| LIONS GATE ENTERTAINMENT CORP /CN/ Item 1A Risk Factors You should carefully consider the following risks and other information in this Form 10-K before making an investment decision with respect to our Common Shares |
| The following risks and uncertainties could materially adversely affect our business, results of operations and financial condition |
| The risks described below are not the only ones facing the Company |
| Additional risks that we are not presently aware of or that we currently believe are immaterial may also impair our business operations |
| We have had losses, and we cannot assure future profitability |
| Our accumulated deficit was dlra177dtta1 million at March 31, 2006 |
| We cannot assure you that we will operate profitably, and if we do not, we may not be able to meet our debt service requirements, working capital requirements, capital expenditure plans, anticipated production slate, acquisition and releasing plans or other cash needs |
| Our inability to meet those needs could have a material adverse effect on our business, results of operations and financial condition |
| We face substantial capital requirements and financial risks |
| Our business requires a substantial investment of capital |
| The production, acquisition and distribution of motion pictures and television programs require a significant amount of capital |
| A significant amount of time may elapse between our expenditure of funds and the receipt of commercial revenues from or government contributions to our motion pictures or television programs |
| This time lapse requires us to fund a significant portion of our capital requirements from our revolving credit facility and from other financing sources |
| Although we intend to continue to reduce the risks of our production exposure through financial contributions from broadcasters and distributors, tax shelters, government and industry programs, other studios and other sources, we cannot assure you that we will continue to implement successfully these arrangements or that we will not be subject to substantial financial risks relating to the production, acquisition, completion and release of future motion pictures and television programs |
| If we increase (through internal growth or acquisition) our production slate or our production budgets, we may be required to increase overhead and/or make larger up-front payments to talent and consequently bear greater financial risks |
| Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition |
| The costs of producing and marketing feature films have steadily increased and may further increase in the future, which may make it more difficult for a film to generate a profit or compete against other films |
| The costs of producing and marketing feature films have generally increased in recent years |
| These costs may continue to increase in the future, which may make it more difficult for our films to generate a profit or 13 _________________________________________________________________ [73]Table of Contents compete against other films |
| Historically, production costs and marketing costs have risen at a higher rate than increases in either the number of domestic admissions to movie theaters or admission ticket prices |
| A continuation of this trend would leave us more dependent on other media, such as home video, television, international markets and new media for revenue, and the revenues from such sources may not be sufficient to offset an increase in the cost of motion picture production |
| If we cannot successfully exploit these other media, it could have a material adverse effect on our business, results of operations and financial condition |
| Budget overruns may adversely affect our business |
| Our business model requires that we be efficient in the production of our motion pictures and television programs |
| Actual motion picture and television production costs often exceed their budgets, sometimes significantly |
| The production, completion and distribution of motion pictures and television productions are subject to a number of uncertainties, including delays and increased expenditures due to creative differences among key cast members and other key creative personnel or other disruptions or events beyond our control |
| Risks such as death or disability of star performers, technical complications with special effects or other aspects of production, shortages of necessary equipment, damage to film negatives, master tapes and recordings or adverse weather conditions may cause cost overruns and delay or frustrate completion of a production |
| If a motion picture or television production incurs substantial budget overruns, we may have to seek additional financing from outside sources to complete production |
| We cannot make assurances regarding the availability of such financing on terms acceptable to us, and the lack of such financing could have a material adverse effect on our business, results of operations and financial condition |
| In addition, if a motion picture or television production incurs substantial budget overruns, we cannot assure you that we will recoup these costs, which could have a material adverse effect on our business, results of operations and financial condition |
| Increased costs incurred with respect to a particular film may result in any such film not being ready for release at the intended time and the postponement to a potentially less favorable time, all of which could cause a decline in box office performance, and thus the overall financial success of such film |
