  
    2007     2006     Amount     Percent  
    (Amounts in millions)  
 
General and Administrative Expenses
                               
Motion Pictures
  $ 31.1     $ 26.5     $ 4.6       17.4 %
Television
    3.7       0.5       3.2       NM  
Corporate
    56.0       42.9       13.1       30.5 %
                                 
    $ 90.8     $ 69.9     $ 20.9       29.9 %
                                 
 
 
(NM) Percentage not meaningful.
 
The increase in general and administrative expenses is primarily due to corporate general and administration expenses of $56.0 million which increased by $13.1 million or 30.5% 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 $7.1 million, an increase in salaries and related expenses of approximately $4.1 million, an increase in professional fees of $1.5 million and an increase in other general overhead costs. In fiscal 2007, $5.9 million of production overhead was capitalized compared to $5.2 million in fiscal 2006.
 
The following table sets forth stock-based compensation expense (benefit) for the years ended March 31, 2007 and 2006:
 
                                 
    Year Ended
    Year Ended
             
    March 31,
    March 31,
    Increase (Decrease)  
    2007     2006     Amount     Percent  
    (Amounts in millions)  
 
Stock Based Compensation Expense (Benefit):
                               
Stock options
  $ 2.6     $     $ 2.6       100.0 %
Restricted share units
    4.4       1.7       2.7       158.8 %
Stock appreciation rights
    1.7       (0.3 )     2.0       NM  
                                 
    $ 8.7     $ 1.4     $ 7.3       NM  
                                 
 
 
(NM) Percentage not meaningful.
 
At March 31, 2007, as disclosed in Note 11 to the consolidated financial statements, there were 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, the vesting of which will be subject to performance targets to be set annually by the Compensation Committee of the Board of Directors of the Company. These restricted stock units will vest in four annual installments assuming annual performance targets set annually 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 shares as of March 31, 2007. The market value will be remeasured when the


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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 $4.6 million or 17.4% 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-Mercury.
 
 
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, as compared to nil for the fiscal year ended March 31, 2006.
 
The Company’s equity interests in fiscal 2007 included a $1.5 million loss from the Company’s 33.33% equity interests in FEARnet, 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 Pictures. The Company’s equity interests from FEARnet 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 U.S. 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 UK 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.


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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.
 
Liquidity and Capital Resources
 
Our liquidity and capital resources are provided principally through cash generated from operations, issuance of subordinated notes, and our credit facility.
 
Convertible Senior Subordinated Notes.  In December 2003, Lions Gate Entertainment Inc., a wholly-owned subsidiary of the Company (“LGEI”), sold $60.0 million of 4.875% Convertible Senior Subordinated Notes that were to mature on December 15, 2010 (the “4.875% Notes”). The Company received $57.0 million of net proceeds, after paying placement agents’ fees from the sale of the 4.875% Notes. Offering expenses were $0.7 million. The 4.875% Notes were convertible, at the option of the holder, at any time before the close of business on the business day immediately preceding the maturity date of the 4.875% Notes, unless previously redeemed, into the Company’s common shares at a conversion rate of 185.0944 shares per $1,000 principal amount of the 4.875% Notes, which is equal to a conversion price of approximately $5.40 per share. On December 15, 2006, pursuant to the Company’s optional redemption, all of the noteholders voluntarily elected to convert their notes into the Company’s common shares pursuant to the indenture. 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 associated with the original conversion of the 4.875% Notes of approximately $2.1 million was recorded as an increase to common shares.
 
In October 2004, LGEI sold $150 million of 2.9375% Convertible Senior Subordinated Notes that mature on October 15, 2024 (the “2.9375% Notes”). The Company received $146.0 million of net proceeds after paying placement agents’ fees from the sale of the 2.9375% Notes. Offering expenses were $0.7 million. The 2.9375% Notes are convertible at the option of the holder, at any time prior to maturity, upon satisfaction of certain conversion contingencies, into common shares of the Company at a conversion rate of 86.9565 shares per $1,000 principal amount of the 2.9375% Notes, which is equal to a conversion price of approximately $11.50 per share, subject to adjustment upon certain events. From October 15, 2009 to October 14, 2010, LGEI may redeem the 2.9375% Notes at 100.839%; from October 15, 2010 to October 14, 2011, LGEI may redeem the 2.9375% Notes at 100.420%; and thereafter, LGEI may redeem the notes at 100%.
 
