UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 13, 2012
Lions Gate Entertainment Corp.
(Exact name of registrant as specified in charter)
British Columbia, Canada
(State or Other Jurisdiction of Incorporation)
(Commission File Number) 1-14880 |
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(IRS Employer Identification No.) N/A |
(Address of principal executive offices)
1055 West Hastings Street, Suite 2200
Vancouver, British Columbia V6E 2E9
and
2700 Colorado Avenue, Suite 200
Santa Monica, California 90404
Registrants telephone number, including area code: (877) 848-3866
No Change
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 2.01 Completion of Acquisition or Disposition of Assets.
As disclosed in the Current Report on Form 8-K filed with the Securities and Exchange Commission by Lions Gate Entertainment Corp. (the Company) on January 17, 2012 (the Original Form 8-K), the Companys wholly owned subsidiaries, LGAC 1, LLC (LGAC 1) and LGAC 3, LLC (LGAC 3), completed on January 13, 2012 the acquisition of Summit Entertainment, LLC (Summit), pursuant to the Membership Interest Purchase Agreement entered into among Summit, the members thereof and S Representative, LLC (the Membership Interest Purchase Agreement).
As part of the Original Form 8-K, the Company indicated that the financial statements and pro forma financial information under Item 9.01 would be filed no later than 71 days following the date that the Form 8-K was required to be filed. This Form 8-K/A contains the required financial statements and pro forma financial information.
The description of the acquisition contained in this Item 2.01 is qualified in its entirety by reference to the full text of the Membership Interest Purchase Agreement, which was filed as Exhibit 2.1 to the Original Form 8-K, which is incorporated herein by reference.
Item 9.01 Financial Statements and Exhibits.
(a) Financial statements of businesses acquired.
The audited consolidated balance sheet of Summit as of December 31, 2011 and the related audited consolidated statements of operations, equity and cash flows for the year ended December 31, 2011 and notes thereto are attached hereto as Exhibit 99.1 and incorporated herein by reference.
The audited consolidated balance sheets of Summit as of December 31, 2010 and 2009, and the related audited consolidated statements of operations, equity and cash flows for the years ended December 31, 2010 and 2009 and notes thereto are attached hereto as Exhibit 99.2 and incorporated herein by reference.
(b) Pro forma financial information.
The following unaudited pro forma condensed consolidated financial information that gives effect to the acquisition of Summit is attached hereto as Exhibit 99.3 and incorporated herein by reference:
· Unaudited pro forma condensed consolidated balance sheet as of December 31, 2011
· Unaudited pro forma condensed consolidated statements of operations for the year ended March 31, 2011 and the nine months ended December 31, 2011
· Notes to unaudited pro forma condensed consolidated financial information
(d) Exhibits.
Exhibit |
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Description |
23.1 |
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Consent of Ernst & Young LLP, Independent Auditors. |
23.2 |
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Consent of PricewaterhouseCoopers LLP, Independent Auditors. |
99.1 |
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The audited consolidated balance sheet of Summit as of December 31, 2011, and the related audited consolidated statements of operations, equity and cash flows for the year ended December 31, 2011 and notes thereto. |
99.2 |
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The audited consolidated balance sheets of Summit as of December 31, 2010 and 2009, and the related audited consolidated statements of operations, equity and cash flows for the years ended December 31, 2010 and 2009 and notes thereto. |
99.3 |
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The unaudited pro forma condensed consolidated financial information as of December 31, 2011, and for the year ended March 31, 2011 and the nine months ended December 31, 2011 that give effect to the acquisition of Summit. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: March 21, 2012 |
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LIONS GATE ENTERTAINMENT CORP. |
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/s/ James Keegan |
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James Keegan |
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Chief Financial Officer |
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration Statements of Lions Gate Entertainment Corp. of our report dated March 21, 2012 with respect to the consolidated financial statements of Summit Entertainment, LLC included in the Current Report (Form 8-K/A) of Lions Gate Entertainment Corp. to be filed with the Securities and Exchange Commission on March 21, 2012.
Form S-3 |
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Form S-8 |
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No. 333-176656 |
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No. 333-122275 |
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No. 333-164960 |
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No. 333-145068 |
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No. 333-144231 |
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No. 333-146296 |
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No. 333-131975 |
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No. 333-146251 |
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No. 333-123652 |
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No. 333-111022 |
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No. 333-122580 |
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No. 333-107266 |
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/s/ Ernst & Young LLP |
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Los Angeles, California |
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March 21, 2012 |
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Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-122580, 333-123652, 333-131975, 333-144231, 333-164960 and 333-176656) and Form S-8 (Nos. 333-107266, 333-111022, 333-146296, 333-146251, 333-145068 and 333-122275) of Lions Gate Entertainment Corp. of our report dated March 29, 2011 relating to the consolidated financial statements of Summit Entertainment, LLC, which appears in this Current Report on Form 8-K/A.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
March 21, 2012
Exhibit 99.1
Summit Entertainment, LLC
Consolidated Financial Statements
For the Year Ended December 31, 2011
Report of Independent Auditors
The Members of
Summit Entertainment, LLC
We have audited the accompanying consolidated balance sheet of Summit Entertainment, LLC (the Company) as of December 31, 2011, and the related consolidated statements of operations, equity, and cash flows for the year then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Summit Entertainment, LLC at December 31, 2011, and the consolidated results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
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/s/ Ernst & Young LLP |
Los Angeles, CA
March 21, 2012
Summit Entertainment, LLC
Consolidated Balance Sheet
December 31, 2011
(Amounts in Thousands)
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December 31, 2011 |
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Assets |
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Cash and cash equivalents |
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$ |
247,099 |
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Accounts receivable, net |
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161,971 |
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Restricted cash |
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49,765 |
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Film costs, net |
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388,848 |
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Property and equipment, net |
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1,713 |
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Goodwill |
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6,465 |
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Intangible assets, net |
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7,332 |
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Other assets |
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48,622 |
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Total assets |
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$ |
911,815 |
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Liabilities and Equity |
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Accounts payable and accrued liabilities |
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$ |
67,940 |
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Notes payable |
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553,163 |
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Deferred revenue |
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136,261 |
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Participations and residuals payable |
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92,701 |
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Other liabilities |
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2,449 |
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Total liabilities |
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852,514 |
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Commitments and contingencies |
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Members capital |
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102,420 |
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Accumulated deficit |
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(46,424 |
) | |
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55,996 |
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Non-controlling interest |
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3,305 |
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Total equity |
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59,301 |
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Total liabilities and equity |
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$ |
911,815 |
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Summit Entertainment, LLC
Consolidated Statement of Operations
Year Ended December 31, 2011
(Amounts in Thousands)
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Year Ended |
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December 31, 2011 |
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Net revenue |
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$ |
609,798 |
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Cost of revenue |
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537,985 |
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Gross profit |
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71,813 |
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Operating expenses |
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58,447 |
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Operating income |
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13,366 |
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Interest expense and other, net |
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(30,033 |
) | |
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Pre-tax loss |
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(16,667 |
) | |
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Income tax expense |
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6,221 |
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Net loss |
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(22,888 |
) | |
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Less: net income attributable to non-controlling interest |
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(494 |
) | |
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Net loss attributable to Summit members |
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$ |
(23,382 |
) |
Summit Entertainment, LLC
Consolidated Statement of Equity
Year Ended December 31, 2011
(Amounts in Thousands)
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Retained |
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Earnings |
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Members |
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(Accumulated |
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Non-Controlling |
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Capital |
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Deficit) |
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Interest |
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Total |
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Balance as of December 31, 2010 |
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$ |
101,253 |
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$ |
199,366 |
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$ |
2,811 |
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$ |
303,430 |
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Member unit compensation expense |
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1,167 |
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1,167 |
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Distribution |
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(222,408 |
) |
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(222,408 |
) | ||||
Net income (loss) |
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(23,382 |
) |
494 |
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(22,888 |
) | ||||
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Balance as of December 31, 2011 |
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$ |
102,420 |
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$ |
(46,424 |
) |
$ |
3,305 |
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$ |
59,301 |
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Summit Entertainment, LLC
Consolidated Statement of Cash Flows
Year Ended December 31, 2011
(Amounts in Thousands)
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Year Ended |
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December 31, 2011 |
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Cash flows from operating activities |
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Net loss |
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$ |
(22,888 |
) |
Adjustments to reconcile net loss to net cash used in operating activities |
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Amortization of debt issuance costs and discount |
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7,676 |
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Bad debt expense |
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2,678 |
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Depreciation and amortization |
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2,227 |
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Notes payable accretion |
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2,071 |
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Unit-based compensation |
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1,167 |
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Amortization of film costs |
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169,454 |
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Changes in operating assets and liabilities |
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Accounts receivable |
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7,362 |
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Additions to film costs |
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(263,924 |
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Other assets |
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(4,023 |
) | |
Accounts payable and accrued liabilities |
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(24,662 |
) | |
Deferred revenue |
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51,516 |
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Participations and residuals payable |
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(6,274 |
) | |
Other liabilities |
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923 |
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Net cash used in operating activities |
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(76,697 |
) | |
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Cash flows from investing activities |
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Contingent consideration paid |
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(481 |
) | |
Additions to property and equipment |
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(727 |
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Net cash used in investing activities |
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(1,208 |
) | |
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Cash flows from financing activities |
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Proceeds from notes payable |
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685,962 |
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Repayments of notes payable |
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(334,513 |
) | |
Change in restricted cash |
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202,670 |
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Debt issuance costs |
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(16,771 |
) | |
Distributions to members |
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(222,408 |
) | |
Net cash provided by financing activities |
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314,940 |
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Increase in cash and cash equivalents |
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237,035 |
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Cash and cash equivalents |
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Beginning of year |
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10,064 |
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End of year |
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$ |
247,099 |
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Supplemental cash flow information |
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Cash paid during the year for interest |
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$ |
39,573 |
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Cash paid for income taxes |
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4,556 |
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Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2011
1. Description of the Business
Summit Entertainment, LLC, a Delaware limited liability company, and its wholly owned subsidiaries (collectively Summit or the Company), are engaged in the development, financing, production and distribution of motion picture films in the theatrical, home entertainment, television and ancillary markets. The Company also provides international sales agency services to major film producers.
The Company was formed in 2007 to acquire the operations of Summit Entertainment L.P. (the Predecessor) for a combination of cash, contingent consideration, and a minority equity position in the Company. This acquisition was accounted for as a purchase in accordance with ASC 805, Business Combinations. On this date, all tangible and intangible assets and liabilities of the Company were adjusted to their fair value.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements of the Company include the accounts of all of its majority-owned and controlled subsidiaries. The Company reviews its relationships with other entities to identify whether it is the primary beneficiary of a variable interest entity (VIE). Other entities are primarily created for the distribution or financing of films. If the determination is made that the Company is the primary beneficiary, then the entity is consolidated in accordance with ASC 810, Variable Interest Entities. The Company has concluded that its other equity investments do not require consolidation as they are not variable interest entities.
Revenue Recognition
Revenue from the sale or licensing of films is recognized upon meeting all recognition requirements of ASC 926, Entertainment Films (ASC 926). Revenue from the theatrical distribution of films is recognized as the films are exhibited. Home entertainment revenue is recognized on the later of shipment or the date the title is available for sale, net of estimated returns. Sales allowances are recorded at the time of sale for returns and other allowances. Revenue from the licensing of films for exhibition on television is recognized upon availability of the film to the licensee for telecast.
Revenue from international exploitation of films is recognized when a film is available for exhibition and other conditions of sale are met in the respective media. Non-refundable guarantees against a percentage of film rentals that result from the distribution of motion picture rights are recorded as revenue when each related license agreement is executed, the picture is available for delivery to the licensee, and the licensee is able to exploit the picture in the related media and market licensed to it. Film revenue earned in excess of non-refundable guarantees is recorded when reported by distributors.
Revenue for international sales agency services is recognized when the film licensing agreements are executed, the films have been delivered to the sub-distributor, and the related licensing fee has been collected by either the Company or the producers of the films. The licensing fee is recorded on a net basis as the Company acts as an agent for these services.
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2011
To the extent that all revenue recognition conditions have not been met, amounts received are reported in the accompanying consolidated financial statements as deferred revenue.
Advertising Expense
The Company expenses advertising costs, including advertising costs related to the release of feature films, as incurred in accordance with ASC 970, Advertising Costs, and ASC 926. The Company incurred total advertising expenses of $218.7 million for the year ended December 31, 2011.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with original maturities of three months or less from the date of purchase.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is based on the Companys best estimate of the amount of probable credit losses in existing accounts receivable. The Company reviews the allowance for doubtful accounts, and provisions are made upon a specific review of all receivables. Account balances are charged off against the allowance when the Company believes it is probable the receivable will not be recovered.
Long-term (ie. due after one year), non-interest bearing accounts receivable are discounted to present value. At December 31, 2011, $14.2 million of accounts receivable are due beyond one year.
Restricted Cash
Restricted cash consists of cash and cash equivalents which are contractually restricted for specific purposes under the Companys various debt, film financing and distribution arrangements.
Film Costs
The Company accounts for film costs in accordance with ASC 926. Film costs include capitalizable production costs, production overhead, interest, development costs, and acquired production costs and are stated at the lower of cost, less accumulated amortization, or estimated fair value determined by a discounted cash flow analysis. Subsidies from governmental jurisdictions related to a specific project are reflected as a reduction of film costs when the amounts are reasonably assured and estimable.
Film, participation, and residuals costs are expensed based on the ratio of the current periods gross revenue to estimated remaining gross revenue to be received from all sources that will be earned within ten years of the date of initial theatrical release. Estimated remaining gross revenue is reviewed regularly and revisions to the amortization rates are recorded as necessary.
