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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
For the fiscal year ended March 31, 2020
OR
For the transition period from ____________ to ____________
Commission File No.: 1-14880
LIONS GATE ENTERTAINMENT CORP.
(Exact name of registrant as specified in its charter)
British Columbia, Canada N/A
250 Howe Street, 20th Floor 2700 Colorado Avenue
Vancouver, British Columbia V6C 3R8 Santa Monica, California 90404
(Address of Principal Executive Offices, Zip Code)
Registrant’s telephone number, including area code:
(877) 848-3866
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered
Securities registered pursuant to Section 12(g) of the Act: None
___________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes ☐No☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of September 30, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $1,626,643,913, based on the closing sale price of such shares as reported on the New York Stock Exchange.
As of May 18, 2020, 82,899,512 shares of the registrant’s no par value Class A voting common shares were outstanding, and 136,513,166 shares of the registrant's no par value Class B non-voting common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement relating to its 2020 annual meeting of shareholders (the “ 2020 Proxy Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The 2020 Proxy Statement will be filed with the U.S. Securities and Exchange Commission (the "SEC") within 120 days after the end of the fiscal year to which this report relates. Portions of the Registrant's Annual Report on Form 10-K for Fiscal 2019, filed with the SEC on May 23, 2019, are incorporated by reference into Part II of this Annual Report on Form 10-K.
Table of Contents
Page
PART I
Item 1. Business 4
Item 1A. Risk Factors 24
Item 1B. Unresolved Staff Comments 48
Item 2. Properties 48
Item 3. Legal Proceedings 48
Item 4. Mine Safety Disclosures 49
PART II
Item 6. Selected Financial Data 53
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 83
Item 8. Financial Statements and Supplementary Data 86
Item 9A. Controls and Procedures 86
Item 9B. Other Information 89
PART III
Item 10. Directors, Executive Officers and Corporate Governance 89
Item 11. Executive Compensation 89
Item 14. Principal Accounting Fees and Services 89
PART IV
Item 15. Exhibits, Financial Statement Schedules 89
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FORWARD-LOOKING STATEMENTS
This report includes statements that are, or may be deemed to be, “forward-looking statements” within the meaning of the Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “potential,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “forecasts,” “may,” “will,” “could,” “would” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those discussed under Part I, Item 1A. “Risk Factors.” These factors should not be construed as exhaustive and should be read with the other cautionary statements and information in the report. These factors may also be increased or intensified as a result of the coronavirus (COVID-19 global pandemic), including if there is a resurgence of the COVID-19 global pandemic after the initial outbreak subsides. The extent to which the COVID-19 global pandemic ultimately impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted.
We caution you that forward-looking statements made in this report or anywhere else are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially and adversely from those made in or suggested by the forward-looking statements contained in this report as a result of various important factors, including, but not limited to: the potential effects of the COVID-19 global pandemic on the Company, economic and business conditions; the substantial investment of capital required to produce and market films and television series; budget overruns; limitations imposed by our credit facilities and notes; unpredictability of the commercial success of our motion pictures and television programming; risks related to acquisition and integration of acquired businesses; the effects of dispositions of businesses or assets, including individual films or libraries; the cost of defending our intellectual property; technological changes and other trends affecting the entertainment industry; potential adverse reactions or changes to business or employee relationships; and the other risks and uncertainties discussed under Part I, Item 1A. Risk Factors herein. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods.
Any forward-looking statements, which we make in this report, speak only as of the date of such statement, and we undertake no obligation to update such statements. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
This Annual Report on Form 10-K contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Annual Report on Form 10-K, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other company.
Unless otherwise indicated or the context requires, all references to the “Company,” “Lionsgate,” “we,” “us,” and “our” refer to Lions Gate Entertainment Corp., a corporation organized under the laws of the province of British Columbia, Canada, and its direct and indirect subsidiaries.
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PART I
ITEM 1.BUSINESS.
Overview
Lionsgate (NYSE: LGF.A, LGF.B) is a global content leader whose films, television series, digital products and linear and over-the-top platforms reach next generation audiences around the world. Lionsgate’s film and television properties support location-based entertainment venues and other branded attractions, as well as a video game business. Lionsgate's content initiatives are backed by a nearly 17,000-title film and television library and delivered through a global sales and licensing infrastructure.
We manage and report our operating results through three reportable business segments: Motion Picture, Television Production and Media Networks. Financial information for our segments is set forth in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report.
Motion Picture
Our Motion Picture segment includes revenues derived from the following:
Television Production
Our Television Production segment includes revenues derived from the following:
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Media Networks
Our Media Networks segment includes revenues derived from the following:
Segment Revenue
For the year ended March 31, 2020, contributions to the Company’s consolidated revenues from its reporting segments included Motion Picture43.0%, Television Production25.7% and Media Networks38.2%, and intersegment revenue eliminations represented (6.9)% of consolidated revenues.
Within the Motion Picture segment, revenues were generated from the following:
•Theatrical, 21.3%;
•Home Entertainment, 42.2%;
•Television, 14.8%;
•International, 20.4%; and
•Motion Picture-Other, 1.3%.
Within the Television Production segment, revenues were generated from the following:
•Television, 71.5%;
•International,15.3%;
•Home Entertainment, 6.1%; and
•Television Production-Other, 7.1%.
Within the Media Networks segment, revenues were generated from the following:
•Starz Networks, 96.2%;
•STARZPLAY International, 1.5%
•Other Streaming Services, 2.3%.
Corporate Strategy
We continue to grow and diversify our portfolio of content to capitalize on demand from streaming and traditional platforms throughout the world. We maintain a disciplined approach to acquisition, production and distribution of content, by balancing our financial risks against the probability of commercial success for each project. We also continue to invest in new programming and support the growth of STARZ’s direct-to-consumer offering and expansion of STARZPLAY, our international premium branded SVOD service. We believe that our strategic focus on content, alignment of our content creation and distribution platforms, and creation of other innovative content distribution strategies will enhance our competitive position in the industry, ensure optimal use of our capital, build a diversified foundation for future growth and create significant incremental long-term value for our shareholders.
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MOTION PICTURE
Motion Picture - Theatrical
Production and Acquisition
We take a disciplined approach to theatrical production, with the goal of producing content that can be distributed through various domestic and international platforms. In doing so, we attempt to mitigate the financial risk associated with production by, among other things:
Our approach to acquiring films for theatrical release is similar to our approach to film production. We generally seek to limit our financial exposure in acquiring films while adding films of quality and commercial viability to our release schedule and library.
Distribution
The economic life of a motion picture consists of its exploitation in theaters, on packaged media and on various digital and television platforms in territories around the world.
We distribute motion pictures directly to movie theaters in the U.S. whereby the exhibitor retains a portion of the gross box office receipts and the balance is remitted to the distributor. Concurrent with their release in the U.S., films are generally released in Canada and may also be released in one or more other foreign markets. We construct release schedules taking into account moviegoer attendance patterns and competition from other studios' scheduled theatrical releases. We use either wide (generally, more than 2,000 screens nationwide) or limited initial releases, depending on the film. After the initial theatrical release, distributors seek to maximize revenues by releasing films in sequential release date windows, which may be exclusive against other non-theatrical distribution platforms.
Producing, marketing and distributing films can involve significant risks and costs, and can cause our financial results to vary depending on the timing of a film’s release. For instance, marketing costs are generally incurred before and throughout the theatrical release of a film and, to a lesser extent, other distribution windows, and are expensed as incurred. Therefore, we typically incur losses with respect to a particular film prior to and during the film’s theatrical exhibition, and profitability for the film may not be realized until after its theatrical release window. Further, we may revise the release date of a film as the production schedule changes or in such a manner as we believe is likely to maximize revenues or for other business reasons. Additionally, there can be no assurance that any of the films scheduled for release will be completed, that completion will occur in accordance with the anticipated schedule or budget, or that the film will ever be released.
Theatrical Releases
In fiscal 2020 (i.e., the twelve-month period ended March 31, 2020), we released 28 films in the U.S. across all our labels, which included the following:
• Three films released through our Good Universe label;
• Ten films released through our partnership with Roadside Attractions.
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Fiscal 2020Theatrical Releases
Title Release Date Label/Partnership
I Still Believe* March 13, 2020 Lionsgate
Hope Gap March 6, 2020 Roadside Attractions
Las Pildoras De Mi Novio (My Boyfriend's Meds) February 21, 2020 Pantelion Films
The Last Full Measure January 24, 2020 Roadside Attractions
The Grudge January 3, 2020 Good Universe/Sony
Bombshell December 13, 2019 Summit
En Brazos De Un Asesino December 6, 2019 Pantelion Films
Knives Out November 27, 2019 Lionsgate
The Warrior Queen Of Jhansi November 15, 2019 Roadside Attractions
Midway November 8, 2019 Summit
My Love (Edmond) Cyrano October 18, 2019 Roadside Attractions
Jexi October 11, 2019 Lionsgate
Judy September 27, 2019 Roadside Attractions
Rambo: Last Blood September 20, 2019 Lionsgate
Tod@s Caen August 30, 2019 Pantelion Films
Angel Has Fallen August 23, 2019 Lionsgate
Fiddler: A Miracle Of Miracles August 23, 2019 Roadside Attractions
Good Boys August 16, 2019 Good Universe/Universal
Scary Stories To Tell In The Dark August 9, 2019 Lionsgate
The Peanut Butter Falcon August 9, 2019 Roadside Attractions
Marianne & Leonard: Words Of Love July 5, 2019 Roadside Attractions
American Woman (2019) June 14, 2019 Roadside Attractions
John Wick: Chapter 3 - Parabellum May 17, 2019 Summit
Trial By Fire May 17, 2019 Roadside Attractions
Long Shot May 3, 2019 Good Universe/Summit
Fast Color April 19, 2019 Lionsgate
* Theatrical run terminated early due to the COVID-19 global pandemic.
