LIONS GATE ENTERTAINMENT CORP /CN/ - FORM 10-Q - August 7, 2014

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________
Form 10-Q 
___________________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No.: 1-14880
___________________________________________________________
Lions Gate Entertainment Corp.
(Exact name of registrant as specified in its charter)
___________________________________________________________
British Columbia, Canada
 
N/A
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
 Identification No.)
250 Howe Street, 20th Floor
Vancouver, British Columbia V6C 3R8
and
2700 Colorado Avenue, Suite 200
Santa Monica, California 90404
(Address of principal executive offices)
___________________________________________________________
(877) 848-3866
(Registrant’s telephone number, including area code)
___________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
 
Accelerated filer o
 
Non accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨  No  ý
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Title of Each Class
 
Outstanding at August 1, 2014
Common Shares, no par value per share
 
137,094,417 shares




 


2

FORWARD-LOOKING STATEMENTS

This report includes statements that are, or may be deemed to be, “forward-looking statements” within the meaning of 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” found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on May 29, 2014, which risk factors are incorporated herein by reference, as updated by the risk factors found under Part II, Item 1A. "Risk Factors" herein. These risk factors should not be construed as exhaustive and should be read with the other cautionary statements and information in our Annual Report on Form 10-K, and this report.
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 substantial investment of capital required to produce and market films and television series, increased costs for producing and marketing feature 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, difficulties in integrating acquired businesses, technological changes and other trends affecting the entertainment industry, and the other risks and uncertainties discussed under Part I, Item 1A. “Risk Factors” found in our Annual Report on Form 10-K filed with the SEC on May 29, 2014, which risk factors are incorporated herein by reference, as updated by the risk factors found under Part II, 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.
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.


3

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
June 30,
2014
 
March 31,
2014
 
(Amounts in thousands,
except share amounts)
ASSETS
 
 
 
Cash and cash equivalents
$
50,372

 
$
25,692

Restricted cash
7,534

 
8,925

Accounts receivable, net of reserves for returns and allowances of $63,419 (March 31, 2014 - $106,680) and provision for doubtful accounts of $2,683 (March 31, 2014 - $4,876)
717,498

 
885,571

Investment in films and television programs, net
1,380,581

 
1,274,573

Property and equipment, net
15,092

 
14,552

Equity method investments
188,996

 
181,941

Goodwill
323,328

 
323,328

Other assets
67,396

 
71,067

Deferred tax assets
61,228

 
65,983

Total assets
$
2,812,025

 
$
2,851,632

LIABILITIES
 
 
 
Senior revolving credit facility
$
84,000

 
$
97,619

Senior secured second-priority notes
225,000

 
225,000

July 2013 7-Year Term Loan
222,842

 
222,753

Accounts payable and accrued liabilities
223,386

 
332,457

Participations and residuals
467,976

 
469,390

Film obligations and production loans
636,292

 
499,787

Convertible senior subordinated notes
133,255

 
131,788

Deferred revenue
283,482

 
288,300

Total liabilities
2,276,233

 
2,267,094

Commitments and contingencies

 

SHAREHOLDERS’ EQUITY
 
 
 
Common shares, no par value, 500,000,000 shares authorized, 137,657,820 shares issued (March 31, 2014 - 141,007,461 shares)
651,110

 
743,788

Accumulated deficit
(114,614
)
 
(157,875
)
Accumulated other comprehensive loss
(704
)
 
(1,375
)
Total shareholders’ equity
535,792

 
584,538

Total liabilities and shareholders’ equity
$
2,812,025

 
$
2,851,632

See accompanying notes.

4

LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended
 
June 30,
 
2014
 
2013
 
(Amounts in thousands, except per share amounts)
Revenues
$
449,383

 
$
569,728

Expenses:
 
 
 
Direct operating
238,873

 
306,445

Distribution and marketing
97,321

 
171,460

General and administration
64,079

 
56,770

Depreciation and amortization
1,346

 
1,625

Total expenses
401,619

 
536,300

Operating income
47,764

 
33,428

Other expenses (income):
 
 
 
Interest expense
 
 
 
Cash interest
9,442

 
16,273

Amortization of debt discount and deferred financing costs
3,530

 
4,541

Total interest expense
12,972

 
20,814

Interest and other income
(1,018
)
 
(1,496
)
Loss on extinguishment of debt
—

 
466

Total other expenses, net
11,954

 
19,784

Income before equity interests and income taxes
35,810

 
13,644

Equity interests income
18,210

 
7,977

Income before income taxes
54,020

 
21,621

Income tax provision
10,759

 
8,004

Net income
$
43,261

 
$
13,617

 
 
 
 
Basic net income per common share
$
0.31

 
$
0.10

Diluted net income per common share
$
0.30

 
$
0.10

 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
Basic
138,509

 
136,189

Diluted
152,210

 
140,745

 
 
 
 
Dividends declared per common share
$
0.05

 
$
—

See accompanying notes.

5

LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended
 
June 30,
 
2014
 
2013
 
(Amounts in thousands)
Net income
$
43,261

 
$
13,617

Foreign currency translation adjustments
1,482

 
549

Net unrealized loss on foreign exchange contracts, net of tax
(811
)
 
(336
)
Comprehensive income
$
43,932

 
$
13,830

See accompanying notes.


6

LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY



 
Common Shares
 
Accumulated
Deficit
 
Accumulated
 Other
Comprehensive
Income (Loss)
 
 
 
Number
 
Amount
 
 
 
Total
 
(Amounts in thousands, except share amounts)
Balance at March 31, 2014
141,007,461

 
$
743,788

 
$
(157,875
)
 
$
(1,375
)
 
$
584,538

Exercise of stock options
32,522

 
446

 
 
 
 
 
446

Share-based compensation, net of withholding tax obligations of $10,247
428,001

 
11,791

 
 
 
 
 
11,791

Conversion of October 2004 2.9375% Notes
9,846

 
109

 
 
 
 
 
109

Issuance of common shares to directors for services
10,646

 
276

 
 
 
 
 
276

Repurchase of common shares, no par value
(3,830,656
)
 
(101,190
)
 
 
 
 
 
(101,190
)
Dividends declared
 
 
(6,881
)
 


 
 
 
(6,881
)
Excess tax benefits on equity-based compensation awards
 
 
2,771

 
 
 
 
 
2,771

Net income
 
 
 
 
43,261

 
 
 
43,261

Foreign currency translation adjustments
 
 
 
 
 
 
1,482

 
1,482

Net unrealized loss on foreign exchange contracts, net of tax
 
 
 
 
 
 
(811
)
 
(811
)
Balance at June 30, 2014
137,657,820

 
$
651,110

 
$
(114,614
)
 
$
(704
)
 
$
535,792

See accompanying notes.

7


LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
 
June 30,
 
2014
 
2013
 
(Amounts in thousands)
Operating Activities:
 
 
 
Net income
$
43,261

 
$
13,617

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
1,346

 
1,625

Amortization of films and television programs
158,808

 
219,364

Amortization of debt discount and deferred financing costs
3,530

 
4,541

Non-cash share-based compensation
16,537

 
13,220

Distribution from equity method investee
6,230

 
9,849

Loss on extinguishment of debt
—

 
466

Equity interests income
(18,210
)
 
(7,977
)
Deferred income taxes
5,105

 
2,063

Changes in operating assets and liabilities:
 
 
 
Restricted cash
1,391

 
1,662

Accounts receivable, net
169,514

 
(32,516
)
Investment in films and television programs
(263,851
)
 
(160,933
)
Other assets
382

 
(1,222
)
Accounts payable and accrued liabilities
(95,666
)
 
(33,584
)
Participations and residuals
(1,539
)
 
(17,512
)
Film obligations
(34,589
)
 
(21,370
)
Deferred revenue
(4,883
)
 
(20,582
)
Net Cash Flows Used In Operating Activities
(12,634
)
 
(29,289
)
Investing Activities:
 
 
 
Proceeds from the sale of equity method investees
14,575

 
9,000

Investment in equity method investees
(9,650
)
 
(3,750
)
Distributions from equity method investee in excess of earnings
—

 
4,169

Purchases of property and equipment
(1,427
)
 
(1,428
)
Net Cash Flows Provided By Investing Activities
3,498

 
7,991

Financing Activities:
 
 
 
Senior revolving credit facility - borrowings
170,000

 
173,000

Senior revolving credit facility - repayments
(183,619
)
 
(172,000
)
Senior secured second-priority notes - repurchases
—

 
(4,280
)
Convertible senior subordinated notes - borrowings
—

 
60,000

Convertible senior subordinated notes - repurchases
(16
)
 
—

Production loans - borrowings
207,953

 
108,605

Production loans - repayments
(36,859
)
 
(82,292
)
Pennsylvania Regional Center credit facility - repayments
—

 
(65,000
)
Repurchase of common shares
(109,529
)
 
—

Dividends paid
(7,066
)
 
—

Excess tax benefits on equity-based compensation awards
2,771

 
—

Exercise of stock options
406

 
543

Tax withholding required on equity awards
(10,247
)
 
(9,019
)
Net Cash Flows Provided By Financing Activities
33,794

 
9,557

Net Change In Cash And Cash Equivalents
24,658

 
(11,741
)
Foreign Exchange Effects on Cash
22

 
397

Cash and Cash Equivalents - Beginning Of Period
25,692

 
62,363

Cash and Cash Equivalents - End Of Period
$
50,372

 
$
51,019

See accompanying notes.

8


LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. General
Nature of Operations
Lions Gate Entertainment Corp. (the “Company,” “Lionsgate,” “we,” “us” or “our”) is a leading global entertainment company with a strong and diversified presence in motion picture production and distribution, television programming and syndication, home entertainment, family entertainment, digital distribution, new channel platforms and international distribution and sales.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Lionsgate and all of its majority-owned and controlled subsidiaries.
The unaudited condensed consolidated financial statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to quarterly report on Form 10-Q under the Exchange Act, and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these unaudited condensed consolidated financial statements. Operating results for the three months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2015. The balance sheet at March 31, 2014 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read together with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2014.
Certain amounts presented in prior years have been reclassified to conform to the current year’s presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The most significant estimates made by management in the preparation of the financial statements relate to ultimate revenue and costs for investment in films and television programs; estimates of sales returns and other allowances and provisions for doubtful accounts; fair value of equity-based compensation; fair value of assets and liabilities for allocation of the purchase price of companies acquired; income taxes and accruals for contingent liabilities; and impairment assessments for investment in films and television programs, property and equipment, equity investments, goodwill and intangible assets. Actual results could differ from such estimates.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board ("FASB") issued an accounting standard update relating to the presentation of unrecognized tax benefits. The accounting update requires companies to present a deferred tax asset net of related unrecognized tax benefits if there is a net operating loss or other tax carryforwards that would apply in settlement of the uncertain tax position. To the extent that an uncertain tax position would not be settled through a reduction of a net operating loss or other tax carryforwards, the unrecognized tax benefit will be presented as a liability. The Company has adopted the new guidance effective April 1, 2014, with no material impact on its consolidated financial statements.
In May 2014, the FASB issued an accounting standard update relating to the recognition of revenue from contracts with customers, which will supersede most current U.S. GAAP revenue recognition guidance, including industry-specific guidance. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance will be effective for the Company's fiscal year beginning April 1, 2017, and can be applied either retrospectively or under a cumulative-effect transition method. The Company is currently evaluating the impact that the adoption of this new guidance will have on its consolidated financial statements.

9
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




2. Investment in Films and Television Programs
 
June 30,
2014
 
March 31,
2014
 
(Amounts in thousands)
Motion Pictures Segment - Theatrical and Non-Theatrical Films
 
 
 
Released, net of accumulated amortization
$
454,356

 
$
509,831

Acquired libraries, net of accumulated amortization
13,022

 
14,329

Completed and not released
50,756

 
50,785

In progress
466,155

 
351,047

In development
27,784

 
22,336

Product inventory
27,332

 
31,248

 
1,039,405

 
979,576

Television Production Segment - Direct-to-Television Programs
 
 
 
Released, net of accumulated amortization
224,212

 
212,929

In progress
111,186

 
76,459

In development
5,778

 
5,609

 
341,176

 
294,997

 
$
1,380,581

 
$
1,274,573

The following table sets forth acquired libraries that represent titles released three years prior to the date of acquisition. These libraries are being amortized over their expected revenue stream from the acquisition date over a period up to 20 years:
 
 
 
 
Total
Amortization
Period
 
Remaining
Amortization
Period
 
Unamortized Costs
Acquired Library
 
Acquisition Date
 
 
 
June 30,
2014
 
March 31,
2014
 
 
 
 
(In years)
 
(Amounts in thousands)
Artisan Entertainment
December 2003
 
20.00
 
9.50
 
$
9,261

 
$
10,236

Summit Entertainment
January 2012
 
20.00
 
17.50
 
3,761

 
4,093

Total acquired libraries
 
 
 
 
 
 
$
13,022

 
$
14,329

The Company expects approximately 47% of completed films and television programs, net of accumulated amortization, will be amortized during the one-year period ending June 30, 2015. Additionally, the Company expects approximately 81% of completed and released films and television programs, net of accumulated amortization and excluding acquired libraries, will be amortized during the three-year period ending June 30, 2017.

3. Equity Method Investments
The carrying amount of significant equity method investments at June 30, 2014 and March 31, 2014 were as follows:
 
 
June 30,
2014
 
 
 
 
Equity Method Investee
Ownership
Percentage
 
June 30,
2014
 
March 31,
2014
 
 
 
(Amounts in thousands)
EPIX
31.2%
 
$
81,036

 
$
78,758

TVGN
50.0%
 
91,573

 
86,298

Other equity method investments (1)
Various
 
16,387

 
16,885

 
 
 
$
188,996

 
$
181,941


10
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Equity interests in equity method investments for the three months ended June 30, 2014 and 2013 were as follows (income (loss)):
 
 
Three Months Ended
 
June 30,
Equity Method Investee
2014
 
2013
 
(Amounts in thousands)
EPIX
$
8,508

 
$
6,741

TVGN
(2,225
)
 
2,864

Other equity method investments (1)
11,927

 
(1,628
)
 
$
18,210

 
$
7,977

_________________________
(1)The Company records its share of the net income or loss of other equity method investments on a one quarter lag and, accordingly, during the three months ended June 30, 2014 and 2013, the Company recorded its share of the income or loss generated by these entities for the three months ended March 31, 2014 and 2013, respectively. On April 14, 2014, the Company sold all of its 34.5% interest in FEARnet. The sales price was approximately $14.6 million, net of a working capital adjustment. The Company has recorded a gain on the sale of $11.4 million within equity interest income in the three months ended June 30, 2014. As a result of this transaction, the Company's equity interest in FEARnet has been reduced to zero as of June 30, 2014.
The Company licenses certain of its theatrical releases and other films and television programs to EPIX and TVGN. A portion of the profits of these licenses reflecting the Company's ownership share in the venture are eliminated through an adjustment to the equity interest income (loss) of the venture. These profits are recognized as they are realized by the equity method investee through the amortization of the related asset, recorded on the equity method investee's balance sheet, over the license period.
Distributions from equity method investees are recorded as a reduction of the Company's investment. Distributions received up to the Company's interest in the investee's retained earnings are considered returns on investments and are classified within cash flows from operating activities in the statement of cash flows. Distributions from equity method investments in excess of the Company's interest in the investee's retained earnings are considered returns of investments and are classified within cash flows provided by investing activities in the statement of cash flows.
EPIX. In April 2008, the Company formed a joint venture with Viacom, its Paramount Pictures unit and Metro-Goldwyn-Mayer Studios to create a premium television channel and subscription video-on-demand service named “EPIX”. The Company invested $80.4 million through September 30, 2010, and no additional amounts have been funded since. During the three months ended June 30, 2014 and 2013, the Company received distributions from EPIX of $6.2 million and $14.0 million, respectively.
EPIX Financial Information:
The following table presents summarized balance sheet data as of June 30, 2014 and March 31, 2014 for EPIX:
 
 
June 30,
2014
 
March 31,
2014
 
(Amounts in thousands)
Current assets
$
183,748

 
$
184,471

Non-current assets
$
251,669

 
$
247,231

Current liabilities
$
121,262

 
$
126,217

Non-current liabilities
$
10,336

 
$
9,459

The following table presents the summarized statement of operations for the three months ended June 30, 2014 and 2013 for EPIX and a reconciliation of the net income reported by EPIX to equity interest income recorded by the Company:

11
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



 
Three Months Ended
 
June 30,
 
2014
 
2013
 
(Amounts in thousands)
Revenues
$
91,449

 
$
85,197

Expenses:
 
 
 
Operating expenses
57,506

 
62,142

Selling, general and administrative expenses
5,755

 
5,630

Operating income
28,188

 
17,425

Interest and other income (expense)
(394
)
 
430

Net income
$
27,794

 
$
17,855

Reconciliation of net income reported by EPIX to equity interest income:
 
 
 
Net income reported by EPIX
$
27,794

 
$
17,855

Ownership interest in EPIX
31.15
%
 
31.15
%
The Company's share of net income
8,658

 
5,562

Eliminations of the Company’s share of profits on licensing sales to EPIX (1)
(1,867
)
 
(3,521
)
Realization of the Company’s share of profits on licensing sales to EPIX (2)
1,717

 
4,700

Total equity interest income recorded
$
8,508

 
$
6,741

__________________
(1)
Represents the elimination of the gross profit recognized by the Company on licensing sales to EPIX in proportion to the Company's ownership interest in EPIX. The amount of intra-entity profit is calculated as the total gross profit recognized on a title by title basis multiplied by the Company's percentage ownership of EPIX. The table below sets forth the revenues and gross profits recognized by the Company and the calculation of the profit eliminated for the three months ended June 30, 2014 and 2013:
 
Three Months Ended
 
June 30,
 
2014
 
2013
 
(Amounts in thousands)
Revenue recognized on licensing sales to EPIX
$
6,937

 
$
14,804

 
 
 
 
Gross profit on licensing sales to EPIX
$
5,995

 
$
11,304

Ownership interest in EPIX
31.15
%
 
31.15
%
Elimination of the Company's share of profits on licensing sales to EPIX
$
1,867

 
$
3,521

(2)
Represents the realization of a portion of the profits previously eliminated. This profit remains eliminated until realized by EPIX. EPIX initially records the license fee for the title as inventory on its balance sheet and amortizes the inventory over the license period. Accordingly, the profit is realized as the inventory on EPIX's books is amortized. The profit amount realized is calculated by multiplying the percentage of the EPIX inventory amortized in the period reported by EPIX, by the amount of profit initially eliminated, on a title by title basis.
TVGN. The Company’s investment interest in TVGN consists of an equity investment in its common stock units and mandatorily redeemable preferred stock units. The Company has determined that it is not the primary beneficiary of TVGN because the power to direct the activities that most significantly impact the economic performance of TVGN is shared with the other 50% owner of TVGN. Accordingly, the Company's interest in TVGN is being accounted for under the equity method of accounting. During the three months ended June 30, 2014, the Company contributed $7.5 million to TVGN.
The mandatorily redeemable preferred stock units carry a dividend rate of 10% compounded annually and are mandatorily redeemable in May 2019 at the stated value plus the dividend return and any additional capital contributions less previous distributions. The mandatorily redeemable preferred stock units were initially recorded based on their estimated fair value, as determined using an option pricing model. The mandatorily redeemable preferred stock units and the 10% dividend are being

12
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



accreted up to their redemption amount over the ten-year period to the redemption date, which is recorded as income within equity interest.
On May 31, 2013, the Company sold its 50% interest in TVGuide.com, a wholly-owned subsidiary of TVGN, to a subsidiary of CBS Corporation. The Company recorded a gain in the three months ended June 30, 2013 of $4.0 million. As a result of the transaction, TVGuide.com is considered a discontinued operation by TVGN, and accordingly, the revenues and expenses of TVGuide.com prior to the transaction for all periods presented, are reflected net within the discontinued operations section of the summarized statement of operations for TVGN shown below.
TVGN Financial Information:
The following table presents summarized balance sheet data as of June 30, 2014 and March 31, 2014 for TVGN:
 
June 30,
2014
 
March 31,
2014
 
(Amounts in thousands)
Current assets
$
32,389

 
$
27,150

Non-current assets
$
193,859

 
$
196,011

Current liabilities
$
31,256

 
$
30,653

Non-current liabilities
$
8,791

 
$
12,334

Redeemable preferred stock
$
346,637

 
$
325,204

The following table presents the summarized statement of operations for the three months ended June 30, 2014 and 2013 for TVGN and a reconciliation of the net loss reported by TVGN to equity interest income (loss) recorded by the Company:
 
 
Three Months Ended
 
June 30,
 
2014
 
2013
 
(Amounts in thousands)
Revenues
$
18,828

 
$
16,792

Expenses:
 
 
 
Cost of services
8,490

 
7,246

Selling, marketing, and general and administration
12,471

 
9,728

Depreciation and amortization
1,997

 
2,008

Operating loss
(4,130
)
 
(2,190
)
Other income
110

 
(1,376
)
Interest expense, net
210

 
347

Accretion of redeemable preferred stock units (1)
10,932

 
9,308

Total interest expense, net
11,252

 
8,279

Loss from continuing operations
$
(15,382
)
 
$
(10,469
)
Loss from discontinued operations
—

 
(1,114
)
Net loss
$
(15,382
)
 
$
(11,583
)
Reconciliation of net loss reported by TVGN to equity interest loss:
 
 
 
Net loss reported by TVGN
$
(15,382
)
 
$
(11,583
)
Ownership interest in TVGN
50
%
 
50
%
The Company's share of net loss
(7,691
)
 
(5,792
)
Gain on sale of the Company's 50% share of TVGuide.com (2)
—

 
3,960

Accretion of dividend and interest income on redeemable preferred stock units (1)
5,466

 
4,654

Realization of the Company’s share of profits on licensing sales to TVGN
—

 
42

Total equity interest income (loss) recorded
$
(2,225
)
 
$
2,864

 ___________________

13
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



(1)
Accretion of mandatorily redeemable preferred stock units represents TVGN’s 10% dividend and the amortization of discount on its mandatorily redeemable preferred stock units held by the Company and the other interest holder. The Company recorded its share of this expense as income from the accretion of dividend and discount on mandatorily redeemable preferred stock units within equity interest income (loss).
(2)
Represents the gain on sale of the Company's 50% interest in TVGuide.com.

Other Equity Method Investments
Break Media and Defy Media (together the "Defy Media Group"). Break Media was a multi-platform digital media company and a leader in male-targeted content creation and distribution. In May 2013, the Company contributed $0.8 million to Break Media and combined with the losses recorded for the nine months ended December 31, 2013, reduced the investment in Break Media to zero as of December 31, 2013. In October 2013, the assets of Break Media were merged with Alloy Digital, a multi-platform digital media company with a strong presence in the youth market, to create a newly formed company, Defy Media. Break Media owns a 38% interest in Defy Media. In addition, Lions Gate invested $10 million in Defy Media in exchange for certain preferred units, representing an interest in Defy Media of approximately 3.5%. The Company's effective economic interest in Defy Media through its investment in Break Media and its direct investment in Defy Media is approximately 16.1%. The Company is accounting for its investment in Defy Media, a limited liability company, under the equity method of accounting due to the Company's board representation that provides significant influence over the investee.
Roadside Attractions. Roadside Attractions is an independent theatrical distribution company. The Company owns a 43.0% interest in Roadside Attractions.
Pantelion Films. Pantelion Films is a joint venture with Videocine, an affiliate of Televisa, which produces, acquires and distributes a slate of English and Spanish language feature films that target Hispanic moviegoers in the U.S. The Company owns a 49.0% interest in Pantelion Films.
MovieFriends. MovieFriends is a theatrical movie discovery service. The Company made an initial investment of $2.2 million in MovieFriends during the three months ended June 30, 2014. The Company owns a 12.3% interest in MovieFriends. The Company is accounting for its investment in MovieFriends, a limited liability company, under the equity method of accounting due to the Company's board representation that provides significant influence over the investee.


4. Other Assets
The composition of the Company’s other assets is as follows as of June 30, 2014 and March 31, 2014:
 
 
June 30,
2014
 
March 31,
2014
 
(Amounts in thousands)
Deferred financing costs, net of accumulated amortization
$
32,678

 
$
34,722

Prepaid expenses and other
32,173

 
33,347

Finite-lived intangible assets
2,545

 
2,998

 
$
67,396

 
$
71,067

Deferred Financing Costs. Deferred financing costs primarily include costs incurred in connection with the Company's various debt issuances (see Note 5).
Prepaid Expenses and Other. Prepaid expenses and other primarily include prepaid expenses and security deposits.
Finite-lived Intangible Assets. Finite-lived intangibles consist primarily of sales agency relationships and trademarks.


14
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



5. Corporate Debt

The total carrying values of corporate debt of the Company, excluding film obligations and production loans, were as follows as of June 30, 2014 and March 31, 2014:
 
June 30, 2014
 
March 31, 2014
 
(Amounts in thousands)
Senior revolving credit facility
$
84,000

 
$
97,619

5.25% Senior Notes
225,000

 
225,000

July 2013 7-Year Term Loan, net of unamortized discount of $2,158 (March 31, 2014 - $2,247)
222,842

 
222,753

Convertible senior subordinated notes, net of unamortized discount of $8,805 (March 31, 2014 - $10,397)
133,255

 
131,788

 
$
665,097

 
$
677,160

The following table sets forth future annual contractual principal payment commitments of corporate debt as of June 30, 2014:
 
 
 
Conversion Price Per Share
 
Maturity Date or Next Holder Redemption Date (1)
 
Year Ended March 31,
Debt Type
 
 
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
 
 
 
 
 
 
(Amounts in thousands)
Senior revolving credit facility
 
N/A
 
September 2017
 
$
—

 
$
—

 
$
—

 
$
84,000

 
$
—

 
$
—

 
$
84,000

5.25% Senior Notes
 
N/A
 
August 2018
 
—

 
—

 
—

 
—

 
225,000

 
—

 
225,000

July 2013 7-Year Term Loan
 
N/A
 
July 2020
 
—

 
—

 
—

 
—

 
—

 
225,000

 
225,000

Principal amounts of convertible senior subordinated notes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
April 2009 3.625% Notes
 
$8.21
 
March 2015
 
40,210

 
—

 
—

 
—

 
—

 
—

 
40,210

January 2012 4.00% Notes
 
$10.44
 
January 2017
 
—

 
—

 
41,850

 
—

 
—

 
—

 
41,850

April 2013 1.25% Notes
 
$29.84
 
April 2018
 
—

 
—

 
—

 
—

 
60,000

 
—

 
60,000

 
 
 
 
 
 
$
40,210

 
$
—

 
$
41,850

 
$
84,000

 
$
285,000

 
$
225,000

 
676,060

Less aggregate unamortized discount
 
 
 
 
 
 
 
 
 
 
 
 
 
(10,963
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
665,097

(1)
The future repayment dates of the convertible senior subordinated notes represent the next redemption date by holders for each series of notes respectively, as described below.

Senior Revolving Credit Facility
Availability of Funds. At June 30, 2014, there was $715.9 million available (March 31, 2014 — $702.3 million) under the senior revolving credit facility. The senior revolving credit facility provides for borrowings and letters of credit up to an aggregate of $800 million. The availability of funds is limited by a borrowing base and also reduced by outstanding letters of credit which amounted to less than $0.1 million at June 30, 2014 (March 31, 2014 — $0.1 million).
Maturity Date. The senior revolving credit facility expires September 27, 2017.
Interest. Interest is payable at an alternative base rate, as defined, plus 1.5%, or LIBOR plus 2.5% as designated by the Company. As of June 30, 2014, the senior revolving credit facility bore interest of 2.5% over the LIBOR rate (effective interest rate of 2.66% and 2.65% on borrowings outstanding as of June 30, 2014 and March 31, 2014, respectively).

15
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Commitment Fee. The Company is required to pay a quarterly commitment fee of 0.375% to 0.5% per annum, depending on the average balance of borrowings outstanding during the period, on the total senior revolving credit facility of $800 million less the amount drawn.
Security. Obligations under the senior revolving credit facility are secured by collateral (as defined in the credit agreement) granted by the Company and certain subsidiaries of the Company, as well as a pledge of equity interests in certain of the Company’s subsidiaries.
Covenants. The senior revolving credit facility contains a number of covenants that, among other things, require the Company to satisfy certain financial covenants and restrict the ability of the Company to incur additional debt, pay dividends, make certain investments and acquisitions, repurchase its stock, prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of its business, enter into sale-leaseback transactions, transfer and sell material assets and merge or consolidate. As of June 30, 2014, the Company was in compliance with all applicable covenants.

Change in Control. Under the senior revolving credit facility, the Company may also be subject to an event of default upon a change in control (as defined in the credit agreement) which, among other things, includes a person or group acquiring ownership or control in excess of 50% of the Company’s common shares.

5.25% Senior Notes and July 2013 7-Year Term Loan

In July 2013, contemporaneous with the redemption of the 10.25% Senior Notes discussed below, Lions Gate Entertainment Corp. issued $225.0 million aggregate principal amount of 5.25% Senior Secured Second-Priority Notes (the "5.25% Senior Notes"), and entered into a seven-year term loan (the "July 2013 7-Year Term Loan"), for an aggregate amount of $222.5 million, net of an original issue discount of $2.5 million (collectively, the "New Issuances"). Transaction costs of $4.2 million relating to these borrowings were capitalized as deferred financing costs and are being amortized to interest expense using the effective interest method over the terms of the respective borrowings. Transaction costs of $2.6 million relating to the portion of these borrowings deemed to be a modification of terms with creditors participating in both the New Issuances and the 10.25% Senior Notes redemption were expensed as an early extinguishment of debt in the quarter ended September 30, 2013.

Interest:
(i)
5.25% Senior Notes: Interest is payable semi-annually on February 1 and August 1 of each year at a rate of 5.25% per year, and commenced on February 1, 2014.
(ii)
July 2013 7-Year Term Loan: Bears interest by reference to a base rate or the LIBOR rate, plus an applicable margin of 3.00% or 4.00%, respectively. The base rate is subject to a floor of 2.00%, and the LIBOR rate is subject to a floor of 1.00%. In the case of LIBOR loans, interest is paid according to the respective LIBOR maturity, and in the case of base rate loans, interest is paid quarterly on the last business day of the quarter. The effective interest rate on borrowings outstanding as of June 30, 2014 was approximately 5.00% (March 31, 2014 - 5.00%).

Maturity:
(i)
5.25% Senior Notes: August 1, 2018
(ii)
July 2013 7-Year Term Loan: July 19, 2020

Guarantees. The respective borrowings are guaranteed by all of the restricted subsidiaries of the Company that guarantee any material indebtedness of the Company or any other guarantor, subject, in the case of certain special purpose producers, to receipt of certain consents.

Security Interest and Ranking. The respective borrowings and the guarantees are secured by second-priority liens on substantially all of the Company’s and the guarantors’ tangible and intangible personal property, subject to certain exceptions and permitted liens. The 5.25% Senior Notes rank equally in right of payment with all of the Company’s existing and future debt that is not subordinated in right of payment to the 5.25% Senior Notes and July 2013 7-Year Term Loan, including the Company’s existing convertible senior subordinated notes. The respective borrowings are structurally subordinated to all existing and future liabilities (including trade payables) of the subsidiaries that do not guarantee the 5.25% Senior Notes and July 2013 7-Year Term Loan.
 
Optional Redemption or Prepayment:
(i)
5.25% Senior Notes: Redeemable by the Company, in whole or in part, at a price equal to 100% of the principal amount, plus the Applicable Premium, as defined in the indenture governing the 5.25% Senior Notes, plus accrued

16
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



and unpaid interest, if any, to the date of redemption. The Applicable Premium amounts to the greater of (i) 1.0% of the principal amount redeemed and (ii) the excess of the present value of the principal amount of the notes redeemed plus interest through the maturity date over the principal amount of the notes redeemed on the redemption date.
(ii)
July 2013 7-Year Term Loan: The Company may voluntarily prepay at any time, provided that if prepaid (i) on or before July 19, 2015, the Company shall pay to the lenders a prepayment premium of 2.0% on the principal amount prepaid; (ii) after July 19, 2015 and on or before July 19, 2016, the Company shall pay to the lenders a prepayment premium of 1.0% on the principal amount prepaid; and (iii) after July 19, 2016, no prepayment premium shall be payable.
 
Change of Control. The occurrence of a change of control will be a triggering event requiring the Company to offer to purchase from holders some or all of the 5.25% Senior Notes, or prepay some or all of the July 2013 7-Year Term Loan, at a price equal to 101% of the principal amount, plus accrued and unpaid interest, if any, to the date of purchase or prepayment. In addition, certain asset dispositions will be triggering events that may require the Company to use the excess proceeds from such dispositions to make an offer to purchase the 5.25% Senior Notes, or prepay the July 2013 7-Year Term Loan, at 100% of their principal amount, plus accrued and unpaid interest, if any to the date of purchase or prepayment.