The Company regularly evaluates whether any indicators of an impairment of a film have occurred. If an impairment indicator has occurred, the Company compares the fair value of the film, determined using a discounted cash flow analysis, to the carrying value of the film. If the fair value is less than the carrying value, an impairment charge is recorded in cost of revenue.
Film development costs for projects that have been abandoned or have not been set for production within three years are generally written off.
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2011
Debt Issuance Costs
Debt issuance costs are principally related to the Companys term loan and credit facility. These costs are deferred and amortized using the straight-line method, which approximates the effective interest rate method, over the term of the related debt agreements.
Property and Equipment
Property and equipment are stated at cost and are depreciated over their estimated useful lives, generally five years, using the straight-line method. Leasehold improvements are amortized using the straight-line method over the lesser of their estimated useful lives or the remaining term of the underlying lease.
Goodwill
Goodwill represents the excess of the purchase price of acquiring the Predecessor over the fair value of the net tangible and intangible assets acquired. Contingent purchase consideration payment is recognized as an additional cost of the transaction and recorded as goodwill. As of December 31, 2011, $6.5 million was recorded to goodwill, which represents contingent consideration paid to the former owners.
The Company accounts for goodwill in accordance with ASC 350, Intangibles-Goodwill and Other. Goodwill is not amortized but is reviewed for impairment annually or when events occur or circumstances change that would more likely than not indicate that the goodwill might be impaired. The Company performed its annual impairment test on its goodwill as of December 31, 2011, and no goodwill impairment was identified.
Intangible Assets
The Company is required to compare annually the fair value of each of its indefinite-lived intangible assets to its respective carrying value. If the carrying value exceeds the fair value, an impairment loss is recorded. Amortizable intangible assets are amortized on a straight-line basis over a period of 5.5 years.
Foreign Currency Translation
The Companys foreign subsidiaries use the U.S. dollar as the functional currency. Assets and liabilities are translated into U.S. dollars at current exchange rates. Revenue and expenses are translated into U.S. dollars at average rates prevailing during the period. Foreign currency gains and losses are not significant for the year ended December 31, 2011.
Equity-Based Compensation
The Company accounts for equity-based compensation arrangements in accordance with ASC 718, CompensationStock Compensation (ASC 718), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on the grant-date fair values of the awards.
ASC 718 requires companies to estimate the fair value of share-based payment awards on the grant date using an option-pricing model. The Company elected to use the Black-Scholes option-pricing model for valuing equity-based compensation awards. The value of the portion of
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2011
the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Companys statement of operations.
Concentration of Credit Risk
The Company licenses various rights in its motion pictures to distributors throughout the world. Generally, payment of minimum guarantees is received in full, or letters of credit are obtained, prior to the Companys delivery of the films to its distributors.
The Company places its temporary cash investments principally in interest-bearing accounts or time deposit accounts with its banks, which are high-credit, quality financial institutions, and at times such balances may be in excess of insured limits. Generally, such investments mature within 90 days and are therefore subject to limited risk.
As of December 31, 2011, one customer represented 16% of the Companys accounts receivable balance.
For the year ended December 31, 2011, no customer represented more than 10% of the Companys revenue.
Use of Estimates
In the normal course of preparing financial statements in conformity with accounting principles generally accepted in the United States, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
The Company estimates ultimate film revenue to determine the basis over which to amortize capitalized film costs, participations, and residuals. Actual future revenue may vary significantly from these estimates, which are based on the Companys previous experience, existing contractual arrangements, and other market information.
3. Film Costs
Film costs, net of amortization, consisted of the following (in thousands):
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2011 |
| |
|
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|
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Completed and released |
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$ |
170,859 |
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In process |
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209,803 |
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In development |
|
8,186 |
| |
|
|
$ |
388,848 |
|
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2011
Based on managements estimates of total gross revenue as of December 31, 2011, approximately 62% and 89% of released films, are expected to be amortized in the next twelve months and the next three years, respectively. During the year ended December 31, 2011, the Company capitalized interest to film projects of approximately $16.8 million.
Additionally, the Company expects to pay approximately $65.6 million in participations and residuals during the one-year period ending December 31, 2012.
In 2008, the Company entered into an agreement with a certain producer, who is also a shareholder, with respect to the co-financing and/or distribution by the Company of certain motion pictures acquired, produced, financed and/or co-financed by the producer. During the year ended December 31, 2011, the Company incurred participation expense related to the producers films of $8.8 million, which is included in cost of revenue on the consolidated statement of operations. As of December 31, 2011, amounts owed to the producer related to the distribution of its titles equal $3.8 million and are included in participations and residuals payable on the consolidated balance sheet.
4. Detail of Balance Sheet Accounts
Accounts receivable, net consisted of the following (in thousands):
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2011 |
| |
|
|
|
| |
Accounts receivable |
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$ |
178,839 |
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Allowance for returns and doubtful accounts |
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(16,868 |
) | |
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$ |
161,971 |
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Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2011
Other assets consisted of the following (in thousands):
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2011 |
| |
|
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|
| |
Film subsidies receivable |
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$ |
15,472 |
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Inventory |
|
12,571 |
| |
Debt issuance costs |
|
14,323 |
| |
Other |
|
6,256 |
| |
|
|
$ |
48,622 |
|
Inventory consists of DVDs/Blu-ray discs and is stated at the lower of cost or market value (first-in, first-out method).
Intangible assets, net consisted of the following (in thousands):
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2011 |
| |
|
|
|
| |
Sales agency relationships |
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$ |
6,475 |
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Accumulated amortization |
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(5,543 |
) | |
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|
| |
Net amortizable intangible assets |
|
932 |
| |
|
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|
| |
Trademarks |
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6,400 |
| |
|
|
|
| |
|
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$ |
7,332 |
|
The sales agency relationships are being amortized over 5.5 years. Amortization expense for the year ended December 31, 2011 was $1.2 million. Amortization expense for the year ended December 31, 2012 is expected to total $0.9 million.
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2011
Accounts payable and accrued liabilities consisted of the following (in thousands):
|
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2011 |
| |
|
|
|
| |
Accounts payable |
|
$ |
24,825 |
|
Accrued prints and advertising |
|
23,927 |
| |
Accrued payroll related |
|
616 |
| |
Other |
|
18,572 |
| |
|
|
$ |
67,940 |
|
5. Notes Payable
Notes payable consisted of the following (in thousands):
|
|
2011 |
| |
|
|
|
| |
Term loan, net of discount of $9,375 |
|
$ |
496,910 |
|
Foreign rights loans |
|
50,760 |
| |
Other |
|
5,493 |
| |
|
|
$ |
553,163 |
|
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2011
2011 Debt Refinancing
On March 8, 2011, the Company closed a series of transactions that restructured the Companys previously outstanding Senior Credit Facilities and Mezzanine Notes and put in place a $550 million senior secured Term Loan Facility and a $200 million senior secured Revolving Credit Facility (the Loans), which may be increased up to an amount not exceeding $300 million. The proceeds of the Term Loan Facility were used in part to refinance and purchase the Senior Credit Facilities and Mezzanine Notes, fund a $200 million distribution to the members and pay transaction costs. The remaining balance was used for working capital and general corporate purposes. At December 31, 2011, no amounts were outstanding under the Revolving Credit Facility.
The Term Loan matures (i) in equal quarterly consecutive installments commencing on June 30, 2011, and (ii) on September 7, 2016 in an amount equal to the remaining outstanding Term Loan balance. The Term Loan is subject to quarterly mandatory minimum payments equal to $13.8 million, reducing the scheduled amortization on a pro-rata basis. The Revolving Credit Facility expires on the earlier of (i) March 7, 2016, and (ii) such other date as the Loans become due subject to mandatory prepayment.
The Loans may from time to time be LIBOR loans or Alternate Base loans as determined by the Company. The rate of interest on outstanding amounts under a LIBOR loan is equal to LIBOR plus a margin of 6.0% and 4.25%, respectively, with respect to the Term Loan Facility and the Revolving Credit Facility,
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2011
respectively. In the case of an Alternate Base Rate loan, interest is equal to the Alternate Base Rate plus a margin of 5.0% and 3.25%, respectively, with respect to the Term Loan Facility and the Revolving Credit Facility, respectively. The weighted average interest rate on the outstanding Term Loan at December 31, 2011 was 7.5%. The Company is also required to pay quarterly fees on unused availability under the Revolving Credit Facility. The unused commitment fee is 0.50% of the average daily amount that the Revolving Credit Facility total availability exceeds the principal outstanding during such period.
The Company is required to maintain a collection account to receive payments from its distribution, licensing, and sales agreements. Each quarter, 50% of any excess cash flow from these amounts (excluding amounts related to The Twilight Saga: Breaking Dawn Parts 1 and 2 (the Breaking Dawn Films) shall be used to prepay the Term Loan. Additionally, 75% of any excess cash flow from the Breaking Dawn Films shall also prepay the Term Loan.
The Credit Agreement requires the Company to meet certain performance covenants and maintain sufficient liquidity. Failure to meet these requirements would be an event of default and require the Company to pay any outstanding Loan obligations if not remedied within five business days.
Foreign Rights Loans
As of December 31, 2011, the Company had $50.8 million outstanding under four foreign rights loans with a bank. The foreign rights loans mature at various dates through March 31, 2013, and bear interest at LIBOR plus 3.00% (3.30% at December 31, 2011). The loans are secured by various foreign presale agreements and other foreign assets related to the underlying motion pictures. Amounts received under the foreign presale agreements are generally required to pay down the loan.
6. Members Capital
On April 20, 2007, the Company issued 92,500,000 Class A Preferred Units for cash of $92.5 million ($83.5 million net of issuance costs). The Company also sold 15,000,000 Class C Preferred Units for cash of $15.0 million and contemporaneously entered into an output deal for certain territories with a third party. The cash consideration was allocated to equity and to deferred revenue based on a valuation of the equity by a third-party appraiser. The deferred revenue is being recognized ratably over the seven-year term of the output deal.
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2011
As discussed in Note 7, the Company also issued Class B Preferred Units, Class D Preferred Units, and Class A Common Units in exchange for future services.
The units carry the following key rights and obligations:
Conversion
Class A, Class B, Class C, and Class D Preferred Units are immediately convertible at the members option into Class A Common Units on a one-unit-for-one-unit basis. The conversion price is subject to proportional adjustment for certain dilutive issuances, splits and combinations and other recapitalizations or reorganizations. Conversion of Class A, Class B, Class C, and Class D Preferred Units is automatic when the liquidation value, as defined, with respect to the Preferred Units, has been reduced to zero. Conversion of Class A, Class B, Class C, and Class D Preferred Units is also automatic in the event of a public offering of the Companys common stock for which the aggregate gross proceeds to the Company is at least $50.0 million and the price per share is at least $2.00.
Voting Rights
The holders of the Class A, Class B, Class C, and Class D Preferred Units and the Class A and vested Class B Common Units are entitled to vote on certain matters. Each member is entitled to a number of votes equal to the number of units of the respective class of units held. Holders of Class B Common Units that are subject to vesting and forfeiture restrictions are not entitled to vote.
Selection of the Board of Directors
The Companys Board of Directors has a tiered structure that includes up to ten board members. The Chief Executive Officer of the Company is entitled to serve as a Director and can designate another Director. Subject to the continued employment by the Company of the Class B Preferred members and their ownership of at least 50% of the outstanding Class B Preferred Units, two of the Class B Preferred members are entitled to serve on the Board of Directors.
The Class A Preferred members elect five of the Directors by majority vote and can elect a sixth board member subject to the approval of certain members of the Company.
Dividends
Class A Preferred Units accrue a 10% per annum, accumulating, non-compounding return on the original Class A Preferred Unit price, payable in cash. To the extent that the return is not paid, the amount continues to accrue.
Payment of dividends is at the discretion of the Board of Directors. On March 8, 2011, the Company declared a $200.0 million dividend to its members of which $199.8 million was paid on the same date, including $20.9 million paid to holders of Class A Preferred Units in respect of accumulated but undeclared dividends and $144.4 million paid to holders of Preferred Units in full payment of their liquidation value. All Preferred Units were simultaneously converted to Class A Common Units in accordance with the Companys governing documents. As of December 31, 2011, $0.2 million of dividends were declared but not paid and are included in accounts payable and accrued liabilities.
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2011
During the year ended December 31, 2011, $22.6 million of tax distributions were declared and paid.
Allocation of Net Profits and Losses
Net losses for any fiscal year are allocated to the members in the following order of priority on a cumulative basis:
1. First, net losses are allocated to each member to the extent of and in reverse order of priority of the aggregate amount of net profits previously allocated to such member.
2. Second, net losses are allocated to the Class C Preferred members until each such Class C Preferred member has been allocated an amount of net losses equal to fifty percent (50%) of the original unit price per unit.
3. Third, net losses are allocated to the Class C and the Class D Preferred members in proportion to their respective remaining capital balances until their capital accounts are zero.
4. Fourth, net losses are allocated to the Class B Preferred members until their capital accounts are zero.
5. Fifth, net losses are allocated to the Class A Preferred members until their capital accounts are zero.
6. Sixth, net losses are allocated pro rata among the members in accordance with their then percentage interests.
Net profits for any fiscal year are allocated to the members in the following order of priority on a cumulative basis:
1. First, net profits are allocated to each member to the extent of and in the reverse order of priority to the aggregate amount of net losses previously allocated to such member.
2. Second, net profits are allocated pro rata among the Class A Preferred members until the cumulative net profits allocated to each Class A Preferred member are equal to the cumulative Class A Preferred Return accrued with respect to the Class A Preferred Units.