In fiscal 2020, we also released the following films ‘day-and-date’ (where select titles are released on video-on-demand (“VOD”) and other digital formats on the same day as they are released theatrically):
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Day-and-Date Releases
Title Release Date Label/Partnership
Intrigo: Death Of An Author January 17, 2020 Grindstone
Inherit The Viper January 10, 2020 Lionsgate
Hell On The Border December 13, 2019 Grindstone
Trauma Center December 6, 2019 Grindstone
The Courier November 22, 2019 Grindstone
The Turkey Bowl November 15, 2019 Lionsgate
Primal November 8, 2019 Lionsgate
The Gallows Act Ii October 25, 2019 Lionsgate
Lucky Day October 11, 2019 Grindstone
The Cotton Club Encore October 11, 2019 Lionsgate
Semper Fi October 4, 2019 Lionsgate
10 Minutes Gone September 27, 2019 Grindstone
3 From Hell September 16, 2019 Lionsgate/Saban with Fathom
The Weekend September 13, 2019 Grindstone
Strange But True September 6, 2019 Lionsgate
Angel Of Mine August 30, 2019 Grindstone
Apocalypse Now: Final Cut August 15, 2019 Lionsgate
The Tracker August 9, 2019 Grindstone
Killers Anonymous June 28, 2019 Grindstone
The Poison Rose May 24, 2019 Grindstone
Crypto April 12, 2019 Grindstone
Lionsgate and affiliated companies have distributed films that have earned 129 Academy Award® nominations and 32 wins, as well as numerous Golden Globe Awards®, Producers Guild Awards®, Screen Actors Guild Awards®, Directors Guild Awards®, BAFTA Awards and Independent Spirit Awards nominations and wins.
Motion Picture - Home Entertainment
Our U.S. home entertainment distribution operation exploits our film and television content library of nearly 17,000 motion picture titles and television episodes and programs, consisting of titles from, among others, Lionsgate, our subsidiaries, affiliates and joint ventures (such as Starz, Summit Entertainment, Anchor Bay Entertainment, Artisan Entertainment, Grindstone Entertainment Group, Modern Entertainment, Trimark, Pantelion Films and Roadside Attractions), as well as titles from third parties such as A24, A&E, Amazon Studios, AMC, CBS Films, Entertainment Studios, Marvel, Saban Entertainment, StudioCanal, and Tyler Perry Studios.Home entertainment revenue consists of packaged media and digital revenue.
Packaged Media
Packaged media distribution involves the marketing, promotion and sale and/or lease of DVDs/Blu-ray discs to wholesalers and retailers who then sell or rent the DVDs/Blu-ray discs to consumers for private viewing. Fulfillment of physical distribution services are substantially licensed to Twentieth Century Fox Home Entertainment.
We distribute or sell content directly to retailers such as Wal-Mart, Best Buy, Target, Amazon, Costco and others who buy large volumes of our DVDs/Blu-ray discs to sell directly to consumers. Sales to Wal-Mart accounted for approximately 50% of net home entertainment packaged media revenue in fiscal 2020. We also directly distribute content to the rental market through Redbox, Netflix and others.
Of these titles, certain are released through our subsidiary, Grindstone Entertainment Group, which acquires and/or produces titles as finished pictures and as “pre-buys” based on script, cast and genres, and creates targeted key art, marketing materials and
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release plans, which are then distributed direct-to-video, VOD and through other media. In fiscal 2020, Grindstone Entertainment Group released 35 titles.
Additionally, we distribute television product including series such as American Gods, Ancient Aliens, Ash vs. Evil Dead, Blue Mountain State, Duck Dynasty, Fear the Walking Dead, Grace and Frankie, Narcos, Into the Badlands, Knightfall, MacGyver, Mad Men, Nurse Jackie, Orange Is The New Black, Power, Project Blue Book, The Royals, The Walking Dead, Vida, Weeds, Zoey’s Extraordinary Playlist, library titles such as Alf and Little House on the Prairie, certain Disney-ABC Domestic Television series, as well as premier children's brands including Saban Brand’s Power Rangers and Aardman’s Shaun the Sheep library.
Our year included the following:
Digital Media
Digital media distribution involves delivering content (including certain titles not distributed theatrically or on physical media) by electronic means directly to consumers in-home and on mobile devices. The key distribution methods today include transactional distribution (such as electronic-sell-through (“EST”) and transactional video-on-demand (“TVOD”)), subscription video-on-demand (“SVOD”), ad-supported video-on-demand (“AVOD”) and free video-on-demand (“FVOD”), as well as distribution through various linear pay, basic cable and free, over-the-air television platforms.
We directly distribute our content to digital transactional distribution platforms and networks including, among others, AMC Theaters On Demand, Amazon, Apple, Vudu, Google Play, Fandango NOW, Microsoft's Movies & TV, and Sony's PlayStation Network. Digital SVOD services to which we license our content include, among others, Netflix, Hulu, and Amazon Prime. AVOD services to which we license our content include, among others, The Roku Channel, Tubi TV, YouTube, IMDb, Pluto and Peacock. We also directly distribute our content to other transactional distribution platforms, including, among others, MVPDs like Altice USA, Comcast, DIRECTV, DISH Network, and Verizon Fios.
Linear networks to which we distribute our content include, among others, pay television networks such as Starz, EPIX, HBO and Showtime, and basic cable network groups such as NBCUniversal Cable Entertainment, FX, ViacomCBS Domestic Media Networks, Turner Entertainment Networks, A+E Networks and AMC Networks, as well as Freeform, Reelz, Bounce, Telemundo and UniMás.
In fiscal 2020, we achieved the following:
Motion Picture - Television
We license our theatrical productions and acquired films to the domestic linear pay, basic cable and free television markets. For additional information regarding such distribution, see Motion Picture-Home Entertainment - Digital Media above.
Motion Picture - International
Our international sales operations are headquartered at our offices in London, England. The primary components of our international business are, on a territory by territory basis through third parties or directly through our international divisions:
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• The licensing of third party feature films on an agency basis; and
• Direct distribution of theatrical and/or ancillary rights licensing.
We license rights in all media on a territory by territory basis (other than the territories where we self-distribute) of (i) our in-house Lionsgate and Summit Entertainment feature film product, and (ii) films produced by third parties such as Black Label Media, CBS Films, Gold Circle Films, Participant Media, River Road Entertainment, Thunder Road Pictures and other independent producers. Films licensed and/or released by us internationally in fiscal 2020 included such in-house productions as Knives Out, Bombshell, I Still Believe, John Wick: Chapter 3 - Parabellum, Anna, and Long Shot. Third party films for which we were engaged as exclusive sales agent and/or released by us internationally in fiscal 2020 included Burden, Dark Waters, Playmobil, and Paradise Hills.
Through our territory by territory sales and output arrangements, we generally cover a substantial portion of the production budget or acquisition cost of new theatrical releases which we license and distribute internationally. Our output agreements for Lionsgate and Summit feature films currently cover 12 major territories including the following:
• Australia/New Zealand;
• Benelux (Belgium/Netherlands/Luxembourg);
• Canada;
• CIS (Commonwealth of Independent States);
• France;
• Middle East;
• Poland;
• Scandinavia;
• Singapore; and
• Spain.
These output agreements generally include all rights for all media (including home entertainment and television rights). We also distribute theatrical titles in Latin America through our partnership with International Distribution Company and certain theatrical titles in China through our relationship with Hunan TV & Broadcast Intermediary Co.
We also self-distribute motion pictures in the United Kingdom and Ireland through Lions Gate International UK (“Lionsgate UK”). Lionsgate UK has established a reputation in the United Kingdom as a leading producer, distributor and acquirer of commercially successful and critically acclaimed product. In fiscal 2020, Lionsgate UK released the following 16 films theatrically:
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Fiscal 2020Theatrical Releases - Lionsgate UK
Title Release Date
Missing Link April 5, 2019
John Wick: Chapter 3 - Parabellum May 17, 2019
The Queen's Corgi July 5, 2019
Angel Has Fallen August 21, 2019
Rambo: Last Blood September 19, 2019
The Personal History of David Copperfield* January 24, 2020
Military Wives** March 6, 2020
* British film productions.
** Theatrical run terminated early due to the COVID-19 global pandemic.
Additionally, we have established an office in India to manage operations and growth opportunities in the South Asian/Indian sub-continent. Through our local office in Mumbai, we manage the following activities:
Motion Picture - Other
Global Live, Interactive and Location Based Entertainment
Our Global Live, Interactive and Location Based Entertainment division drives incremental revenue and builds consumer engagement across our entire portfolio of properties via licensing and launching of live shows and experiences, location-based entertainment destinations, games, and related merchandise around the world, and through select strategic partnerships and investments.
Our Global Live Entertainment business focuses on licensing, developing, and producing live stage shows, concerts, and live experiences and events based on our theatrical and television content.
Our Interactive Entertainment business focuses on growing our robust games slate that includes games across PC/console, mobile, casino, tabletop, virtual reality and more, as well as integration of our properties into franchise crossover events with marquee games. We also maintain strategic investments in Finnish mobile game developer/publisher Next Games, live-streaming native mobile gaming platform Mobcrush, and leading esports franchise Immortals.
Our Location Based Entertainment business licenses our Lionsgate, theatrical, and television brands for theme parks, destinations, attractions, and experiences. Our projects currently include, among others, Lionsgate Entertainment World in Hengqin, China, an indoor theme park which opened on July 31, 2019, and a Lionsgate branded theme park zone at the Motiongate Theme Park in Dubai, which opened in October of 2017.
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Music
Our music department creatively manages music for our theatrical and television slates, including overseeing songs, scores and soundtracks for all of our theatrical productions, co-productions and acquisitions, as well as music staffing, scores and soundtracks for all of our television productions. Music revenues are derived from the sales and licensing of music from our films, television, and other productions, and the theatrical exhibition of our films and the broadcast and webcast of our productions.
Ancillary Revenues
Ancillary revenues are derived from the licensing of non-theatrical uses of our films and television content to distributors who, in turn, make such content available to airlines, hotels, schools, oil rigs, public libraries, prisons, community groups, the armed forces, ships at sea and others.
TELEVISION PRODUCTION
Our television business consists of the development, production, syndication and distribution of television programming. We principally generate revenue from the licensing and distribution of such programming to broadcast television networks, pay and basic cable networks, digital platforms and syndicators of first-run programming, which license programs on a station-by-station basis and pay in cash or via barter (i.e., trade of programming for airtime). Each of these platforms may acquire a mix of original and library programming.
After initial exhibition, we distribute programming to subsequent buyers, both domestically and internationally, including basic cable network, premium subscription services or digital platforms (known as “off-network syndicated programming”). Off-network syndicated programming can be sold in successive cycles of sales which may occur on an exclusive or non-exclusive basis. In addition, television programming is sold on home entertainment (packaged media and via digital delivery) and across all other applicable ancillary revenue streams including music publishing, touring and integration.
As with film production, we use tax credits, subsidies, and other incentive programs for television production in order to maximize our returns and ensure fiscally responsible production models.