Covenants. The 5.25% Senior Notes and July 2013 7-Year Term Loan contain certain restrictions and covenants that, subject to certain exceptions, limit the Company’s ability to incur additional indebtedness, pay dividends or repurchase the Company’s common shares, make certain loans or investments, and sell or otherwise dispose of certain assets subject to certain conditions, among other limitations. As of June 30, 2014, the Company was in compliance with all applicable covenants.

10.25% Senior Notes
In June 2013, Lions Gate Entertainment, Inc. ("LGEI"), the Company's wholly-owned subsidiary, paid $4.3 million to repurchase $4.0 million of aggregate principal amount (carrying value - $4.0 million) of the 10.25% Senior Secured Second-Priority Notes (the "10.25% Senior Notes"). The Company recorded a loss on extinguishment in the quarter ended June 30, 2013 of $0.5 million, which included $0.2 million of deferred financing costs written off.

In July 2013, the Company called for early redemption of the $432.0 million remaining outstanding principal amount of the 10.25% Senior Notes. The 10.25% Senior Notes were due November 1, 2016, but were redeemable by the Company at any time prior to November 1, 2013 at a redemption price of 100% of the principal amount plus the Applicable Premium, as defined in the indenture, and accrued and unpaid interest to the date of redemption. In July 2013, the proceeds from the issuance of the 5.25% Senior Notes and the July 2013 7-Year Term Loan discussed above, whose principal amount collectively totaled $450.0 million, together with cash on hand and borrowings under the Company's senior revolving credit facility, were used to fund the discharge of the 10.25% Senior Notes. In conjunction with the early redemption of the 10.25% Senior Notes, the Company paid $34.3 million, representing the present value of interest through the first call date of November 1, 2013 and related call premium pursuant to the terms of the indenture governing the 10.25% Senior Notes. This, along with $19.8 million of deferred financing costs and unamortized debt discount related to the redeemed notes, will be amortized over the life of the New Issuances to the extent deemed to be a modification of terms with creditors participating in both the New Issuances and the 10.25% Senior Notes redemption. The remaining amount of those costs plus certain New Issuance costs (as discussed above) amounting to $35.9 million in aggregate was expensed as an early extinguishment of debt in the quarter ended September 30, 2013.


17
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Convertible Senior Subordinated Notes
Outstanding Amount. The following table sets forth the convertible senior subordinated notes outstanding at June 30, 2014 and March 31, 2014:
 
 
 
Conversion Price Per Share as of June 30, 2014
 
June 30, 2014
 
March 31, 2014
 
 
 
Principal
 
Unamortized
Discount
 
Net Carrying
Amount
 
Principal
 
Unamortized
Discount
 
Net Carrying
Amount
 
 
 
 
(Amounts in thousands)
Convertible Senior Subordinated Notes
 
 
 
 
 
 
 
 
 
 
 
 
 
 
October 2004 2.9375% Notes (1)
 
 N/A
 
$
—

 
$
—

 
$
—

 
$
115

 
$
—

 
$
115

April 2009 3.625% Notes (1)
 
$8.21
 
40,210

 
(3,472
)
 
36,738

 
40,220

 
(4,605
)
 
35,615

January 2012 4.00% Notes (1)
 
$10.44
 
41,850

 
(5,333
)
 
36,517

 
41,850

 
(5,792
)
 
36,058

April 2013 1.25% Notes (2)
 
$29.84
 
60,000

 
—

 
60,000

 
60,000

 
—

 
60,000

 
 
 
 
$
142,060

 
$
(8,805
)
 
$
133,255

 
$
142,185

 
$
(10,397
)
 
$
131,788

________________
(1)
The convertible senior subordinated notes provide, with the exception of the 1.25% Convertible Senior Subordinated Notes issued in April 2013 (the "April 2013 1.25% Notes"), at the Company's option, that the conversion of the notes may be settled in cash rather than in the Company's common shares, or a combination of cash and the Company's common shares. Accounting rules require that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are recorded by separately accounting for the liability and equity component (i.e., conversion feature), thereby reducing the principal amount with a debt discount that is amortized as interest expense over the expected life of the note using the effective interest method. The effective interest rate on the liability component of the 3.625% Convertible Senior Subordinated Notes issued in April 2009 (the "April 2009 3.625% Notes") is 17.26%, and the effective interest rate on the liability component of the 4.00% Convertible Senior Subordinated Notes issued in January 2012 (the "January 2012 4.00% Notes") is 9.56%.
(2)
The April 2013 1.25% Notes are convertible only into the Company's common shares, and do not carry an option to be settled in cash upon conversion. Accordingly, the April 2013 1.25% Notes have been recorded at their principal amount and are not reduced by a debt discount for the equity component.
Interest Expense. The amount of interest expense recognized for the convertible senior subordinated notes, which includes both the contractual interest coupon and amortization of the discount on the liability component, for the three months ended June 30, 2014 and 2013 is presented below.
 
 
Three Months Ended
 
June 30,
 
2014
 
2013
 
(Amounts in thousands)
Interest Expense
 
 
 
Contractual interest coupon
$
973

 
$
1,196

Amortization of discount on liability component and debt issuance costs
1,619

 
2,096

 
$
2,592

 
$
3,292

Convertible Senior Subordinated Notes Terms
April 2009 3.625% Notes. In April 2009, LGEI issued approximately $66.6 million of April 2009 3.625% Notes, of which $16.2 million was allocated to the equity component.
Outstanding Amount: As of June 30, 2014, $40.2 million of aggregate principal amount (carrying value — $36.7 million) remains outstanding.

18
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Interest: Interest is payable at 3.625% per annum semi-annually on March 15 and September 15 of each year.
Maturity Date: March 15, 2025.
Redeemable by LGEI: Redeemable by the Company on or after March 15, 2015, in whole or in part, at a price equal to 100% of the principal amount of the April 2009 3.625% Notes to be redeemed, plus accrued and unpaid interest through the date of redemption.

Repurchase Events: The holder may require LGEI to repurchase the April 2009 3.625% Notes on March 15, 2015, 2018 and 2023 or upon a “designated event,” (as defined in the governing indenture), at a price equal to 100% of the principal amount of the April 2009 3.625% Notes to be repurchased plus accrued and unpaid interest.
Conversion Features: Convertible into common shares of the Company at any time before maturity, redemption or repurchase by the Company, at an initial conversion price of approximately $8.25 per share, subject to adjustment in certain circumstances, as specified in the governing indenture (June 30, 2014 - $8.21). Upon conversion, the Company has the option to deliver, in lieu of common shares, cash or a combination of cash and common shares of the Company.
Make Whole Premium: Under certain circumstances, if the holder requires LGEI to repurchase all or a portion of their notes upon a change in control, they will be entitled to receive a make whole premium. The amount of the make whole premium, if any, will be based on the price of the Company’s common shares on the effective date of the change in control. No make whole premium will be paid if the price of the Company’s common shares at such time is less than $5.36 per share or exceeds $50.00 per share.
January 2012 4.00% Notes. In January 2012, LGEI issued approximately $45.0 million of January 2012 4.00% Notes, of which $10.1 million was allocated to the equity component.
Outstanding Amount: As of June 30, 2014, $41.9 million of aggregate principal amount (carrying value — $36.5 million) remains outstanding.
Interest: Interest is payable at 4.00% per annum semi-annually on January 15 and July 15 of each year.
Maturity Date: January 11, 2017.
Conversion Features: Convertible into common shares of the Company at any time prior to maturity or repurchase by the Company, at an initial conversion price of approximately $10.50 per share, subject to adjustment in certain circumstances as specified in the governing indenture (June 30, 2014 - $10.44). Upon conversion, the Company has the option to deliver, in lieu of common shares, cash or a combination of cash and common shares of the Company.
April 2013 1.25% Notes. In April 2013, LGEI issued approximately $60.0 million in aggregate principal amount of April 2013 1.25% Notes.
Outstanding Amount: As of June 30, 2014, $60.0 million of aggregate principal amount (carrying value - $60.0 million) remains outstanding.
Interest: Interest is payable semi-annually on April 15 and October 15 of each year, and commenced on October 15, 2013.
Maturity Date: April 15, 2018.
Conversion Features: Convertible into common shares of the Company at any time prior to maturity or repurchase by the Company, at an initial conversion price of approximately $30.00 per share, subject to adjustment in certain circumstances, as specified in the governing indenture (June 30, 2014 - $29.84).

6. Participations and Residuals
The Company expects approximately 59% of accrued participations and residuals will be paid during the one-year period ending June 30, 2015.


19

7. Film Obligations and Production Loans
 
 
June 30,
2014
 
March 31,
2014
 
(Amounts in thousands)
Film obligations
$
46,315

 
$
80,904

Production loans
589,977

 
418,883

Total film obligations and production loans
$
636,292

 
$
499,787


The following table sets forth future annual repayment of film obligations and production loans as of June 30, 2014:
 
 
Nine Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31,
 
Year Ended March 31,
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
 
(Amounts in thousands)
Film obligations
$
24,526

 
$
16,680

 
$
2,964

 
$
2,000

 
$
1,000

 
$
—

 
$
47,170

Production loans
93,862

 
421,777

 
74,338

 
—

 
—

 
—

 
589,977

 
$
118,388

 
$
438,457

 
$
77,302

 
$
2,000

 
$
1,000

 
$
—

 
637,147

Less imputed interest on film obligations
 
 
 
 
 
 
 
 
 
 
 
 
(855
)
 
 
 
 
 
 
 
 
 
 
 
 
 
$
636,292

Film Obligations
Film obligations include minimum guarantees, which represent amounts payable for film rights that the Company has acquired and certain theatrical marketing obligations for amounts received from third parties that are contractually committed for theatrical marketing expenditures associated with specific titles.
Production Loans
Production loans represent individual loans for the production of film and television programs that the Company produces. Production loans have contractual repayment dates either at or near the expected completion date, with the exception of certain loans containing repayment dates on a longer term basis, and incur interest at rates ranging from 3.24% to 3.49%.


8. Fair Value Measurements
Fair Value
Accounting guidance and standards about fair value define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Fair Value Hierarchy
Accounting guidance and standards about fair value establish a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The accounting guidance and standards establish three levels of inputs that may be used to measure fair value:

•
Level 1 — Quoted prices in active markets for identical assets or liabilities.
•
Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 liabilities that are not required to be measured at fair value on a recurring basis include the Company’s convertible senior subordinated notes, production loans, senior

20
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



secured second-priority notes, and July 2013 7-Year Term Loan, which are priced using discounted cash flow techniques that use observable market inputs, such as LIBOR-based yield curves, three- and seven-year swap rates, and credit ratings.
•
Level 3 — Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. The Company measures the fair value of its investment in TVGN's Mandatorily Redeemable Preferred Stock Units using primarily a discounted cash flow analysis based on the expected cash flows of the investment. The analysis reflects the contractual terms of the investment, including the period to maturity, and uses a discount rate commensurate with the risk associated with the investment.
The following table sets forth the carrying values and fair values of the Company’s investment in TVGN's mandatorily redeemable preferred stock units and outstanding debt at June 30, 2014 and March 31, 2014:
 
 
June 30, 2014
 
March 31, 2014
 
(Amounts in thousands)
 
Carrying
Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
 
 
(Level 3)
 
 
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Investment in TVGN's Mandatorily Redeemable Preferred Stock Units
$
91,573

 
$
108,704

 
$
86,298

 
$
99,907

 
 
 
 
 
 
 
 
 
Carrying
Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
 
 
(Level 2)
 
 
 
(Level 2)
Liabilities:
 
 
 
 
 
 
 
October 2004 2.9375% Notes
$
—

 
$
—

 
$
115

 
$
111

April 2009 3.625% Notes
36,738

 
40,548

 
35,615

 
40,140

January 2012 4.00% Notes
36,517

 
42,038

 
36,058

 
41,401

April 2013 1.25% Notes
60,000

 
52,238

 
60,000

 
51,411

Production loans
589,977

 
589,977

 
418,883

 
418,883

Senior secured second-priority notes
225,000

 
231,750

 
225,000

 
223,313

July 2013 7-Year Term Loan
222,842

 
227,813

 
222,753

 
225,844

 
$
1,171,074

 
$
1,184,364

 
$
998,424

 
$
1,001,103


9. Direct Operating Expenses
 
 
Three Months Ended
 
June 30,
 
2014
 
2013
 
(Amounts in thousands)
Amortization of films and television programs
$
158,808

 
$
219,364

Participations and residual expense
82,871

 
85,826

Other direct operating expenses
(2,806
)
 
1,255

 
$
238,873

 
$
306,445



21
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



10. Net Income Per Share
Basic net income per share is calculated based on the weighted average common shares outstanding for the period. Basic net income per share for the three months ended June 30, 2014 and 2013 is presented below:
 
 
Three Months Ended
 
June 30,
 
2014
 
2013
 
(Amounts in thousands, except per share amounts)
Basic Net Income Per Common Share:
 
 
 
Numerator:
 
 
 
Net income
$
43,261

 
$
13,617

Denominator:
 
 
 
Weighted average common shares outstanding
138,509

 
136,189

Basic Net Income Per Common Share
$
0.31

 
$
0.10


Diluted net income per common share reflects the potential dilutive effect, if any, of the conversion of convertible senior subordinated notes under the "if converted" method. Diluted net income per common share also reflects share purchase options, including equity-settled share appreciation rights and restricted share units using the treasury stock method when dilutive, and any contingently issuable shares when dilutive. Diluted net income per common share for the three months ended June 30, 2014 and 2013 is presented below:

 
Three Months Ended
 
June 30,
 
2014
 
2013
 
(Amounts in thousands, except per share amounts)
Diluted Net Income Per Common Share:
 
 
 
Numerator:
 
 
 
Net income
$
43,261

 
$
13,617

Add:
 
 
 
Interest on convertible notes, net of tax
1,643

 
99

Numerator for Diluted Net Income Per Common Share
$
44,904

 
$
13,716

 
 
 
 
Denominator:
 
 
 
Weighted average common shares outstanding
138,509

 
136,189

Effect of dilutive securities:
 
 
 
Conversion of notes
10,909

 
1,692

Share purchase options
2,366

 
2,207

Restricted share units
426

 
657

Adjusted weighted average common shares outstanding
152,210

 
140,745

Diluted Net Income Per Common Share
$
0.30

 
$
0.10


22
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



For the three months ended June 30, 2014 and 2013, the Company's outstanding common shares issuable presented below were excluded from diluted net income per common share because their inclusion would have had an anti-dilutive effect.

 
Three Months Ended
 
June 30,
 
2014
 
2013
 
(Amounts in thousands)
Anti-dilutive shares issuable
 
 
 
Conversion of notes
—

 
12,264

Share purchase options
5,107

 
1,774

Restricted share units
288

 
27

Contingently issuable shares
275

 
442

Total weighted average anti-dilutive shares issuable excluded from Diluted Net Income Per Common Share
5,670

 
14,507




11. Capital Stock

(a) Common Shares
The Company had 500 million authorized common shares at June 30, 2014 and March 31, 2014. The table below outlines common shares reserved for future issuance:
 
 
June 30,
2014
 
March 31,
2014
 
(Amounts in thousands)
Stock options outstanding, average exercise price $21.14 (March 31, 2014 - $20.83)
11,553

 
10,894

Restricted share units — unvested
1,770

 
2,139

Share purchase options and restricted share units available for future issuance
1,711

 
3,471

Shares issuable upon conversion of October 2004 2.9375% Notes at conversion price of $11.46 per share at March 31, 2014
—

 
10

Shares issuable upon conversion of April 2009 3.625% Notes at conversion price of $8.21 per share (March 31, 2014 - $8.22)
4,898

 
4,893

Shares issuable upon conversion of January 2012 4.00% Notes at conversion price of $10.44 per share (March 31, 2014 - $10.46)
4,009

 
4,001

Shares issuable upon conversion of April 2013 1.25% Notes at conversion price of $29.84 per share (March 31, 2014 - $29.89)
2,011

 
2,007

Shares reserved for future issuance
25,952

 
27,415


In September 2012, the Company adopted the 2012 Performance Incentive Plan (the "2012 Plan"). The 2012 Plan provides for the issuance of up to an additional 18.3 million common shares of the Company, stock options, share appreciation rights, restricted shares, stock bonuses and other forms of awards granted or denominated in common shares or units of common shares of the Company, as well as certain cash bonus awards to eligible directors of the Company, officers or employees of the Company or any of its subsidiaries, and certain consultants and advisors to the Company or any of its subsidiaries.