| Budget overruns could also prevent a picture from being completed or released |
| Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition |
| Our credit facility contains certain covenants and financial tests that limit the way we conduct business |
| Our credit facility contains various covenants limiting our ability to incur or guarantee additional indebtedness, pay dividends and make other distributions, pre-pay any subordinated indebtedness, make investments and other restricted payments, make capital expenditures, make acquisitions and sell assets |
| These covenants may prevent us from raising additional financing, competing effectively or taking advantage of new business opportunities |
| Under our credit facility, we are also required to maintain specified financial ratios and satisfy certain financial tests |
| If we cannot comply with these covenants or meet these ratios and other tests, it could result in a default under our credit facility, and unless we are able to negotiate an amendment, forbearance or waiver, we could be required to repay all amounts then outstanding, which could have a material adverse effect on our business, results of operations and financial condition depending upon our outstanding balance at the time |
| Borrowings under our credit facility also are secured by liens on substantially all of our assets and the assets of our subsidiaries |
| If we are in default under our credit facility, the lenders could foreclose upon all or substantially all of our assets and the assets of our subsidiaries |
| We cannot assure you that we will generate sufficient cash flow to repay our indebtedness, and we further cannot assure you that, if the need arises, we will be able to obtain additional financing or to refinance our indebtedness on terms acceptable to us, if at all |
| Any such failure to obtain financing could have a material adverse effect on our business, results of operations and financial condition |
| Substantial leverage could adversely affect our financial condition |
| Historically, we have been highly leveraged and may be highly leveraged in the future |
| We have access to capital through our dlra215 million credit facility with JP Morgan Chase Bank, National Association |
| In addition, we have dlra385 million Convertible Senior Subordinated Notes outstanding, with dlra60 million maturing December 15, 2010, dlra150 million maturing October 15, 2024 and dlra175 million maturing March 15, 2025 |
| At March 31, 2006, we had approximately 14 _________________________________________________________________ [74]Table of Contents dlra47dtta0 million in cash and cash equivalents and dlra167dtta1 million in highly liquid investments, principally auction rate preferreds and municipal bonds |
| While the outstanding balance under our credit facility is currently zero, we could borrow some or all of the permitted amount in the future |
| The amount we have available to borrow under this facility depends upon our borrowing base, which in turn depends on the value of our existing library of films and television programs, as well as accounts receivable and cash held in collateral accounts |
| If several of our larger motion picture releases are commercial failures or our library declines in value, our borrowing base could decrease |
| Such a decrease could have a material adverse effect on our business, results of operations and financial condition |
| For example, it could: • require us to dedicate a substantial portion of our cash flow to the repayment of our indebtedness, reducing the amount of cash flow available to fund motion picture and television production, distribution and other operating expenses; • limit our flexibility in planning for or reacting to downturns in our business, our industry or the economy in general; • limit our ability to obtain additional financing, if necessary, for operating expenses, or limit our ability to obtain such financing on terms acceptable to us; and • limit our ability to pursue strategic acquisitions and other business opportunities that may be in our best interests |
| Failure to achieve and maintain effective disclosure controls or internal controls could have a material adverse effect on our ability to report our financial results timely and accurately |
| Section 404 of the Sarbanes-Oxley Act requires that this report on Form 10-K for the fiscal year ended March 31, 2006 include a report containing management’s assessment of our internal controls over financial reporting and a related attestation of management’s assessment and an opinion on the effectiveness of our internal controls by our independent registered public accounting firm |
| We are incurring, and will continue to incur, substantial additional expense and diversion of management’s time as a result of performing the internal control systems evaluation, testing and remediation required in order to comply with the requirements of Section 404 of the Sarbanes-Oxley Act |
| In connection with our documentation, evaluation and testing of our internal controls over financial reporting at March 31, 2005, we discovered material weaknesses |
| The material weaknesses we identified related to calculating our participations expense and the related liability for financial reporting purposes, calculating amortization of investment in film and television programs, monitoring certain charges billed to us by our outsourced home entertainment distribution service provider and our financial statement close process |