Television Production - Television
Lionsgate Television
We currently produce, syndicate and distribute nearly 60 television shows on more than 25 networks (including programming produced by Pilgrim Media Group, of which we own a majority interest).
In fiscal 2020, scripted and unscripted programming produced, co-produced or distributed by us and our affiliated entities (see Starz Original Programming below for original programming that appears on our Starz services), as well as programming syndicated by our wholly-owned subsidiary, Debmar-Mercury, included the following:
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Scripted - Lionsgate
Title Network
Dear White People Netflix
Florida Girls Pop
Greenleaf OWN
High Town Starz
Leavenworth Starz
MacGyver CBS
Manhunt: Deadly Games Charter
Mythic Quest Apple+
Orange Is The New Black Netflix
Power Starz
Power Confidential Starz
P-Valley Starz
The Rook Starz
Vida Starz
Zoey's Extraordinary Playlist NBC
Unscripted - Lionsgate
Title Network
Chasing the Cure TNT
De Viaje con los Derbez Pantaya
Gooseberry Comedy Central
Grant History
Kevin Hart: Don't F**k This Up Netflix
Kevin Hart: What The Fit YouTube
Kevin Hart's Laugh Out Loud Bounce
Raise The Bar YouTube
Revenge Body With Khloé Kardashian E!
Selling Sunset Netflix
Skindecision Netflix
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Unscripted - Pilgrim Media Group
Title Network
American Wreckers History
Driven Discovery
Fast & Loud Discovery
Ghost Hunters A&E
My Big Fat Fabulous Life TLC
Street Outlaws Discovery
Street Outlaws: Fastest in America Discovery
Street Outlaws Memphis Discovery
Street Outlaws: No Prep King Discovery
Switching Gears Discovery
Wicked Tuna Nat Geo
Wicked Tuna Outer Banks Nat Geo
Zombie House Flipping FYI
Syndication - Debmar-Mercury
Title
Ambitions
Bojack Horseman
Caught In Providence
Family Feud
House of Payne
Meet The Browns
Wendy Williams
Starz Original Programming
For information regarding production of Starz original programming, see Media Networks - Starz Networks - Starz Original Programming.
Television Production- International
We continue to expand our television business through international sales and distribution of original Lionsgate television series, Starz original programming, third party television programming and format acquisitions via packaged media and various digital platforms.
Lionsgate UK also continues to build a robust television business alongside its premier film brand through its various joint ventures and investments. Lionsgate UK holds interests in, and has strategic partnerships with, television and film production company Kindle Entertainment, television production company Further South Productions and television drama company Potboiler Television.
In fiscal 2020, Lionsgate UK television programming (developed in-house and through Lionsgate UK’s interest and partnerships) included the following:
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Fiscal 2020Television - Lionsgate UK
Title Network Partner(s)
Kiss Me First Channel 4/Netflix Kindle Entertainment, Balloon Entertainment
The A-List BBC3 Kindle Entertainment
Jerk BBC3 Primal Media, Roughcut TV
Motherland Series 2 BBC BBC, Merman, Delightful
The Goes Wrong Show BBC Mischief Screen, Big Talk, BBC
Cold Courage Viaplay Luminoir
Television Production-Home Entertainment
For information regarding television production home entertainment revenue, see Motion Picture - Home Entertainment above.
Television Production-Other
Other revenues are derived from, among others, the licensing of our television programs to other ancillary markets, the sales and licensing of music from the television broadcasts of our productions, and from our interest in 3 Arts Entertainment, a talent management company. 3 Arts Entertainment receives commission revenue from talent representation and are producers on a number of television shows and films where they receive an executive producer fee and back-end participations.
MEDIA NETWORKS
Media Networks - Starz Networks - United States
Starz is a leading provider of premium subscription video programming to MVPDs in the U.S., including cable operators (such as Comcast and Charter), satellite television providers (such as DIRECTV and DISH Network), OTT providers (such as Amazon, Apple, Google and Hulu), telecommunications companies (such as AT&T and Verizon), and on a direct-to-consumer basis.
Our flagship premium service STARZ had 18.9 million subscribers as of March 31, 2020 (not including subscribers who receive programming free as part of a promotional offer). STARZ offers premium original series and recently released and library movies without advertisements. Our other services, STARZ ENCORE and MOVIEPLEX, offer theatrical and independent library movies as well as original and classic television series also without advertisements. Our services include 17 linear networks, on-demand and online viewing platforms, and a stand-alone direct-to-consumer service. The linear networks air over 1,000 movies per month from studio partners, including first-run content from Sony Pictures Entertainment, and have a growing line-up of successful original programming. Our services are offered by our Distributors to their subscribers either at a fixed monthly price as part of a programming tier or package or on an a la carte basis, or directly to consumers via the STARZ app at www.starz.com or through our retail partners (such as Apple and Google) for a monthly fee.
The table below depicts our 17 existing linear services, the respective on-demand service, the STARZ app service and highlights some of their key attributes.
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Demographics and Strategy
Designed to complement any basic television offering across traditional MVPD, wholesale and retail OTT and telecom distribution platforms, STARZ is a best-in-class subscription service delivering premium original series and hit movies with appeal to women and diverse audiences worldwide.
We are focused on developing and distributing authentic and engaging programming that resonates with women, African American, Latinx and LGBTQIA audiences, which have been traditionally underserved in the premium television space. Driven primarily by growing multiplatform viewership amongst these target audiences, Starz is positioned to continue to capture the digital television transition.
Across our digital platforms, the STARZ app provides an alternative for subscribers looking for a competitively priced option. Subscribers have access to a vast library of quality content and a top-rated user experience, along with the ability to download and watch STARZ original series, blockbuster theatricals and favorite classic TV series and movies without an internet connection.
This strategy, combined with a proven management team, will ensure Starz Networks’ services remain a “must have” for subscribers and a meaningful profit center for our Distributors, thereby driving value for our stockholders.
Affiliation agreements
Our services are distributed pursuant to affiliation agreements with our Distributors. These agreements require delivery of programming that meets certain standards. We earn revenue under these agreements either (i) based on the total number of subscribers who receive our services multiplied by rates specified in the affiliation agreements or (ii) based on amounts or rates which are not tied solely to the total number of subscribers who receive our services. Our affiliation agreements expire at various dates through 2026.
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We work with our Distributors to increase the number of subscribers to our services. To accomplish this, we may help fund the Distributors’ efforts to market our services or may permit Distributors to offer limited promotional periods without payment of subscriber fees. We believe these efforts enhance our relationship with Distributors, improve the awareness of our services and maximize subscribers and revenue over the term of these affiliation agreements.
Distributors report the number of subscribers to our services and pay for services, generally, on a monthly basis. The agreements are generally structured to be multi-year agreements with staggered expiration dates and certain of the agreements provide for annual contractual rate increases of a fixed percentage or a fixed amount, or rate increases tied to annual increases in the Consumer Price Index.
OTT service
The STARZ app is the single destination for both Distributor authenticated and direct OTT subscribers to stream or download our original series and movie content. The STARZ app:
• Is available for purchase as a standalone OTT service for $8.99/month; and
Starz Original Programming
Starz Networks contracts with our Television Production segment and other independent production companies to produce original programming that appears on our Starz services.
Starz’s currently announced fiscal 2021 STARZ Originals line-up is as follows:
Title Number of Episodes
Vida Season 3 6
High Town Season 1 8
P-Valley Season 1 8
TBD 1 TBD
TBD 2 TBD
Power II: Ghost Season 1 10
Spanish Princess Part 2 8
TBD 3 TBD
American Gods Season 3 10
Run the World Season 1 8
TBD 4 TBD
Step Up Season 3 10
TBD
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Starz’s fiscal 2020 STARZ Originals line-up was as follows:
Title Number of Episodes
Spanish Princess Part 1 8
Vida Season 2 10
The Rook Season 1 8
Sweetbitter Season 2 8
Power Season 6 15
Leavenworth (documentary series) 5
Dublin Murders 8
Wrong Man Season 2 (documentary series) 6
Outlander Season 5 12
Lionsgate and Starz television programming have earned 235 Emmy® Award nominations including 37 wins, as well as numerous Golden Globe ® Awards, NAACP Awards, GLAAD Awards, Screen Actors Guild Awards nomination and wins.
Output and Content License Agreements
The majority of content on our services consists of movies that have been released theatrically. Starz has an exclusive long-term output licensing agreement with Sony for all qualifying movies released theatrically in the U.S. by studios owned by Sony through December 31, 2021. The Sony agreement, which began in 2001, includes all titles released under the Columbia, Screen Gems, Sony Pictures Classics and TriStar labels. Starz does not license movies produced by Sony Pictures Animation. Under this agreement, Starz has valuable exclusive rights to air new movies on linear television services, on-demand or online during two separate windows over a period of approximately three (3) to seven (7) years from their initial theatrical release. Generally, except on a VOD or pay-per-view basis, no other linear service, online streaming or other video service may air or stream these recent releases during Starz’s windows, and no other premium subscription service may air or stream these releases between the two windows.
Starz also licenses library content comprised of older, previously released theatrical movies from many of Hollywood’s major studios. In addition to theatrical movies, Starz licenses made for television movies, television series and other content from studios, production companies or other rights holders. The rights agreements for library content are of varying duration and generally permit Starz’s services to exhibit these movies, series and other programming during certain window periods.
A summary of significant output and library programming agreements (including a library agreement with Lionsgate) are as follows:
Studio Term (1) Studio Term
Warner Bros. . . . . . . . . . . . . . . . . . . 12/2022
Miramax . . . . . . . . . . . . . . . . . . . . . . 02/2023
Twentieth Century Fox. . . . . . . . . . . . 02/2025
MGM . . . . . . . . . . . . . . . . . . . . . . . . . 04/2025
Sony Pictures. . . . . . . . . . . . . . . . . . . . 12/2025
Lionsgate . . . . . . . . . . . . . . . . . . . . . . 01/2026
Universal . . . . . . . . . . . . . . . . . . . . . 03/2027
(1) Dates based on initial theatrical release.
The Sony output agreement requires Starz to pay for movies at rates calculated on a pricing grid that is based on each film’s domestic box office performance (subject to maximum amounts payable per movie and a cap on the number of movies that can be put to Starz each year). The amounts Starz pays for library content vary based on each specific agreement, but generally reflect
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an amount per movie, series or other programming commensurate with the quality (e.g., utility and perceived popularity) of the content being licensed.