23
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



(b) Share-based Compensation

The Company recognized the following share-based compensation expense during the three months ended June 30, 2014, and 2013:
 
 
Three Months Ended
 
June 30,
 
2014
 
2013
 
(Amounts in thousands)
Compensation Expense:
 
 
 
Stock Options
$
8,643

 
$
3,767

Restricted Share Units and Other Share-based Compensation
6,049

 
7,403

Share Appreciation Rights
1,729

 
6,577

 
16,421

 
17,747

Impact of accelerated vesting on stock options and restricted share units (1)
1,194

 
—

Total share-based compensation expense
$
17,615

 
$
17,747

 
 
 
 
Tax impact (2)
(6,458
)
 
(6,566
)
Reduction in net income
$
11,157

 
$
11,181

____________________________
(1)
Represents the impact of the acceleration of certain vesting schedules for stock options and restricted share units pursuant to the severance arrangements related to the integration of the marketing operations of the Company's Lionsgate and Summit film labels.
(2)
Represents the income tax benefit recognized in the statements of income for share-based compensation arrangements.
During the three months ended June 30, 2014, the Company granted 701,667 and 435,613 stock options and restricted share units ("RSU"), respectively, at a weighted-average grant-date fair value of $9.57 and $26.65, respectively. During the three months ended June 30, 2013, the Company granted 2,113,756 and 782,072 stock options and RSUs, respectively, at a weighted-average grant-date fair value of $12.17 and $25.34, respectively.
During the three months ended June 30, 2014, 75,000 cash-settled share appreciation rights ("SARs") were exercised resulting in a cash payment of $1.7 million. During the three months ended June 30, 2013, there were no cash-settled SARs exercised.
During the three months ended June 30, 2014 and 2013, 32,522 and 42,420 options, respectively, were exercised. The total intrinsic value of options exercised as of each exercise date during the three months ended June 30, 2014 and 2013 was $0.4 million and $0.7 million, respectively.
The excess tax benefits realized from tax deductions associated with option exercises and RSU activity were $2.8 million and nil for the three months ended June 30, 2014 and 2013, respectively.
Total unrecognized compensation cost related to unvested stock options and restricted share unit awards at June 30, 2014 are $64.9 million and $30.5 million, respectively, and are expected to be recognized over a weighted average period of 2.4 and 1.9 years, respectively.

(c) Share Repurchases

On December 17, 2013, our Board of Directors authorized the Company to increase our previously announced share repurchase plan from a total authorization of $150 million to $300 million. From April 1, 2014 through June 30, 2014, the Company repurchased a total of 3.8 million common shares for an aggregate price of $101.2 million. See Note 18 for shares repurchased through July 25, 2014.

(d) Dividends

On June 13, 2014, the Company's Board of Directors declared a quarterly cash dividend of $0.05 per common share payable on August 8, 2014, to shareholders of record as of June 30, 2014. As the Company had an accumulated deficit at the

24
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



time the dividend was declared, this dividend was recorded as a reduction to common shares on the unaudited consolidated statement of shareholders' equity at June 30, 2014. As of June 30, 2014, the Company had $6.9 million of cash dividends payable included in accounts payable and accrued liabilities on the unaudited consolidated balance sheet.

12. Income Taxes
The Company had an income tax expense of $10.8 million, or 19.9%, of income before income taxes in the three months ended June 30, 2014, compared to an expense of $8.0 million, or 37.0%, of income before income taxes in the three months ended June 30, 2013.
The income tax provision for the three months ended June 30, 2014 and 2013 is calculated by estimating the Company's annual effective tax rate (estimated annual tax provision divided by estimated annual income before income taxes), and then applying the effective tax rate to income before income taxes for the quarter, plus or minus the tax effects of items that relate discretely to the quarter, if any.

13. Segment Information
Accounting guidance requires the Company to make certain disclosures about each reportable segment. The Company’s reportable segments are determined based on the distinct nature of their operations and each segment is a strategic business unit that offers different products and services and is managed separately. The Company has two reportable business segments as of June 30, 2014: Motion Pictures and Television Production.
Motion Pictures consists of the development and production of feature films, acquisition of North American and worldwide distribution rights, North American theatrical, home entertainment and television distribution of feature films produced and acquired, and worldwide licensing of distribution rights to feature films produced and acquired.
Television Production consists of the development, production and worldwide distribution of television productions including television series, television movies and mini-series and non-fiction programming.


25
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Segment information by business unit is as follows:
 
 
Three Months Ended
 
June 30,
 
2014
 
2013
 
(Amounts in thousands)
Segment revenues
 
 
 
Motion Pictures
$
331,916

 
$
438,646

Television Production
117,467

 
131,082

 
$
449,383

 
$
569,728

Direct operating expenses
 
 
 
Motion Pictures
$
147,194

 
$
203,450

Television Production
91,679

 
102,995

 
$
238,873

 
$
306,445

Distribution and marketing
 
 
 
Motion Pictures
$
88,605

 
$
165,100

Television Production
8,716

 
6,360

 
$
97,321

 
$
171,460

Gross segment contribution
 
 
 
Motion Pictures
$
96,117

 
$
70,096

Television Production
17,072

 
21,727

 
$
113,189

 
$
91,823

Segment general and administration
 
 
 
Motion Pictures
$
17,353

 
$
16,425

Television Production
3,410

 
3,007

 
$
20,763

 
$
19,432

Segment profit
 
 
 
Motion Pictures
$
78,764

 
$
53,671

Television Production
13,662

 
18,720

 
$
92,426

 
$
72,391


Gross segment contribution is defined as segment revenue less segment direct operating and distribution and marketing expenses.

26
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Segment profit is defined as segment revenue less segment direct operating, distribution and marketing, and general and administration expenses. The reconciliation of total segment profit to the Company’s income before income taxes is as follows:
 
 
Three Months Ended
 
June 30,
 
2014
 
2013
 
(Amounts in thousands)
Company’s total segment profit
$
92,426

 
$
72,391

Shared services and corporate expenses:
 
 
 
Share-based compensation expense
(16,421
)
 
(17,747
)
Restructuring charges (1)
(4,888
)
 
—

Other shared services and corporate expenses
(22,007
)
 
(19,591
)
Total shared services and corporate expenses
(43,316
)
 
(37,338
)
Depreciation and amortization
(1,346
)
 
(1,625
)
Operating income
47,764

 
33,428

Interest expense
(12,972
)
 
(20,814
)
Interest and other income
1,018

 
1,496

Loss on extinguishment of debt
—

 
(466
)
Equity interests income
18,210

 
7,977

Income before income taxes
$
54,020

 
$
21,621

________________________
(1)
Restructuring charges in the three months ended June 30, 2014 primarily consist of severance costs associated with the integration of the marketing operations of the Company's Lionsgate and Summit film labels and costs related to the move of our international sales and distribution organization to the United Kingdom. Approximately $1.2 million of the costs are non-cash charges resulting from the acceleration of vesting of stock awards (see Note 11).

The following table sets forth significant assets as broken down by segment and other unallocated assets as of June 30, 2014 and March 31, 2014:
 
 
June 30, 2014
 
March 31, 2014
 
Motion
Pictures
 
Television
Production
 
Total
 
Motion
Pictures
 
Television
Production
 
Total
 
(Amounts in thousands)
Significant assets by segment
 
 
 
 
 
 
 
 
 
 
 
Accounts receivable
$
405,907

 
$
311,591

 
$
717,498

 
$
580,906

 
$
304,665

 
$
885,571

Investment in films and television programs, net
1,039,405

 
341,176

 
1,380,581

 
979,576

 
294,997

 
1,274,573

Goodwill
294,367

 
28,961

 
323,328

 
294,367

 
28,961

 
323,328

 
$
1,739,679

 
$
681,728

 
$
2,421,407

 
$
1,854,849

 
$
628,623

 
$
2,483,472

Other unallocated assets (primarily cash, other assets, and equity method investments)
 
 
 
 
390,618

 
 
 
 
 
368,160

Total assets
 
 
 
 
$
2,812,025

 
 
 
 
 
$
2,851,632



27
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



The following table sets forth acquisition of investment in films and television programs as broken down by segment for the three months ended June 30, 2014 and 2013:
 
Three Months Ended
 
June 30,
 
2014
 
2013
 
(Amounts in thousands)
Acquisition of investment in films and television programs
 
 
 
Motion Pictures
$
152,421

 
$
122,239

Television Production
111,430

 
38,694

 
$
263,851

 
$
160,933


Purchases of property and equipment amounted to $1.4 million and $1.4 million for the three months ended June 30, 2014 and 2013, respectively, primarily pertaining to purchases for the Company’s corporate headquarters.


14. Contingencies
Two purported Lions Gate stockholders have initiated legal proceedings in the United States District Court for the Southern District of New York relating to the March 13, 2014 announcement that the Company had entered into an administrative order with the United States Securities and Exchange Commission (the "SEC") that resolved the SEC’s investigation into transactions that the Company announced on July 20, 2010. These actions are captioned Laborers Pension Trust Fund-Detroit & Vicinity v. Lions Gate Entertainment Corp., et al., Case No. 14 CV 5197 (filed July 11, 1014) and Barger v. Lions Gate Entertainment Corp., Case No. 14 CV 5477 (filed July 21, 2014). The actions allege, among other things, that the Company and certain of its current and former officers and directors violated the federal securities laws by failing to disclose the SEC’s investigation prior to March 13, 2014. The Company does not believe these actions have any merit and intends to vigorously defend against them.
In addition, on May 16, 2014, the Company received a letter from another purported stockholder, Arkansas Teachers Retirement System, demanding that the Company seek to recover the costs of the SEC investigation, including the fine paid, from the directors who were on the board at the time the July 20, 2010 transactions occurred. The board will consider the demand as provided by law.
From time to time, the Company is involved in other claims and legal proceedings arising in the normal course of business. While the resolution of these matters cannot be predicted with certainty, we do not believe, based on current knowledge, that the outcome of any currently pending legal proceedings in which the Company is currently involved will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flow.

15. Consolidating Financial Information — Convertible Senior Subordinated Notes

The April 2009 3.625% Notes, the January 2012 4.00% Notes, and the April 2013 1.25% Notes by their terms, are fully and unconditionally guaranteed by the Company. LGEI, the issuer of the April 2009 3.625% Notes, the January 2012 4.00% Notes, and the April 2013 1.25% Notes that are guaranteed by the Company, is 100% owned by the parent company guarantor, Lions Gate Entertainment Corp.

The following tables present condensed consolidating financial information as of June 30, 2014 and March 31, 2014, and for the three months ended June 30, 2014 and 2013 for (1) the Company, on a stand-alone basis, (2) LGEI, on a stand-alone basis, (3) the non-guarantor subsidiaries of the Company (including the subsidiaries of LGEI), on a combined basis (collectively, the “Non-guarantor Subsidiaries”) and (4) the Company, on a consolidated basis.
 

28
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



 
As of
 
June 30, 2014
 
Lions Gate
Entertainment
Corp.
 
Lions Gate
Entertainment
Inc.
 
Non-guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Lions Gate
Consolidated
 
(Amounts in thousands)
BALANCE SHEET
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
10,338

 
$
5,273

 
$
34,761

 
$
—

 
$
50,372

Restricted cash
—

 
7,534

 


 
—

 
7,534

Accounts receivable, net
689

 
2,408

 
714,401

 
—

 
717,498

Investment in films and television programs, net
—

 
6,394

 
1,372,886

 
1,301

 
1,380,581

Property and equipment, net
—

 
14,778

 
314

 
—

 
15,092

Equity method investments
—

 
5,978

 
183,018

 
—

 
188,996

Goodwill
10,172

 
—

 
313,156

 
—

 
323,328

Other assets
3,948

 
66,777

 
2,896

 
(6,225
)
 
67,396

Deferred tax assets
8,011

 
43,776

 
9,441

 
—

 
61,228

Subsidiary investments and advances
1,049,411

 
1,161,128

 
1,751,527

 
(3,962,066
)
 
—

 
$
1,082,569

 
$
1,314,046

 
$
4,382,400

 
$
(3,966,990
)
 
$
2,812,025

Liabilities and Shareholders’ Equity (Deficiency)
 
 
 
 
 
 
 
 
 
Senior revolving credit facility
$
84,000

 
$
—

 
$
—

 
$
—

 
$
84,000

Senior secured second-priority notes
225,000

 
—

 
—

 
—

 
225,000

July 2013 7-Year Term Loan
222,842

 
—

 
—

 
—

 
222,842

Accounts payable and accrued liabilities
14,935

 
53,842

 
154,609

 
—

 
223,386

Participations and residuals
—

 
3,417

 
464,559

 
—

 
467,976

Film obligations and production loans
—

 
—

 
636,292

 
—

 
636,292

Convertible senior subordinated notes
—

 
133,255

 
—

 
—

 
133,255

Deferred revenue
—

 
11,327

 
272,155

 
—

 
283,482

Intercompany payable
—

 
1,328,362

 
1,531,380

 
(2,859,742
)
 
—

Shareholders’ equity (deficiency)
535,792

 
(216,157
)
 
1,323,405

 
(1,107,248
)
 
535,792

 
$
1,082,569

 
$
1,314,046

 
$
4,382,400

 
$
(3,966,990
)
 
$
2,812,025



29
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



 
Three Months Ended
 
June 30, 2014
 
Lions Gate
Entertainment
Corp.
 
Lions Gate
Entertainment
Inc.
 
Non-guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Lions Gate
Consolidated
 
 
 
(Amounts in thousands)
 
 
STATEMENT OF INCOME
 
 
 
 
 
 
 
 
 
Revenues
$
—

 
$
2,896

 
$
446,586

 
$
(99
)
 
$
449,383

EXPENSES:
 
 
 
 
 
 
 
 
 
Direct operating
2

 
(829
)
 
239,586

 
114

 
238,873

Distribution and marketing
—

 
568

 
96,753

 
—

 
97,321

General and administration
564

 
39,942

 
23,692

 
(119
)
 
64,079

Depreciation and amortization
—

 
752

 
594

 
—

 
1,346

Total expenses
566

 
40,433

 
360,625

 
(5
)
 
401,619

OPERATING INCOME (LOSS)
(566
)
 
(37,537
)
 
85,961

 
(94
)
 
47,764

Other expenses (income):
 
 
 
 
 
 
 
 
 
Interest expense
7,373

 
46,575

 
33,125

 
(74,101
)
 
12,972

Interest and other income
(43,039
)
 
(31
)
 
(31,933
)
 
73,985

 
(1,018
)
Total other expenses (income)
(35,666
)
 
46,544

 
1,192

 
(116
)
 
11,954

INCOME (LOSS) BEFORE EQUITY INTERESTS AND INCOME TAXES
35,100

 
(84,081
)
 
84,769

 
22

 
35,810

Equity interests income (loss)
8,550

 
94,758

 
18,050

 
(103,148
)
 
18,210

INCOME (LOSS) BEFORE INCOME TAXES
43,650

 
10,677

 
102,819

 
(103,126
)
 
54,020

Income tax provision (benefit)
389

 
2,127

 
20,477

 
(12,234
)
 
10,759

NET INCOME (LOSS)
43,261

 
8,550

 
82,342

 
(90,892
)
 
43,261

Foreign currency translation adjustments
671

 
2,217

 
(391
)
 
(1,015
)
 
1,482

Net unrealized loss on foreign exchange contracts, net of tax
—

 
—

 
(811
)
 
—

 
(811
)
COMPREHENSIVE INCOME (LOSS)
$
43,932

 
$
10,767

 
$
81,140

 
$
(91,907
)
 
$
43,932


30
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



 
Three Months Ended
 
June 30, 2014
 
Lions Gate
Entertainment
Corp.
 
Lions Gate
Entertainment
Inc.
 