| In light of the material weaknesses related to our internal controls and processes over financial reporting, we and our independent registered public accounting firm concluded that our disclosure controls and procedures and our internal controls and processes over financial reporting were ineffective at March 31, 2005 |
| During fiscal 2006, we remediated these material weaknesses, and we and our independent registered public accounting firm concluded that our disclosure controls and procedures and our internal controls and processes over financial reporting were effective at March 31, 2006 |
| Any failure to implement required new or improved controls, or difficulties encountered in their implementations, could cause us to fail to meet our future reporting obligations |
| In addition, we may in the future identify further material weaknesses or significant deficiencies in our internal controls over financial reporting |
| Any of the foregoing could materially and adversely affect our business, our financial condition and the market value of our securities |
| Our revenues and results of operations may fluctuate significantly |
| Revenues and results of operations are difficult to predict and depend on a variety of factors |
| Our revenues and results of operations depend significantly upon the commercial success of the motion pictures and television programming that we distribute, which cannot be predicted with certainty |
| Accordingly, our 15 _________________________________________________________________ [75]Table of Contents revenues and results of operations may fluctuate significantly from period to period, and the results of any one period may not be indicative of the results for any future periods |
| Furthermore, largely as a result of these predictive difficulties, we may not be able to achieve our publicly projected earnings |
| In fiscal 2006, we revised our projected earnings downward twice |
| Future revisions to projected earnings could cause investors to lose confidence in us, which in turn could materially and adversely affect our business, our financial condition and the market value of our securities |
| In addition, historically, our revenues and results of operations have been significantly impacted by the success of critically acclaimed and award winning films, including Academy Award winners and nominees |
| We cannot assure you that we will manage the production, acquisition and distribution of future motion pictures (including any films in the Saw or Tyler Perry franchise) as successfully as we have done with these recent critically acclaimed, award winning and/or commercially popular films or that we will produce or acquire motion pictures that will receive similar critical acclaim or perform as well commercially |
| Any inability to achieve such commercial success could have a material adverse effect on our business, results of operations and financial condition |
| We lack output agreements with cable and broadcast channels |
| We had an agreement with one cable broadcast channel to exhibit our films, but that agreement does not cover films released theatrically after 2003 |
| We have an output arrangement with another cable broadcast channel that covers some but not all of our films that are theatrically released through December 31, 2008 |
| While similar broadcasters exhibit our films, they license such rights on a film-by-film, rather than an output, basis |
| We cannot assure you that we will be able to secure other output agreements on acceptable terms, if at all |
| Without multiple output agreements that typically contain guaranteed minimum payments, our revenues may be subject to greater volatility, which could have a material adverse effect on our business, results of operations and financial condition |
| We rely on a few major retailers and distributors for a material portion of our business and the loss of any of those retailers or distributors could reduce our revenues and operating results |
| Wal-Mart represented over 10prca of our revenues in fiscal 2006 |
| In addition, a small number of other retailers and distributors account for a significant percentage of our revenues |
| We do not have long-term agreements with the retailers |
| We cannot assure you that we will continue to maintain favorable relationships with our retailers and distributors or that they will not be adversely affected by economic conditions |
| If any of these retailers or distributors reduces or cancels a significant order, it could have a material adverse effect on our business, results of operations and financial condition |
| Our revenues and results of operations are vulnerable to currency fluctuations |
| We report our revenues and results of operations in US dollars, but a significant portion of our revenues is earned outside of the United States |
| Our principal currency exposure is between Canadian and US dollars |
| We enter into forward foreign exchange contracts to hedge future production expenses |
| We cannot accurately predict the impact of future exchange rate fluctuations on revenues and operating margins, and fluctuations could have a material adverse effect on our business, results of operations and financial condition |
| From time to time we may experience currency exposure on distribution and production revenues and expenses from foreign countries, which could have a material adverse effect on our business, results of operations and financial condition |
| Accounting practices used in our industry may accentuate fluctuations in operating results |
| In addition to the cyclical nature of the entertainment industry, our accounting practices (which are standard for the industry) may accentuate fluctuations in our operating results |