Transmission
We uplink our programming to four non-pre-emptible, protected transponders on two satellites positioned in geo-synchronous orbit. These satellites feed our signals to various swaths of the Americas. We lease these transponders under long-term lease agreements. These transponder leases have termination dates in 2023. We transmit to these satellites from our uplink center in Englewood, Colorado. We have made arrangements at a third party facility to uplink our linear channels to these satellites in the event we are unable to do so from our uplink center.
Regulatory Matters
In the U.S., the Federal Communications Commission (the “FCC”) regulates several aspects of our, and our distribution ecosystem’s operations and programming. This includes FCC oversight in connection with communications satellites and related uplink/downlink equipment and transmissions, content-specific requirements such as closed captioning, messaging during children’s programming, loudness of commercials, and program access requirements in connection with certain Distributors and programmer services with shared attributable interests. Additionally, as part of the FCC’s 2008 order approving the acquisition by Liberty Media Corporation (now known as Qurate Retail, Inc.) (“Liberty Media”) of a controlling interest in DIRECTV, the FCC imposed program access conditions on Liberty Media and its affiliated entities, which may remain applicable to Starz.
Online Services
To the extent that our programming services are distributed through online based platforms, we must comply with various federal and state laws and regulations applicable to online communications and commerce. Congress and individual states may consider additional legislation addressing online privacy and other issues.
Proposed Changes in Regulation
The regulation of programming services, cable television systems, direct broadcast satellite providers, broadcast television licensees and online distributed services is subject to the political process and has been in constant flux historically. Further material changes in the law and regulatory requirements must be anticipated and there can be no assurance that our business will not be materially adversely affected by future legislation, new regulation or deregulation.
Media Networks - Starz - International
STARZ is available in 50 countries outside the U.S. through our four (4) international branded services: STARZPLAY in Western Europe and Latin America; STARZ in Canada; LIONSGATE Play in India; and through our STARZPLAY Arabia joint venture in the Middle East and North Africa (see Joint Ventures, Partnerships and Ownership Interests below). These branded services are made available through OTT providers (such as Amazon and Apple), internet protocol television ("IPTV") providers (such as Orange and Vodafone), telecommunications companies (such as Orange and Vodafone), on a direct-to-consumer basis, and cable and satellite providers in Canada only. Across these services, Starz had 5.0 million subscribers as of March 31, 2020.
International Strategy
STARPLAY is positioned as a pure-play premium content service offered at a competitive subscription price, made available through a complementary retail and wholesale distribution strategy.
Premium content that targets all adults is the foundation of our international content strategy. We believe this allows us to operate as a complementary service, not a direct competitor, with other higher priced, broad based video services. STARZPLAY provides subscribers with access to STARZ original series, often airing day-and-date with the U.S., a rich and diverse Lionsgate library of television series, feature films and documentaries, and, to amplify content from the Starz domestic original programming slate, first-run, exclusive third-party programming, including locally produced television shows that align with the STARZ brand. Most content available on STARZPLAY is English-language, available with sub-titles and/or local language dubbing for each country. Starz also expects to co-produce local language content for some countries in the coming years.
We have priced STARZPLAY competitively on a territory by territory basis and made it available through a complementary wholesale and retail distribution strategy that has allowed us to quickly build out our distribution platform with 50 implementations across our 31 country footprint. Our distribution strategy is led with a wholesale model, where STARZPLAY is sold or bundled
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as an a la carte channel or bundled within our partners’ platforms, including Amazon and Apple, as well as local IPTV and Telco partners. Our wholesale distribution partners manage the technology and infrastructure associated with the exhibition of the STARZPLAY service in exchange for a share of the subscription revenue. To enhance our subscriber reach, we modified our domestic (U.S.) app for deployment internationally to include, among other new features, full European Union General Data Protection Regulation compliance, support for seven (7) languages, multiple audio/closed captioning options and a variety of potential carrier/billing integrations. We expect to launch with additional wholesale partners and deploy the STARZPLAY app in additional countries in the coming years.
STARZPLAY App
The STARZPLAY app is the single destination for direct OTT subscribers to stream on-demand or download our original series and movie content. The STARZPLAY app:
Affiliation agreements
Our services are distributed pursuant to affiliation agreements with Distributors. These agreements require delivery of programming that meets certain standards. We earn revenue under these agreements either (i) based on the total number of subscribers who receive our services multiplied by rates specified in the affiliation agreements or (ii) in the case of India, the total number of our distributors’ monthly active video users who view our content multiplied by rates specified in the affiliation agreements. Our affiliation agreements expire at various dates through 2023.
We work with Distributors to increase the number of subscribers to our services. To accomplish this, we may help fund the Distributors’ efforts to market these services or may permit Distributors to offer limited promotional periods with discounted or no payment of subscriber fees. We believe these efforts enhance our relationship with Distributors, improve the awareness of our services and ultimately increase subscribers and revenue over the term of these affiliation agreements.
Distributors report the number of subscribers to our services and pay for services, generally, on a monthly basis. The agreements are structured on a country by country basis, to be multi-year agreements with staggered expiration dates by Distributor.
STARZPLAY Programming
STARZPLAY contracts with our Television Production segment and other major content licensors to acquire first-run original scripted series that appears on our STARZPLAY services.
STARZPLAY’s currently expected fiscal 2021 first-run STARZ Originals programming, which will be available to STARZPLAY across its footprint in Western Europe, Latin America and Canada, is as follows:
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Title Number of Episodes
Vida Season 3 6
High Town Season 1 8
P-Valley S1 8
TBD 1 TBD
TBD 2 TBD
Power II: Ghost Season 1 10
Spanish Princess Part 2 (not available in Spain) 8
TBD 3 TBD
Run the World Season 1 8
TBD 4 TBD
Step Up Season 3 10
TBD
STARZPLAY’s fiscal 2020 first-run STARZ Originals programming and country availability was as follows:
Title Countries Available Number of Episodes
Dublin Murders DE, FR, IT, ES, Benelux, LatAm, Brazil 8
The Rook DE, FR, IT, ES, Benelux, LatAm, Brazil 8
Spanish Princess UK, DE, FR, IT, Benelux, LatAm, Brazil 8
Vida UK, DE, FR, IT, ES, Benelux, LatAm, Brazil 10
Sweetbitter UK, DE, FR, IT, ES, Benelux, LatAm, Brazil 8
Power ES 13
STARZPLAY’s fiscal 2020 first-run third-party programming and country availability was as follows:
Title Countries Available Number of Episodes Distributor
Pennyworth UK, DE, IT, ES, Benelux, LatAm, Brazil 10 Warner Bros
Castle Rock UK, DE, IT, Benelux, LatAm, Brazil 10 Warner Bros
The Act UK, DE, FR, IT, Benelux, LatAm, Brazil 8 NBCU
Catch 22 DE, ES, Benelux 6 Paramount
Killing Eve DE 8 Endeavor
Mr. Mercedes UK, DE, FR, IT, LatAm, Brazil 10 Sony
Media Networks - Other Streaming Services
Other Streaming Services represent revenues derived primarily from our majority owned premium Spanish language streaming services business, Pantaya. Pantaya is the first-ever premium streaming destination for world-class movies in Spanish offering the largest selection of current and classic, commercial-free blockbusters and critically acclaimed titles from Latin America and the U.S.
JOINT VENTURES, PARTNERSHIPS AND OWNERSHIP INTERESTS
Our joint ventures, partnerships and ownership interests support our strategy of being a multiplatform global industry leader in entertainment. We regularly evaluate our existing properties, libraries and other assets and businesses in order to determine whether they continue to enhance our competitive position in the industry, have the potential to generate significant long-term
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returns, represent an optimal use of our capital and are aligned with our goals. When appropriate, we discuss potential strategic transactions with third parties for purchase of our properties, libraries or other assets or businesses that factor into these evaluations. As a result, we may, from time to time, determine to sell individual properties, libraries or other assets or businesses or enter into additional joint ventures, strategic transactions and similar arrangements for individual properties, libraries or other assets or businesses. Certain of the Company’s joint ventures, partnerships and ownership interests include the following:
Intellectual Property
We currently use and own or license a number of trademarks, service marks, copyrights, domain names and similar intellectual property in connection with our businesses and own registrations and applications to register them both domestically and internationally. We believe that ownership of, and/or the right to use, such trademarks, service marks, copyrights, domain names and similar intellectual property is an important factor in our businesses and that our success depends, in part, on such ownership.
Motion picture and television piracy is extensive in many parts of the world, including South America, Asia and certain Eastern European countries, and is made easier by technological advances and the conversion of content into digital formats. This trend facilitates the creation, transmission and sharing of high quality unauthorized copies of content on packaged media and through digital formats. 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 may reduce the revenue we receive from our products. Our ability to protect and enforce our intellectual property rights is subject to certain risks and from time to time, we encounter disputes over rights and obligations concerning intellectual property. We cannot provide assurance that we will prevail in any intellectual property disputes.
Competition
Our businesses operate in highly competitive markets. We compete with companies within the entertainment and media business and from alternative forms of leisure entertainment, such as travel, sporting events, outdoor recreation and other cultural related activities. We compete with the major studios, numerous independent motion picture and television production companies, television networks, pay television services and digital media platforms for the acquisition of literary and film properties, the services of performing artists, directors, producers and other creative and technical personnel and production financing, all of which are essential to the success of our businesses. In addition, our motion pictures compete for audience acceptance and exhibition outlets with motion pictures produced and distributed by other companies. Likewise, our television product faces significant competition from independent distributors as well as major studios. Moreover, our networks compete with other programming networks for viewing and subscribership by each distributor’s customer base, as well as for carriage by such distributors. As a result, the success of any of our motion picture, television or media networks business is dependent not only on the quality and acceptance of a particular film or program, but also on the quality and acceptance of other competing content released into the marketplace at or near the same time as well as on the ability to license and produce content for the networks that is adequate in quantity and quality and will generate satisfactory subscriber levels.
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Given such competition, we attempt to operate with a different business model than others. We typically emphasize a lower cost structure, risk mitigation, reliance on financial partnerships and innovative financial strategies. Our cost structures are designed to utilize our flexibility and agility as well as the entrepreneurial spirit of our employees, partners and affiliates, in order to provide creative entertainment content to serve diverse audiences worldwide.