3. Third, net profits are allocated pro rata among the members in accordance with their then percentage interests.
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2011
Liquidation
In the event of liquidation, including a merger, acquisition or sale of assets where there is a change in control, any proceeds are allocated as follows:
1. First, Class A Preferred members are entitled to receive $1.00 per unit plus any accrued dividends (whether or not paid), less distributions previously paid to the Preferred A members.
2. Second, Class B Preferred members are entitled to receive $1.00 per unit, less any distributions previously paid to the Class B Preferred members.
3. Third, Class C Preferred members and Class D Preferred members are entitled to receive $0.50 per unit and $1.00 per unit on a pro rata basis, less any distributions previously paid to the Class C Preferred members and Class D Preferred members.
4. Any remaining amounts are distributed to all members in proportion to their ownership interests prior to the liquidation event.
7. Equity-Based Compensation
Units Issued in Connection with the Acquisition and Certain Employment Arrangements
The Company issued Class B Preferred Units, Class D Preferred Units, and Class A Common Units to certain senior executives. In general, these awards vest in four annual installments on the annual anniversary of the date of grant. In the event that the executive is terminated without cause (as defined) or leaves for good reason (as defined), the awards continue to vest, subject to certain conditions. In the event that the executive is terminated with cause or leaves without good reason, any unvested units are forfeited. The Company generally has the right, but not the obligation, to repurchase any vested units upon an executive leaving the Company. The repurchase price is the fair value of the respective units on the date of repurchase.
Activity related to the equity unit award program is as follows:
|
|
Class B Preferred |
|
Class D Preferred |
|
Class A Common |
| |||||||||
|
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
Weighted |
| |||
|
|
|
|
Average |
|
|
|
Average |
|
|
|
Average |
| |||
|
|
|
|
Grant |
|
|
|
Grant |
|
|
|
Grant |
| |||
|
|
|
|
Date |
|
|
|
Date |
|
|
|
Date |
| |||
|
|
|
|
Fair |
|
|
|
Fair |
|
|
|
Fair |
| |||
|
|
Number |
|
Value |
|
Number |
|
Value |
|
Number |
|
Value |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Awards unvested at December 31, 2010 |
|
1,875,000 |
|
$ |
0.32 |
|
473,831 |
|
$ |
0.30 |
|
154,986 |
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Awards granted |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Awards vested |
|
(1,875,000 |
) |
0.32 |
|
(473,831 |
) |
0.30 |
|
(154,986 |
) |
0.10 |
| |||
Awards forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Awards unvested at December 31, 2011 |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
The fair value of the restricted stock units was determined on the date of grant based on a third-party valuation of the respective classes of equity units. Total equity compensation expense
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2011
recognized for the year ended December 31, 2011 was $0.8 million, which is included in operating expenses. As of December 31, 2011, there was no unrecognized compensation cost.
2007 Unit Incentive Plan
In April 2007, the Board of Directors adopted, and members entitled to vote approved, the 2007 Unit Incentive Plan (the 2007 Plan), with an initial reserve of 8,318,438 Class B Common Units. The plan provides for the issuance of units, options to acquire units, and/or unit appreciation rights as equity-based awards to employees, members of the Board, and consultants. The purpose is to provide an incentive to employees and other individuals who render services to the Company.
The Companys Board of Directors administers the 2007 Plan, and has delegated authority to certain officers of the Company to grant unit awards. Since the adoption of the 2007 Plan, the Company has made several grants of restricted unit bonus awards and unit appreciation rights pursuant to its unit incentive plan to executive employees. These units generally vest equally over a four- to five- year period from the date of the grant, contingent on continued employment of the grantee with the Company. In the event that the executive is terminated without cause (as defined) or leaves for good reason (as defined), the awards continue to vest, subject to certain conditions. In the event that the executive is terminated with cause or leaves without good reason, the unvested portion of any award is forfeited. The exercise price for options granted or base price for unit appreciation rights may not be less than 100% of the fair market value of the underlying unit on the grant date. Options granted generally expire seven years after grant date. 1.3 million units were available for future grants at December 31, 2011.
Activity related to the Class B Common Units under the 2007 Plan is as follows:
|
|
Class B Common |
| |||
|
|
|
|
Weighted |
| |
|
|
|
|
Average |
| |
|
|
|
|
Grant Date |
| |
|
|
Number |
|
Fair Value |
| |
|
|
|
|
|
| |
Unvested at end of December 31, 2010 |
|
1,707,429 |
|
$ |
0.13 |
|
|
|
|
|
|
| |
Awards granted |
|
450,000 |
|
2.03 |
| |
Awards vested |
|
(846,968 |
) |
0.45 |
| |
Awards forfeited |
|
(87,500 |
) |
0.36 |
| |
|
|
|
|
|
| |
Unvested at end of December 31, 2011 |
|
1,222,961 |
|
$ |
0.59 |
|
The amount of the equity-based compensation associated with Class B Common Unit awards included in operating expense for the year ended December 31, 2011 totaled $0.4 million.
The fair value of the unit appreciation rights are marked to market each reporting period. The Company recognized $0.9 million in equity-based compensation associated with unit appreciation rights for the year ended December 31, 2011, which are included in operating expense. The
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2011
Company has an equity-based compensation liability accrual in the amount of $2.5 million included in accounts payable and accrued liabilities as of December 31, 2011.
Total unrecognized compensation cost related to unvested Class B Common Unit awards and unit appreciation rights at December 31, 2011, was approximately $1.6 million and was expected to be recognized over a weighted-average period of 2.1 years.
8. Fair Value of Financial Instruments
On January 1, 2008, the Company adopted certain provisions of ASC 820, Fair Value Measurements and Disclosures (ASC 820), which establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. The provisions of ASC 820 relate to financial assets and liabilities as well as other assets and liabilities carried at fair value on a recurring basis. In accordance with ASC 820, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements.
When available, the Company uses quoted market prices to measure fair value (Level 1). If market prices are not available, fair value measurement is based upon models that use primarily market-based or independently-sourced market parameters (Level 2). If market-observable inputs for model-based valuation techniques are not available, the Company is required to make judgments about assumptions market participants would use in estimating the fair value of the financial instrument (Level 3).
Certain of the Companys financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, and the foreign rights loans are carried at cost, which approximates fair value because of their short-term nature.
The Company is required to estimate the fair value of long-term debt under ASC 825, Financial Instruments. There were no amounts outstanding under the Companys revolving credit facility. In determining the fair value of amounts outstanding under the Term Loan, the Company utilized a discounted cash flow model based on its estimate of when amounts outstanding at December 31, 2011, would be paid and its estimate of the current prevailing interest rate spreads. Because considerable judgment is required in developing the estimates of fair value, these estimates are not necessarily indicative of the amounts that could be realized in a debt market exchange. As of December 31, 2011, the face value of amounts outstanding under the Term Loan is estimated to approximate fair value based on Level 2 inputs.
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2011
9. Income Taxes
A certain consolidated subsidiary of the Company is taxed as a corporation. The tax provision in the current period primarily relates to a valuation allowance associated with foreign tax credits generated by this consolidated subsidiary due to the payment of certain foreign withholding taxes. The Company has no other significant deferred tax assets or liabilities. As a significant portion of the Companys taxable income continues to be allocated to the members, the effective tax rate is significantly less than the statutory tax rate.
At December 31, 2011, the Company has no material unrecognized tax positions. The Companys policy is to recognize interest and penalties, if any, related to uncertain tax positions as a component of interest and other expense. For the year ended December 31, 2011, the Company did not recognize any interest or penalties for uncertain tax positions. The Company is currently not under examination by the United States Internal Revenue Service or any other state, city or local jurisdiction. As such, the Company is subject to the standard statutes of limitations by the relevant tax authorities for federal and state purposes.
State franchise taxes were minor and are included in operating expenses.
10. Commitments and Contingencies
Legal Matters
The Company is, from time to time, subject to legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not have a material adverse effect on the Companys financial position or results of operations.
Commitments
The Company leases office facilities and certain office equipment under operating leases. Future minimum operating lease payment commitments as of December 31, 2011, are (in thousands):
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2011
|
|
Operating |
| |
|
|
Lease |
| |
|
|
|
| |
2012 |
|
$ |
2,696 |
|
2013 |
|
2,327 |
| |
2014 |
|
172 |
| |
2015 |
|
12 |
| |
Total minimum lease payments |
|
$ |
5,207 |
|
For the year ended December 31, 2011, rent expense under all operating leases was approximately $2.6 million.
11. Subsequent Events
As required by ASC 855, Subsequent Events, management has evaluated the impact of subsequent events through March 21, 2012, which is the date the financial statements are issued.
Sale to Lionsgate Entertainment
On January 13, 2012, Lions Gate Entertainment Corp. purchased all of the membership interests in the Company for consideration of approximately $419.9 million.
Exhibit 99.2
Summit Entertainment, LLC
Consolidated Financial Statements
For the Years Ended December 31, 2010 and 2009
Report of Independent Auditors
To the Members of Summit Entertainment, LLC:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of members equity, and of cash flows present fairly, in all material respects, the financial position of Summit Entertainment, LLC and its subsidiaries (the Company) at December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Los Angeles, CA
March 29, 2011
Summit Entertainment, LLC
Consolidated Balance Sheets
Years Ended December 31, 2010 and 2009
(Amounts in Thousands)
|
|
2010 |
|
2009 |
| ||
|
|
|
|
|
| ||
Assets |
|
|
|
|
| ||
Current assets |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
10,064 |
|
$ |
20,456 |
|
Accounts receivable, net |
|
170,441 |
|
67,830 |
| ||
Restricted cash |
|
252,435 |
|
192,384 |
| ||
Other current assets |
|
30,801 |
|
39,468 |
| ||
Total current assets |
|
463,741 |
|
320,138 |
| ||
Film costs, net |
|
294,378 |
|
269,674 |
| ||
Property and equipment, net |
|
1,623 |
|
1,359 |
| ||
Goodwill |
|
5,984 |
|
3,777 |
| ||
Intangible assets, net |
|
8,875 |
|
10,905 |
| ||
Other assets |
|
4,692 |
|
5,009 |
| ||
Total assets |
|
$ |
779,293 |
|
$ |
610,862 |
|
Liabilities and Members Equity |
|
|
|
|
| ||
Current liabilities |
|
|
|
|
| ||
Accounts payable and accrued liabilities |
|
$ |
92,599 |
|
$ |
48,380 |
|
Notes payable |
|
90,566 |
|
208,719 |
| ||
Deferred revenue |
|
53,751 |
|
64,877 |
| ||
Participations and residuals payable |
|
82,407 |
|
35,648 |
| ||
Total current liabilities |
|
319,323 |
|
357,624 |
| ||
Notes payable |
|
107,452 |
|
97,392 |
| ||
Deferred revenue |
|
30,994 |
|
10,700 |
| ||
Participations and residuals payable |
|
16,568 |
|
21,850 |
| ||
Other liabilities |
|
1,526 |
|
1,679 |
| ||
Total liabilities |
|
475,863 |
|
489,245 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies (Note 10) |
|
|
|
|
| ||
|
|
|
|
|
| ||
Members equity |
|
101,253 |
|
97,956 |
| ||
Retained earnings |
|
199,366 |
|
21,836 |
| ||
|
|
300,619 |
|
119,792 |
| ||
|
|
|
|
|
| ||
Non-controlling interest |
|
2,811 |
|
1,825 |
| ||
|
|
|
|
|
| ||
Total members equity |
|
303,430 |
|
121,617 |
| ||
|
|
|
|
|
| ||
Total liabilities and members equity |
|
$ |
779,293 |
|
$ |
610,862 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Summit Entertainment, LLC
Consolidated Statements of Operations
Years Ended December 31, 2010 and 2009
(Amounts in Thousands)
|
|
Years Ended December 31, |
| ||||
|
|
2010 |
|
2009 |
| ||
|
|
|
|
|
| ||
Net revenue |
|
$ |
1,150,807 |
|
$ |
722,075 |
|
Cost of revenue |
|
714,749 |
|
513,172 |
| ||
Gross profit |
|
436,058 |
|
208,903 |
| ||
|
|
|
|
|
| ||
Operating expenses |
|
71,074 |
|
52,849 |
| ||
Operating income |
|
364,984 |
|
156,054 |
| ||
|
|
|
|
|
| ||
Interest expense and other, net |
|
(9,893 |
) |
(8,587 |
) | ||
|
|
|
|
|
| ||
Pre-tax income |
|
355,091 |
|
147,467 |
| ||
|
|
|
|
|
| ||
Income tax expense |
|
1,898 |
|
1,394 |
| ||
|
|
|
|
|
| ||
Net income |
|
353,193 |
|
146,073 |
| ||
|
|
|
|
|
| ||
Less: net income attributable to non-controlling interests |
|
(986 |
) |
(978 |
) | ||
|
|
|
|
|
| ||
Net income attributable to Summit members |
|
$ |
352,207 |
|
$ |
145,095 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Summit Entertainment, LLC
Consolidated Statements of Cash Flows
Years Ended December 31, 2010 and 2009
(Amounts in Thousands)
|
|
Years Ended December 31, |
| ||||
|
|
2010 |
|
2009 |
| ||
|
|
|
|
|
| ||
Cash flows from operating activities |
|
|
|
|
| ||
Net income |
|
$ |
353,193 |
|
$ |
146,073 |
|
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
| ||
Amortization of debt issuance costs |
|
1,559 |
|
1,557 |
| ||
Bad debt expense |
|
6,010 |
|
|
| ||
Depreciation and amortization |
|
2,591 |
|
2,756 |
| ||
Accretion and interest paid in kind |
|
15,177 |
|
15,879 |
| ||
Unit-based compensation |
|
4,012 |
|
3,718 |
| ||
Other |
|
363 |
|
1,110 |
| ||
Amortization of film costs |
|
189,614 |
|
142,002 |
| ||
Additions to film costs |
|
(214,318 |
) |
(226,397 |
) | ||
Changes in operating assets and liabilities |
|
|
|
|
| ||
Accounts receivable |
|
(108,621 |
) |
7,914 |
| ||
Other assets |
|
6,848 |
|
(34,817 |
) | ||
Accounts payable and accrued liabilities |
|
28,205 |
|
4,966 |
| ||
Deferred revenue |
|
9,168 |
|
9,460 |
| ||
Participations and residuals payable |
|
41,477 |
|
45,080 |
| ||
Other liabilities |
|
(868 |
) |
585 |
| ||
Net cash provided by operating activities |
|
334,410 |