| In accordance with US generally accepted accounting principles and industry practice, we amortize film and television programming costs using the 16 _________________________________________________________________ [76]Table of Contents “individual-film-forecast” method |
| Under this accounting method, we amortize film and television programming costs for each film or television program based on the following ratio: Revenue earned by title in the current period Estimated total revenues by title We regularly review, and revise when necessary, our total revenue estimates on a title-by-title basis |
| This review may result in a change in the rate of amortization and/or a write-down of the film or television asset to its estimated fair value |
| Results of operations in future years depend upon our amortization of our film and television costs |
| Periodic adjustments in amortization rates may significantly affect these results |
| In addition, we are required to expense film advertising costs as incurred, but are also required to recognize the revenue from any motion picture or television program over the entire revenue stream expected to be generated by the individual picture or television program |
| Failure to manage future growth may adversely affect our business |
| We are subject to risks associated with possible acquisitions, business combinations, or joint ventures |
| From time to time we engage in discussions and activities with respect to possible acquisitions, business combinations, or joint ventures intended to complement or expand our business |
| For example, we are currently considering a transaction with respect to Image that may or may not be friendly, as discussed under the heading “Business |
| ” We may not realize the anticipated benefit from any of the transactions we pursue |
| Regardless of whether we consummate any such transaction, the negotiation of a potential transaction (including, in connection with the potential Image transaction and similar transactions, associated litigation and proxy contests), as well as the integration of the acquired business, could require us to incur significant costs and cause diversion of management’s time and resources |
| Any such transaction could also result in impairment of goodwill and other intangibles, development write-offs and other related expenses |
| Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition |
| Integrating any business that we acquire or have acquired or with which we combine or have combined is distracting to our management and disruptive to our business and may result in significant costs to us |
| We could face challenges in consolidating functions and integrating procedures, information technology and accounting systems, personnel and operations in a timely and efficient manner |
| If any such integration is unsuccessful, or if the integration takes longer than anticipated, there could be a material adverse effect on our business, results of operations and financial condition |
| We may have difficulty managing the combined entity in the short term if we experience a significant loss of management personnel during the transition period after the significant acquisition |
| Claims against us relating to any acquisition or business combination may necessitate our seeking claims against the seller for which the seller may not indemnify us or that may exceed the seller’s indemnification obligations |
| There may be liabilities assumed in any acquisition or business combination that we did not discover or that we underestimated in the course of performing our due diligence investigation |
| Although a seller generally will have indemnification obligations to us under an acquisition or merger agreement, these obligations usually will be subject to financial limitations, such as general deductibles and maximum recovery amounts, as well as time limitations |
| We cannot assure you that our right to indemnification from any seller will be enforceable, collectible or sufficient in amount, scope or duration to fully offset the amount of any undiscovered or underestimated liabilities that we may incur |
| Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, results of operations and financial condition |
| We may not be able to obtain additional funding to meet our requirements |
| Our ability to grow through acquisitions, business combinations and joint ventures, to maintain and expand our development, production and distribution of motion pictures and television programs and to fund our operating expenses depends upon our ability to obtain funds through equity financing, debt financing (including credit facilities) or the sale or syndication of some or all of our interests in certain projects or other assets |
| If we do not have access to such financing arrangements, and if other funding does not become available on terms acceptable to us, there could be a material adverse effect on our business, results of operations and financial condition |
| 17 _________________________________________________________________ [77]Table of Contents A significant portion of our filmed and television content library revenues comes from a small number of titles |
| We depend on a limited number of titles for the majority of the revenues generated by our filmed and television content library |
| In addition, many of the titles in our library are not presently distributed and generate substantially no revenue |