In February 2005, LGEI sold $175.0 million of 3.625% Convertible Senior Subordinated Notes that mature on March 15, 2025 (the “3.625% Notes”). The Company received $170.2 million of net proceeds after paying placement agents’ fees from the sale of the 3.625% Notes. Offering expenses were approximately $0.6 million. The 3.625% Notes are convertible at the option of the holder, at any time prior to maturity, into common shares of the Company at a conversion rate of 70.0133 shares per $1,000 principal amount of the 3.625% Notes, which is equal to a conversion price of approximately $14.28 per share, subject to adjustment upon certain events. LGEI may redeem the 3.625% Notes at its option on or after March 15, 2012 at 100% of their principal amount plus accrued and unpaid interest.
 
Credit Facility.  At March 31, 2008, the Company had a $215 million revolving line of credit, of which $10 million is available for borrowing by Lionsgate UK in either U.S. dollars or British pounds sterling. At March 31, 2008, the Company had no borrowings (March 31, 2007 — nil) under the credit facility. The credit facility expires December 31, 2008 and bears interest at 2.75% over the “Adjusted LIBOR” or the “Canadian


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Bankers Acceptance” rate (each as defined in the credit facility), or 1.75% over the U.S. or Canadian prime rates. The availability of funds under the credit facility is limited by the borrowing base. Amounts available under the credit facility are also limited by outstanding letters of credit which amounted to $22.7 million at March 31, 2008. At March 31, 2008, there was $192.3 million available under the credit facility. The Company is required to pay a monthly commitment fee of 0.50% per annum on the total credit facility of $215 million less the amount drawn. Right, title and interest in and to all personal property of Lions Gate Entertainment Corp. and Lions Gate Entertainment Inc. is pledged as security for the credit facility. The credit facility is senior to the Company’s film obligations and senior subordinated notes. The credit facility restricts the Company from paying cash dividends on its common shares. Additionally, our credit facility expires on December 31, 2008. While we intent to renew the facility prior to such date and with similar or greater availability, we cannot assure you that additional financing will be available on terms favorable to us, or at all.
 
Theatrical Slate Financing.  On May 25, 2007, the Company closed a theatrical slate funding arrangement, as amended on January 30, 2008. Under this arrangement Pride, 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 $196 million, net of transaction costs. The funds available from Pride were generated from the issuance by Pride of $35 million of subordinated debt instruments, $35 million of equity and $134 million from a senior credit facility, which is subject to a borrowing base. The Company is not a party to the Pride debt obligations or their senior credit facility, and provides no guarantee of repayment of these obligations. The percentage of the contribution may vary on certain pictures. Pride 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 based on their pro rata contribution to the applicable costs similar to a back-end participation on a film. The $134 million senior credit facility is a revolving facility for print and advertising costs, other releasing costs, and direct production and acquisition costs. Funding of direct production and acquisition cost is subject to a borrowing base calculation generally based on 90% of the estimated ultimate amounts due to Pride on previously released films, as defined in the appropriate agreements.
 
SGF.  On July 30, 2007, the Company entered into a four-year filmed entertainment slate financing agreement with SGF, the Québec provincial government’s investment arm. SGF will finance up to 35% of production costs of television and feature film productions produced in Québec for a four-year period for an aggregate investment of up to $140 million, and the Company will advance all amounts necessary to fund the remaining budgeted costs. The maximum aggregate of budgeted costs over the four-year period will be $400 million, including the Company’s portion, but no more than $100 million per year. In connection with this agreement, the Company and SGF will proportionally share in the proceeds derived from the funded productions after the Company deducts a distribution fee, recoups all distribution expenses and releasing costs, and pays all applicable participations and residuals.
 
Filmed Entertainment Backlog.  Backlog represents the amount of future revenue not yet recorded from contracts for the licensing of films and television product for television exhibition and in international markets. Backlog at March 31, 2008 and 2007 is $437.4 million and $320.2 million, respectively.
 
Cash Flows Provided by Operating Activities.  Cash flows provided by operating activities of continuing operations in the year ended March 31, 2008 were $89.2 million, compared to cash flows provided by operating activities of continuing operations in the year ended March 31, 2007 of $59.7 million, and cash flows provided by operating activities of continuing operations in the year ended March 31, 2006 of $52.7 million. The change in cash provided by operating activities in fiscal 2008 as compared to fiscal 2007 is primarily due to the net loss incurred in the year ended March 31, 2008, increases in accounts receivables and increases in investment in film, offset by increases in amortization expense, and increases in participation and residuals. The increase in cash flows provided by operating activities in fiscal 2007 as compared to fiscal 2006 is primarily due to decreases in accounts payable and accrued liabilities, unpresented bank drafts, and participations and residuals, offset by an increase in cash provided by the decrease in accounts receivable and deferred revenue. Cash flows provided by operating activities of discontinued operations in the years ended March 31, 2008 and 2007 were nil compared to cash flows provided by operating activities of discontinued operations in the year ended March 31, 2006 of $2.6 million.