Impact of COVID-19 Global Pandemic
The impact of disruptions associated with the ongoing COVID-19 global pandemic and measures to prevent its spread and mitigate its effects both domestically and internationally, and the resulting unprecedented economic uncertainty, are affecting our business in a number of ways. To date, we have experienced early termination of the theatrical run of one of our films domestically and one of our films in the UK, delayed theatrical distribution of several films domestically and internationally, and delayed production of film and television content (resulting in changes in future release dates for some titles and series). Our partners have also closed several location-based entertainment attractions based on our film and television properties. Conversely, television and streaming consumption around the globe has increased as well as home entertainment demand. STARZ has experienced an increase in viewership of its content across all platforms as well as an increase in subscribers to its OTT services, both domestically and internationally. In a number of instances, we have also been able to adapt to these new circumstances by releasing one of our theatrical films earlier on streaming platforms, completing post-production of one of our television series remotely and continuing the development of a number of our television series utilizing virtual writers’ rooms. These changes in the way we operate may be helpful to partially offset some of the negative impacts from the pandemic; however, the ultimate impact of these changes and the COVID-19 global pandemic cannot be predicted with certainty. For additional information regarding the impact on our operating results, cash flows and financial position, and the other risks and uncertainties see Part I, Item 1A. Risk Factors and Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report.
Social Responsibility and Employee Engagement
Lionshares
We are committed to acting responsibly and making a positive difference in the local and global community through Lionshares, the umbrella for our companywide commitment to our communities. Lionshares is a volunteer program that seeks to provide opportunities for employees within the Lionsgate family to partner with a diverse range of charitable organizations. The program not only enriches the Lionsgate work experience through cultural and educational outreach, but also positively interacts and invests in the local and global community.
Employee Resource Groups
We provide our employees with an opportunity to enhance cross-cultural awareness, develop leadership skills and network across the Company’s various business units and levels through resource groups including Lionsgate Multicultural Group, Lionsgate Pride, Lionsgate Vets and Lionsgate Women’s Empowerment Group.
Employees
As of May 18, 2020, we had 1,443 full-time employees in our worldwide operations. We also utilize many consultants in the ordinary courseof our business and hire additional employees on a project-by-project basis in connection with the production of our motion pictures and television programming.
Corporate History
We are a corporation organized under the laws of the Province of British Columbia, resulting from the merger of Lions Gate Entertainment Corp. and Beringer Gold Corp. on November 13, 1997. Beringer Gold Corp. was incorporated under the Business
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Corporation Act (British Columbia) on May 26, 1986 as IMI Computer Corp. Lions Gate Entertainment Corp. was incorporated under the Canada Business Corporations Act using the name 3369382 Canada Limited on April 28, 1997, amended its articles on July 3, 1997 to change its name to Lions Gate Entertainment Corp., and on September 24, 1997, continued under the Business Corporations Act (British Columbia).
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act, are available, free of charge, on our website at investors.lionsgate.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). The Company's Disclosure Policy, Corporate Governance Guidelines, Standards for DirectorIndependence, Code of Business Conduct and Ethics for Directors, Officers and Employees, Policy on Shareholder Communications, Related Person Transaction Policy, Charter of the Audit & Risk Committee, Charter of the CompensationCommittee and Charter of the Nominating and Corporate Governance Committee and any amendments thereto are also available on the Company's website, as well as in print to any shareholder who requests them. The information posted on our website is not incorporated into this Annual Report on Form 10-K. We will disclose on our website waivers of, or amendments to, our Code of Business Conduct and Ethics that applies to our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer or persons performing similar functions.
The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.
ITEM 1A.RISK FACTORS.
You should carefully consider the risks described below as well as other information included in, or incorporated by reference into this Form 10-K. The risk and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of these risks and uncertainties occur, they could adversely affect our business, financial condition, operating results, liquidity and prospects.
Risks Related to Our Business
The impact of the COVID-19 global pandemic could materially and adversely affect our business, financial condition and results of operations.
The impact of disruptions associated with the ongoing COVID-19 global pandemic and measures to prevent its spread and mitigate its effects both domestically and internationally, and the resulting unprecedented economic uncertainty, are affecting our business in a number of ways. To date, we have experienced early termination of the theatrical run of one of our films domestically and one of our films in the UK, delayed theatrical distribution of several films domestically and internationally, the delayed production of film and television content (resulting in future changes in release dates for some titles and series). Our partners have also closed several location-based entertainment attractions based on our film and television properties. We may not be able to accurately predict when theaters re-open, production resumes or if and when certain of our content will be released. We also may not be able to predict if current insurance will provide sufficient coverage for continued production delays, or if we will be able to obtain and/or recover insurance coverage for productions in the future if there are additional disruptions associated with COVID-19 or similar pandemics. Our businesses could also be impacted should the disruptions lead to changes in consumer behavior. The COVID-19 global pandemic could also impact our results of operations by decreasing our revenue and increasing our expenses. As a direct result of the COVID-19 global pandemic and the related economic disruption, including the worldwide closure of most theaters, international travel restrictions and the pausing of motion picture and television productions, during the fourth quarter of fiscal 2020 we have incurred $50.5 million in incremental costs which were expensed in the period. We expect to incur additional incremental costs in future periods. In addition to the potential direct impacts on our business, the global economy may be weakened as a result of actions taken in response to the COVID-19 global pandemic. To the extent that the weakened global economy impacts consumers’ ability or willingness to pay for our services, we could see our business and results of operations negatively affected.
Conversely, television and streaming consumption around the globe has increased as well as home entertainment demand. STARZ has experienced an increase in viewership of its content across all platforms as well as an increase in subscribers to its OTT services, both domestically and internationally. This increase, however, may not be indicative of future results and growth may slow as
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governmental and other restrictions are relaxed and as a result of the current and possible long-term negative economic impact of the pandemic. In a number of instances, we have also been able to adapt to these new circumstances by releasing one of our theatrical films earlier on streaming platforms, completing post-production of one of our television series remotely and continuing the development of a number of our television series utilizing virtual writers’ rooms. These changes in the way we operate may be helpful to partially offset some of the negative impacts from the pandemic; however, the ultimate impact of these changes and the COVID-19 global pandemic cannot be predicted with certainty.
We expect that the ultimate impact of these disruptions, including the extent of any adverse impact on our business, results of operations and financial condition, will depend on, among other things, the duration and spread of the pandemic, the impact of governmental regulations that have been, and may continue to be, imposed in response to the pandemic, the effectiveness of actions taken to contain or mitigate the outbreak, and global economic conditions as a result of the COVID-19 global pandemic. In addition, if a resurgence of the COVID-19 global pandemic occurs after the initial outbreak subsides, the impact could be exacerbated. All of these impacts could place limitations on our ability to execute on our business plan and materially and adversely affect our business, financial condition and results of operations. We continue to monitor the situation, have actively implemented policies and procedures to address the situation and mitigate any adverse impacts, and may adjust our current policies and procedures as more information and guidance become available to address the evolving situation. The impact of the ongoing COVID-19 global pandemic and its effects may also exacerbate other risks discussed in Item 1A. Risk Factors in this Annual Report, any of which could have a material effect on us. Accordingly, due to the evolving and uncertain nature of this situation, we are not able to estimate the full extent of the impact on our operating results, cash flows and financial position.
We face substantial capital requirements and financial risks.
Our business requires a substantial investment of capital. The production, acquisition and distribution of motion picture and television content requires substantial capital. A significant amount of time may elapse between our expenditure of funds and the receipt of revenues after release or distribution of such content. This may require us to fund a significant portion of our capital requirements under the Senior Credit Facilities (as defined below) or other financing sources. Although we reduce the risks of our production exposure through tax credit programs, government and industry programs, co-financiers and other sources, we cannot assure you that we will continue to successfully implement these arrangements or that we will not be subject to substantial financial risks relating to the production, acquisition and distribution of future motion picture and television content. In addition, 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, financial condition, operating results, liquidity and prospects.
The costs of producing and marketing feature films is high and may increase in the future. The costs of producing and marketing feature films generally increase each year, which may make it more difficult for our films to generate a profit. A continuation of this trend would leave us more dependent on other media, such as packaged media, digital media, television and international markets, which revenues may not be sufficient to offset an increase in the cost of motion picture production and marketing. If we cannot successfully exploit these other media, it could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
Budget overruns may adversely affect our business. While our business model requires that we be efficient in the production of motion picture and television content, actual production costs may exceed their budgets. The production, completion and distribution of such content can be subject to a number of uncertainties, including delays and increased expenditures due to disruptions or events beyond our control. As a result, if production incurs substantial budget overruns, we may have to seek additional financing or fund the overrun ourselves. We cannot make assurances regarding the availability of such additional financing on terms acceptable to us, or that we will recoup these costs. For instance, increased costs incurred with respect to a particular film may result in a delayed release and the postponement to a potentially less favorable date, 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, financial condition, operating results, liquidity and prospects.
We may incur significant write-offs if our feature films and other projects do not perform well enough to recoup costs.
We are required to amortize capitalized production costs over the expected revenue streams as we recognize revenue from films or other projects. The amount of production costs that will be amortized each quarter depends on, among other things, how much future revenue we expect to receive from each project. Unamortized production costs are evaluated for impairment each reporting period on a project-by-project basis. If estimated remaining revenue is not sufficient to recover the unamortized production costs, including because of delayed theatrical distribution of films as a result of the ongoing COVID-19 global pandemic and its effects, those costs will be written down to fair value. In any given quarter, if we lower our previous forecast with respect to total anticipated
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revenue from any film or other project, we may be required to accelerate amortization or record impairment charges with respect to the unamortized costs, even if we previously recorded impairment charges for such film or other project. Such impairment charges could adversely impact our business, operating results and financial condition.
An impairment in the carrying value of goodwill and intangible assets could have a material adverse effect on our financial condition and results of operations.
At March 31, 2020, the carrying value of our goodwill and indefinite-lived intangible assets was $2.8 billion and $250.0 million, respectively. Our indefinite-lived intangible assets consist of trade names primarily representing the estimated fair value of the Starz brand name determined in connection with the acquisition of Starz as of December 8, 2016. Our reporting units for purposes of goodwill impairment testing, along with their respective balances at March 31, 2020 were Motion Picture (goodwill of $394 million), Media Networks (goodwill of $2.04 billion), and each of our Television (goodwill of $309 million) and Talent Management (goodwill of $93 million) businesses, both of which are part of our Television Production segment.
Goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment each fiscal year or between the annual tests if an event occurs or circumstances change that indicates it is more-likely-than-not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying value. For fiscal 2019, due primarily to the decline in the market price of our common shares, we performed a quantitative goodwill impairment assessment for all of our reporting units. Our quantitative goodwill impairment analysis of our reporting units indicated that the fair value of the reporting units exceeded their respective carrying values. However, our Television business reporting unit was considered at risk for impairment due to relatively small changes in certain key assumptions that could cause an impairment of goodwill. As a result, during fiscal 2020 we monitored all of our reporting units for changes in the business environment that could impact recoverability.