Non-guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Lions Gate
Consolidated
 
(Amounts in thousands)
STATEMENT OF CASH FLOWS
 
 
 
 
 
 
 
 
 
NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
$
142,265

 
$
(26
)
 
$
(154,873
)
 
$
—

 
$
(12,634
)
INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Proceeds from the sale of equity method investees
—

 
—

 
14,575

 
—

 
14,575

Investment in equity method investees
—

 
(2,150
)
 
(7,500
)
 
—

 
(9,650
)
Purchases of property and equipment
—

 
(1,305
)
 
(122
)
 
—

 
(1,427
)
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
—

 
(3,455
)
 
6,953

 
—

 
3,498

FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Senior revolving credit facility - borrowings
170,000

 
—

 
—

 
—

 
170,000

Senior revolving credit facility - repayments
(183,619
)
 
—

 
—

 
—

 
(183,619
)
Convertible senior subordinated notes - repurchases
—

 
(16
)
 
—

 
—

 
(16
)
Production loans - borrowings
—

 
—

 
207,953

 
—

 
207,953

Production loans - repayments
—

 
—

 
(36,859
)
 
—

 
(36,859
)
Repurchase of common shares
(109,529
)
 
—

 
—

 
—

 
(109,529
)
Dividends paid
(7,066
)
 
—

 
—

 
—

 
(7,066
)
Excess tax benefits on equity-based compensation awards
—

 
2,771

 
—

 
—

 
2,771

Exercise of stock options
406

 
—

 
—

 
—

 
406

Tax withholding required on equity awards
(10,247
)
 
—

 
—

 
—

 
(10,247
)
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
(140,055
)
 
2,755

 
171,094

 
—

 
33,794

NET CHANGE IN CASH AND CASH EQUIVALENTS
2,210

 
(726
)
 
23,174

 
—

 
24,658

FOREIGN EXCHANGE EFFECTS ON CASH
—

 
—

 
22

 
—

 
22

CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD
8,128

 
5,999

 
11,565

 
—

 
25,692

CASH AND CASH EQUIVALENTS — END OF PERIOD
$
10,338

 
$
5,273

 
$
34,761

 
$
—

 
$
50,372



31
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



 
As of
 
March 31, 2014
 
Lions Gate
Entertainment
Corp.
 
Lions Gate
Entertainment
Inc.
 
Non-guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Lions Gate
Consolidated
 
(Amounts in thousands)
BALANCE SHEET
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
8,128

 
$
5,999

 
$
11,565

 
$
—

 
$
25,692

Restricted cash
—

 
8,925

 
—

 
—

 
8,925

Accounts receivable, net
688

 
2,514

 
882,369

 
—

 
885,571

Investment in films and television programs, net
(18
)
 
6,394

 
1,266,703

 
1,494

 
1,274,573

Property and equipment, net
—

 
14,185

 
367

 
—

 
14,552

Equity method investments
—

 
3,668

 
178,273

 
—

 
181,941

Goodwill
10,172

 
—

 
313,156

 
—

 
323,328

Other assets
4,113

 
67,612

 
5,682

 
(6,340
)
 
71,067

Deferred tax assets
8,417

 
48,125

 
9,441

 
—

 
65,983

Subsidiary investments and advances
1,118,356

 
1,065,274

 
1,532,070

 
(3,715,700
)
 
—

 
$
1,149,856

 
$
1,222,696

 
$
4,199,626

 
$
(3,720,546
)
 
$
2,851,632

Liabilities and Shareholders’ Equity (Deficiency)
 
 
 
 
 
 
 
 
 
Senior revolving credit facility
$
97,619

 
$
—

 
$
—

 
$
—

 
$
97,619

Senior secured second-priority notes
225,000

 
—

 
—

 
—

 
225,000

July 2013 7-Year Term Loan
222,753

 
—

 
—

 
—

 
222,753

Accounts payable and accrued liabilities
19,946

 
73,045

 
239,466

 
—

 
332,457

Participations and residuals
—

 
3,417

 
465,973

 
—

 
469,390

Film obligations and production loans
—

 
—

 
499,787

 
—

 
499,787

Convertible senior subordinated notes
—

 
131,788

 
—

 
—

 
131,788

Deferred revenue
—

 
11,689

 
276,611

 
—

 
288,300

Intercompany payable
—

 
1,232,310

 
1,480,273

 
(2,712,583
)
 
—

Shareholders’ equity (deficiency)
584,538

 
(229,553
)
 
1,237,516

 
(1,007,963
)
 
584,538

 
$
1,149,856

 
$
1,222,696

 
$
4,199,626

 
$
(3,720,546
)
 
$
2,851,632




32
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



 
Three Months Ended
 
June 30, 2013
 
Lions Gate
Entertainment
Corp.
 
Lions Gate
Entertainment
Inc.
 
Non-guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Lions Gate
Consolidated
 
(Amounts in thousands)
STATEMENT OF INCOME
 
 
 
 
 
 
 
 
 
Revenues
$
—

 
$
6,534

 
$
563,194

 
$
—

 
$
569,728

EXPENSES:
 
 
 
 
 
 
 
 
 
Direct operating
—

 
709

 
305,736

 
—

 
306,445

Distribution and marketing
—

 
1,568

 
169,892

 
—

 
171,460

General and administration
245

 
36,702

 
19,976

 
(153
)
 
56,770

Depreciation and amortization
—

 
566

 
1,059

 
—

 
1,625

Total expenses
245

 
39,545

 
496,663

 
(153
)
 
536,300

OPERATING INCOME (LOSS)
(245
)
 
(33,011
)
 
66,531

 
153

 
33,428

Other expenses (income):
 
 
 
 
 
 
 
 
 
Interest expense
—

 
19,497

 
1,441

 
(124
)
 
20,814

Interest and other income
(2
)
 
(833
)
 
(785
)
 
124

 
(1,496
)
Loss on extinguishment of debt
—

 
466

 
—

 
—

 
466

Total other expenses (income)
(2
)
 
19,130

 
656

 
—

 
19,784

INCOME (LOSS) BEFORE EQUITY INTERESTS AND INCOME TAXES
(243
)
 
(52,141
)
 
65,875

 
153

 
13,644

Equity interests income (loss)
13,860

 
74,141

 
9,747

 
(89,771
)
 
7,977

INCOME (LOSS) BEFORE INCOME TAXES
13,617

 
22,000

 
75,622

 
(89,618
)
 
21,621

Income tax provision (benefit)
—

 
8,140

 
27,270

 
(27,406
)
 
8,004

NET INCOME (LOSS)
13,617

 
13,860

 
48,352

 
(62,212
)
 
13,617

Foreign currency translation adjustments
213

 
6,989

 
13,685

 
(20,338
)
 
549

Net unrealized loss on foreign exchange contracts, net of tax
—

 
—

 
(336
)
 
—

 
(336
)
COMPREHENSIVE INCOME (LOSS)
$
13,830

 
$
20,849

 
$
61,701

 
$
(82,550
)
 
$
13,830



33
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



 
Three Months Ended
 
June 30, 2013
 
Lions Gate
Entertainment
Corp.
 
Lions Gate
Entertainment
Inc.
 
Non-guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Lions Gate
Consolidated
 
(Amounts in thousands)
STATEMENT OF CASH FLOWS
 
 
 
 
 
 
 
 
 
NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
$
9,091

 
$
(68,860
)
 
$
30,480

 
$
—

 
$
(29,289
)
INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Proceeds from the sale of equity method investees
—

 
—

 
9,000

 
—

 
9,000

Investment in equity method investees
—

 
(750
)
 
(3,000
)
 
—

 
(3,750
)
Distributions from equity method investee in excess of earnings
—

 
—

 
4,169

 
—

 
4,169

Purchases of property and equipment
—

 
(1,343
)
 
(85
)
 
—

 
(1,428
)
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
—

 
(2,093
)
 
10,084

 
—

 
7,991

FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Senior revolving credit facility - borrowings
—

 
173,000

 
—

 
—

 
173,000

Senior revolving credit facility - repayments
—

 
(172,000
)
 
—

 
—

 
(172,000
)
Senior secured second-priority notes - repurchases
—

 
(4,280
)
 
—

 
—

 
(4,280
)
Convertible senior subordinated notes - borrowings
—

 
60,000

 
—

 
—

 
60,000

Production loans - borrowings
—

 
—

 
108,605

 
—

 
108,605

Production loans - repayments
—

 
—

 
(82,292
)
 
—

 
(82,292
)
Pennsylvania Regional Center credit facility - repayments
—

 
—

 
(65,000
)
 
—

 
(65,000
)
Exercise of stock options
543

 
—

 
—

 
—

 
543

Tax withholding required on equity awards
(9,019
)
 
—

 
—

 
—

 
(9,019
)
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
(8,476
)
 
56,720

 
(38,687
)
 
—

 
9,557

NET CHANGE IN CASH AND CASH EQUIVALENTS
615

 
(14,233
)
 
1,877

 
—

 
(11,741
)
FOREIGN EXCHANGE EFFECTS ON CASH
(24
)
 
—

 
421

 
—

 
397

CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD
592

 
36,834

 
24,937

 
—

 
62,363

CASH AND CASH EQUIVALENTS — END OF PERIOD
$
1,183

 
$
22,601

 
$
27,235

 
$
—

 
$
51,019





34
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




16. Derivative Instruments and Hedging Activities
The Company enters into forward foreign exchange contracts to hedge its foreign currency exposures on future production expenses denominated in various foreign currencies. As of June 30, 2014, the Company had the following outstanding forward foreign exchange contracts with maturities of less than 10 months from June 30, 2014:

June 30, 2014
Foreign Currency
 
Foreign Currency Amount
 
US Dollar Amount
 
Weighted Average Exchange Rate Per $1 USD
 
 
(Amounts in millions)
 
(Amounts in millions)
 
 
British Pound Sterling
 

£16.6

in exchange for

$27.9

 
£0.60
Australian Dollar
 

A$26.4

in exchange for

$23.2

 
A$1.14
Euro
 

€0.5

in exchange for

$0.6

 
€0.74
Canadian Dollar
 

C$11.3

in exchange for

$10.3

 
C$1.09
Changes in the fair value representing a net unrealized fair value gain (loss) on foreign exchange contracts that qualified as effective hedge contracts outstanding during the three months ended June 30, 2014 were losses of $0.8 million, and are included in accumulated other comprehensive loss, a separate component of shareholders’ equity. As of June 30, 2013, there were no outstanding forward foreign exchange contracts. The Company monitors its positions with, and the credit quality of, the financial institutions that are party to its financial transactions.
As of June 30, 2014, $1.9 million was included in other assets and $1.2 million in accounts payable and accrued liabilities (March 31, 2014 - $1.8 million in other assets) in the accompanying consolidated balance sheets related to the Company's use of foreign currency derivatives. The Company classifies its forward foreign exchange contracts within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.
During the three months ended June 30, 2014, the Company did not have any significant amounts reclassified out of accumulated other comprehensive loss.


17. Supplementary Cash Flow Statement Information

The supplemental schedule of non-cash investing and financing activities for the three months ended June 30, 2014 is presented below. There were no significant non-cash investing or financing activities for the three months ended June 30, 2013.

 
Three Months Ended
 
June 30,
 
2014
 
(Amounts in thousands)
Non-cash financing activities:
 
Accrued dividends (see Note 11)
$
6,881





35


18. Subsequent Events (Unaudited)

Share Repurchases. On December 17, 2013, our Board of Directors authorized the Company to increase our previously announced share repurchase plan from a total authorization of $150 million to $300 million. Since the December 17, 2013 increase in share repurchase authorization, through July 25, 2014, we have repurchased a total of 4.7 million common shares for an aggregate price of $126.4 million. As a result of these repurchases, the Company has $108.4 million of remaining capacity in its $300 million share repurchase plan as of July 25, 2014.



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview
Lions Gate Entertainment Corp. (“Lionsgate,” the “Company,” “we,” “us” or “our”) is a leading global entertainment company with a strong and diversified presence in motion picture production and distribution, television programming and syndication, home entertainment, family entertainment, digital distribution, new channel platforms and international distribution and sales. We operate primarily through two reporting segments: Motion Pictures and Television Production.
Revenues
Our revenues are derived from the Motion Pictures and Television Production segments, as described below. Our revenues are derived from the U.S., Canada, the U.K., and other foreign countries. None of the non-U.S. countries individually comprised greater than 10% of total revenues for the three months ended June 30, 2014 and 2013.
Motion Pictures. Our Motion Pictures segment includes revenues derived from the following:
•
Theatrical. Theatrical revenues are derived from the theatrical release of motion pictures in the U.S. and Canada which are licensed to theatrical exhibitors on a picture-by-picture basis. The financial terms that we negotiate with our theatrical exhibitors generally provide that we receive a percentage of the box office results and are negotiated on a picture-by-picture basis.
•
Home Entertainment. Home Entertainment revenues are derived from releases of our own film and television productions and acquired or licensed films, including theatrical and direct-to-video releases, generated from the sale to retail stores and through digital media platforms. In addition, we have revenue sharing arrangements with certain digital media platforms which generally provide that in exchange for a nominal or no upfront sales price, we share in the rental or sales revenues generated by the platform on a title-by-title basis. We categorized our Home Entertainment revenue as follows:
•
Packaged media revenue: Packaged media revenue consists of the sale or rental of DVDs and Blu-ray discs.
•
Digital media revenue: Digital media revenue consists of revenues generated from pay-per-view and video-on-demand platforms, electronic sell-through (“EST”), and digital rental.
•
Television. Television revenues are primarily derived from the licensing of our theatrical productions and acquired films to the domestic cable, satellite, and free and pay television markets.
•
International. International revenues are derived from the licensing and sale of our productions, acquired films, our catalog product and libraries of acquired titles from our international subsidiaries, and revenues from our distribution to international sub-distributors, on a territory-by-territory basis.
•
Lionsgate UK. Lionsgate UK revenues are derived from the licensing and sale of our productions, acquired films, our catalog product and libraries of acquired titles from Lionsgate UK, our subsidiary located in the United Kingdom.
•
Motion Pictures - Other. Other revenues are derived from, among other things, the sales and licensing of domestic and worldwide rights of titles developed or acquired by our subsidiary, Mandate Pictures, to third-party distributors and to international sub-distributors, sales and licensing of music from the theatrical exhibition of our films and the television broadcast of our productions, and the licensing of our films and television programs to ancillary markets.

36

Television Production. Our Television Production segment includes revenues derived from the licensing and syndication to domestic and international markets of one-hour and half-hour series, television movies, mini-series and non-fiction programming, and home entertainment revenues consisting of television production movies or series.
Expenses
Our primary operating expenses include direct operating expenses, distribution and marketing expenses and general and administration expenses.
Direct operating expenses include amortization of film and television production or acquisition costs, participation and residual expenses, provision for doubtful accounts, and foreign exchange gains and losses. Participation costs represent contingent consideration payable based on the performance of the film to parties associated with the film, including producers, writers, directors or actors, etc. Residuals represent amounts payable to various unions or “guilds” such as the SAG - AFTRA, Directors Guild of America, and Writers Guild of America, based on the performance of the film in certain ancillary markets or based on the individual’s (i.e., actor, director, writer) salary level in the television market.
Distribution and marketing expenses primarily include the costs of theatrical “prints and advertising” (“P&A”) and of DVD/Blu-ray duplication and marketing. Theatrical P&A includes the costs of the theatrical prints delivered to theatrical exhibitors and the advertising and marketing cost associated with the theatrical release of the picture. DVD/Blu-ray duplication represents the cost of the DVD/Blu-ray product and the manufacturing costs associated with creating the physical products. DVD/Blu-ray marketing costs represent the cost of advertising the product at or near the time of its release or special promotional advertising.
General and administration expenses include salaries and other overhead.