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Cash Flows Provided by/Used in Investing Activities.  Cash flows provided by investing activities of $201.3 million for the year ended March 31, 2008 consisted of net proceeds from the sale of $237.4 million of auction rate securities, $19.3 million in net proceeds from the sale of equity securities, $3.6 million for purchases of property and equipment, $6.5 million for the investment in equity method investees, $3.0 million for a note receivable from Break.com, $41.2 million for the acquisition of Mandate Pictures, net of unrestricted cash. Cash flows used in investing activities of continuing operations of $107.6 million in the year ended March 31, 2007 consisted of net purchases of $70.0 million of investments available-for-sale, $8.3 million for purchases of property and equipment, $24.1 million for the acquisition of Debmar-Mercury, net of cash acquired, and $5.1 million for the investment in FEARnet. Cash flows used in investing activities of continuing operations of $165.4 million in the year ended March 31, 2006 included the purchase of a net $170.6 million of investments available-for-sale, $27.1 million for the Company’s acquisition of Redbus, net of cash acquired, $5.6 million for purchases of property and equipment partially offset by cash received from the sale of studio facilities of $34.9 million and from the sale of the Company’s investment in Christal Distribution of $2.9 million. Cash flows provided by investing activities of discontinued operations were nil for the years ended March 31, 2008 and 2007 and $0.1 million for the year ended March 31, 2006.
 
Cash Flows Provided by Financing Activities.  Cash flows provided by financing activities of $28.4 million in the year ended March 31, 2008 consisted of cash received from borrowings and the exercise of stock options of $167.4 million, offset by $97.1 million repayment of production obligations, repayment of $14.3 million of debt assumed from the Mandate Pictures acquisition, $22.3 million paid for the repurchase of the Company’s common shares and $5.3 million paid for withholding requirements associated with the exercise of stock options. Cash flows provided by financing activities from continuing operations of $52.4 million in the year ended March 31, 2007 consisted of cash received from borrowings and the exercise of stock options of $101.4 million, offset by $49.0 million repayment of production obligations. Cash flows provided by financing activities of continuing operations in the year ended March 31, 2006 of $47.4 million were comprised primarily of cash received from borrowings and the exercise of stock options of $94.0 million, offset by $24.8 million repayment of production obligations, $16.2 million used to pay off the remaining mortgages payable in connection with the Company’s sale of its studio facility and $5.0 million for the repayment of a promissory note. Cash flows used in financing activities of discontinued operations were nil for the years ended March 31, 2008 and 2007, and $2.7 million for the year ended March 31, 2006.
 
Anticipated Cash Requirements.  The nature of our business is such that significant initial expenditures are required to produce, acquire, distribute and market films and television programs, while revenues from these films and television programs are earned over an extended period of time after their completion or acquisition. We believe that cash flow from operations, cash on hand, investments available-for-sale, credit facility availability, tax-efficient financing and production financing available will be adequate to meet known operational cash requirements for the foreseeable future, including the funding of future film and television production, film rights acquisitions and theatrical and video release schedules. We monitor our cash flow liquidity, availability, fixed charge coverage, capital base, film spending and leverage ratios with the long-term goal of maintaining our credit worthiness.
 
Our current financing strategy is to fund operations and to leverage investment in films and television programs through our cash flow from operations, our credit facility, single-purpose production financing, government incentive programs, film funds, and distribution commitments. In addition, we may acquire businesses or assets, including individual films or libraries that are complementary to our business. Any such transaction could be financed through our cash flow from operations, credit facilities, equity or debt financing.


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Future commitments under contractual obligations as of March 31, 2008 are as follows:
 
                                                         
    Year Ended March 31,  
    2009     2010     2011     2012     2013     Thereafter     Total  
    (Amounts in thousands)  
 
Future annual repayment of debt and other financing obligations as of March 31, 2008
                                                       
Production obligations(1)
  $ 163,794     $ 13,685     $ 40,644     $ 29,988     $     $     $ 248,111  
Interest payments on subordinated notes and other financing obligations
    11,046       11,046       11,046       11,046       10,776       124,594       179,554  
Subordinated notes and other financing obligations
                            3,718       325,000       328,718  
                                                         
    $ 174,840     $ 24,731     $ 51,690     $ 41,034     $ 14,494     $ 449,594     $ 756,383  
                                                         