|
119,886 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities |
|
|
|
|
| ||
Change in restricted cash |
|
(60,051 |
) |
(110,542 |
) | ||
Contingent consideration paid |
|
(1,612 |
) |
(3,777 |
) | ||
Additions to property and equipment |
|
(825 |
) |
(526 |
) | ||
Proceeds (payments) from investments |
|
214 |
|
609 |
| ||
Net cash used in investing activities |
|
(62,274 |
) |
(114,236 |
) | ||
|
|
|
|
|
| ||
Cash flows from financing activities |
|
|
|
|
| ||
Proceeds from notes payable |
|
546,911 |
|
538,949 |
| ||
Repayments of notes payable |
|
(670,181 |
) |
(530,281 |
) | ||
Distributions to equity holders |
|
(159,258 |
) |
(343 |
) | ||
Net cash provided by (used in) financing activities |
|
(282,528 |
) |
8,325 |
| ||
|
|
|
|
|
| ||
Increase (decrease) in cash and cash equivalents |
|
(10,392 |
) |
13,975 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents |
|
|
|
|
| ||
Beginning of year |
|
20,456 |
|
6,481 |
| ||
End of year |
|
$ |
10,064 |
|
$ |
20,456 |
|
|
|
|
|
|
| ||
Supplemental cash flow information |
|
|
|
|
| ||
Cash paid during the year for interest |
|
$ |
5,211 |
|
$ |
5,329 |
|
Cash paid for income taxes |
|
5,130 |
|
1,177 |
| ||
Supplemental schedule of non-cash investing and financing activities |
|
|
|
|
| ||
Declaration of a tax distribution |
|
$ |
15,419 |
|
$ |
5,034 |
|
Accrued produced picture payments |
|
595 |
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Summit Entertainment, LLC
Consolidated Statements of Members Equity
Years Ended December 31, 2010 and 2009
(Amounts in Thousands)
|
|
|
|
Retained |
|
|
|
|
| ||||
|
|
|
|
Earnings |
|
Non- |
|
|
| ||||
|
|
Members |
|
(Accumulated |
|
Controlling |
|
|
| ||||
|
|
Capital |
|
Deficit) |
|
Interest |
|
Total |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Balance as of December 31, 2008 |
|
$ |
94,238 |
|
$ |
(118,225 |
) |
$ |
1,190 |
|
$ |
(22,797 |
) |
|
|
|
|
|
|
|
|
|
| ||||
Member unit compensation expense |
|
3,718 |
|
|
|
|
|
3,718 |
| ||||
Distribution and other |
|
|
|
(5,034 |
) |
(343 |
) |
(5,377 |
) | ||||
Net income |
|
|
|
145,095 |
|
978 |
|
146,073 |
| ||||
Balance as of December 31, 2009 |
|
97,956 |
|
21,836 |
|
1,825 |
|
121,617 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Member unit compensation expense |
|
3,297 |
|
|
|
|
|
3,297 |
| ||||
Distribution and other |
|
|
|
(174,677 |
) |
|
|
(174,677 |
) | ||||
Net income |
|
|
|
352,207 |
|
986 |
|
353,193 |
| ||||
Balance as of December 31, 2010 |
|
$ |
101,253 |
|
$ |
199,366 |
|
$ |
2,811 |
|
$ |
303,430 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
1. Description of the Business
Summit Entertainment, LLC, a Delaware limited liability company, and its wholly owned subsidiaries (collectively Summit or the Company), are engaged in the development, financing, production and distribution of motion picture films in the theatrical, home entertainment, television and ancillary markets. The Company also provides international sales agency services to major film producers.
The Company was formed to consummate the acquisition of the operations of Summit Entertainment L.P. (the Predecessor) for a combination of cash, contingent consideration, and a minority equity position in the Company. This transaction required the application of purchase accounting and represented the termination of the reporting basis of the Predecessor on April 20, 2007. On this date, all tangible and intangible assets and liabilities of the Company were adjusted to their fair value.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements of the Company include the accounts of all of its majority-owned and controlled subsidiaries. The Company reviews its relationships with other entities to identify whether it is the primary beneficiary of a variable interest entity (VIE). If the determination is made that the Company is the primary beneficiary, then the entity is consolidated in accordance with ASC 810, Variable Interest Entities. The Company consolidates several 50% owned variable interest entities where the Company believes that it is the primary beneficiary. These entities are primarily created for the distribution or financing of films. The Company has concluded that its other equity investments do not require consolidation as they are not variable interest entities.
Revenue Recognition
Revenue from the sale or licensing of films is recognized upon meeting all recognition requirements of ASC 926, Entertainment Films. Revenue from the theatrical distribution of films is recognized as the films are exhibited. Home entertainment revenue is recognized on the later of shipment or the date the title is available for sale, net of estimated returns. Sales allowances are recorded at the time of sale for returns and other allowances. Revenue from the licensing of films for exhibition on television is recognized upon availability of the film to the licensee for telecast.
Revenue from international exploitation of films is recognized when a film is available for exhibition and other conditions of sale are met in the respective media. Non-refundable guarantees against a percentage of film rentals that result from the distribution of motion picture rights are recorded as revenue when each related license agreement is executed, the picture is available for delivery to the licensee, and the licensee is able to exploit the picture in the related media and market licensed to it. Film revenue earned in excess of non-refundable guarantees is recorded when reported by distributors.
Revenue for international sales agency services is recognized when the film licensing agreements are executed, the films have been delivered to the sub-distributor, and the related licensing fee has been collected by either the Company or the producers of the films.
To the extent that all revenue recognition conditions have not been met, amounts received are reported in the accompanying consolidated financial statements as deferred revenue.
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Advertising Expense
The Company expenses advertising costs, including advertising costs related to the release of feature films, as incurred in accordance with ASC 970, Advertising Costs, and ASC 926. The Company incurred total advertising expenses of $220.6 million and $216.4 million for the years ended December 31, 2010 and 2009, respectively.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with remaining maturities of three months or less from the date of purchase.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is based on the Companys best estimate of the amount of probable credit losses in existing accounts receivable. The Company reviews the allowance for doubtful accounts, and provisions are made upon a specific review of all receivables. Account balances are charged off against the allowance when the Company believes it is probable the receivable will not be recovered.
Restricted Cash
Restricted cash consists of cash and cash equivalents which are contractually restricted for specific purposes under the Companys various debt, film financing and distribution arrangements.
Film Costs
The Company accounts for film costs in accordance with ASC 926. Film costs include capitalizable production costs, production overhead, interest, development costs, and acquired production costs and are stated at the lower of cost, less accumulated amortization, or estimated fair value determined by a discounted cash flow analysis. Subsidies from governmental jurisdictions related to a specific project are reflected as a reduction of film costs when the amounts are reasonably assured and estimable.
Film, participation, and residuals costs are expensed based on the ratio of the current periods gross revenue to estimated remaining gross revenue to be received from all sources that will be earned within ten years of the date of initial theatrical release. Estimated remaining gross revenue is reviewed regularly, and revisions to the amortization rates are recorded as necessary.
The Company regularly evaluates whether any indicators of an impairment of a film have occurred. If an impairment indicator has occurred, the Company compares the fair value of the film, determined using a discounted cash flow analysis, to the carrying value of the film. If the fair value is less than the carrying value, an impairment charge is recorded in cost of revenue.
Film development costs for projects that have been abandoned or have not been set for production within three years are generally written off.
Debt Issuance Costs
Debt issuance costs are principally related to the Companys revolving credit facilities and mezzanine notes. These costs are deferred and amortized using the straight-line method over the term of the related debt agreement.
Property and Equipment
Property and equipment are stated at cost and are depreciated over their estimated useful lives, generally five years, using the straight-line method. Leasehold improvements are amortized
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
using the straight-line method over the lesser of their estimated useful lives or the remaining term of the underlying lease.
Goodwill
Goodwill represents the excess of the purchase price of acquiring the Predecessor over the fair value of the net tangible and intangible assets acquired. Contingent consideration was recorded as a liability to the former owners in purchase accounting in order to eliminate any negative goodwill and the related pro rata reduction of the value of non-current assets acquired. Any contingent consideration payment in excess of the negative goodwill is recognized as an additional cost of the transaction and recorded as goodwill. As of December 31, 2010, $6.0 million was recorded to goodwill, which represents contingent consideration paid to the former owners.
The Company accounts for goodwill in accordance with ASC 350, Intangibles-Goodwill and Other. Goodwill is not amortized but is reviewed for impairment annually or when events occur or circumstances change that would more likely than not indicate that the goodwill might be impaired. The Company performed its annual impairment test on its goodwill as of December 31, 2010, and no goodwill impairment was identified.
Intangible Assets
The Company is required to compare annually the fair value of each of its indefinite-lived intangible assets to its respective carrying value. If the carrying value exceeds the fair value, an impairment loss is recorded. Amortizable intangible assets are amortized on a straight-line basis over periods of up to 5.5 years.
Foreign Currency Translation
The Companys foreign subsidiaries use the U.S. dollar as the functional currency. Assets and liabilities are translated into U.S. dollars at current exchange rates. Revenue and expenses are translated into U.S. dollars at average rates prevailing during the period. Foreign currency gains and losses are not significant for the years ended December 31, 2010 and 2009.
Equity-Based Compensation
The Company accounts for equity-based compensation arrangements in accordance with ASC 718 CompensationStock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on the grant-date fair values of the awards.
ASC 718 requires companies to estimate the fair value of share-based payment awards on the grant-date using an option-pricing model. The Company elected to use the Black-Scholes option-pricing model for valuing equity-based compensation awards. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Companys statement of operations.
Concentration of Credit Risk
The Company licenses various rights in its motion pictures to distributors throughout the world. Generally, payment of minimum guarantees is received in full, or letters of credit are obtained, prior to the Companys delivery of the films to its distributors.
The Company places its temporary cash investments principally in interest-bearing accounts or time deposit accounts with its banks, which are high-credit, quality financial institutions, and at times such balances may be in excess of insured limits. Generally, such investments mature within 90 days and are therefore subject to limited risk.
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
As of December 31, 2010, two customers represented 31% and 13% of the Companys accounts receivable balance. As of December 31, 2009, two customers represented 24% and 12% of the Companys accounts receivable balance.
For the years ended December 31, 2010 and 2009, one customer represented 17% and 13% of the Companys revenue, respectively.
Use of Estimates
In the normal course of preparing financial statements in conformity with accounting principles generally accepted in the United States, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
The Company estimates ultimate film revenue to determine the basis over which to amortize capitalized film costs, participations, and residuals. Actual future revenue may vary significantly from these estimates, which are based on the Companys previous experience, existing contractual arrangements, and other market information.
3. Film Costs
Film costs, net of amortization, consisted of the following (in thousands):
|
|
2010 |
|
2009 |
| ||
|
|
|
|
|
| ||
Completed and released |
|
$ |
129,104 |
|
$ |
93,035 |
|
Completed and unreleased |
|
23,762 |
|
|
| ||
In process |
|
131,983 |
|
167,691 |
| ||
In development |
|
9,529 |
|
8,948 |
| ||
|
|
$ |
294,378 |
|
$ |
269,674 |
|
Based on managements estimates of total gross revenue as of December 31, 2010, approximately 56% and 87% of released films, excluding the acquired film library, are expected to be amortized in the next twelve months and the next three years, respectively. During the years ended December 31, 2010 and 2009, the Company capitalized interest to film projects of approximately $10.9 million and $10.5 million, respectively.
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
4. Detail of Balance Sheet Accounts
Accounts receivable, net consisted of the following (in thousands):
|
|
2010 |
|
2009 |
| ||
|
|
|
|
|
| ||
Accounts receivable |
|
$ |
176,451 |
|
$ |
67,830 |
|
Allowance for doubtful accounts |
|
(6,010 |
) |
|
| ||
|
|
$ |
170,441 |
|
$ |
67,830 |
|
Other current assets consisted of the following (in thousands):
|
|
2010 |
|
2009 |
| ||
|
|
|
|
|
| ||
Film subsidies receivable |
|
$ |
18,418 |
|
$ |
29,239 |
|
Inventory and print costs |
|
6,754 |
|
7,083 |
| ||
Debt issuance costs |
|
1,759 |
|
1,560 |
| ||
Other |
|
3,870 |
|
1,586 |
| ||
|
|
$ |
30,801 |
|
$ |
39,468 |
|
Intangible assets, net consisted of the following (in thousands):
|
|
2010 |
|
2009 |
| ||
|
|
|
|
|
| ||
Sales agency relationships |
|
$ |
6,475 |
|
$ |
6,475 |
|
Film distribution relationships |
|
3,770 |
|
3,770 |
| ||
Accumulated amortization |
|
(8,136 |
) |
(6,106 |
) | ||
|
|
|
|
|
| ||
Net amortizable intangible assets |
|
2,109 |
|
4,139 |
| ||
|
|
|
|
|
| ||
Trademarks |
|
6,766 |
|
6,766 |
| ||
|
|
|
|
|
| ||
|
|
$ |
8,875 |
|
$ |
10,905 |
|
The sales agency relationships and film distribution relationships are being amortized over 5.5 and 3.5 years, respectively. Amortization expense for the years ended December 31, 2010 and 2009 are $2.0 million and $2.3 million, respectively. Amortization expense for the years ended December 31, 2011 and 2012 is expected to total $1.2 million and $0.9 million, respectively.