For the second quarter of fiscal 2020, due primarily to the sustained decline in the market price of our common shares, we updated our quantitative impairment assessment for three (Television, Media Networks and Motion Picture) of our reporting units. Based on our quantitative impairment assessment for the second quarter of fiscal 2020, we determined that there were no goodwill impairments; however, two of our reporting units (Television and Media Networks) were at risk for impairment due to relatively small changes in certain key assumptions that could cause an impairment of goodwill.
For our annual goodwill impairment test for fiscal 2020, due to the decline in the market price of our common shares in the fourth quarter ended March 31, 2020, which was significantly impacted by the economic uncertainty and market volatility resulting from the COVID-19 global pandemic, we updated our quantitative impairment assessment for all of our reporting units as of March 31, 2020. Based on our annual quantitative impairment assessment for fiscal 2020, we determined that two of our reporting units (Television and Media Networks) were at risk for impairment.
The recoverability of goodwill is dependent upon the continued growth of revenue and cash flows from our business activities. Examples of events or circumstances that could result in changes to the underlying key assumptions and judgments used in our goodwill impairment tests, and ultimately impact the estimated fair value of our reporting units may include the duration of the COVID-19 global pandemic and its impact on the global economy and the creation and consumption of our content; adverse macroeconomic conditions; volatility in the equity and debt markets which could result in higher weighted-average cost of capital; the commercial success of our television programming and our motion pictures; our continual contractual relationships with our customers, including our affiliate agreements of our Media Networks business; our subscriber growth rates domestically and internationally across our traditional and OTT platforms and changes in consumer behavior. While historical performance and current expectations have resulted in fair values of our reporting units in excess of carrying values, if our assumptions used in our assessments are not realized, it is possible that an impairment charge may need to be recorded in the future, which could have a material adverse effect on our financial condition and results of operations.
At March 31, 2020, the carrying value of our finite-lived intangible assets was approximately $1.47 billion. Our finite-lived intangible assets primarily relate to customer relationships associated with U.S. MVPDs, including cable operators, satellite television providers and telecommunications companies (“Traditional Affiliate”), and the carrying value reflects the estimated fair value of these customer relationships determined in connection with the acquisition of Starz on December 8, 2016, net of amortization recorded since the date of the Starz acquisition.
Identifiable intangible assets with finite lives are amortized to depreciation and amortization expense over their estimated useful lives, ranging from 5 to 17 years. Through the first quarter of fiscal 2020, we amortized our Traditional Affiliate customer relationships discussed above on a straight-line basis over 17 years. Our finite-lived intangible assets are tested for impairment whenever events or changes in circumstances (triggering events) indicate that the carrying amount of the asset may not be recoverable. If a triggering event has occurred, an impairment analysis is required. The impairment test first requires a
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comparison of undiscounted future cash flows expected to be generated over the useful life of an asset to the carrying value of the asset. The impairment test is performed at the lowest level of cash flows associated with the asset. If the carrying value of the asset exceeds the undiscounted future cash flows, the asset would not be deemed to be recoverable. Impairment would then be measured as the excess of the asset’s carrying value over its fair value.
Due to changes in the industry related to the migration from linear to OTT and direct-to-consumer consumption, during the second quarter of the fiscal year ended March 31, 2020, we determined it was appropriate to change the pattern of amortization of our Traditional Affiliate customer relationship intangible asset (i.e., a finite-lived intangible asset). Accordingly, beginning in the second quarter of the fiscal year ended March 31, 2020, the Company has adopted an amortization method that reflects amortization in the proportion that current period revenues bear to management’s estimate of future revenue over the remaining estimated useful life of the asset. This method results in greater amortization in the earlier years of the estimated useful life of the asset than the latter years.
During the fiscal year ended March 31, 2020, due to industry factors discussed in the preceding paragraph and the economic uncertainty from the COVID-19 global pandemic, we performed an impairment analysis of our amortizable intangible assets, as described above. The impairment analysis requires a comparison of undiscounted future cash flows expected to be generated over the useful life of an asset to the carrying value of the asset. Based on our impairment analysis, the estimated undiscounted cash flows exceeded the carrying amount of the assets and therefore no impairment charge was required.
Should the revenues from our Traditional Affiliate relationships decline more than the assumed attrition rates used in our current estimates, either as a result of decreases in subscriber rates or changes of the terms of our renewals of our Traditional Affiliate contracts, we may have indicators of impairment which could result in an impairment of our customer relationships intangible assets, or we may need to further shorten the useful life or adopt a more accelerated method of amortization. Both of these occurrences would increase the amount of amortization expense we record, which could have a material adverse effect on our financial condition and results of operations.
For further discussion, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies.
Changes in our business strategy, plans for growth or restructuring of our businesses may increase our costs or otherwiseaffect the profitability of our businesses.
As changes in our business environment occur, we may adjust our business strategies to meet these changes, which may include growing a particular area of business or restructuring a particular business or asset. In addition, external events including changing technology, changing consumer patterns, acceptance of our theatrical and television offerings and changes in macroeconomic condition, including the volatility and uncertainty in financial markets as a result of the ongoing COVID-19 global pandemic and its effects, may impair the value of our assets. When these changes or events occur, we may incur costs to change our business strategy and may need to write down the value of assets. We may also make investments in existing or new businesses, including investments in the international expansion of our business and in new business lines. Such investments have and continue to be made in our Global Live, Interactive and Location Based Entertainment and our direct-to-consumer and licensed offerings (specifically, the international rollout of our STARZPLAY service). Some of these investments may have short-term returns that are negative or low and the ultimate prospects of the businesses may be uncertain, or, in international markets, may not develop at a rate that supports our level of investment. In any of these events, our costs may increase, we may have significant charges associated with the write-down of assets, or returns on new investments may be lower than prior to the change in strategy, plans for growth or restructuring.
We have entered into output licensing agreements that require Starz to make substantial payments.
Starz has an output licensing agreement with Sony to acquire theatrical releases that will expire on December 31, 2021. Starz is required to pay Sony for films released at rates calculated on a pricing grid that is based on each film’s domestic box office performance (subject to maximum amounts payable per film and a cap on the number of films that can be put to Starz each year), and the amounts payable pursuant to such agreement will be substantial. We believe that the theatrical performance of the films Starz will receive under the agreements will perform at levels consistent with the performance of films Starz has received from Sony in the past. We also assume a certain number of annual releases of first run films by Sony’s studios consistent with the number Starz received in prior years. Should the films perform at higher levels across the slate of films Starz receives or the quantity of films increase, then our payment obligations would increase and would have a materially adverse effect on our business, financial condition, operating results, liquidity and prospects.
Our revenues and results of operations may fluctuate significantly.
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Our results of operations are difficult to predict and depend on a variety of factors. Our results of operations depend significantly upon the commercial success of the motion picture, television and other content that we sell, license or distribute, which cannot be predicted with certainty. In particular, the underperformance at the box office of one or more motion pictures in any period may cause our revenue and earnings results for that period (and potentially, subsequent periods) to be less than anticipated, in some instances, to a significant extent. Additionally and as stated previously, we have experienced early termination of the theatrical run of one of our films domestically and one of our films in the UK, delayed theatrical distribution of several films domestically and internationally and delayed production of film and television content due to the ongoing COVID-19 global pandemic and its effects. Accordingly, our 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.
Our results of operations also fluctuate due to the timing, mix, number and availability of our theatrical motion picture and home entertainment releases, as well as license periods for content. Our operating results may increase or decrease during a particular period or fiscal year due to differences in the number and/or mix of films released compared to the corresponding period in the prior fiscal year.
Low ratings for television programming produced by us may lead to the cancellation of a program and can negatively affect future license fees for the cancelled program. If we decide to no longer air programming due to low ratings or other factors, we could incur significant programming impairments, which could have a material adverse effect on our results of operations in a given period.
Moreover, our results of operations may be impacted by the success of all of our theatrical releases, including critically acclaimed and award winning films. We cannot assure you that we will manage the production, acquisition and distribution of all future motion pictures successfully including critically acclaimed, award winning and/or commercially popular films or that we will produce or acquire motion pictures that will receive critical acclaim or perform well commercially. Any inability to achieve such commercial success could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
Our operating results also fluctuate due to our accounting practices (which are standard for the industry) which may cause us to recognize the production and marketing expenses in different periods than the recognition of related revenues, which may occur in later periods. For example, in accordance with generally accepted accounting principles and industry practice, 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. In addition, we amortize film and television programming costs using the “individual-film-forecast” method. Under this accounting method, we amortize film and television programming costs for each film or television program based on the following ratio:
Revenue earned by title in the current year-to-date period
Estimated total future revenues by title as of the beginning of the year
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, the comparability of our results may be affected by changes in accounting guidance or changes in our ownership of certain assets and businesses. Accordingly, our results of operations from year to year may not be directly comparable to prior reporting periods.
As a result of the foregoing and other factors, our 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 period.
We do not have long-term arrangements with many of our production or co-financing partners. We typically do not enter into long term production contracts with the creative producers of motion picture and television content that we produce, acquire or distribute. Moreover, we generally have certain derivative rights that provide us with distribution rights to, for example, prequels, sequels and remakes of certain content we produce, acquire or distribute. However, there is no guarantee that we will produce, acquire or distribute future content by any creative producer or co-financing partner, and a failure to do so could adversely affect our business, financial condition, operating results, liquidity and prospects.
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We rely on a few major retailers and distributors and the loss of any of those retailers or distributors could reduce our revenues and operating results. A small number of other retailers and distributors account for a material percentage of our revenues. We do not have long-term agreements with retailers. We cannot assure you that we will continue to maintain favorable relationships with our retailers and distributors or that they will not be adversely affected by economic conditions, includingas a result of the ongoing COVID-19 global pandemic and its effects. If any of these retailers or distributors reduces or cancels a significant order or becomes bankrupt, it could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
We depend on distributors that carry our Starz programming, and no assurance can be given that we will be able to maintain and renew these affiliation agreements on favorable terms or at all. Starz currently distributes programming through affiliation agreements with many distributors, including Altice, Amazon, AT&T, Charter, Comcast, Cox, DISH Network, Hulu and Verizon. These agreements are scheduled to expire at various dates through 2026. The largest distributors have significant leverage in their relationship with certain programmers, including Starz. Furthermore, Starz depends on a limited number of major global partners to distribute its content internationally.
