Filing summary
Filing identity: The supplied filing is Lions Gate Entertainment Corp.’s unaudited Form 10-Q, not a filing by STARZ Entertainment Corp. It covers the three months ended June 30, 2010, Lionsgate’s first quarter of fiscal 2011; comparisons are with the three months ended June 30, 2009. Amounts below are U.S. dollars unless stated otherwise.
Business context and reporting period
Lionsgate describes itself as a diversified entertainment studio, with Motion Pictures and Television Production as its reportable segments. The company retrospectively changed its accounting for TV Guide Network under new consolidation guidance: it no longer consolidates the network and accounts for its 51% interest using the equity method. This affected presentation and comparability, but management said adoption did not change net loss.
Financial results and liquidity
| Metric | Quarter ended June 30, 2010 | Prior comparable quarter |
|---|---|---|
| Revenue | $326.6 million | $379.2 million |
| Operating income (loss) | $(37.4) million | $41.5 million |
| Net income (loss) | $(64.1) million | $36.3 million |
| Basic and diluted earnings (loss) per share | $(0.54) | $0.31 basic; $0.30 diluted |
| Cash from (used in) operating activities | $(62.9) million | $(154.4) million |
| Cash from (used in) investing activities | $(37.4) million | $(8.4) million |
| Cash from financing activities | $110.4 million | $128.0 million |
| Cash and cash equivalents at period end | $78.6 million | $101.8 million |
- Revenue fell 13.9%. Operating and net margins were approximately negative 11.4% and negative 19.6%, respectively, versus positive 10.9% and 9.6% a year earlier.
- At June 30, total assets were $1.593 billion, total liabilities $1.594 billion, and shareholders’ equity was deficient by $1.6 million.
- Reported debt and production-financing obligations included $199.0 million drawn on the revolving facility, $225.5 million carrying value of second-priority notes, $195.4 million of subordinated notes and other financing obligations, and $285.7 million of film obligations and production loans. These categories are not all conventional corporate borrowings.
- The $340 million revolving facility had $115.4 million available, after borrowing-base limits and $25.6 million of letters of credit. The separate film credit facility had $81.6 million available. Restricted cash was $24.3 million, including approximately $16.8 million in an irrevocable trust for potential executive severance obligations.
- Operating cash use improved year over year, but remained negative. Film and television investment was a major cash use; financing cash flow included net revolving-credit borrowings.
Material changes versus the prior comparable period
- Motion Pictures revenue was essentially unchanged at $272.7 million. Theatrical revenue rose 214% to $71.3 million, while home entertainment fell 21% to $111.3 million and Mandate Pictures revenue fell 75% to $13.3 million. Television and international motion-picture revenue increased.
- Television Production revenue declined 38% to $53.9 million, reflecting fewer program deliveries and the end of the Ish collaboration; Debmar-Mercury revenue increased.
- Total distribution and marketing expense rose to $140.1 million from $84.0 million, principally because theatrical marketing and release costs increased. General and administration rose to $64.7 million from $36.6 million.
- Stock-based compensation was $27.3 million versus $4.0 million, including $21.9 million of additional expense from immediate vesting of executive awards following a change-in-control trigger. Management also cited $7.3 million of shareholder-activist-related legal and professional expense.
- Equity-method losses increased to $11.7 million from $2.0 million, mainly due to Lionsgate’s share of EPIX losses. The EPIX amount recorded for the quarter was $12.0 million; the filing said EPIX expected further losses for its quarter ended June 30, to be reflected by Lionsgate in the subsequent quarter.
- Interest expense increased 51% to $14.5 million. The prior-year quarter included a $7.5 million gain on extinguishment of debt, while the current quarter had no such gain.
Outlook, risks, contingencies and unusual items
- Management expected fiscal 2011 Motion Pictures revenue to exceed fiscal 2010, citing an anticipated increase in theatrical releases. It also expected theatrical distribution and marketing expense to exceed fiscal 2010 levels. Management cautioned that actual revenue depends on title performance. No numerical company-wide earnings or cash-flow guidance is provided.
- Management said cash on hand, operating cash flow, credit availability and production financing should meet known operational requirements for the foreseeable future. This assessment is subject to substantial production and marketing needs and access to financing.
- A July 20, 2010 exchange of approximately $99.7 million principal amount of two convertible note issues was followed by conversion of the new notes into 16,236,305 common shares. The transaction occurred after quarter-end; the filing reports 136,244,246 common shares outstanding on August 1, versus 119,987,198 issued at June 30.
- On June 30, a shareholder’s ownership triggered change-in-control provisions in certain executive employment agreements, leading to accelerated equity-award vesting and the compensation charge noted above. Restricted cash for potential severance obligations also became irrevocable, subject to the agreement terms.
- The filing describes an unsolicited Icahn Group tender offer and litigation in British Columbia and New York concerning the July note exchange, share issuance, disclosures and shareholder rights plan. The British Columbia Securities Commission dismissed the Icahn Group’s request for a temporary cease-trade order against the company and MHR Fund; other claims remained pending as described in the filing.
- Management identifies risks including film and television investment requirements, uncertain title performance, production and marketing cost increases, debt and covenant constraints, interest-rate and foreign-exchange exposure, and the possibility that a change in control could trigger debt repurchases or acceleration. The company reported $919.7 million of scheduled debt and financing principal repayments and $679.4 million of other contractual commitments in its disclosed maturity table; these are contractual schedules, not forecasts of cash payments in a single period.
- The company reported ordinary-course legal matters that it did not believe would materially adversely affect financial condition or future results, in addition to the specifically described shareholder litigation.
Important facts for investors to verify
- Confirm issuer and period: this is a Lions Gate Entertainment Corp. filing for the quarter ended June 30, 2010, not a STARZ Entertainment Corp. filing.
- Review the July 20 note conversion, resulting share count and dilution, and subsequent developments in the Icahn Group’s tender offer and litigation.
- Assess liquidity against the negative operating cash flow, available borrowing capacity, restricted cash, production-financing needs and contractual commitments.
- Track theatrical release performance and the effect of higher marketing spending, alongside home-entertainment and Television Production trends.
- Monitor EPIX losses, executive change-in-control costs, debt covenants and whether the company’s stated liquidity expectations are borne out.