Contractual commitments by expected repayment date
                                                       
Film obligations(1)
  $ 29,905     $     $     $     $     $     $ 29,905  
Distribution and marketing commitments(2)
    39,123       28,000                               67,123  
Minimum guarantee commitments(3)
    167,057       54,626       43,300       1,750                   266,733  
Production obligation commitments(3)
    33,905       49,155       7,157                         90,217  
Operating lease commitments
    7,502       8,801       8,239       4,347       2,672       1,689       33,250  
Other contractual obligations
    13,095       257       221       185                   13,758  
Employment and consulting contracts
    29,253       17,578       10,824       1,587       377             59,619  
                                                         
    $ 319,840     $ 158,417     $ 69,741     $ 7,869     $ 3,049     $ 1,689     $ 560,605  
                                                         
Total future commitments under contractual obligations
  $ 494,680     $ 183,148     $ 121,431     $ 48,903     $ 17,543     $ 451,283     $ 1,316,988  
                                                         
 
 
(1) Film and production obligations include minimum guarantees, theatrical marketing obligations and production obligations as disclosed in Note 8 of our consolidated financial statements. Repayment dates are based on anticipated delivery or release date of the related film or contractual due dates of the obligation.
 
(2) Distribution and marketing commitments represent contractual commitments for future expenditures associated with distribution and marketing of films which the Company will distribute. The payment dates of these amounts are primarily based on the anticipated release date of the film.
 
(3) Minimum guarantee commitments represent contractual commitments related to the purchase of film rights for future delivery. Production obligation commitments represent amounts committed for future film production and development to be funded through production financing and recorded as a production obligation liability. Future payments under these obligations are based on anticipated delivery or release dates of the related film or contractual due dates of the obligation. The amounts include future interest payments associated with the obligations.
 
 
We do not have any transactions, arrangements and other relationships with unconsolidated entities that will affect our liquidity or capital resources. We have no special purpose entities that provided off-balance sheet financing, liquidity or market or credit risk support, nor do we engage in leasing, hedging or research and development services, that could expose us to liability that is not reflected on the face of our financial statements.
 
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Currency and Interest Rate Risk Management
 
Market risks relating to our operations result primarily from changes in interest rates and changes in foreign currency exchange rates. Our exposure to interest rate risk results from the financial debt instruments that arise from transactions entered into during the normal course of business. As part of our overall risk management program, we evaluate and manage our exposure to changes in interest rates and currency exchange risks on an ongoing basis.


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Hedges and derivative financial instruments will be used in the future in order to manage our interest rate and currency exposure. We have no intention of entering into financial derivative contracts, other than to hedge a specific financial risk.
 
Currency Rate Risk.  The Company enters into forward foreign exchange contracts to hedge its foreign currency exposures on future production expenses denominated in Canadian dollars. As of March 31, 2008, the Company had outstanding contracts to sell CDN$7.6 million in exchange for US$7.3 million over a period of six weeks at a weighted average exchange rate of CDN$0.96, and to buy CDN$4.0 million in exchange for US$4.0 million over a period of four weeks at a weighted average exchange rate of CDN$0.9992. Changes in the fair value representing a net unrealized fair value loss on foreign exchange contracts that qualified as effective hedge contracts outstanding during the year ended March 31, 2008 amounted to $0.3 million and are included in accumulated other comprehensive income (loss), a separate component of shareholders’ equity. Changes in the fair value representing a net unrealized fair value gain on foreign exchange contracts that did not qualify as effective hedge contracts outstanding during the year ended March 31, 2008 amounted to $0.2 million and are included in earnings. During the year ended March 31, 2008, the Company completed foreign exchange contracts denominated in Canadian dollars. The net gains resulting from the completed contracts were $2.1 million. These contracts are entered into with a major financial institution as counterparty. The Company is exposed to credit loss in the event of nonperformance by the counterparty, which is limited to the cost of replacing the contracts, at current market rates. The Company does not require collateral or other security to support these contracts.
 
Interest Rate Risk.  Our principal risk with respect to our debt is interest rate risk. We currently have minimal exposure to cash flow risk due to changes in market interest rates related to our outstanding debt and other financing obligations. Our credit facility has a nil balance at March 31, 2008. Other financing obligations subject to variable interest rates include $164.2 million owed to film production entities on delivery of titles.
 
The table below presents repayments and related weighted average interest rates for our interest-bearing debt and production obligations and subordinate notes and other financing obligations at March 31, 2008.
 
                                                         
    Year Ended March 31,  
    2009     2010     2011     2012     2013     Thereafter     Total  
    (Amounts in thousands)  
 
Revolving Credit Facility:
                                                       
Variable(1)
  $     $     $     $     $     $     $  
Production Obligations:
                                                       
Variable(2)
    150,591       9,979       3,632 </