| If we cannot acquire new product and the rights to popular titles through production, distribution agreements, acquisitions, mergers, joint ventures or other strategic alliances, it could have a material adverse effect on our business, results of operations and financial condition |
| We are limited in our ability to exploit a portion of our filmed and television content library |
| Our rights to the titles in our filmed and television content library vary; in some cases we have only the right to distribute titles in certain media and territories for a limited term |
| We cannot assure you that we will be able to renew expiring rights on acceptable terms and that any failure to renew titles generating a significant portion of our revenue would not have a material adverse effect on our business, results of operations or financial condition |
| Our success depends on external factors in the motion picture and television industry |
| Our success depends on the commercial success of motion pictures and television programs, which is unpredictable |
| Operating in the motion picture and television industry involves a substantial degree of risk |
| Each motion picture and television program is an individual artistic work, and inherently unpredictable audience reactions primarily determine commercial success |
| Generally, the popularity of our motion pictures or programs depends on many factors, including the critical acclaim they receive, the format of their initial release, for example, theatrical or direct-to-video, the actors and other key talent, their genre and their specific subject matter |
| The commercial success of our motion pictures or television programs also depends upon the quality and acceptance of motion pictures or programs that our competitors release into the marketplace at or near the same time, critical reviews, the availability of alternative forms of entertainment and leisure activities, general economic conditions and other tangible and intangible factors, many of which we do not control and all of which may change |
| We cannot predict the future effects of these factors with certainty, any of which factors could have a material adverse effect on our business, results of operations and financial condition |
| In addition, because a motion picture’s or television program’s performance in ancillary markets, such as home video and pay and free television, is often directly related to its box office performance or television ratings, poor box office results or poor television ratings may negatively affect future revenue streams |
| Our success will depend on the experience and judgment of our management to select and develop new investment and production opportunities |
| We cannot make assurances that our motion pictures and television programs will obtain favorable reviews or ratings, that our motion pictures will perform well at the box office or in ancillary markets or that broadcasters will license the rights to broadcast any of our television programs in development or renew licenses to broadcast programs in our library |
| The failure to achieve any of the foregoing could have a material adverse effect on our business, results of operations and financial condition |
| Licensed distributors’ failure to promote our programs may adversely affect our business |
| Licensed distributors’ decisions regarding the timing of release and promotional support of our motion pictures, television programs and related products are important in determining the success of these pictures, programs and products |
| We do not control the timing and manner in which our licensed distributors distribute our motion pictures or television programs |
| Any decision by those distributors not to distribute or promote one of our motion pictures, television programs or related products or to promote our competitors’ motion pictures, television programs or related products to a greater extent than they promote ours could have a material adverse effect on our business, results of operations and financial condition |
| We could be adversely affected by strikes or other union job actions |
| We are directly or indirectly dependent upon highly specialized union members who are essential to the production of motion pictures and television programs |
| A strike by, or a lockout of, one or more of the unions that provide personnel essential to the production of motion pictures or television programs could delay or halt our ongoing production activities |
| Such a halt or delay, depending on the length of time, could cause a delay or interruption in our release of new 18 _________________________________________________________________ [78]Table of Contents motion pictures and television programs, which could have a material adverse effect on our business, results of operations and financial condition |
| We face substantial competition in all aspects of our business |
| We are smaller and less diversified than many of our competitors |
| As an independent distributor and producer, we constantly compete with major US and international studios |
| Most of the major US studios are part of large diversified corporate groups with a variety of other operations, including television networks and cable channels, that can provide both the means of distributing their products and stable sources of earnings that may allow them better to offset fluctuations in the financial performance of their motion picture and television operations |
| In addition, the major studios have more resources with which to compete for ideas, storylines and scripts created by third parties as well as for actors, directors and other personnel required for production |