The renewal negotiation process for affiliation agreements is typically lengthy. In certain cases, renewals are not agreed upon prior to the expiration of a given agreement, while the programming typically continues to be carried by the relevant distributor pursuant to the other terms and conditions in the affiliation agreement. We may be unable to obtain renewals with our current distributors on acceptable terms, if at all. We may also be unable to successfully negotiate affiliation agreements with new distributors to carry our programming. The failure to renew affiliation agreements on acceptable terms, or the failure to negotiate new affiliation agreements at all, in each case covering a material portion of multichannel television households, could result in a discontinuation of carriage, or could otherwise materially adversely affect our subscriber growth, revenue and earnings which could materially adversely affect our business, financial condition, operating results, liquidity and prospects.Moreover, given the limited number of global partners, the loss of one more of Starz global partners could materially adversely affect our international business, operating results, and growth prospects.
In some cases, if a distributor is acquired, the affiliation agreement of the acquiring distributor will govern following the acquisition. In those circumstances, the acquisition of a distributor that is party to affiliation agreements with us that are more favorable to us may adversely impact our business, financial condition, operating results, liquidity and prospects.
Increasing rates paid by distributors to other programmers may result in increased rates charged to their subscribers for their services, making it more costly for subscribers to purchase our STARZ services. The amounts paid by distributors to certain programming networks for the rights to carry broadcast networks and sports networks have increased substantially in recent years. As a result, distributors have passed on some of these increases to their subscribers. The rates that subscribers pay for programming from distributors continue to increase each year and these increases may impact our ability, as a premium subscription video provider, to increase or even maintain our subscriber levels and may adversely impact our revenue and earnings which could have a materially adverse effect on our business, financial condition, operating results, liquidity and prospects.
We depend on distributors to market Starz’s networks and other services, the lack of which may result in reduced customer demand. At times, certain of our distributors do not allow us to participate in cooperative marketing campaigns to market Starz’s networks and services. Our inability to participate in the marketing of our networks and other services may put us at a competitive disadvantage. Also, our distributors are often focused more on marketing their bundled service offerings (video, Internet and telephone) than premium video services. If our distributors do not sign up new subscribers to our networks, we may lose subscribers which would have a materially adverse effect on our business, financial condition, operating results, liquidity and prospects.
We must respond successfully to ongoing changes in the U.S. television industry and consumer viewing patterns to remain competitive. We derive revenues and profits from our Starz networks and the production and licensing of television programming to broadcast and cable networks and other premium pay television services. The U.S. television industry is continuing to evolve rapidly, with developments in technology leading to new methods for the distribution of video content and changes in when, where and how audiences consume video content. These changes pose risks to the traditional U.S. television industry including the disruption of the traditional television content distribution model by OTT services, which are increasing in number and some of which have significant and growing subscriber/user bases. Over the past few years, the number of subscribers to traditional services in the U.S. has declined each year. Developments in technology and new content delivery products and services have also led to an increasing amount of video content that is available through OTT services and consumers spending an increased amount of time viewing such content, as well as changes in consumers’ expectations regarding the availability and packaging of video content, their willingness to pay for access to such content, their perception of what quality entertainment is and how much it should cost, and the ease for a consumer to unsubscribe or switch. We are engaged in efforts to respond to and mitigate the risks from these changes, including launching the Starz service on these OTT services and on a direct-to-consumer basis and making the STARZ service available on an authenticated basis via our app as an additional benefit to paying traditional subscribers of our premium
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services. Growth in OTT service subscribers may be slower than the decline of service subscribers on traditional services in the U.S., and we may incur significant costs to implement our strategy and initiatives, and if we are not successful, our competitive position, businesses and results of operations could be adversely affected.
Our revenues and results of operations are vulnerable to currency fluctuations. We report our revenues and results of operations in U.S. dollars, but a portion of our revenue is earned outside of the U.S. Our currency exposure is primarily between Canadian dollars, British pound sterling, Euros and U.S. dollars. We cannot accurately predict the impact of future exchange rate fluctuations on revenues and operating margins. Moreover, we may experience currency exposure on distribution and production revenues and expenses from foreign countries. This could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
The directional guidance we provide from time to time is subject to several factors that we may not be successful in achieving. From time to time, we provide directional guidance for certain financial periods which depends on a number of factors that we may not be successful in achieving, including, but not limited to, the timing and commercial success of content that we distribute, which cannot be accurately predicted. In particular, underperformance at the box office of one or more motion pictures in any period (including because of early termination or even delayed theatrical distribution as a result of the ongoing COVID-19 global pandemic and its effects), may cause our revenue and earnings results for that period (and potentially, subsequent periods) to be less than anticipated, in some instances significantly. Accordingly, our 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 future periods. Management prepares directional guidance on the basis of available information at such time, and believes such estimates are prepared on a reasonable basis. However, such estimates should not be relied on as necessarily indicative of our actual financial results. Our inability to achieve directional guidance could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
A significant portion of our library revenues comes from a small number of titles, a portion of which we may be limited in our ability to exploit.
We depend on a limited number of titles in any given fiscal quarter for the majority of the revenues generated by our library. In addition, many of the titles in our library are not presently distributed and generate substantially no revenue. Additionally, our rights to the titles in our library vary; in some cases, we have only the right to distribute titles in certain media and territories for a limited term. If we cannot acquire new product and the rights to popular titles through production, distribution agreements, acquisitions, mergers, joint ventures or other strategic alliances, or renew expiring rights to titles generating a significant portion of our revenue on acceptable terms, any such failure could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
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, sale of assets, business combinations, or joint ventures intended to complement or expand our business. We may not realize the anticipated benefit from any of the transactions we pursue.
Regardless of whether we consummate any such transaction, the negotiation of a potential transaction and 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. Such transaction may pose challenges in the consolidation and integration of information technology, accounting systems, personnel and operations. We may also have difficulty managing the combined entity in the short term if we experience a significant loss of management personnel during the transition period after a significant acquisition. No assurance can be given that expansion or acquisition opportunities will be successful, completed on time, or that we will realize expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits. Any of the foregoing could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
We may seek claims against a seller for claims against us relating to any acquisition or business combination that theseller may not indemnify us for 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. 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 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 could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
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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 content, 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 or businesses. If we do not have access to such financing arrangements, and if other funds do not become available on terms acceptable to us, there could be a material adverse effect on our business, financial condition, operating results, liquidity and prospects. Further, concerns over the COVID-19 global pandemic has caused extreme volatility in financial and other capital markets and impacted the ability to access capital on favorable terms. As a result of the impacts of the COVID-19 global pandemic, we may be required to raise additional capital and such additional debt financing may not be available on commercially reasonable terms, if at all.
Our dispositions may not aid our future growth. If we determine to sell individual properties, libraries or other assets or businesses, we will benefit from the net proceeds realized from such sales. However, our revenues may suffer in the long term due to the disposition of a revenue generating asset, or the timing of such dispositions may be poor, causing us to fail to realize the full value of the disposed asset, all of which may diminish our ability to service our indebtedness and repay our notes and our other indebtedness at maturity. Furthermore, our future growth may be inhibited if the disposed asset contributed in a significant way to the diversification of our business platform.
Limitations on control of joint ventures may adversely impact our operations.
We hold our interests in certain businesses as a joint venture or in partnership with non-affiliated third parties. As a result of such arrangements, we may be unable to control the operations, strategies and financial decisions of such joint venture or partnership entities which could, in turn, result in limitations on our ability to implement strategies that we may favor and may limit our ability to transfer our interests. Consequently, any losses experienced by these entities could adversely impact our results of operations and the value of our investment.
Our success depends on attracting and retaining key personnel.
Our success depends upon the continued efforts, abilities and expertise of our executive teams and other key employees, including production, creative and technical personnel. Our success also depends on our ability to identify, attract, hire, train and retain such personnel. We have entered into employment agreements with top executive officers and production executives but do not currently have significant “key person” life insurance policies for any employee. Although it is standard in the industry to rely on employment agreements as a method of retaining the services of key employees, these agreements cannot assure us of the continued services of such employees. In addition, competition for the limited number of business, production and creative personnel necessary to create and distribute our entertainment content is intense and may grow in the future. We cannot assure you that we will be successful in identifying, attracting, hiring, training and retaining such personnel in the future, and our inability to do so could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
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 programming, which is unpredictable. Generally, the popularity of our programs depends on many factors, including the critical acclaim they receive, the format of their initial release, their talent, their genre and their specific subject matter, audience reaction, the quality and acceptance of motion pictures or television content 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. In addition, because a 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 assure you that our motion pictures and television programing 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. Additionally, we cannot assure you that any original programming content will appeal to our distributors and subscribers. The failure to achieve any of the foregoing could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
Our business depends on the appeal of our content to distributors and subscribers, which is difficult to predict. Our business depends in part upon viewer preferences and audience acceptance of Starz’s network programming. These factors are difficult to
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predict and are subject to influences beyond our control, such as the quality and appeal of competing programming, general economic conditions and the availability of other entertainment activities. We may not be able to anticipate and react effectively to shifts in tastes and interests in markets. A change in viewer preferences could cause Starz’s programming to decline in popularity, which could jeopardize renewal of affiliation agreements with distributors. In addition, our competitors may have more flexible programming arrangements, as well as greater amounts of available content, distribution and capital resources and may be able to react more quickly than we can to shifts in tastes and interests.
To an increasing extent, the success of our business depends on exclusive original programming and our ability to accurately predict how audiences will respond to our original programming. We must invest substantial amounts in the production and marketing of our original programming before we learn whether such content will reach anticipated audience acceptance levels. Because original programming often involves a greater degree of financial commitment, as compared to acquired programming that we license from third parties, and because our branding strategies depend significantly on a relatively small number of original series, a failure to anticipate viewer preferences for such series could be especially detrimental to our business.
In addition, theatrical feature films constitute a significant portion of the programming on our Starz networks. In general, the popularity of feature-film content on linear television is declining, due in part to the broad availability of such content through an increasing number of distribution platforms prior to our linear window. Should the popularity of feature-film programming suffer significant further declines, Starz may lose subscribership or be forced to rely more heavily on original programming, which could increase our costs.
If Starz’s programming does not gain the level of audience acceptance we expect, or if we are unable to maintain the popularity of Starz’s programming, we may have a diminished negotiating position when dealing with distributors, which could reduce our revenue and earnings. We cannot ensure that we will be able to maintain the success of any of Starz’s current programming, or generate sufficient demand and market acceptance for Starz’s new original programming. This could materially adversely impact our business, financial condition, operating results, liquidity and prospects.