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
Accounts payable and accrued liabilities consisted of the following (in thousands):
|
|
2010 |
|
2009 |
| ||
|
|
|
|
|
| ||
Accounts payable |
|
$ |
8,738 |
|
$ |
4,273 |
|
Accrued prints and advertising |
|
27,554 |
|
14,695 |
| ||
Accrued payroll related |
|
15,854 |
|
8,678 |
| ||
Accrued members tax distribution |
|
15,439 |
|
5,034 |
| ||
Other |
|
25,014 |
|
15,700 |
| ||
|
|
$ |
92,599 |
|
$ |
48,380 |
|
5. Notes Payable
Notes payable consisted of the following (in thousands):
|
|
2010 |
|
2009 |
| ||
|
|
|
|
|
| ||
Senior Credit Facility - P&A |
|
$ |
28,012 |
|
$ |
80,546 |
|
Senior Credit Facility - Production |
|
|
|
48,801 |
| ||
Senior Credit Facility - Ultimates |
|
56,711 |
|
6,033 |
| ||
Mezzanine Notes |
|
92,455 |
|
82,905 |
| ||
Foreign Rights Loans |
|
13,070 |
|
59,575 |
| ||
New Mexico State Investment Council |
|
|
|
14,888 |
| ||
Other |
|
7,770 |
|
13,363 |
| ||
Total notes payable |
|
198,018 |
|
306,111 |
| ||
|
|
|
|
|
| ||
Less: current portion of notes payable |
|
(90,566 |
) |
(208,719 |
) | ||
|
|
|
|
|
| ||
Total long-term notes payable |
|
$ |
107,452 |
|
$ |
97,392 |
|
Senior Credit Facilities
The Company has a $300 million senior debt financing comprising three Senior Credit Facilities: (i) a $100 million P&A facility, (ii) a $140 million Ultimates Facility, and (iii) a $60 million Production Facility. The Company has pledged all of its assets as collateral for the borrowings under the Senior Credit Facilities.
The P&A Facility and the Ultimates Facility expire on the earlier to occur of (i) April 19, 2014, and (ii) the date of the declaration of an event of default under the terms of the Senior Credit Facilities. The Production Facility expires on the earlier to occur of (i) April 19, 2012, and (ii) the date of the declaration of an event of default under the terms of the Senior Credit Facilities.
The Company is required to maintain certain bank accounts to receive amounts receivable from its customers for exploitation of the films. These amounts are distributed on a monthly basis to pay amounts owing for principal and interest under the Senior Credit Facilities. As the amounts outstanding at December 31, 2010 and 2009, under the Senior Credit Facilities are expected to be paid within one year of the balance sheet date, all amounts outstanding at December 31, 2010 and 2009, respectively, are reflected as a current liability.
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
The interest rate for outstanding amounts under the Senior Credit Facilities is as follows:
· For outstanding amounts under the P&A Facility, LIBOR plus 1.75% (2.01% at December 31, 2010)
· For outstanding amounts under the Ultimates Facility, LIBOR plus 2.00% (2.26% at December 31, 2010)
· For outstanding under the Production Facility, LIBOR plus 2.25% (2.51% at December 31, 2010)
The Senior Credit Facilities also require the Company to pay fees on unused availability. This fee is 0.50% with respect to the P&A and Ultimates Facilities and 0.75% with respect to the Production Facility, and is applied monthly on each Senior Credit Facilitys maximum availability reduced by the average amount of any debt outstanding under the Senior Credit Facility.
The Senior Credit Facilities require the maintenance of a minimum adjusted net worth and compliance with various administrative covenants. At December 31, 2010, the Company was in compliance with the covenants required by the Senior Credit Facility agreements.
Mezzanine Notes
As of December 31, 2010 and 2009, the Company had $92.5 million and $82.9 million, respectively, in outstanding Mezzanine Notes. Proceeds from the sale of the Mezzanine Notes are used to fund direct production costs of feature films, the interest payments of the Mezzanine Notes, and the operations of the Company. The Company has pledged all of its assets as collateral for the Mezzanine Notes. The Mezzanine Notes are subordinated to the Senior Credit Facilities.
The Mezzanine Notes expire on the earlier to occur of (i) April 19, 2014, and (ii) the date of the declaration of an event of default under the terms of the Mezzanine Notes. The interest rate for the Mezzanine Notes is the greater of (i) LIBOR plus 7.0% and (ii) 11.0%. At December 31, 2010 and 2009, the interest rate was 11.0%. Interest is paid in cash on a monthly basis, until a calculated ratio falls below a certain specified threshold from which point in time accrued interest is paid in kind with additional Mezzanine Notes. During the years ended December 31, 2010 and 2009, additional Mezzanine Notes totaling $9.6 million and $8.6 million, respectively, were issued to settle accrued interest obligations.
The Mezzanine Notes require the maintenance of a minimum net worth and compliance with various administrative covenants. The Company was in compliance with the covenants required by the Mezzanine Note agreements at December 31, 2010.
2011 Debt Refinancing
On March 8, 2011, the Company closed a series of transactions that restructured the Companys Senior Credit Facilities and Mezzanine Notes and put in place a $550 million senior secured Term Loan Facility and a $200 million senior secured Revolving Credit Facility, which may be increased up to an amount not exceeding $300 million. The proceeds of the Term Loan Facility were used in part to refinance and purchase the Senior Credit Facilities and Mezzanine Notes, fund a $200 million distribution to the members and pay transaction costs. The remaining balance will be used for working capital and general corporate purposes. The proceeds of the Revolving Credit Facility shall be used for working capital and general corporate purposes.
The Term Loan matures (i) in equal quarterly consecutive installments commencing on June 30, 2011, and (ii) on September 7, 2016 in an amount equal to the remaining outstanding Term Loan
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
balance. The Term Loan is subject to mandatory prepayments that reduce the scheduled amortization on a pro-rata basis. The Revolving Credit Facility expires on the earlier of (i) March 7, 2016, and (ii) such other date as the Loans become due subject to mandatory prepayment.
The Term Loans and the Revolving Credit Facility Loans may from time to time be LIBOR loans or Alternate Base loans as determined by the Company. The rate of interest on outstanding amounts under a LIBOR loan is equal to LIBOR plus a margin of 6.0% with respect to the Term Loan Facility and 4.25% with respect to the Revolving Credit Facility. In the case of an Alternate Base Rate loan, interest is equal to the Alternate Base Rate plus a margin of 5.0% with respect the Term Loan Facility and 3.25% with respect to the Revolving Credit Facility. The Company is also required to pay quarterly fees on unused availability under the Revolving Credit Facility. The unused commitment fee is 0.50% of the average daily amount that the Revolving Credit Facility total availability exceeds the principal outstanding during such period.
The Company is required to maintain a collection account to receive payments from its distribution, licensing, and sales agreements. Each quarter, 50% of any excess cash flow from these amounts (excluding amounts related to The Twilight Saga: Breaking Dawn Parts 1 and 2 (the Breaking Dawn Films) shall be used to prepay the Term Loan. 75% of any excess cash flow from the Breaking Dawn Films shall also prepay the Term Loan.
The Credit Agreement requires the Company to meet certain performance covenants and maintain sufficient liquidity. Failure to meet these requirements would be an event of default and require the Company to pay any outstanding Loan obligations if not remedied within five business days.
Foreign Rights Loans
As of December 31, 2010 and 2009, the Company had $13.1 million and $59.6 million, respectively, outstanding under five foreign rights loans with a bank. The foreign rights loans mature at various dates through January 31, 2011, and bear interest at LIBOR plus 3.25% (3.56% at December 31, 2010). The loans are secured by various foreign presale agreements and other foreign assets related to the underlying motion pictures. Amounts received under the foreign presale agreements are generally required to pay down the loan.
New Mexico State Investment Council (NMSIC)
As of December 31, 2009, the Company had a note payable to NMSIC bearing interest equal to 10.25% of the net proceeds, as defined, of the film In the Valley of Elah. As of December 31, 2009, the Company estimated the variable interest payments to be zero. The note matured on February 28, 2010, and was paid in full.
6. Members Equity
On April 20, 2007, the Company issued 92,500,000 Class A Preferred Units for cash of $92.5 million ($83.5 million net of issuance costs). The Company also sold 15,000,000 Class C Preferred Units for cash of $15.0 million and contemporaneously entered into an output deal for certain territories with a third party. The cash consideration has been allocated to equity and to deferred revenue based on the fair value of the equity. The deferred revenue will be recognized ratably over the seven-year term of the output deal.
As discussed in Note 7, the Company also issued Class B Preferred Units, Class D Preferred Units, and Class A Common Units in exchange for future services.
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
The units carry the following key rights and obligations:
Conversion
Class A, Class B, Class C, and Class D Preferred Units are immediately convertible at the members option into Class A Common Units on a one-unit-for-one-unit basis. The conversion price is subject to proportional adjustment for certain dilutive issuances, splits and combinations and other recapitalizations or reorganizations. Conversion of Class A, Class B, Class C, and Class D Preferred Units is automatic when the liquidation value, as defined, with respect to the Preferred Units, has been reduced to zero. Conversion of Class A, Class B, Class C, and Class D Preferred Units is also automatic in the event of a public offering of the Companys common stock for which the aggregate gross proceeds to the Company is at least $50.0 million and the price per share is at least $2.00.
Voting Rights
The holders of the Class A, Class B, Class C, and Class D Preferred Units and the Class A and vested Class B Common Units are entitled to vote on certain matters. Each member is entitled to a number of votes equal to the number of units of the respective class of units held. Holders of Class B Common Units that are subject to vesting and forfeiture restrictions are not entitled to vote.
Selection of the Board of Directors
The Companys Board of Directors has a tiered structure that includes up to ten board members. Subject to the continued employment by the Company of the Class B Preferred members and their ownership of at least 50% of the outstanding Class B Preferred Units, two of the Class B Preferred members are entitled to serve on the Board of Directors. The Chief Executive Officer of the Company is entitled to serve as a Director and can designate another Director.
The Class A Preferred members elect five of the Directors by majority vote and can elect a sixth board member subject to the approval of certain members of the Company.
Dividends
Class A Preferred Units accrue a 10% per annum, accumulating, non-compounding return on the original Class A Preferred Unit price, payable in cash. To the extent that the return is not paid, the amount continues to accrue. Payment of dividends is at the discretion of the Board of Directors. To date, no dividends have been declared by the Board of Directors, other than tax distributions. As of December 31, 2010 and 2009, accumulated, but undeclared, dividends due to Class A Preferred members totaled $19.2 million and $20.0 million, respectively.
During the years ended December 31, 2010 and 2009, $169.7 million and $5.0 million of tax distributions were declared. As of December 31, 2010 and 2009, $15.4 million and $5.0 million, respectively, of tax distributions were declared, but not paid, and are included in accounts payable and accrued liabilities.
Allocation of Net Profits and Losses
Net losses for any fiscal year are allocated to the members in the following order of priority on a cumulative basis:
1. First, net losses are allocated to each member to the extent of and in reverse order of priority of the aggregate amount of net profits previously allocated to such member.
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
2. Second, net losses are allocated to the Class C Preferred members until each such Class C Preferred member has been allocated an amount of net losses equal to fifty percent (50%) of the original unit price per unit.
3. Third, net losses are allocated to the Class C and the Class D Preferred members in proportion to their respective remaining capital balances until their capital accounts are zero.
4. Fourth, net losses are allocated to the Class B Preferred members until their capital accounts are zero.
5. Fifth, net losses are allocated to the Class A Preferred members until their capital accounts are zero.
6. Sixth, net losses are allocated pro rata among the members in accordance with their then percentage interests.
Net profits for any fiscal year are allocated to the members in the following order of priority on a cumulative basis:
1. First, net profits are allocated to each member to the extent of and in the reverse order of priority to the aggregate amount of net losses previously allocated to such member.
2. Second, net profits are allocated pro rata among the Class A Preferred members until the cumulative net profits allocated to each Class A Preferred member are equal to the cumulative Class A Preferred Return accrued with respect to the Class A Preferred Units,
3. Third, net profits are allocated pro rata among the members in accordance with their then percentage interests.
Liquidation
In the event of liquidation, including a merger, acquisition or sale of assets where there is a change in control, any proceeds are allocated as follows:
1. First, Class A Preferred members are entitled to receive $1.00 per unit plus any accrued dividends (whether or not paid), less distributions previously paid to the Preferred A members.
2. Second, Class B Preferred members are entitled to receive $1.00 per unit, less any distributions previously paid to the Class B Preferred members,
3. Third, Class C Preferred members and Class D Preferred members are entitled to receive $0.50 per unit and $1.00 per unit on a pro rata basis, less any distributions previously paid to the Class C Preferred members and Class D Preferred members.
4. Any remaining amounts are distributed to all members in proportion to their ownership interests prior to the liquidation event.
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
7. Equity-Based Compensation
Units Issued in Connection with the Acquisition and Certain Employment Arrangements
The Company issued Class B Preferred Units, Class D Preferred Units, and Class A Common Units to certain senior executives. In general, these awards vest in four annual installments on the annual anniversary of the date of grant. In the event that the executive is terminated without cause (as defined) or leaves for good reason (as defined), the awards continue to vest, subject to certain conditions. In the event that the executive is terminated with cause or leaves without good reason, any unvested units are forfeited. The Company generally has the right, but not the obligation, to repurchase any vested units upon an executive leaving the Company. The repurchase price is the fair value of the respective units on the date of repurchase.