| The resources of the major studios may also give them an advantage in acquiring other businesses or assets, including film libraries, that we might also be interested in acquiring |
| Our inability to compete successfully could have a material adverse effect on our business, results of operations and financial condition |
| The motion picture industry is highly competitive and at times may create an oversupply of motion pictures in the market |
| The number of motion pictures released by our competitors, particularly the major US studios, may create an oversupply of product in the market, reduce our share of box office receipts and make it more difficult for our films to succeed commercially |
| Oversupply may become most pronounced during peak release times, such as school holidays and national holidays, when theater attendance is expected to be highest |
| For this reason, and because of our more limited production and advertising budgets, we typically do not release our films during peak release times, which may also reduce our potential revenues for a particular release |
| Moreover, we cannot guarantee that we can release all of our films when they are otherwise scheduled |
| In addition to production or other delays that might cause us to alter our release schedule, a change in the schedule of a major studio may force us to alter the release date of a film because we cannot always compete with a major studio’s larger promotion campaign |
| Any such change could adversely impact a film’s financial performance |
| In addition, if we cannot change our schedule after such a change by a major studio because we are too close to the release date, the major studio’s release and its typically larger promotion budget may adversely impact the financial performance of our film |
| The foregoing could have a material adverse effect on our business, results of operations and financial condition |
| The limited supply of motion picture screens compounds this product oversupply problem |
| Currently, a substantial majority of the motion picture screens in the US typically are committed at any one time to only ten to 15 films distributed nationally by major studio distributors |
| In addition, as a result of changes in the theatrical exhibition industry, including reorganizations and consolidations and the fact that major studio releases occupy more screens, the number of screens available to us when we want to release a picture may decrease |
| If the number of motion picture screens decreases, box office receipts, and the correlating future revenue streams, such as from home video and pay and free television, of our motion pictures may also decrease, which could have a material adverse effect on our business, results of operations and financial condition |
| We must successfully respond to rapid technological changes and alternative forms of delivery or storage to remain competitive |
| The entertainment industry in general and the motion picture and television industries in particular continue to undergo significant technological developments |
| Advances in technologies or alternative methods of product delivery or storage or certain changes in consumer behavior driven by these or other technologies and methods of delivery and storage could have a negative effect on our business |
| Examples of such advances in technologies include video-on-demand, new video formats and downloading and streaming from the internet |
| In addition, technologies that enable users to fast-forward or skip advertisements, such as Digital Video Recorders (DVRs), may cause changes in consumer behavior that could affect the attractiveness of our products to advertisers, and could therefore adversely affect our revenues |
| Similarly, further increases in the use of portable digital devices that allow users to view content of their own choosing while avoiding traditional commercial advertisements could 19 _________________________________________________________________ [79]Table of Contents adversely affect our revenues |
| Other larger entertainment distribution companies will have larger budgets to exploit these growing trends |
| While we have a minority interest in CinemaNow, its commercial success is impossible to predict |
| We cannot predict how we will financially participate in the exploitation of our motion pictures and television programs through these emerging technologies or whether we have the right to do so for certain of our library titles |
| If we cannot successfully exploit these and other emerging technologies, it could have a material adverse effect on our business, results of operations and financial condition |
| In addition, the technologies we choose to invest in could prove to be less successful than we expect |
| For example, we have plans to release titles in high-definition Blu-ray Disc format, which could negatively impact our business if that format is not generally accepted by the public |
| We face risks from doing business internationally |
| We distribute motion picture and television productions outside the United States directly in the UK and Ireland and through third party licensees elsewhere and derive revenues from these sources |
| As a result, our business is subject to certain risks inherent in international business, many of which are beyond our control |