CRITICAL ACCOUNTING POLICIES
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The application of the following accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management. As described more fully below, these estimates bear the risk of change due to the inherent uncertainty attached to the estimate. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. For example, accounting for films and television programs requires us to estimate future revenue and expense amounts which, due to the inherent uncertainties involved in making such estimates, are likely to differ to some extent from actual results. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. For a summary of all of our accounting policies, including the accounting policies discussed below, see Note 2 to our audited consolidated financial statements in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on May 29, 2014.
Accounting for Films and Television Programs. We capitalize costs of production and acquisition, including financing costs and production overhead, to investment in films and television programs. These costs for an individual film or television program are amortized and participation and residual costs are accrued to direct operating expenses in the proportion that current year’s revenues bear to management’s estimates of the ultimate revenue at the beginning of the year expected to be recognized from exploitation, exhibition or sale of such film or television program over a period not to exceed ten years from the date of initial release. For previously released film or television programs acquired as part of a library, ultimate revenue includes estimates over a period not to exceed 20 years from the date of acquisition.
Due to the inherent uncertainties involved in making such estimates of ultimate revenues and expenses, these estimates have differed in the past from actual results and are likely to differ to some extent in the future from actual results. In addition, in the normal course of our business, some films and titles are more successful than anticipated and some are less successful than anticipated. Our management regularly reviews and revises when necessary its ultimate revenue and cost estimates, which may result in a change in the rate of amortization of film costs and participations and residuals and/or write-down of all or a portion of the unamortized costs of the film or television program to its estimated fair value. Our management estimates the ultimate revenue based on experience with similar titles or title genre, the general public appeal of the cast, actual performance (when available) at the box office or in markets currently being exploited, and other factors such as the quality and acceptance of motion pictures or programs that our competitors release into the marketplace at or near the same time, critical reviews,

37

general economic conditions and other tangible and intangible factors, many of which we do not control and which may change.
An increase in the estimate of ultimate revenue will generally result in a lower amortization rate and, therefore, less film and television program amortization expense, while a decrease in the estimate of ultimate revenue will generally result in a higher amortization rate and, therefore, higher film and television program amortization expense, and also periodically results in an impairment requiring a write-down of the film cost to the title’s fair value. These write-downs are included in amortization expense within direct operating expenses in our consolidated statements of income. Investment in films and television programs is stated at the lower of amortized cost or estimated fair value. The valuation of investment in films and television programs is reviewed on a title-by-title basis, when an event or change in circumstances indicates that the fair value of a film or television program is less than its unamortized cost. In determining the fair value of its films and television programs, we employ a discounted cash flows ("DCF") methodology with assumptions for cash flows. Key inputs employed in the DCF methodology include estimates of a film's ultimate revenue and costs as well as a discount rate. The discount rate utilized in the DCF analysis is based on our weighted average cost of capital plus a risk premium representing the risk associated with producing a particular film or television program. The fair value of any film costs associated with a film or television program that we plan to abandon is zero. As the primary determination of fair value is determined using a DCF model, the resulting fair value is considered a Level 3 measurement (as defined in Note 8 to our unaudited consolidated financial statements). Additional amortization is recorded in the amount by which the unamortized costs exceed the estimated fair value of the film or television program. Estimates of future revenue involve measurement uncertainty and it is therefore possible that reductions in the carrying value of investment in films and television programs may be required as a consequence of changes in our future revenue estimates.
Revenue Recognition. Revenue from the theatrical release of feature films is recognized at the time of exhibition based on our participation in box office receipts. Revenue from the sale of DVDs and Blu-ray discs in the retail market, net of an allowance for estimated returns and other allowances, is recognized on the later of receipt by the customer or “street date” (when it is available for sale by the customer). Under revenue sharing arrangements, including digital and EST arrangements, such as download-to-own, download-to-rent, video-on-demand, and subscription video-on-demand, revenue is recognized when we are entitled to receipts and such receipts are determinable. Revenues from television or digital licensing for fixed fees are recognized when the feature film or television program is available to the licensee for telecast. For television licenses that include separate availability “windows” during the license period, revenue is allocated over the “windows.” Revenue from sales to international territories are recognized when access to the feature film or television program has been granted or delivery has occurred, as required under the sales contract, and the right to exploit the feature film or television program has commenced. For multiple media rights contracts with a fee for a single film or television program where the contract provides for media holdbacks (defined as contractual media release restrictions), the fee is allocated to the various media based on our assessment of the relative fair value of the rights to exploit each media and is recognized as each holdback is released. For multiple-title contracts with a fee, the fee is allocated on a title-by-title basis, based on our assessment of the relative fair value of each title. The primary estimate requiring the most subjectivity and judgment involving revenue recognition is the estimate of sales returns associated with our revenue from the sale of DVDs/Blu-ray discs in the retail market which is discussed separately below under the caption “Sales Returns Allowance.”
Sales Returns Allowance. Revenues are recorded net of estimated returns and other allowances. We estimate reserves for DVD/Blu-ray returns based on previous returns experience, point-of-sale data available from certain retailers, current economic trends, and projected future sales of the title to the consumer based on the actual performance of similar titles on a title-by-title basis in each of the DVD/Blu-ray businesses. Factors affecting actual returns include, among other factors, limited retail shelf space at various times of the year, success of advertising or other sales promotions, and the near term release of competing titles. We believe that our estimates have been materially accurate in the past; however, due to the judgment involved in establishing reserves, we may have adjustments to our historical estimates in the future. Our estimate of future returns affects reported revenue and operating income. If we underestimate the impact of future returns in a particular period, then we may record less revenue in later periods when returns exceed the estimated amounts. If we overestimate the impact of future returns in a particular period, then we may record additional revenue in later periods when returns are less than estimated. An incremental change of 1% in our estimated sales returns rate (i.e., provisions for returns divided by gross sales of related product) for home entertainment products would have had an impact of approximately $1.1 million and $1.7 million on our total revenue in the three months ended June 30, 2014 and 2013, respectively.
Provisions for Accounts Receivable. We estimate provisions for accounts receivable based on historical experience and relevant facts and information regarding the collectability of the accounts receivable. In performing this evaluation, significant judgments and estimates are involved, including an analysis of specific risks on a customer-by-customer basis for our larger customers and an analysis of the length of time receivables have been past due. The financial condition of a given customer and its ability to pay may change over time or could be better or worse than anticipated and could result in an increase or decrease to our allowance for doubtful accounts, which, when the impact of such change is material, is disclosed in our discussion on

38

direct operating expenses elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Income Taxes. We are subject to federal and state income taxes in the U.S., and in several foreign jurisdictions. We record deferred tax assets, net of applicable reserves, related to net operating loss carryforwards and certain temporary differences. We recognize a future tax benefit to the extent that realization of such benefit is more likely than not, otherwise a valuation allowance is applied. In order to realize the benefit of our deferred tax assets, we will need to generate sufficient taxable income in the future. Because of our historical operating losses, in previous years, we had historically provided a full valuation allowance against our net deferred tax assets. However, due to the profitability achieved in our fiscal year ended March 31, 2013, which resulted in a cumulative positive three year pre-tax income, and due to our current projections of profitability in the next few years, we determined that it was more likely than not that we will realize the benefit of certain of our deferred tax assets, including our net operating loss carryforwards and, accordingly, the valuation allowance related to those assets was reversed as of March 31, 2013. In addition, due to certain financing transactions in the year ended March 31, 2014, we determined that it was more likely than not that we will realize the benefit of certain of our deferred tax assets in our Canadian tax jurisdiction, and accordingly, the valuation allowance related to those assets was reversed during the year ended March 31, 2014. However, the assessment as to whether there will be sufficient taxable income to realize our net deferred tax assets is an estimate which could change in the future depending primarily upon the actual performance of our Company. We will be required to continually evaluate the more likely than not assessment that our net deferred tax assets will be realized, and if operating results deteriorate, we may need to reestablish all or a portion of the valuation allowance through a charge to our income tax provision.
We operate and are subject to income taxes in the U.S., and in several foreign jurisdictions. Our effective tax rates are affected by many factors, including the level of income generated in the jurisdictions in which we operate, changes in tax laws and regulations in those jurisdictions, changes in valuation allowances on our deferred tax assets, tax planning strategies available to us and other discrete items.
In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on our expected annual income and statutory tax rates in the various jurisdictions in which we operate. The income tax provision in the period is calculated by estimating the Company's annual effective tax rate (estimated annual tax provision divided by estimated annual income before income taxes), and then applying the effective tax rate to income before income taxes for the period plus or minus the tax effects of items that relate discretely to the period, if any. Our tax provision and effective tax rate could fluctuate significantly based on changes in the level of expected annual income, in total and by tax jurisdiction, and the tax planning opportunities available to us in the various jurisdictions in which we operate.
Goodwill. Goodwill is reviewed for impairment each fiscal year or between the annual tests if an event occurs or circumstances change that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. We perform our annual impairment test as of January 1 in each fiscal year. We performed our last annual impairment test on our goodwill as of January 1, 2014 by first assessing qualitative factors to determine whether it was necessary to perform the two-step annual goodwill impairment test. Based on our qualitative assessments, including but not limited to, the results of our most recent quantitative impairment test, consideration of macroeconomic conditions, industry and market conditions, cash flows, changes in our share price, we concluded that it was more likely than not that the fair value of our reporting units was greater than their carrying value.
Business Acquisitions. We account for business acquisitions as purchases, whereby the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair value. The excess of the purchase price over estimated fair value of the net identifiable assets is allocated to goodwill. Determining the fair value of assets and liabilities requires various assumptions and estimates. These estimates and assumptions are refined with adjustments recorded to goodwill as information is gathered and final appraisals are completed over a one-year measurement period. The changes in these estimates or different assumptions used in determining these estimates could impact the amount of assets, including goodwill and liabilities, ultimately recorded on our balance sheet and could impact our operating results subsequent to such acquisition. We believe that our assumptions and estimates have been materially accurate in the past.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board ("FASB") issued an accounting standard update relating to the presentation of unrecognized tax benefits. The accounting update requires companies to present a deferred tax asset net of related unrecognized tax benefits if there is a net operating loss or other tax carryforwards that would apply in settlement of the uncertain tax position. To the extent that an uncertain tax position would not be settled through a reduction of a net operating or other tax carryforwards, the unrecognized tax benefit will be presented as a liability. We have adopted the new guidance effective April 1, 2014, with no material impact on our consolidated financial statements.

39

In May 2014, the FASB issued an accounting standard update relating to the recognition of revenue from contracts with customers, which will supersede most current U.S. GAAP revenue recognition guidance, including industry-specific guidance. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance will be effective for our fiscal year beginning April 1, 2017, and can be applied either retrospectively or under a cumulative-effect transition method. We are currently evaluating the impact that the adoption of this new guidance will have on our consolidated financial statements.


40

RESULTS OF OPERATIONS

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013
The following table sets forth segment information by business unit, and as a percentage of segment revenues, for the three months ended June 30, 2014 and 2013:
 
 
Three Months Ended
 
 
 
June 30,
 
 
 
2014
 
2013
 
Increase (Decrease)
 
Amount
 
% of Segment Revenues
 
Amount
 
% of Segment Revenues
 
Amount
 
Percent
 
(Amounts in millions)
 
 
Segment revenues (1)
 
 
 
 
 
 
 
 
 
 
 
Motion Pictures
$
331.9

 
 
 
$
438.6

 
 
 
$
(106.7
)
 
(24.3
)%
Television Production
117.5

 
 
 
131.1

 
 
 
(13.6
)
 
(10.4
)%
 
$
449.4

 
 
 
$
569.7

 
 
 
$
(120.3
)
 
(21.1
)%
Direct operating expenses
 
 
 
 
 
 
 
 
 
 
 
Motion Pictures
$
147.2

 
44.4
%
 
$
203.5

 
46.4
%
 
$
(56.3
)
 
(27.7
)%
Television Production
91.7

 
78.0

 
103.0

 
78.6

 
(11.3
)
 
(11.0
)%
 
$
238.9

 
53.2
%
 
$
306.5

 
53.8
%
 
$
(67.6
)
 
(22.1
)%
Distribution and marketing
 
 
 
 
 
 
 
 
 
 
 
Motion Pictures
$
88.6

 
26.7
%
 
$
165.1

 
37.6
%
 
$
(76.5
)
 
(46.3
)%
Television Production
8.7

 
7.4

 
6.4

 
4.9

 
2.3

 
35.9
 %
 
$
97.3

 
21.7
%
 
$
171.5

 
30.1
%
 
$
(74.2
)
 
(43.3
)%
Gross segment contribution
 
 
 
 
 
 
 
 
 
 
 
Motion Pictures
$
96.1

 
29.0
%
 
$
70.1

 
16.0
%
 
$
26.0

 
37.1
 %
Television Production
17.1

 
14.6

 
21.7

 
16.6

 
(4.6
)
 
(21.2
)%
 
$
113.2

 
25.2
%
 
$
91.8

 
16.1
%
 
$
21.4

 
23.3
 %
_________________________________________
(1)
Our largest component of revenue comes from home entertainment. The following table sets forth total home entertainment revenue for both the Motion Pictures and Television Production reporting segments for the three months ended June 30, 2014 and 2013:
 
 
Three Months Ended
 
 
 
 
 
June 30,
 
Increase (Decrease)
 
2014
 
2013
 
Amount
 
Percent
 
 
 
(Amounts in millions)
 
 
Home Entertainment Revenue
 
 
 
 
 
 
 
Motion Pictures
$
133.2

 
$
162.2

 
$
(29.0
)
 
(17.9
)%
Television Production
7.7

 
7.2

 
0.5

 
6.9
 %
 
$
140.9

 
$
169.4

 
$
(28.5
)
 
(16.8
)%

Motion Pictures Revenue
The table below sets forth the components of revenue and the changes in these components for the Motion Pictures reporting segment for the three months ended June 30, 2014 and 2013.

41

 
Three Months Ended
 
 
 
 
 
June 30,
 
Increase (Decrease)
 
2014
 
2013
 
Amount
 
Percent
 
(Amounts in millions)
Motion Pictures
 
 
 
 
 
 
 
Theatrical
$
42.7

 
$
88.9

 
$
(46.2
)
 
(52.0
)%
Home Entertainment
133.2

 
162.2

 
(29.0
)
 
(17.9
)%
Television
58.8

 
36.8

 
22.0

 
59.8
 %
International
60.7

 
79.1

 
(18.4
)
 
(23.3
)%
Lionsgate UK
30.0

 
32.4

 
(2.4
)
 
(7.4
)%
Other
6.5

 
39.2

 
(32.7
)
 
(83.4
)%
 
$
331.9

 
$
438.6

 
$
(106.7
)
 
(24.3
)%
Motion Pictures — Theatrical Revenue
The following table sets forth the titles contributing significant theatrical revenue by fiscal years theatrical slate and the month of their release for the three months ended June 30, 2014 and 2013:
 
Three Months Ended June 30,
2014
 
2013
 
Theatrical
Release Date
 
 
Theatrical
Release Date
Fiscal 2015 Theatrical Slate:
 
 
Fiscal 2014 Theatrical Slate:
 
Draft Day
April 2014
 
Now You See Me
May 2013
The Quiet Ones
April 2014
 
The Big Wedding
April 2013
Fiscal 2014 Theatrical Slate:
 
 
Fiscal 2013 Theatrical Slate:
 
Divergent
March 2014
 
Temptation: Confessions of a Marriage Counselor
March 2013
 
 
 
Managed Brands and Other:
 
 
 
 
Mud (released through Roadside Attractions)
May 2013
Theatrical revenue decreased in the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, which was largely driven by the performance of our Fiscal 2015 Theatrical Slate releases in the three months ended June 30, 2014, as compared to the performance of our Fiscal 2014 Theatrical Slate releases, and particularly the successful performance of Now You See Me, in the three months ended June 30, 2013. The decrease was also, to a lesser extent, due to higher revenue from our Managed Brands and Other titles in the three months ended June 30, 2013 from the success of the film Mud, as compared to the three months ended June 30, 2014. These decreases were offset in part by continued revenue from the March 2014 release of Divergent.