Activity related to the equity unit award program is as follows:
|
|
Class B Preferred |
|
Class D Preferred |
|
Class A Common |
| |||||||||
|
|
Number |
|
Weighted |
|
Number |
|
Weighted |
|
Number |
|
Weighted |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Awards unvested at December 31, 2008 |
|
14,375,000 |
|
$ |
0.32 |
|
6,572,985 |
|
$ |
0.25 |
|
2,257,932 |
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Awards granted |
|
|
|
|
|
800,000 |
|
1.10 |
|
1,500,000 |
|
0.10 |
| |||
Awards vested |
|
(6,250,000 |
) |
0.32 |
|
(3,619,299 |
) |
0.38 |
|
(2,551,473 |
) |
0.10 |
| |||
Awards forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Awards unvested at December 31, 2009 |
|
8,125,000 |
|
0.32 |
|
3,753,686 |
|
0.31 |
|
1,206,459 |
|
0.10 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Awards granted |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Awards vested |
|
(6,250,000 |
) |
0.32 |
|
(3,279,855 |
) |
0.30 |
|
(1,051,473 |
) |
0.10 |
| |||
Awards forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Awards unvested at December 31, 2010 |
|
1,875,000 |
|
$ |
0.32 |
|
473,831 |
|
$ |
0.30 |
|
154,986 |
|
$ |
0.10 |
|
Total equity compensation expense recognized for the years ended December 31, 2010 and 2009 was $3.1 million and $3.6 million, respectively, which is included in operating expenses. As of December 31, 2010, unrecognized compensation cost totaled $0.9 million, which is expected to be recognized over the next 0.3 years
2007 Unit Incentive Plan
In April 2007, the Board of Directors adopted, and members entitled to vote approved, the 2007 Unit Incentive Plan (the 2007 Plan), with an initial reserve of 8,318,438 Class B Common Units. The plan provides for the issuance of units, options to acquire units, and/or unit appreciation rights as equity-based awards to employees, members of the Board, and consultants. The purpose is to provide an incentive to employees and other individuals who render services to the Company.
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
The Companys Board of Directors administers the 2007 Plan, and has delegated authority to certain officers of the Company to grant unit awards. Since the adoption of the 2007 Plan, the Company has made several grants of restricted unit bonus awards and unit appreciation rights pursuant to its unit incentive plan to executive employees. These units generally vest equally over a four to five year period from the date of the grant, contingent on continued employment of the grantee with the Company. In the event that the executive is terminated without cause (as defined) or leaves for good reason (as defined), the awards continue to vest, subject to certain conditions. In the event that the executive is terminated with cause or leaves without good reason, the unvested portion of any award is forfeited. The exercise price for options granted or base price for unit appreciation rights may not be less than 100% of the fair market value of the underlying unit on the grant date. Options granted generally expire seven years after grant date. 2.1 million units were available for future grants at December 31, 2010.
Activity related to the 2007 Plan is as follows:
|
|
Class B Common |
| |||
|
|
|
|
Weighted |
| |
|
|
|
|
Average |
| |
|
|
Number |
|
Grant Date |
| |
|
|
of Units |
|
Fair Value |
| |
|
|
|
|
|
| |
Unvested at end of December 31, 2008 |
|
4,129,013 |
|
$ |
0.09 |
|
|
|
|
|
|
| |
Awards granted |
|
335,000 |
|
0.06 |
| |
Awards vested |
|
(953,707 |
) |
0.08 |
| |
Awards forfeited |
|
(851,000 |
) |
0.10 |
| |
Unvested at end of December 31, 2009 |
|
2,659,306 |
|
0.09 |
| |
|
|
|
|
|
| |
Awards granted |
|
370,000 |
|
1.67 |
| |
Awards vested |
|
(1,321,877 |
) |
0.26 |
| |
Awards forfeited |
|
|
|
0.00 |
| |
Unvested at end of December 31, 2010 |
|
1,707,429 |
|
$ |
0.13 |
|
The amount of equity-based compensation related to the 2007 Plan included in operating expense for the years ended December 31, 2010 and 2009, totaled $0.9 million and $0.9 million, respectively.
Total unrecognized compensation cost related to unvested units at December 31, 2010, was approximately $1.4 million and was expected to be recognized over a weighted-average period of 1.8 years.
8. Fair Value of Financial Instruments
On January 1, 2008, the Company adopted certain provisions of ASC 820, Fair Value Measurements and Disclosures, which establishes a single authoritative definition of fair value,
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. The provisions of ASC 820 relate to financial assets and liabilities as well as other assets and liabilities carried at fair value on a recurring basis and did not have a material impact on the Companys consolidated financial statements. In accordance with ASC 820, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements.
When available, the Company uses quoted market prices to measure fair value (Level 1). If market prices are not available, fair value measurement is based upon models that use primarily market-based or independently-sourced market parameters (Level 2). If market-observable inputs for model-based valuation techniques are not available, the Company is required to make judgments about assumptions market participants would use in estimating the fair value of the financial instrument (Level 3).
The Company considers the carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, and the foreign rights loans to approximate fair value because of their short-term nature. The value of the Mezzanine Notes was determined based on consideration of the Companys existing cash balances and the payoff of the notes on March 8, 2011. Given the Companys strong cash position and the subordinated nature of Mezzanine Notes, management believes that at December 31, 2010 that the fair value of the notes approximate their carrying value.
The Company is required to estimate the fair value of long-term debt under ASC 825, Financial Instruments. In determining the fair value of amounts outstanding under the Senior Credit Facilities, the Company utilized a discounted cash flow model based on its estimate of when amounts outstanding at December 31, 2010 and 2009, would be paid and its estimate of the current prevailing interest rate spreads. Under the Senior Credit Facilities, amounts received from customers are generally remitted to bank accounts which are required to pay down this debt on a monthly basis. Because considerable judgment is required in developing the estimates of fair value, these estimates are not necessarily indicative of the amounts that could be realized in a debt market exchange. In preparing this analysis the Company is not aware of any actual trading of amounts outstanding under the Senior Credit Facilities. As of December 31, 2010 and 2009, the face value of amounts outstanding under the P&A Credit Facility, Production Facility, and Ultimates Facility are estimated to approximate fair value based on the Companys assumption that all outstanding debt under these facilities will be repaid within one year.
9. Income Taxes
During the year ended December 31, 2009, the Company changed the tax classification of one of its consolidated subsidiaries, Summit Distribution, LLC (SDLLC), from an LLC taxed as partnership to an LLC taxed as a corporation. This election was made on March 5, 2009, effective January 1, 2009, with the primary purpose of reducing the number of states in which members would be required to file returns.
For the years ended December 31, 2010 and 2009, the Company recorded a provision for income taxes of $1.9 million and $1.4 million, respectively. There were no significant deferred tax assets or liabilities recorded as a result of consolidating this taxable entity. As a significant portion of the Companys income continues to be allocated to the members, the effective tax rate is significantly less than the statutory tax rate.
At January 1, 2009, the Company adopted accounting guidance regarding accounting for uncertainty in income taxes. The Company has determined that the adoption did not have a
Summit Entertainment, LLC
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
material impact on the Companys income tax provision. At December 31, 2010, the Company has no material unrecognized tax positions. The Companys policy is to recognize interest and penalties, if any, related to uncertain tax positions as a component of interest and other expense. For the years ended December 31, 2010 and 2009, the Company did not recognize any interest or penalties for uncertain tax positions. The Company is currently not under examination by the United States Internal Revenue Service or any other state, city or local jurisdiction. As such, the Company is subject to the standard statutes of limitations by the relevant tax authorities for federal and state purposes.
State franchise taxes for the each of the periods referenced above were minor and are included in operating expenses.
10. Commitments and Contingencies
Legal Matters
The Company is, from time to time, subject to legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not have a material adverse effect on the Companys financial position or results of operations.
Commitments
The Company leases office facilities and certain office equipment under operating leases. Future minimum operating lease payment commitments as of December 31, 2010, are (in thousands):
|
|
Operating |
| |
|
|
Lease |
| |
|
|
|
| |
2011 |
|
$ |
2,637 |
|
2012 |
|
2,723 |
| |
2013 |
|
2,372 |
| |
2014 |
|
188 |
| |
2015 |
|
10 |
| |
Total minimum lease payments |
|
$ |
7,930 |
|
For the years ended December 31, 2010 and 2009, rent expense under all operating leases was approximately $2.4 million and $2.4 million, respectively.
11. Subsequent Events
As required by ASC 855, Subsequent Events, management has evaluated the impact of subsequent events through March 29, 2011, which is the date the financial statements are issued.
As discussed in Note 5, subsequent to year end, the Company refinanced its credit facilities and a portion of the proceeds was used to declare and pay a $200 million dividend to its members. As a result of the dividend, the liquidation value, as defined, was fully paid to the holders of the Preferred Units, and these units were converted to Class A Common Units in accordance with the Companys governing documents.
EXHIBIT 99.3
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On January 13, 2012, Lions Gate Entertainment Corp. (the Company or Lionsgate) purchased all of the membership interests in Summit Entertainment, LLC (Summit), a worldwide independent film producer and distributor. The aggregate purchase price was approximately $413.7 million, which consisted of $343.5 million in cash paid at closing, 5,837,781 of the Companys common shares paid at closing (a part of which are included in escrow for indemnification purposes), and an additional $20.0 million of cash or the Companys common shares (based on a common share price of $8.39 per share) to be paid or issued, at the Companys option, within 60 days of the date of the transaction. The Company paid the additional consideration of $20.0 million in cash on March 13, 2012. Of the cash portion of the purchase price, approximately $284.4 million was funded with cash on the balance sheet of Summit. The value assigned to the shares for purposes of recording the acquisition was $50.2 million and was based on the closing price of the Companys common shares on the date of closing of the acquisition. Additionally, the Company may be obligated to pay additional cash consideration of up to $7.5 million pursuant to the purchase agreement, should the domestic theatrical receipts from certain films meet certain target performance thresholds.
In connection with the acquisition of Summit, on January 11, 2012, the Company sold $45.0 million in aggregate principal amount of 4.00% Convertible Senior Subordinated Notes with a maturity date of January 11, 2017 (the January 2012 Notes). The proceeds were used to fund a portion of the acquisition of Summit. The interest payment date on the January 2012 Notes is January 15 and July 15 of each year, commencing on July 15, 2012. The January 2012 Notes are convertible into common shares of the Company at any time prior to maturity or repurchase by the Company, at an initial conversion price of approximately $10.50 per share, subject to adjustment in certain circumstances.
In addition, as part of the closing, Summits existing term loan of $508.0 million was paid off, in part, with cash from Lionsgate and the net proceeds from a new term loan to Summit with a principal amount of $500.0 million, maturing on September 7, 2016 (the Term Loan). The Term Loan was subsequently amended on February 21, 2012.
The Term Loan is secured by the Summit assets. The Term Loan is repayable in quarterly installments of $13.75 million, with the balance payable on the final maturity date. The Term Loan is also repayable periodically to the extent of the excess cash flow, as defined, generated by Summit and its subsidiaries. The Term Loan bears interest by reference to a base rate or the LIBOR rate (subject to a LIBOR floor of 1.25%), in either case plus an applicable margin of 4.50% in the case of base rate loans and 5.50% in the case of LIBOR loans.
The acquisition has been accounted for using the purchase method of accounting in accordance with Accounting Standards Codification (ASC) No. 805, Business Combinations (ASC 805). Under the purchase method of accounting, the total estimated purchase price, as described in Note 1 to these unaudited pro forma combined condensed financial statements, has been preliminarily allocated to the tangible and intangible assets acquired and liabilities assumed of Summit based on a preliminary estimate of their fair values. The preliminary purchase price allocation is subject to revision, as a more detailed analysis of investment in films and intangible assets is completed and additional information on the fair value of assets and liabilities becomes available, including receipt of final appraisals of the net assets acquired. A change in the fair value of the net assets of Summit may change the amount of the purchase price allocable to goodwill, and could impact the amounts of amortization expense included in the unaudited pro forma condensed consolidated statements of operations.
The unaudited pro forma condensed consolidated financial information assumes the following:
· The unaudited pro forma condensed consolidated balance sheet as of December 31, 2011 assumes that the acquisition of Summit, the issuance of the January 2012 Notes, and the refinancing of the Term Loan had been completed on December 31, 2011.
· The unaudited pro forma condensed consolidated statements of operations for the year ended March 31, 2011, and the nine months ended December 31, 2011 assume that the acquisition of Summit, the issuance of the January 2012 Notes, and the refinancing of the Term Loan occurred on April 1, 2010.
· The unaudited pro forma condensed consolidated balance sheet is based on the Company and Summits historical balance sheet at December 31, 2011. The unaudited pro forma condensed consolidated statements of operations include the Companys historical statements of operations for the year ended March 31, 2011 and the nine months ended December 31, 2011 combined with Summits historical statements of operations for the year ended December 31, 2010 and the nine months ended September 30, 2011.
The unaudited pro forma information presented is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the acquisition had been completed on the dates indicated, nor is it indicative of future operating results or financial position. The pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable.
The unaudited pro forma condensed consolidated financial statements do not include any adjustments for any restructuring activities, operating efficiencies or cost savings.
The unaudited pro forma condensed consolidated financial information should be read in conjunction with the:
· Accompanying notes to the Unaudited Pro Forma Condensed Consolidated Financial Information;
· Separate historical consolidated financial statements of the Company previously filed in our Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2011 and our Annual Report on Form 10-K for the fiscal year ended March 31, 2011, as amended; and
· Separate historical audited consolidated financial statements of Summit as of December 31, 2011 and 2010, and for the years ended December 31, 2011 and 2010 presented in Exhibits 99.1 and 99.2 in this Form 8-K/A.