| These risks include: • laws and policies affecting trade, investment and taxes, including laws and policies relating to the repatriation of funds and withholding taxes, and changes in these laws; • changes in local regulatory requirements, including restrictions on content; • differing cultural tastes and attitudes; • differing degrees of protection for intellectual property; • financial instability and increased market concentration of buyers in foreign television markets, including in European pay television markets; • the instability of foreign economies and governments; • fluctuating foreign exchange rates; • the spread of communicable diseases; and • war and acts of terrorism |
| Events or developments related to these and other risks associated with international trade could adversely affect our revenues from non-US sources, which could have a material adverse effect on our business, financial condition and results of operations |
| Protecting and defending against intellectual property claims may have a material adverse effect on our business |
| Our ability to compete depends, in part, upon successful protection of our intellectual property |
| We do not have the financial resources to protect our rights to the same extent as major studios |
| We attempt to protect proprietary and intellectual property rights to our productions through available copyright and trademark laws and licensing and distribution arrangements with reputable international companies in specific territories and media for limited durations |
| Despite these precautions, existing copyright and trademark laws afford only limited practical protection in certain countries |
| We also distribute our products in other countries in which there is no copyright or trademark protection |
| As a result, it may be possible for unauthorized third parties to copy and distribute our productions or certain portions or applications of our intended productions, which could have a material adverse effect on our business, results of operations and financial condition |
| Litigation may also be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity |
| Any such litigation could result in substantial costs and the diversion of resources and could have a material adverse effect on our business, results of operations and financial condition |
| We cannot assure you that infringement or invalidity claims will not materially adversely affect our business, results of operations and financial condition |
| Regardless of the validity or the success of the assertion of these claims, we could incur significant costs and diversion of resources in enforcing our intellectual 20 _________________________________________________________________ [80]Table of Contents property rights or in defending against such claims, which could have a material adverse effect on our business, results of operations and financial condition |
| Others may assert intellectual property infringement claims against us |
| One of the risks of the film production business is the possibility that others may claim that our productions and production techniques misappropriate or infringe the intellectual property rights of third parties with respect to their previously developed films, stories, characters, other entertainment or intellectual property |
| We are likely to receive in the future claims of infringement or misappropriation of other parties’ proprietary rights |
| Any such assertions or claims may materially adversely affect our business, financial condition or results of operations |
| Irrespective of the validity or the successful assertion of such claims, we could incur significant costs and diversion of resources in defending against them, which could have a material adverse effect on our business, financial condition or results of operations |
| If any claims or actions are asserted against us, we may seek to settle such claim by obtaining a license from the plaintiff covering the disputed intellectual property rights |
| We cannot provide any assurances, however, that under such circumstances a license, or any other form of settlement, would be available on reasonable terms or at all |
| Our business involves risks of liability claims for media content, which could adversely affect our business, results of operations and financial condition |
| As a distributor of media content, we may face potential liability for: • defamation; • invasion of privacy; • negligence; • copyright or trademark infringement (as discussed above); and • other claims based on the nature and content of the materials distributed |
| These types of claims have been brought, sometimes successfully, against producers and distributors of media content |
| Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on our business, results of operations and financial condition |
| Piracy of motion pictures, including digital and internet piracy, may reduce the gross receipts from the exploitation of our films |
| Motion picture piracy is extensive in many parts of the world, including South America, Asia, the countries of the former Soviet Union and other former Eastern bloc countries, and is made easier by technological advances and the conversion of motion pictures into digital formats |
| This trend facilitates the creation, transmission and sharing of high quality unauthorized copies of motion pictures in theatrical release, on videotapes and DVDs, from pay-per-view through set top boxes and other devices and through unlicensed broadcasts on free television and the internet |
| The proliferation of unauthorized copies of these products has had and will likely continue to have an adverse effect on our business, because these products reduce the revenue we received from our products |