Starz’s success depends upon the availability of programming that is adequate in quantity and quality at a reasonable cost, and we may be unable to secure or maintain such programming. Starz’s success depends upon the availability of quality programming, particularly original programming and films that is suitable for its target markets. While we produce some of Starz’s original programming, we obtain most of Starz’s programming (including some of Starz’s original series, films and other acquired programming) through agreements with third parties that have produced or control the rights to such programming. These agreements expire at varying times and may be terminated by the other party if we are not in compliance with their terms.
We compete with other programming services, including cable programming, national broadcast television, local broadcast television stations and SVOD to secure desired programming, the competition for which has increased as the number of programming services has increased. Increased competition may drive up talent and production costs and may force some programming services to commit to straight-to-series orders for programming instead of a pilot order. If we commit to straight-to-series orders and those series do not meet anticipated production or quality standards or are otherwise not accepted by audiences, revisions to the programming may be necessary, which could increase production costs. The increased financial commitment for a straight-to-series order also could increase the risks associated with such an order. Other programming services that are affiliated with programming sources such as movie or television studios or film libraries may have a competitive advantage over us in this area. Some of these competitors have exclusive contracts with motion picture studios or independent motion picture distributors or own film libraries.
We cannot assure you that we will ultimately be successful in negotiating renewals of Starz’s programming rights agreements or in negotiating adequate substitute agreements. In the event that these agreements expire or are terminated and are not replaced by programming content, including additional original programming, acceptable to Starz’s distributors and subscribers, it would have a materially adverse impact on our business, financial condition, operating results, liquidity and prospects.
Global economic turmoil and regional economic conditions in the U.S. could adversely affect our business. Global economic turmoil, such as that being created by the ongoing COVID-19 global pandemic and its effects, may cause a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default andbankruptcy, levels of intervention from the U.S. federal government and other foreign governments, decreased consumer confidence, overall slower economic activity and extreme volatility in credit, equity and fixed income markets. A decrease in economic activity in the U.S. or in other regions of the world in which we do business could adversely affect demand for our content, thus reducing our revenues and earnings. A decline in economic conditions could reduce performance of our theatrical, television and home entertainment releases. In addition, an increase in price levels generally could result in a shift in consumer demand away from the entertainment we offer, which could also adversely affect our revenues and, at the same time, increase our costs. For instance, lower household income and decreases
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in U.S. consumer discretionary spending, which is sensitive to general economic conditions, may affect cable television and other video service subscriptions, in particular with respect to digital programming packages on which our networks are typically carried and premium video programming packages and premium a la carte services on which our networks are typically carried. A reduction in spending may cause a decrease in subscribers to our networks, which could have a materially adverse impact on our business, financial condition, operating results, liquidity and prospects. Moreover, financial institution failures may cause us to incur increased expenses or make it more difficult to finance any future acquisitions, or engage in other financing activities. It is likely that the current outbreak or continued spread of COVID-19 will cause a global recession, which will further adversely affect our business, and such adverse effects may be material. In addition, the magnitude, duration and speed of the global pandemic is uncertain. We cannot guarantee that we will recover as rapidly as other industries, or that we will recover as rapidly as others within the industry. As a consequence, we cannot estimate the impact on our business, financial condition or near or longer-term financial or operational results with certainty.
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 content. 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 content could delay or halt our ongoing production activities, or could cause a delay or interruption in our release of new motion pictures and television content. A strike may result in increased costs and decreased revenue, which could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
Business interruptions could adversely affect our operations. Our operations are vulnerable to outages and interruptions due to fire, floods, power loss, telecommunications failures, pandemics such as COVID-19 and similar events beyond our control. Our headquarters are located in Southern California, which is subject to earthquakes. Although we have developed certain plans to respond in the event of a disaster, there can be no assurance that they will be effective in the event of a specific disaster. In the event of a short-term power outage, we have installed uninterrupted power source equipment designed to protect our equipment. A long-term power outage, however, could disrupt our operations. We have also experienced a disruption to our business as a result of the COVID-19 global pandemic which has suspended production of our programming. Although we currently carry business interruption insurance for potential losses (including earthquake-related losses), there can be no assurance that such insurance will be sufficient to compensate us for losses that may occur or that such insurance may continue to be available on affordable terms. Any losses or damages incurred by us could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
We face substantial competition in all aspects of our business.
We are smaller and less diversified than many of our competitors. Unlike us, an independent distributor and producer, most of the major U.S. studios are part of large diversified corporate groups with a variety of other operations that can provide both the means of distributing their products and stable sources of earnings that may allow them to better offset fluctuations in the financial performance of their motion picture and television operations. The major studios also 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. These resources may also give them an advantage in acquiring other businesses or assets, including film libraries, that we might also be interested in acquiring.
The motion picture industry is highly competitive. The number of motion pictures released by our competitors 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. The limited supply of motion picture screens compounds this product oversupply problem, which may be most pronounced during peak release times such as holidays, when theater attendance is expected to be highest. As a result of changes in the theatrical exhibition industry, including reorganizations and consolidations, and major studio releases occupying 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 entertainment and pay and free television, of our motion pictures may also decrease. Moreover, we cannot guarantee that we can release all of our films when they are otherwise scheduled due to production or other delays, or a change in the schedule of a major studio. 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 home entertainment industry is highly competitive. We compete with all of the major U.S. studios which distribute their theatrical, television and titles acquired from third parties on DVDs/Blu-ray discs and other media and have marketing budgets greater than ours. We not only compete for ultimate consumer sales, but also with these parties and independent home entertainment distributors for location and shelf space placement at retailers and other distributors. The quality and quantity of titles as well as
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the quality of our marketing programs determines how much shelf space we are able to garner at any given time as retailers and other distributors look to maximize sales.
We also compete with U.S. studios and other distributors that may have certain competitive advantages over us to acquire the rights to sell or rent DVDs/Blu-ray discs and other media. Our ability to license and produce quality content in sufficient quantities has a direct impact on our ability to acquire shelf space at retail locations and on websites. In addition, certain of our content is obtained through agreements with other parties that have produced or own the rights to such content, while other U.S studios may produce most of the content they distribute.
Our DVDs/Blu-ray discs sales and other media sales are also impacted by myriad choices consumers have to view entertainment content, including over-the-air broadcast television, cable television networks, online services, mobile services, radio, print media, motion picture theaters and other sources of information and entertainment. The increasing availability of content from these varying media outlets may reduce our ability to sell DVDs/ Blu-ray discs and other media in the future, particularly during difficult economic conditions.
We are subject to intense competition for marketing and carriage of our Starz networks. The subscription video programming industry is highly competitive. Our Starz networks compete with other programming networks and other video programming services for marketing and distribution by distributors. We face intense competition from other providers of programming networks for the right to be carried by a particular distributor and for the right to be carried by such distributor on a particular “tier” or in a particular “package” of service. Certain programming networks affiliated with broadcast networks like ABC, CBS, Fox or NBC or other programming networks affiliated with sports and certain general entertainment networks with strong viewer ratings have a competitive advantage over our networks in obtaining distribution through the “bundling” of carriage agreements for such programming networks with a distributor’s right to carry the affiliated broadcasting network. The inability of our programming networks to be carried by one or more distributors, or the inability of our programming networks to be placed on a particular tier or programming package could have a materially adverse effect on our business, financial condition, operating results, liquidity and prospects.
We must successfully respond to rapid technological changes and alternative forms of delivery or storage to remain competitive.
The entertainment industry continues to undergo significant developments as advances in technologies and new methods of product delivery and storage (including the emergence of alternative distribution platforms), and certain changes in consumer behavior driven by these developments emerge. New technologies affect the demand for our content, the manner in which our content is distributed to consumers, the sources and nature of competing content offerings and the time and manner in which consumers acquire and view our content. New technologies also may affect our ability to maintain or grow our business and may increase our capital expenditures. We and our distributors must adapt our businesses to shifting patterns of content consumption and changing consumer behavior and preferences through the adoption and exploitation of new technologies.
For instance, such changes may impact the revenue we are able to generate from traditional distribution methods by decreasing the viewership of our networks on systems of cable operators, satellite television providers and telecommunication companies, or by decreasing the number of households subscribing to services offered by those distributors. If we cannot successfully exploit these and other emerging technologies, our appeal to targeted audiences might decline which could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
Any extended inability to transmit Starz’s programming via satellite would result in lost revenue and couldresult in lost subscribers.
Our success is in the U.S. dependent upon our continued ability to transmit Starz’s programming to distributors through Starz’s satellite uplink facility. Starz has entered into long-term satellite transponder leases that expire in 2023 for carriage of the Starz networks’ programming. These leases provide for replacement transponders and/or replacement satellites, as applicable, throughout the term of the leases to ensure continued carriage of Starz programming in the event of transponder or satellite failures. Although we believe that we take reasonable and customary measures to ensure continued satellite transmission capability, termination or interruption of satellite transmissions may occur and could have a materially adverse effect on our business, financial condition, operating results, liquidity and prospects.
Despite Starz’s efforts to secure transponder capacity with long-term satellite transponder leases, there is a risk that when these leases expire, we may not be able to secure capacity on a transponder on the same or similar terms, if at all. This may result in an inability to transmit content and could result in significant lost revenue and lost subscribers and would have a materially adverse effect on our business, financial condition, operating results, liquidity and prospects.
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If Starz’s technology facilities fail or their operations are disrupted, our business also could be damaged.
Starz’s programming is transmitted from Starz’s uplink center in Englewood, Colorado. Starz uses this center for a variety of purposes, including signal processing, satellite uplinking, program editing, on-air promotions, creation of programming segments (i.e., interstitials) to fill short gaps between featured programs, quality control and live and recorded playback. Starz’s uplink center is equipped with backup generator power and other redundancies. However, like other facilities, this facility is subject to interruption from fire, lightning, adverse weather conditions and other natural causes. Equipment failure, employee misconduct or outside interference could also disrupt the facility’s services. Starz has made arrangements at a third-party facility to uplink Starz’s linear channels and services to Starz’s satellites in the event Starz is unable to do so from this facility. Additionally, Starz has direct fiber connectivity to certain of Starz’s distributors, which would allow continuous operation with respect to a significant segment of Starz’s subscriber base in the event of a satellite transmission interruption. Notwithstanding these precautions, any significant or prolonged interruption of operations at Starz’s facility, and any failure by Starz’s third-party facility to perform as intended, would have a materially adverse effect on our business, financial condition, operating results, liquidity and prospects.