Motion Pictures — Home Entertainment Revenue
The following table sets forth the titles contributing significant motion pictures home entertainment revenue for the three months ended June 30, 2014 and 2013:
 

42

Three Months Ended June 30,
2014
 
2013
 
Packaged Media
Release Date
 
 
Packaged Media
Release Date
Fiscal 2014 Theatrical Slate:
 
 
Fiscal 2013 Theatrical Slate:
 
I, Frankenstein
May 2014
 
Snitch
June 2013
The Legend of Hercules
April 2014
 
Warm Bodies
June 2013
The Hunger Games: Catching Fire
March 2014
 
The Last Stand
May 2013
Escape Plan
February 2014
 
Texas Chainsaw 3D
May 2013
Ender's Game
February 2014
 
The Impossible
April 2013
Managed Brands and Other:
 
 
The Twilight Saga: Breaking Dawn Part 2
March 2013
Joe
June 2014
 
Sinister
February 2013
Tyler Perry's Madea's Neighbors From Hell (the Play)
April 2014
 
The Perks of Being a Wallflower
February 2013
 
 
 
Alex Cross
February 2013
 
 
 
The Expendables 2
November 2012
 
 
 
Managed Brands and Other:
 
 
 
 
Stand Up Guys
May 2013

43

The following table sets forth the components of home entertainment revenue by product category for the three months ended June 30, 2014 and 2013:
 
 
Three Months Ended June 30,
 
2014
 
2013
 
Packaged
Media
 
Digital
Media (1)
 
Total
 
Packaged
Media
 
Digital
Media (1)
 
Total
 
 
 
 
 
(Amounts in millions)
 
 
 
 
Home entertainment revenues
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2014 Theatrical Slate
$
20.0

 
$
40.5

 
$
60.5

 
$
—

 
$
—

 
$
—

Fiscal 2013 Theatrical Slate
4.2

 
1.3

 
5.5

 
58.0

 
41.0

 
99.0

Fiscal 2012 & Prior Theatrical Slates
3.0

 
3.0

 
6.0

 
6.9

 
3.7

 
10.6

Total Theatrical Slates
27.2

 
44.8

 
72.0

 
64.9

 
44.7

 
109.6

Summit Titles Released Theatrically Pre-Acquisition
3.3

 
1.2

 
4.5

 
3.0

 
2.1

 
5.1

Managed Brands and Other (2)
38.4

 
18.3

 
56.7

 
34.3

 
13.2

 
47.5

 
$
68.9

 
$
64.3

 
$
133.2

 
$
102.2

 
$
60.0

 
$
162.2

 ___________________
(1)
Digital media revenue consists of revenues generated from pay-per-view and video-on-demand platforms, EST, and digital rental.
(2)
Managed Brands and Other consists of Direct-to-DVD, acquired and licensed brands, third-party library product and specialty theatrical titles.
Home entertainment revenue of $133.2 million decreased $29.0 million, or 17.9%, in the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. The decrease in home entertainment revenue was primarily due to a decrease in packaged media revenue resulting from the fewer number of titles released on packaged media in the three months ended June 30, 2014 from our smaller Fiscal 2014 Theatrical Slate, as compared to the number of titles released on packaged media in the three months ended June 30, 2013 from our Fiscal 2013 Theatrical Slate. Digital media revenue increased slightly in the three months ended June 30, 2014, mainly due to the revenue generated by the titles and product categories listed above.
Motion Pictures — Television Revenue
The following table sets forth the titles contributing significant motion pictures television revenue for the three months ended June 30, 2014 and 2013:
 
Three Months Ended June 30,
2014
  
2013
Fiscal 2014 Theatrical Slate:
  
Fiscal 2013 Theatrical Slate:
Ender's Game
  
Dredd
Red 2
  
The Possession
You're Next
  
Summit Titles Released Theatrically Pre-Acquisition:
 
  
Red
 
  
Managed Brands and Other:
 
 
Arbitrage


44

The following table sets forth the components of television revenue by product category for the three months ended June 30, 2014 and 2013:
 
 
Three Months Ended
 
 
 
 
 
June 30,
 
Increase (Decrease)
 
2014
 
2013
 
Amount
 
Percent
 
(Amounts in millions)
 
 
 
 
Television revenues
 
 
 
 
 
 
 
Fiscal 2014 Theatrical Slate
$
32.9

 
$
—

 
$
32.9

 
100.0
 %
Fiscal 2013 Theatrical Slate
0.3

 
11.3

 
(11.0
)
 
(97.3
)%
Fiscal 2012 & Prior Theatrical Slate
11.7

 
8.4

 
3.3

 
39.3
 %
Total Theatrical Slates
44.9

 
19.7

 
25.2

 
127.9
 %
Summit Titles Released Theatrically Pre-Acquisition
5.0

 
9.8

 
(4.8
)
 
(49.0
)%
Managed Brands and Other
8.9

 
7.3

 
1.6

 
21.9
 %
 
$
58.8

 
$
36.8

 
22.0

 
59.8
 %
 
Television revenue increased in the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, due primarily to an increase in the contribution of revenue from our theatrical slates as listed above, reflecting the timing of television windows opening in the period, offset in part by a decrease in the contribution of revenue from Summit Titles Released Theatrically Pre-Acquisition, due to the static nature of this product category.
Motion Pictures — International Revenue
The following table sets forth the titles contributing significant motion pictures international revenue for the three months ended June 30, 2014 and 2013:
 
Three Months Ended June 30,
2014
  
2013
Fiscal 2014 Theatrical Slate:
  
Fiscal 2014 Theatrical Slate:
Divergent
 
Now You See Me
The Hunger Games: Catching Fire
 
Fiscal 2013 Theatrical Slate:
Fiscal 2013 Theatrical Slate:
 
The Impossible
The Twilight Saga: Breaking Dawn - Part 2
 
The Last Stand
Summit Titles Released Theatrically Pre-Acquisition:
 
The Twilight Saga: Breaking Dawn - Part 2
The Twilight Saga: Breaking Dawn - Part 1
 
Warm Bodies
 
 
Summit Titles Released Theatrically Pre-Acquisition:
 
 
The Twilight Saga: Eclipse

45

The following table sets forth the components of international revenue by product category for the three months ended June 30, 2014 and 2013:
 
 
Three Months Ended
 
 
 
 
 
June 30,
 
Increase (Decrease)
 
2014
 
2013
 
Amount
 
Percent
 
(Amounts in millions)
 
 
 
 
International revenues
 
 
 
 
 
 
 
Fiscal 2015 Theatrical Slate
$
0.3

 
$
—

 
$
0.3

 
100.0
 %
Fiscal 2014 Theatrical Slate
26.1

 
13.2

 
12.9

 
97.7
 %
Fiscal 2013 Theatrical Slate
7.7

 
47.6

 
(39.9
)
 
(83.8
)%
Fiscal 2012 & Prior Theatrical Slate
5.0

 
5.3

 
(0.3
)
 
(5.7
)%
Total Theatrical Slates
39.1

 
66.1

 
(27.0
)
 
(40.8
)%
Summit Titles Released Theatrically Pre-Acquisition
9.2

 
10.8

 
(1.6
)
 
(14.8
)%
Managed Brands and Other
12.4

 
2.2

 
10.2

 
463.6
 %
 
$
60.7

 
$
79.1

 
(18.4
)
 
(23.3
)%

International revenue included in motion pictures revenue decreased in the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, mainly due to the revenue generated by the titles and product categories listed above. The revenues generated by our Fiscal 2014 Theatrical Slate in the three months ended June 30, 2014 were lower than the revenues generated by our Fiscal 2013 Theatrical Slate in the three months ended June 30, 2013 due to the fewer number of titles in our Fiscal 2014 Theatrical Slate.
Motion Pictures — Lionsgate UK Revenue
The following table sets forth the titles contributing significant Lionsgate UK revenue for the three months ended June 30, 2014 and 2013:
 
Three Months Ended June 30,
2014
  
2013
Fiscal 2014 Theatrical Slate:
  
Fiscal 2013 Theatrical Slate:
The Big Wedding
  
Cabin In The Woods
The Hunger Games: Catching Fire
 
The Expendables 2
You're Next
 
The Last Stand
Fiscal 2012 Theatrical Slate:
  
What To Expect When You're Expecting
The Hunger Games
 
Lionsgate UK and third party product:
Lionsgate UK and third party product:
 
Keith Lemon: The Film
The Railway Man
 
Magic Mike
 
 
Olympus Has Fallen
 
 
Top Cat: The Movie

46

The following table sets forth the components of Lionsgate UK revenue by product category for the three months ended June 30, 2014 and 2013:
 
 
Three Months Ended
 
 
 
 
 
June 30,
 
Increase (Decrease)
 
2014
 
2013
 
Amount
 
Percent
 
(Amounts in millions)
 
 
 
 
Lionsgate UK revenues
 
 
 
 
 
 
 
Fiscal 2015 Theatrical Slate
$
0.6

 
$
—

 
$
0.6

 
100.0
 %
Fiscal 2014 Theatrical Slate
9.4

 
0.4

 
9.0

 
NM

Fiscal 2013 Theatrical Slate
1.6

 
12.3

 
(10.7
)
 
(87.0
)%
Fiscal 2012 & Prior Theatrical Slate
4.7

 
2.5

 
2.2

 
88.0
 %
Total Theatrical Slates
16.3

 
15.2

 
1.1

 
7.2
 %
Lionsgate UK and third party product
11.2

 
13.5

 
(2.3
)
 
(17.0
)%
Managed Brands and Other
2.5

 
3.7

 
(1.2
)
 
(32.4
)%
 
$
30.0

 
$
32.4

 
$
(2.4
)
 
(7.4
)%
______________________
NM - Percentage not meaningful
Lionsgate UK revenue decreased slightly in the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, due to the revenue generated by the titles and product categories listed above.
Motion Pictures —Other Revenue
Other revenue included in motion pictures revenue decreased in the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, primarily due to the sale of a portion of our music catalog in the three months ended June 30, 2013, with no comparable revenue in the three months ended June 30, 2014.
Television Production Revenue
Television production revenue decreased in the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, mainly due to lower domestic television revenue, offset slightly by higher international, other and home entertainment revenue from television production in the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The following table sets forth the components and the changes in the components of revenue that make up television production revenue for the three months ended June 30, 2014 and 2013:
 
 
Three Months Ended
 
 
 
 
 
June 30,
 
Increase (Decrease)
 
2014
 
2013
Amount
 
Percent
 
 
 
(Amounts in millions)
 
 
Television Production
 
 
 
 
 
 
 
Domestic television
$
72.8

 
$
101.1

 
$
(28.3
)
 
(28.0
)%
International
34.4

 
22.4

 
12.0

 
53.6
 %
Home entertainment revenue from television production
7.7

 
7.2

 
0.5

 
6.9
 %
Other
2.6

 
0.4

 
2.2

 
550.0
 %
 
$
117.5

 
$
131.1

 
$
(13.6
)
 
(10.4
)%

 
Television Production - Domestic Television
Domestic television revenue decreased in the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, primarily due to a decrease in television episodes delivered during the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. Television episodes delivered for original exhibition during the three months ended June 30, 2014 and 2013 included the episode deliveries as shown in the table below:

47

 
 
Three Months Ended
 
 
 
Three Months Ended
 
 
June 30, 2014
 
 
 
June 30, 2013
 
 
Episodes
 
Hours
 
 
 
Episodes
 
Hours
Anger Management
1/2hr
11

 
5.5

 
Anger Management
1/2hr
11

 
5.5

Mad Men - Season 7
1hr
4

 
4.0

 
Mad Men - Season 6
1hr
11

 
11.0

Manhattan - Season 1
1hr
1

 
1.0

 
Nashville - Season 1
1hr
6

 
6.0

Nashville - Season 2
1hr
3

 
3.0

 
Orange Is The New Black - Season 1
1hr
5

 
5.0

Rosemary's Baby
1hr
4

 
4.0

 
Other
1/2hr
6

 
3.0

Other
1/2hr
7

 
3.5
 
 
 
 
 
 
 
 
30

 
21.0
 
 
 
39

 
30.5


In addition to the titles mentioned in the table above, significant domestic television revenue was contributed in the three months ended June 30, 2014 from Are We There Yet, House of Payne, Family Feud (Season 7), Meet The Browns, Nurse Jackie (Season 6), and The Wendy Williams Show (Season 5), and in the three months ended June 30, 2013, from Are We There Yet, Family Feud (Season 6), House of Payne, Meet The Browns, and The Wendy Williams Show (Season 4).

Television Production - International Revenue
International revenue in the three months ended June 30, 2014 increased as compared to the three months ended June 30, 2013. International revenue in the three months ended June 30, 2014 primarily included revenue from Anger Management, Mad Men (Seasons 1, 5, 6 & 7), Nashville (Seasons 1 & 2), and Orange Is The New Black (Seasons 1 & 2). International revenue in the three months ended June 30, 2013 primarily included revenue from Anger Management, Mad Men (Seasons 5 & 6), Weeds (Seasons 7 & 8), and Nashville (Season 1).

Television Production - Home Entertainment Revenue from Television Production
The slight increase in home entertainment revenue from television production is primarily due to an increase in digital media revenue, which amounted to $4.5 million in the three months ended June 30, 2014, as compared to $3.2 million in the three months ended June 30, 2013, offset in part by a decrease in packaged media revenue, which amounted to $3.2 million in the three months ended June 30, 2014, as compared to $4.0 million in the three months ended June 30, 2013.
Direct Operating Expenses
The following table sets forth direct operating expenses by segment for the three months ended June 30, 2014 and 2013:
 
 
Three Months Ended
 
Three Months Ended
 
June 30, 2014
 
June 30, 2013
 
Motion
Pictures
 
Television
Production
 
Total
 
Motion
Pictures
 
Television
Production
 
Total
 
(Amounts in millions)
Direct operating expenses
 
 
 
 
 
 
 
 
 
 
 
Amortization of films and television programs
$
93.3

 
$
65.5

 
$
158.8

 
$
142.4

 
$
77.0

 
$
219.4

Participation and residual expense
56.2

 
26.7

 
82.9

 
60.2

 
25.6

 
85.8

Other expenses
(2.3
)
 
(0.5
)
 
(2.8
)
 
0.8

 
0.4

 
1.2

 
$
147.2

 
$
91.7

 
$
238.9

 
$
203.4

 
$
103.0

 
$
306.4

Direct operating expenses as a percentage of segment revenues
44.4
%
 
78.0
%
 
53.2
%
 
46.4
%
 
78.6
%
 
53.8
%
Direct operating expenses of the Motion Pictures segment of $147.2 million for the three months ended June 30, 2014 were 44.4% of motion pictures revenue, compared to $203.4 million, or 46.4% of motion pictures revenue for the three months ended June 30, 2013. The decrease in direct operating expenses of $56.2 million is primarily due to a decrease in motion pictures revenue in the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. The decrease in direct operating expenses as a percentage of motion pictures revenue was primarily driven by the titles released from our Fiscal 2015 Theatrical Slate in the three months ended June 30, 2014, as compared to the titles released from our Fiscal 2014

48

Theatrical Slate in the three months ended June 30, 2013. Investment in film write-downs of the motion pictures segment during the three months ended June 30, 2014 totaled approximately $2.8 million, compared to $3.3 million for the three months ended June 30, 2013. Other direct operating expenses in the three months ended June 30, 2014 consisted primarily of foreign exchange gains, as compared to primarily foreign exchange losses in the three months ended June 30, 2013.
Direct operating expenses of the Television Production segment of $91.7 million for the three months ended June 30, 2014 were 78.0% of television revenue, compared to $103.0 million, or 78.6%, of television revenue for the three months ended June 30, 2013. The decrease in direct operating expenses of $11.3 million is primarily due to a decrease in television production revenue in the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. Direct operating expenses as a percentage of revenue of 78.0% in the three months ended June 30, 2014 were comparable to direct operating expenses as a percentage of revenue of 78.6% in the three months ended June 30, 2013. In the three months ended June 30, 2014, $1.9 million of charges for write-downs of television film costs were included in the amortization of television programs, compared to charges of $4.9 million in the three months ended June 30, 2013.

Distribution and Marketing Expenses
The following table sets forth distribution and marketing expenses by segment for the three months ended June 30, 2014 and 2013:

 
Three Months Ended
 
Three Months Ended
 
June 30, 2014
 
June 30, 2013
 
Motion
Pictures
 
Television
Production
 
Total
 
Motion
Pictures
 
Television
Production
 
Total
 
(Amounts in millions)
Distribution and marketing expenses
 
 
 
 
 
 
 
 
 
 
 
Theatrical
$
37.8

 
$
—

 
$
37.8

 
$
110.1

 
$
0.1

 
$
110.2

Home Entertainment
30.7

 
1.5

 
32.2

 
38.2

 
1.2

 
39.4

Television
0.5

 
4.2

 
4.7

 
0.4

 
3.1

 
3.5

International
5.7

 
2.6

 
8.3

 
4.2

 
1.8

 
6.0

Lionsgate UK
12.6

 
0.3

 
12.9

 
10.0

 
0.2

 
10.2

Other
1.3

 
0.1

 
1.4

 
2.2

 
—

 
2.2

 
$
88.6

 
$
8.7

 
$
97.3

 
$
165.1

 
$
6.4

 
$
171.5

The majority of distribution and marketing expenses relate to the Motion Pictures segment. Theatrical prints and advertising (“P&A”) in the Motion Pictures segment in the three months ended June 30, 2014 of $37.8 million decreased $72.3 million, compared to $110.1 million in the three months ended June 30, 2013. The decrease was primarily driven by fewer releases in the current quarter from our Fiscal 2015 Theatrical Slate (two wide releases), as compared to the releases in the prior year's quarter from our Fiscal 2014 Theatrical Slate (three wide releases), lower average P&A incurred on the titles released in the current quarter, and higher P&A incurred on a specialty theatrical release (Mud) in the prior year's quarter. Also contributing to the decrease was a decrease in P&A incurred in advance for films to be released in subsequent quarters. In the three months ended June 30, 2014, approximately $8.6 million of P&A was incurred in advance for films to be released in subsequent quarters, such as The Expendables 3, The Hunger Games: Mockingjay Part 1, and Step Up: All In. In the three months ended June 30, 2013, approximately $27.0 million of P&A was incurred in advance for films to be released in subsequent quarters, such as Ender's Game, Kevin Hart: Let Me Explain, Red 2, The Hunger Games: Catching Fire, and You're Next.
Home entertainment distribution and marketing costs on motion pictures and television product in the three months ended June 30, 2014 of $32.2 million decreased $7.2 million, or 18.3%, compared to $39.4 million in the three months ended June 30, 2013, primarily due to lower distribution and marketing costs associated with lower motion pictures home entertainment revenues. Home entertainment distribution and marketing costs as a percentage of home entertainment revenues were 22.9% in the three months ended June 30, 2014, and were comparable to home entertainment distribution and marketing costs as a percentage of home entertainment revenues of 23.3% in the three months ended June 30, 2013.
Lionsgate UK distribution and marketing expenses in the Motion Pictures segment in the three months ended June 30, 2014 of $12.6 million increased slightly from $10.0 million in the three months ended June 30, 2013.