| Additionally, in order to contain this problem, we may have to implement elaborate and costly security and anti-piracy measures, which could result in significant expenses and losses of revenue |
| We cannot assure you that even the highest levels of security and anti-piracy measures will prevent piracy |
| In particular, unauthorized copying and piracy are prevalent in countries outside of the US, Canada and Western Europe, whose legal systems may make it difficult for us to enforce our intellectual property rights |
| While the US government has publicly considered implementing trade sanctions against specific countries that, in its opinion, do not make appropriate efforts to prevent copyright infringements of US produced motion pictures, there can be no assurance that any such sanctions will be enacted or, if enacted, will be effective |
| In addition, if enacted, such sanctions could impact the amount of revenue that we realize from the 21 _________________________________________________________________ [81]Table of Contents international exploitation of motion pictures |
| An investment by non-Canadians in our business is potentially reviewable under the ICA, which could adversely affect our results |
| The Investment Canada Act (Canada) or ICA is administered by the Minister of Industry and, in the case of investments in a Canadian cultural business, by the Minister of Canadian Heritage (both referred to herein as the “Minister”) |
| A “Canadian cultural business” is defined in the ICA as a business activity relating to Canada’s cultural heritage or national identity, and includes a business engaged in the production, distribution, sale or exhibition of film or video products |
| The ICA contains rules, the application of which determines whether an entity (as the term is defined in the ICA) is Canadian-controlled and whether it carries on a Canadian cultural business |
| We may or may not be operating a Canadian cultural business for the purposes of the ICA Under the ICA, the Minister has discretion to determine, after considering any information or evidence submitted by the entity or otherwise made available to the Minister or the Director of Investments, that an investment by a non-Canadian in a Canadian cultural business may constitute an acquisition of control by that non-Canadian, notwithstanding the provisions in the ICA that state that certain investments do not or may not constitute an acquisition of control that would require notification or review under the ICA If the Minister exercises such discretion and deems an investment by a non-Canadian in a cultural business to be an acquisition of control, the investment is potentially subject to notification and/or review |
| If the investment is subject to review, the Minister must be satisfied that the investment is likely to be of net benefit to Canada |
| Such a determination is often accompanied by requests that the non-Canadian provide undertakings supportive of Canadian cultural policy |
| These undertakings may, in some circumstances, include a request for financial support of certain initiatives |
| The determination by the Minister of whether a proposed investment is of net benefit to Canada also includes consideration of sector specific policies of the Canadian federal government, some of which restrict or prohibit investments by non-Canadians in certain types of Canadian cultural businesses |
| Our success depends on certain key employees |
| Our success depends to a significant extent on the performance of a number of senior management personnel and other key employees, including production and creative personnel |
| We do not currently have “key person” life insurance for any of our employees, other than our Chief Executive Officer, Jon Feltheimer |
| We have entered into employment agreements with many (but not all) of our top executive officers and production executives |
| However, although it is standard in the motion picture industry to rely on employment agreements as a method of retaining the services of key employees, these agreements cannot assure us of the continued services of such employees |
| The employment agreement for Mr |
| Feltheimer expires March 31, 2007 |
| The employment agreement for Michael Burns, our Vice Chairman, expires August 31, 2006 |
| Although we intend to negotiate and enter into new employment agreements with each of Messrs |
| Feltheimer and Burns, we cannot assure you that we will be able to do so on favorable terms or at all |
| In addition, competition for the limited number of business, production and creative personnel necessary to create and distribute our entertainment content is intense and may grow in the future |
| Our inability to retain or successfully replace where necessary members of our senior management and other key employees could have a material adverse effect on our business, results of operations and financial condition |
| To be successful, we need to attract and retain qualified personnel |
| Our success continues to depend to a significant extent on our ability to identify, attract, hire, train and retain qualified professional, creative, technical and managerial personnel |
| Competition for the caliber of talent required to produce our motion pictures and television programs continues to increase |
| We cannot assure you that we will be successful in identifying, attracting, hiring, training and retaining such personnel in the future |
| If we were unable to hire, assimilate and retain qualified personnel in the future, such inability would have a material adverse effect on our business, results of operations and financial condition |