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
|
|
As of December 31, 2011 |
| |||||||||||||
|
|
Historical |
|
Pro Forma Adjustments |
|
|
| |||||||||
|
|
Lions Gate |
|
Summit |
|
|
|
|
|
|
| |||||
|
|
Entertainment |
|
Entertainment |
|
Pro Forma |
|
Reclassification |
|
|
| |||||
|
|
Corp. |
|
LLC |
|
Adjustments |
|
Adjustments |
|
Pro Forma |
| |||||
|
|
(Note 1) |
|
(Note 1) |
|
(Notes 1 & 2) |
|
(Notes 1 & 2) |
|
Combined |
| |||||
|
|
(All amounts in thousands of dollars) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
|
$ |
52,851 |
|
$ |
247,099 |
|
$ |
(271,359 |
)(a) |
$ |
|
|
$ |
28,591 |
|
Restricted cash |
|
26,496 |
|
49,765 |
|
|
|
|
|
76,261 |
| |||||
Accounts receivable, net |
|
423,117 |
|
161,971 |
|
(47,901 |
)(b) |
15,472 |
(m) |
552,659 |
| |||||
Investment in films and television programs, net |
|
802,872 |
|
388,848 |
|
213,697 |
(c) |
12,571 |
(m) |
1,417,988 |
| |||||
Property and equipment, net |
|
8,359 |
|
1,713 |
|
|
|
|
|
10,072 |
| |||||
Equity method investments |
|
159,919 |
|
|
|
|
|
|
|
159,919 |
| |||||
Finite-lived intangible assets |
|
|
|
7,332 |
|
5,268 |
(d) |
|
|
12,600 |
| |||||
Goodwill |
|
233,201 |
|
6,465 |
|
79,039 |
(e) |
|
|
318,705 |
| |||||
Other assets |
|
55,419 |
|
48,622 |
|
2,027 |
(f) |
(28,043 |
)(m) |
78,025 |
| |||||
Total assets |
|
$ |
1,762,234 |
|
$ |
911,815 |
|
$ |
(19,229 |
) |
$ |
|
|
$ |
2,654,820 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
| |||||
Senior revolving credit facility |
|
$ |
94,500 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
94,500 |
|
Senior secured second-priority notes |
|
431,334 |
|
|
|
|
|
|
|
431,334 |
| |||||
Term loan |
|
|
|
|
|
|
|
492,500 |
(m) |
492,500 |
| |||||
Notes payable |
|
|
|
553,163 |
|
(4,410 |
)(f) |
(548,753 |
)(m) |
|
| |||||
Accounts payable and accrued liabilities |
|
184,000 |
|
70,389 |
|
28,200 |
(g) |
|
|
282,589 |
| |||||
Participations and residuals |
|
280,314 |
|
92,701 |
|
|
|
|
|
373,015 |
| |||||
Film obligations and production loans |
|
463,381 |
|
|
|
|
|
56,253 |
(m) |
519,634 |
| |||||
Convertible senior subordinated notes and other financing obligations |
|
71,340 |
|
|
|
34,875 |
(h) |
|
|
106,215 |
| |||||
Deferred revenue |
|
199,446 |
|
136,261 |
|
(82,228 |
)(i) |
|
|
253,479 |
| |||||
Total liabilities |
|
1,724,315 |
|
852,514 |
|
(23,563 |
) |
|
|
2,553,266 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
| |||||
Common shares |
|
648,492 |
|
|
|
60,330 |
(j) |
|
|
708,822 |
| |||||
Members equity |
|
|
|
102,420 |
|
(102,420 |
)(k) |
|
|
|
| |||||
Retained earnings (accumulated deficit) |
|
(528,282 |
) |
(46,424 |
) |
46,424 |
(l) |
|
|
(528,282 |
) | |||||
Accumulated other comprehensive loss |
|
(5,203 |
) |
|
|
|
|
|
|
(5,203 |
) | |||||
Treasury shares |
|
(77,088 |
) |
|
|
|
|
|
|
(77,088 |
) | |||||
Noncontrolling interest |
|
|
|
3,305 |
|
|
|
|
|
3,305 |
| |||||
|
|
37,919 |
|
59,301 |
|
4,334 |
|
|
|
101,554 |
| |||||
Total liabilities and shareholders equity |
|
$ |
1,762,234 |
|
$ |
911,815 |
|
$ |
(19,229 |
) |
$ |
|
|
$ |
2,654,820 |
|
See accompanying notes.
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
|
|
For the Nine Months Ended December 31, 2011 |
| |||||||||||||
|
|
Historical |
|
Pro Forma Adjustments |
|
|
| |||||||||
|
|
Nine months ended: |
|
|
|
|
|
|
| |||||||
|
|
December 31, |
|
September 30, |
|
|
|
|
|
|
| |||||
|
|
2011 |
|
2011 |
|
|
|
|
|
|
| |||||
|
|
Lions Gate |
|
Summit |
|
|
|
|
|
|
| |||||
|
|
Entertainment |
|
Entertainment |
|
Pro Forma |
|
Reclassification |
|
|
| |||||
|
|
Corp. |
|
LLC |
|
Adjustments |
|
Adjustments |
|
Pro Forma |
| |||||
|
|
(Note 1) |
|
(Note 1) |
|
(Notes 1 & 2) |
|
(Notes 1 & 2) |
|
Combined |
| |||||
|
|
(All amounts in thousands of dollars, except per share amounts) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues |
|
$ |
942,366 |
|
$ |
331,289 |
|
$ |
|
|
$ |
|
|
$ |
1,273,655 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
| |||||
Direct operating |
|
547,659 |
|
|
|
30,713 |
(n) |
118,039 |
(t) |
696,411 |
| |||||
Cost of sales |
|
|
|
252,733 |
|
|
|
(252,733 |
)(t) |
|
| |||||
Operating expenses |
|
|
|
41,439 |
|
|
|
(41,439 |
)(t) |
|
| |||||
Distribution and marketing |
|
279,194 |
|
|
|
|
|
134,694 |
(t) |
413,888 |
| |||||
General and administration |
|
93,151 |
|
|
|
(1,507 |
)(o) |
40,053 |
(t) |
131,697 |
| |||||
Gain on sale of asset disposal group |
|
(10,967 |
) |
|
|
|
|
|
|
(10,967 |
) | |||||
Depreciation and amortization |
|
2,603 |
|
|
|
1,007 |
(p) |
1,386 |
(t) |
4,996 |
| |||||
Total expenses |
|
911,640 |
|
294,172 |
|
30,213 |
|
|
|
1,236,025 |
| |||||
Operating income |
|
30,726 |
|
37,117 |
|
(30,213 |
) |
|
|
37,630 |
| |||||
Other expenses (income): |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
| |||||
Contractual cash based interest |
|
40,343 |
|
|
|
1,349 |
(q) |
16,334 |
(t) |
58,026 |
| |||||
Amortization of debt discount (premium) and deferred financing costs |
|
10,796 |
|
|
|
(3,443 |
)(r) |
7,124 |
(t) |
14,477 |
| |||||
Total interest expense |
|
51,139 |
|
|
|
(2,094 |
) |
23,458 |
|
72,503 |
| |||||
Interest and other, net |
|
|
|
21,788 |
|
|
|
(21,788 |
)(t) |
|
| |||||
Interest and other income |
|
(1,860 |
) |
|
|
|
|
(1,665 |
)(t) |
(3,525 |
) | |||||
Loss on extinguishment of debt |
|
967 |
|
|
|
|
|
|
|
967 |
| |||||
Total other expenses, net |
|
50,246 |
|
21,788 |
|
(2,094 |
) |
5 |
|
69,945 |
| |||||
Income (loss) before equity interests and income taxes |
|
(19,520 |
) |
15,329 |
|
(28,119 |
) |
(5 |
) |
(32,315 |
) | |||||
Equity interests income (loss) |
|
8,325 |
|
|
|
|
|
5 |
(t) |
8,330 |
| |||||
Income (loss) before income taxes |
|
(11,195 |
) |
15,329 |
|
(28,119 |
) |
|
|
(23,985 |
) | |||||
Income tax provision |
|
2,857 |
|
1,029 |
|
|
(s) |
|
|
3,886 |
| |||||
Net income (loss) |
|
$ |
(14,052 |
) |
$ |
14,300 |
|
$ |
(28,119 |
) |
$ |
|
|
$ |
(27,871 |
) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Basic Net Loss Per Common Share |
|
$ |
(0.11 |
) |
|
|
|
|
|
|
$ |
(0.20 |
) | |||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Diluted Net Loss Per Common Share |
|
$ |
(0.11 |
) |
|
|
|
|
|
|
$ |
(0.20 |
) | |||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
| |||||
Basic |
|
132,389 |
|
|
|
5,838 |
(u) |
|
|
138,227 |
| |||||
Diluted |
|
132,389 |
|
|
|
5,838 |
(v) |
|
|
138,227 |
|
See accompanying notes.
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
|
|
For the Year Ended March 31, 2011 |
| |||||||||||||
|
|
Historical |
|
Pro Forma Adjustments |
|
|
| |||||||||
|
|
Year ended: |
|
|
|
|
|
|
| |||||||
|
|
March 31, |
|
December 31, |
|
|
|
|
|
|
| |||||
|
|
2011 |
|
2010 |
|
|
|
|
|
|
| |||||
|
|
Lions Gate |
|
Summit |
|
|
|
|
|
|
| |||||
|
|
Entertainment |
|
Entertainment |
|
Pro Forma |
|
Reclassification |
|
|
| |||||
|
|
Corp. |
|
LLC |
|
Adjustments |
|
Adjustments |
|
Pro Forma |
| |||||
|
|
(Note 1) |
|
(Note 1) |
|
(Notes 1 & 2) |
|
(Notes 1 & 2) |
|
Combined |
| |||||
|
|
(All amounts in thousands of dollars, except per share amounts) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues |
|
$ |
1,582,720 |
|
$ |
1,150,807 |
|
$ |
|
|
$ |
|
|
$ |
2,733,527 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
| |||||
Direct operating |
|
795,746 |
|
|
|
58,325 |
(n) |
357,738 |
(t) |
1,211,809 |
| |||||
Cost of revenue |
|
|
|
714,749 |
|
|
|
(714,749 |
)(t) |
|
| |||||
Operating expenses |
|
|
|
71,074 |
|
|
|
(71,074 |
)(t) |
|
| |||||
Distribution and marketing |
|
547,226 |
|
|
|
|
|
357,012 |
(t) |
904,238 |
| |||||
General and administration |
|
171,407 |
|
|
|
1,091 |
(o) |
68,482 |
(t) |
240,980 |
| |||||
Depreciation and amortization |
|
5,811 |
|
|
|
490 |
(p) |
2,591 |
(t) |
8,892 |
| |||||
Total expenses |
|
1,520,190 |
|
785,823 |
|
59,906 |
|
|
|
2,365,919 |
| |||||
Operating income |
|
62,530 |
|
364,984 |
|
(59,906 |
) |
|
|
367,608 |
| |||||
Other expenses (income): |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
| |||||
Contractual cash based interest |
|
38,879 |
|
|
|
24,199 |
(q) |
8,334 |
(t) |
71,412 |
| |||||
Amortization of debt discount (premium) and deferred financing costs |
|
16,301 |
|
|
|
1,850 |
(r) |
1,559 |
(t) |
19,710 |
| |||||
Total interest expense |
|
55,180 |
|
|
|
26,049 |
|
9,893 |
|
91,122 |
| |||||
Interest and other, net |
|
|
|
9,893 |
|
|
|
(9,893 |
)(t) |
|
| |||||
Interest and other income |
|
(1,742 |
) |
|
|
|
|
|
|
(1,742 |
) | |||||
Loss on extinguishment of debt |
|
14,505 |
|
|
|
|
|
|
|
14,505 |
| |||||
Total other expenses, net |
|
67,943 |
|
9,893 |
|
26,049 |
|
|
|
103,885 |
| |||||
Income (loss) before equity interests and income taxes |
|
(5,413 |
) |
355,091 |
|
(85,955 |
) |
|
|
263,723 |
| |||||
Equity interests loss |
|
(43,930 |
) |
|
|
|
|
|
|
(43,930 |
) | |||||
Income (loss) before income taxes |
|
(49,343 |
) |
355,091 |
|
(85,955 |
) |
|
|
219,793 |
| |||||
Income tax provision |
|
4,256 |
|
1,898 |
|
89,005 |
(s) |
|
|
95,159 |
| |||||
Net income (loss) |
|
$ |
(53,599 |
) |
$ |
353,193 |
|
$ |
(174,960 |
) |
$ |
|
|
$ |
124,634 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Basic Net Income (Loss) Per Common Share |
|
$ |
(0.41 |
) |
|
|
|
|
|
|
$ |
0.91 |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Diluted Net Income (Loss) Per Common Share |
|
$ |
(0.41 |
) |
|
|
|
|
|
|
$ |
0.90 |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
| |||||
Basic |
|
131,176 |
|
|
|
5,838 |
(u) |
|
|
137,014 |
| |||||
Diluted |
|
131,176 |
|
|
|
24,622 |
(v) |
|
|
155,798 |
|
See accompanying notes.
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Pro Forma Presentation
The unaudited pro forma condensed consolidated balance sheet as of December 31, 2011 assumes that the acquisition of Summit, the issuance of the January 2012 Notes, and the refinancing of the Term Loan had been completed on December 31, 2011. The unaudited pro forma condensed consolidated statements of operations for the year ended March 31, 2011, and the nine months ended December 31, 2011 assumes that the acquisition of Summit, the issuance of the January 2012 Notes, and the refinancing of the Term Loan occurred on April 1, 2010. The unaudited pro forma condensed consolidated balance sheet is based on the Company and Summits historical balance sheet at December 31, 2011. The unaudited pro forma condensed consolidated statements of operations include the Companys historical statements of operations for the year ended March 31, 2011 and the nine months ended December 31, 2011, combined with Summits historical statements of operations for the year ended December 31, 2010 and the nine months ended September 30, 2011, respectively.
The unaudited pro forma information presented is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the acquisition had been completed on the dates indicated, nor is it indicative of future operating results or financial position. The pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable.
The unaudited pro forma condensed consolidated financial statements do not include any adjustments for any restructuring activities, operating efficiencies or cost savings.
The Company has made a preliminary allocation of the estimated purchase price of Summit to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value. The preliminary purchase price allocation is subject to revision, as a more detailed analysis of investment in films and intangible assets is completed and additional information on the fair value of assets and liabilities becomes available, including receipt of final appraisals of the net assets acquired. A change in the fair value of the net assets of Summit may change the amount of the purchase price allocable to goodwill, and could impact the amounts of amortization expense included in the unaudited pro forma combined condensed consolidated statements of operations. Based on the preliminary valuation and other information currently available, the allocation of the estimated purchase price assuming the acquisition had been completed as of December 31, 2011 is as follows:
|
|
(Amounts in |
| |
Preliminary estimated purchase price consideration |
|
thousands) |
| |
Cash |
|
$ |
343,500 |
|
Fair value of 5,837,781 of Lionsgates shares issued |
|
50,205 |
| |
Fair value of additional consideration to be paid within 60 days of date of the transaction |
|
20,000 |
| |
Fair value of contingent consideration |
|
6,200 |
| |
|
|
$ |
419,905 |
|
Preliminary allocation of the estimated purchase price |
|
|
| |
Cash and cash equivalents |
|
$ |
247,099 |
|
Restricted cash |
|
49,765 |
| |
Accounts receivable, net |
|
177,443 |
| |
Investment in films and television programs, net |
|
615,116 |
| |
Other assets acquired |
|
7,969 |
| |
Finite-lived intangible assets: |
|
|
| |
Sales agency relationships |
|
6,200 |
| |
Tradenames |
|
6,400 |
| |
Notes payable assumed |
|
(553,163 |
) | |
Other liabilities and noncontrolling interest assumed |
|
(222,428 |
) | |
Fair value of net assets acquired |
|
334,401 |
| |
Goodwill |
|
85,504 |
| |
Total preliminary estimated purchase price |
|
$ |
419,905 |
|
Amortization related to the fair value of amortizable intangible assets is reflected as pro forma adjustments to the unaudited pro forma condensed consolidated statements of operations.
Identifiable intangible assets. Sales agency relationships represent existing contracts that relate primarily to underlying customer relationships, and have a useful life of 5 years. Tradenames are primarily related to the Summit brand and name, and have an estimated useful life of 5 years. Identifiable intangible assets will be amortized on a straight-line basis over their estimated useful lives.
Goodwill. Approximately $85.5 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the underlying tangible and identifiable intangible assets acquired and liabilities assumed. In accordance with ASC 805, goodwill will not be amortized but instead will be tested for impairment annually.
Taxes. The pro forma combined provision for income taxes does not necessarily reflect the amounts that would have resulted had Lionsgate and Summit filed a combined income tax return during the year ended March 31, 2011 and the nine months ended December 31,
2011. Most of Summits income was taxed as a partnership and thus the historical financial statements reflect a minimal tax provision. The pro forma adjustments to the tax provision reflect Summits income as taxable to Lionsgate, net of the use of Lionsgates net operating loss carryforwards (NOLs), the utilization of which would have been limited to Section 382. For the nine months ended December 31, 2011, no additional tax expense is reflected as a result of a projected taxable loss on a combined basis.
2. Pro Forma Adjustments
Pro forma adjustments are necessary to reflect the payment of and the allocation of the estimated purchase price to the estimated fair values of the tangible and intangible assets acquired and liabilities assumed, and the amortization related to the values allocated to the intangible assets, and to remove certain assets and liabilities reflected in the historical balance sheet that were not acquired.
The pro forma condensed consolidated statements of operations do not include any incremental costs associated with the integration activities of the combined companies.
Unaudited Pro Forma Adjustments are as follows:
Pro forma adjustments to the condensed consolidated Balance Sheet as of December 31, 2011
(a) |
To reflect the net use of cash to fund Lionsgates purchase of Summit |
|
|
| |
|
To reflect the proceeds upon issuance of $45 million of 4.00% Convertible Senior Subordinated Notes |
|
$ |
45,000 |
|
|
To reflect the collection of Summits accounts receivable between January 1, 2012 through January 13, 2012 |
|
47,901 |
| |
|
To reflect the use of cash to fund Lionsgates purchase of Summit |
|
(343,500 |
) | |
|
To reflect the proceeds upon the refinancing of Summits assumed Term Loan upon acquisition |
|
476,150 |
| |
|
To reflect the use of cash to extinguish Summits assumed Term Loan prior to refinancing |
|
(496,910 |
) | |
|
|
|
$ |
(271,359 |
) |
|
|
|
|
| |
(b) |
To reflect the collection of Summits accounts receivable between January 1, 2012 through January 13, 2012 |
|
$ |
(47,901 |
) |
|
|
|
|
| |
(c) |
To reflect the preliminary estimated incremental fair value of Summits investment in film rights |
|
$ |
213,697 |
|
|
|
|
|
| |
(d) |
Adjustments to finite-lived intangible assets as a result of the preliminary valuation |
|
|
| |
|
To eliminate Summits historical finite-lived intangibles, net |
|
$ |
(7,332 |
) |
|
To reflect the preliminary estimated fair value of Summits identifiable finite-lived intangible assets acquired |
|
12,600 |
| |
|
|
|
$ |
5,268 |
|
|
|
|
|
| |
(e) |
Adjustments to goodwill |
|
|
| |
|
To eliminate Summits historical goodwill |
|
$ |
(6,465 |
) |
|
To reflect the preliminary estimated fair value of Summits goodwill resulting from the acquisition |
|
85,504 |
| |
|
|
|
$ |
79,039 |
|
|
|
|
|
| |
(f) |
To reflect the refinancing of Summits assumed Term Loan upon acquisition |
|
|
| |
|
To eliminate deferred financing costs associated with Summits assumed Term Loan prior to refinancing |
|
$ |
(14,323 |
) |
|
To reflect deferred financing costs associated with Summits refinanced Term Loan |
|
16,350 |
| |
|
|
|
$ |
2,027 |
|
|
|
|
|
| |
|
To eliminate Summits existing Term Loan prior to refinancing |
|
$ |
(496,910 |
) |
|
To reflect Summits refinanced Term Loan, net of discount |
|
492,500 |
| |
|
|
|
$ |
(4,410 |
) |
|
|
|
|
| |
(g) |
Adjustments to accounts payable and accrued liabilities |
|
|
| |
|
To adjust Summits acquired leases to fair value |
|
$ |
2,000 |
|
|
To reflect the $20 million of consideration to be paid within 60 days |
|
20,000 |
| |
|
To reflect the preliminary estimate of contingent consideration associated with meeting certain target performance thresholds |
|
6,200 |
| |
|
|
|
$ |
28,200 |
|
|
|
|
|
| |
(h) |
To reflect the issuance of $45 million of 4.00% Convertible Senior Subordinated Notes, net of debt discount |
|
$ |
34,875 |
|
|
|
|
|
| |
(i) |
To reflect the fair value adjustments to Summits deferred revenue |
|
$ |
(82,228 |
) |
|
|
|
|
| |
(j) |
To reflect the issuance of 5,837,781 of Lionsgates shares to fund a portion of the purchase price |
|
$ |
50,205 |
|
|
To reflect the equity component associated with the $45 million of 4.00% Convertible Senior Subordinated Notes |
|
10,125 |
| |
|
|
|
$ |
60,330 |
|
|
|
|
|
| |
(k) |
To eliminate the Parents net investment in Summit |
|
$ |
(102,420 |
) |
|
|
|
|
| |
(l) |
To eliminate the Parents net investment in Summit |
|
$ |
46,424 |
|
|
|
|
|
| |
(m) |
To reflect certain reclassification adjustments that have been made to conform Lionsgates and Summits historical reported balances to the pro forma condensed consolidated financial statement basis of presentation. The adjustments were primarily to reclassify Summits other assets into accounts receivable and investment in film and television series and Summits notes payable into term loan and film obligations. |
|
|
|
Pro forma adjustments to the condensed consolidated Statements of Operations for the nine months ended December 31, 2011 and the year ended March 31, 2011
|
|
|
|
Nine months ended |
|
Year ended |
| ||
|
|
|
|
December 31, 2011 |
|
March 31, 2011 |
| ||
(n) |
|
To reflect amortization of the fair value adjustment on Summits acquired film assets |
|
$ |
30,713 |
|
$ |
58,325 |
|
|
|
|
|
|
|
|
| ||
(o) |
|
Adjustments to general and administration expenses |
|
|
|
|
| ||
|
|
To reflect amortization of the fair value adjustment on Summits acquired leases |
|
$ |
818 |
|
$ |
1,091 |
|
|
|
To eliminate transaction costs associated with the Summit acquisition, which are included in the historical statement of operations |
|
(2,325 |
) |
|
| ||
|
|
|
|
$ |
(1,507 |
) |
$ |
1,091 |
|
|
|
|
|
|
|
|
| ||
(p) |
|
Adjustments to amortization of intangible assets |
|
|
|
|
| ||
|
|
To eliminate historical amortization of intangibles |
|
$ |
(883 |
) |
$ |
(2,030 |
) |
|
|
To reflect amortization of identified intangibles acquired from Summit |
|
1,890 |
|
2,520 |
| ||
|
|
|
|
$ |
1,007 |
|
$ |
490 |
|
|
|
|
|
|
|
|
| ||
(q) |
|
Adjustments to cash based interest expense |
|
|
|
|
| ||
|
|
To reflect contractual cash based interest expense on the $45 million of 4.00% Convertible Senior Subordinated Notes |
|
$ |
1,350 |
|
$ |
1,800 |
|
|
|
To adjust contractual cash based interest expense to reflect the refinancing of $500 million of Summits assumed Term Loan at current interest rates |
|
(1 |
) |
22,399 |
| ||
|
|
|
|
$ |
1,349 |
|
$ |
24,199 |
|
(r) |
|
Adjustments to amortization of debt discount and deferred financing costs |
|
|
|
|
| ||
|
|
To reflect amortization of debt discount and deferred financing costs associated with the issuance of $45 million of 4.00% Convertible Senior Subordinated Notes |
|
$ |
1,362 |
|
$ |
1,662 |
|
|
|
To adjust amortization of debt discount and deferred financing costs to reflect the refinancing of Summits assumed Term Loan |
|
(4,805 |
) |
188 |
| ||
|
|
|
|
$ |
(3,443 |
) |
$ |
1,850 |
|
|
|
|
|
|
|
|
| ||
(s) |
|
To adjust income tax expense for pro forma adjustments |
|
$ |
|
|
$ |
89,005 |
|
|
|
|
|
|
|
|
| ||
(t) |
|
To reflect certain reclassification adjustments that have been made to conform Lionsgates and Summits historical reported balances to the pro forma condensed consolidated financial statement basis of presentation. The adjustments were primarily to reclassify Summits operating expenses into direct operating expenses, distribution and marketing expenses, and general and administrative. |
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
(u) |
|
To reflect the shares outstanding associated with the issuance of 5,837,781 of Lionsgates shares to fund a portion of the purchase price |
|
5,838 |
|
5,838 |
| ||
|
|
|
|
|
|
|
| ||
(v) |
|
To reflect the impact of diluted securities outstanding (see Note 3) |
|
5,838 |
|
24,622 |
|
Note 3. Pro Forma Net Income (Loss) Per Share
The pro forma basic net income (loss) per share are based on the weighted average number of the Companys shares outstanding during each period.
The pro forma diluted net income(loss) per share are computed as follows:
|
|
Nine months ended |
|
Year ended |
| ||
|
|
December 31, 2011 |
|
March 31, 2011 |
| ||
|
|
(Amounts in thousands, except per share amounts) |
| ||||
Pro Forma Diluted Net Income (Loss) Per Common Share: |
|
|
|
|
| ||
Numerator: |
|
|
|
|
| ||
Pro forma net income (loss) |
|
$ |
(27,871 |
) |
$ |
124,634 |
|
Add: |
|
|
|
|
| ||
Interest on convertible notes, net of tax |
|
|
|
15,052 |
| ||
Amortization of deferred financing costs, net of tax |
|
|
|
277 |
| ||
Numerator for Pro Forma Diluted Net Income (Loss) Per Common Share |
|
$ |
(27,871 |
) |
$ |
139,963 |
|
|
|
|
|
|
| ||
Denominator: |
|
|
|
|
| ||
Pro forma weighted average common shares outstanding |
|
138,227 |
|
137,014 |
| ||
Effect of dilutive securities: |
|
|
|
|
| ||
Conversion of notes |
|
|
|
18,054 |
| ||
Share purchase options and restricted share units |
|
|
|
730 |
| ||
Adjusted weighted average common shares outstanding |
|
138,227 |
|
155,798 |
| ||
|
|
|
|
|
| ||
Pro Forma Diluted Net Income (Loss) Per Common Share |
|
$ |
(0.20 |
) |
$ |
0.90 |
|