49

Gross Segment Contribution

Gross segment contribution is defined as segment revenue less segment direct operating and distribution and marketing expenses. The following table sets forth gross segment contribution for the three months ended June 30, 2014 and 2013:

 
Three Months Ended
 
 
 
 
 
June 30,
 
 
 
 
 
2014
 
2013
 
Increase (Decrease)
 
Amount
 
% of Segment Revenues
 
Amount
 
% of Segment Revenues
 
Amount
 
Percent
 
(Amounts in millions)
 
 
 
 
Gross segment contribution
 
 
 
 
 
 
 
 
 
 
 
Motion Pictures
$
96.1

 
29.0
%
 
$
70.1

 
16.0
%
 
$
26.0

 
37.1
 %
Television Production
17.1

 
14.6

 
21.7

 
16.6

 
(4.6
)
 
(21.2
)%
 
$
113.2

 
25.2
%
 
$
91.8

 
16.1
%
 
$
21.4

 
23.3
 %
Gross segment contribution of the motion pictures segment for the three months ended June 30, 2014 of $96.1 million increased $26.0 million, or 37.1%, as compared to the three months ended June 30, 2013. The increase in gross segment contribution of the motion pictures segment is primarily due to lower distribution and marketing expenses, and to a lesser extent, lower direct operating expenses incurred relative to motion pictures segment revenue for the three months ended June 30, 2014. The lower distribution and marketing expenses in the three months ended June 30, 2014 primarily resulted from the fewer number of theatrical releases in the current quarter as compared to the three months ended June 30, 2013, and the lower average P&A incurred on the titles released. Gross segment contribution of the motion pictures segment also includes Managed Brands and ancillary driven platform theatrical releases which amounted to $15.0 million for the three months ended June 30, 2014 compared to $0.7 million for the three months ended June 30, 2013. The increase is primarily driven by contributions from ancillary revenues (i.e., home entertainment, television and international revenues) of platform theatrical releases in previous periods.
Gross segment contribution of the television segment for the three months ended June 30, 2014 of $17.1 million decreased $4.6 million, or 21.2%, as compared to the three months ended June 30, 2013. The decrease in gross segment contribution of the television production segment and gross segment contribution as a percentage of television revenues is due to a decrease in television production segment revenues and increased television production distribution and marketing expenses. The gross segment contribution of the television production segment is primarily impacted by the performance and mix of television series and a decrease in television episodes delivered in the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. In particular, the three months ended June 30, 2014 included contributions from Mad Men, Anger Management and Nashville, as compared to contributions from Mad Men and Anger Management in the three months ended June 30, 2013.



50

General and Administrative Expenses
The following table sets forth general and administrative expenses by segment for the three months ended June 30, 2014 and 2013:
 
 
Three Months Ended
 
 
 
 
 
June 30,
 
Increase (Decrease)
 
2014
 
2013
Amount
 
Percent
 
(Amounts in millions)
General and administrative expenses
 
 
 
 
 
 
 
Motion Pictures
$
17.4

 
$
16.4

 
$
1.0

 
6.1
 %
Television Production
3.4

 
3.0

 
0.4

 
13.3
 %
Shared services and corporate expenses
22.1

 
19.7

 
2.4

 
12.2
 %
General and administrative expenses before share-based compensation expense and restructuring charges:
42.9

 
39.1

 
3.8

 
9.7
 %
Share-based compensation expense
16.3

 
17.7

 
(1.4
)
 
(7.9
)%
Restructuring charges
4.9

 
—

 
4.9

 
100.0
 %
 
21.2

 
17.7

 
3.5

 
19.8
 %
Total general and administrative expenses
$
64.1

 
$
56.8

 
$
7.3

 
12.9
 %
Total general and administrative expenses as a percentage of revenue
14.3
%
 
10.0
%
 
 
 
 
General and administrative expenses excluding share-based compensation expense and restructuring charges, as a percentage of revenue
9.5
%
 
6.9
%
 
 
 
 
Total General and Administrative Expenses
General and administrative expenses increased by $7.3 million primarily due to increases in shared services and corporate expenses and restructuring charges.

Shared services and corporate expenses excluding share-based compensation expense and restructuring charges increased $2.4 million mainly due to increases in incentive related compensation and salaries and related expenses.

Share-Based Compensation Expense. The following table sets forth share-based compensation expense included in shared services and corporate expenses for the three months ended June 30, 2014 and 2013:
 
 
Three Months Ended
 
 
 
 
 
June 30,
 
Increase (Decrease)
 
2014
 
2013
Amount
 
Percent
 
(Amounts in millions)
Share-based compensation expense:
 
 
 
 
 
 
 
Stock options
$
8.6

 
$
3.8

 
$
4.8

 
126.3
 %
Restricted share units and other share-based compensation
6.0

 
7.4

 
(1.4
)
 
(18.9
)%
Share appreciation rights
1.7

 
6.5

 
(4.8
)
 
(73.8
)%
 
$
16.3

 
$
17.7

 
$
(1.4
)
 
(7.9
)%
Restructuring Charges. Restructuring charges in the three months ended June 30, 2014 primarily consist of severance costs associated with the integration of the marketing operations of our Lionsgate and Summit film labels and costs related to the move of our international sales and distribution organization to the United Kingdom.  Approximately $1.2 million of the costs are non-cash charges resulting from the acceleration of vesting of stock awards.
Depreciation, Amortization and Other Expenses (Income)
Depreciation and amortization of $1.3 million for the three months ended June 30, 2014 decreased $0.3 million from $1.6 million in the three months ended June 30, 2013.

51

Interest expense of $13.0 million for the three months ended June 30, 2014 decreased $7.8 million, or 37.5%, from $20.8 million in the three months ended June 30, 2013. The following table sets forth the components of interest expense for the three months ended June 30, 2014 and 2013:
 
 
Three Months Ended
 
June 30,
 
2014
 
2013
 
(Amounts in millions)
Interest Expense
 
 
 
Cash Based:
 
 
 
Senior revolving credit facility
$
1.4

 
$
2.5

Convertible senior subordinated notes
1.0

 
1.2

Senior secured second-priority notes
3.0

 
11.2

July 2013 7-Year Term Loan
2.8

 
—

Other
1.3

 
1.4

 
9.5

 
16.3

Non-Cash Based:
 
 
 
Amortization of discount on:
 
 
 
Liability component of convertible senior subordinated notes
1.6

 
2.1

Senior secured second-priority notes
—

 
0.2

July 2013 7-Year Term Loan
0.1

 
—

Amortization of deferred financing costs
1.8

 
2.2

 
3.5

 
4.5

 
$
13.0

 
$
20.8

Interest and other income was $1.0 million in the three months ended June 30, 2014, compared to $1.5 million in the three months ended June 30, 2013.
The following table represents our portion of the income or (loss) of our equity method investees based on our percentage ownership for the three months ended June 30, 2014 and 2013:
 
 
June 30, 2014
 
Three Months Ended
 
 
June 30,
 
Ownership Percentage
 
2014
 
2013
 
 
 
(Amounts in millions)
EPIX (1)
31.2%
 
$
8.5

 
$
6.7

TVGN (1)
50.0%
 
(2.2
)
 
2.9

Other equity method investments (2)
 
 
11.9

 
(1.6
)
 
 
 
$
18.2

 
$
8.0

 ______________________
(1)
We license certain of our theatrical releases and other films and television programs to EPIX and TVGN. A portion of the profits of these licenses reflecting our ownership share in the venture is eliminated through an adjustment to the equity interest income (loss) of the venture. These profits are recognized as they are realized by the venture (see Note 3 to our unaudited consolidated financial statements).
(2)
On April 14, 2014, we sold all of our 34.5% interest in FEARnet, which resulted in a gain on the sale of $11.4 million in the three months ended June 30, 2014 included in our other equity method investments income shown above. See Note 3 to our unaudited consolidated financial statements.

Loss on Extinguishment of Debt

Loss on extinguishment of debt was nil for the three months ended June 30, 2014, compared to a loss on extinguishment of debt of $0.5 million for the three months ended June 30, 2013 resulting from the $4.0 million repurchase of 10.25% Senior Notes.

52


Income Tax Provision

We had an income tax expense of $10.8 million, or 19.9%, of income before income taxes (i.e., effective rate) in the three months ended June 30, 2014, compared to an expense of $8.0 million, or 37.0%, of income before income taxes in the three months ended June 30, 2013. Our tax provision for the three months ended June 30, 2014 was impacted by a discrete charge associated with the gain from the sale of our interest in FEARnet. Excluding this item, our effective tax rate was 15.5% for the three months ended June 30, 2014 compared to 37.0% for the three months ended June 30, 2013. Our effective tax rate excluding discrete items and changes in our valuation allowance for the year ended March 31, 2014 was 25.7%.
The decrease in our effective tax rate from the three months ended June 30, 2013 reflects the implementation of certain business and financing strategies in and among our operations in the various tax jurisdictions in which we operate. Our effective tax rate has changed from the prior period and could fluctuate significantly in the future, as our effective tax rates are affected by many factors, including the level of income generated in the jurisdictions in which we operate, changes in tax laws and regulations in those jurisdictions, changes in valuation allowances on our deferred tax assets, tax planning strategies available to us and other discrete items.
We expect that with the utilization of our net operating loss carryforwards and other tax attributes, our cash tax requirements will not increase significantly in fiscal 2015 as compared to fiscal 2014.

Net Income
Net income for the three months ended June 30, 2014 was $43.3 million, or basic net income per common share of $0.31 on 138.5 million weighted average common shares outstanding and diluted net income per common share of $0.30 on 152.2 million weighted average common shares outstanding. This compares to net income for the three months ended June 30, 2013 of $13.6 million, or basic net income per common share of $0.10 on 136.2 million weighted average common shares outstanding and diluted net income per common share of $0.10 on 140.7 million weighted average common shares outstanding.

Liquidity and Capital Resources
Our liquidity and capital resources have been provided principally through cash generated from operations, corporate debt, and our production loans. Our corporate debt at June 30, 2014 primarily consisted of our senior revolving credit facility, senior secured second-priority notes, July 2013 7-Year Term Loan, and our convertible senior subordinated notes. Our principal uses of cash in operations include the funding of film and television productions, film rights acquisitions, and the distribution and marketing of films and television programs. We also use cash for debt service (i.e. principal and interest payments) requirements, equity method investment funding, quarterly cash dividends, the purchase of common shares under our share repurchase program, capital expenditures, and acquisitions of businesses.
We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.


53

Corporate Debt
The principal amounts outstanding under our corporate debt as of June 30, 2014 and March 31, 2014 were as follows:
 
Maturity Date or Next Holder Redemption Date
 
Conversion Price Per Share as of June 30, 2014
 
Principal Amounts Outstanding
 
 
 
June 30,
 
March 31,
 
 
 
2014
 
2014
 
 
 
 
 
(Amounts in thousands)
Senior revolving credit facility (1)
September 2017
 
N/A
 
$
84,000

 
$
97,619

5.25% Senior Notes (2)
August 2018
 
N/A
 
225,000

 
225,000

July 2013 7-Year Term Loan (2)
July 2020
 
N/A
 
225,000

 
225,000

Principal amounts of convertible senior subordinated notes
 
 
 
 
 
 
 
October 2004 2.9375% Notes
October 2014
 
N/A
 
—

 
115

April 2009 3.625% Notes
March 2015
 
$8.21
 
40,210

 
40,220

January 2012 4.00% Notes
January 2017
 
$10.44
 
41,850

 
41,850

April 2013 1.25% Notes
April 2018
 
$29.84
 
60,000

 
60,000

 
 
 
 
 
$
676,060

 
$
689,804

 ______________________
(1)
Senior Revolving Credit Facility: Interest is payable at an alternative base rate, as defined, plus 1.5% or LIBOR plus 2.5% as designated by us. At June 30, 2014, the effective interest rate was approximately 2.66% (March 31, 2014 - 2.65%). Provides for borrowings up to $800.0 million, limited by a borrowing base and also reduced by outstanding letters of credit. At June 30, 2014, there was $715.9 million available (March 31, 2014 — $702.3 million). We are required to pay a quarterly commitment fee of 0.375% to 0.5% per annum on our unused capacity for the period. Obligations are secured by collateral (as defined in the credit agreement) granted by us and certain of our subsidiaries, as well as a pledge of equity interests in certain of our subsidiaries. The senior revolving credit facility contains a number of covenants that, among other things, require us to satisfy certain financial covenants and restrict our ability to incur additional debt, pay dividends, make certain investments and acquisitions, repurchase our stock, prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of our business, enter into sale-leaseback transactions, transfer and sell material assets and merge or consolidate. As of June 30, 2014, we were in compliance with all applicable covenants.
(2)
5.25% Senior Notes and July 2013 7-Year Term Loan: The 5.25% Senior Notes and July 2013 7-Year Term Loan contain certain restrictions and covenants that, subject to certain exceptions, limit our ability to incur additional indebtedness, pay dividends or repurchase our common shares, make certain loans or investments, and sell or otherwise dispose of certain assets subject to certain conditions, among other limitations. As of June 30, 2014, we were in compliance with all applicable covenants.
(i)
5.25% Senior Notes: Interest is payable semi-annually on February 1 and August 1 of each year at a rate of 5.25% per year.
(ii)
July 2013 7-Year Term Loan: Bears interest by reference to a base rate (subject to a floor of 2.00%) or the LIBOR rate (subject to a floor of 1.00%), plus an applicable margin of 3.00% in the case of base rate loans and 4.00% in the case of LIBOR loans. In the case of LIBOR loans, interest is paid according to the respective LIBOR maturity and in the case of base rate loans, interest is paid quarterly on the last business day of the quarter. The effective interest rate on borrowings outstanding as of June 30, 2014 was approximately 5.00% (March 31, 2014 - 5.00%).
Corporate Debt Transactions:
5.25% Senior Notes and July 2013 7-Year Term Loan

In July 2013, contemporaneous with the redemption of the 10.25% Senior Notes discussed below, Lions Gate Entertainment Corp. issued $225.0 million aggregate principal amount of 5.25% Senior Secured Second-Priority Notes (the "5.25% Senior Notes"), and entered into a seven-year term loan (the "July 2013 7-Year Term Loan"), for an aggregate amount of $222.5 million, net of an original issue discount of $2.5 million (collectively, the "New Issuances").

54

10.25% Senior Notes
In June 2013, we paid $4.3 million to repurchase $4.0 million of aggregate principal amount (carrying value - $4.0 million) of the 10.25% Senior Secured Second-Priority Notes (the "10.25% Senior Notes"). We recorded a loss on extinguishment in the quarter ended June 30, 2013 of $0.5 million, which included $0.2 million of deferred financing costs written off.
In July 2013, we called for early redemption of the $432.0 million remaining outstanding principal amount of the 10.25% Senior Notes. The 10.25% Senior Notes were due November 1, 2016, but were redeemable by us at any time prior to November 1, 2013 at a redemption price of 100% of the principal amount plus the Applicable Premium, as defined in the indenture, and accrued and unpaid interest to the date of redemption. In July 2013, the proceeds from the issuance of the 5.25% Senior Notes and the July 2013 7-Year Term Loan as discussed above, whose principal amount collectively totaled $450.0 million, together with cash on hand and borrowings under our senior revolving credit facility, were used to fund the discharge of the 10.25% Senior Notes. In conjunction with the early redemption of the 10.25% Senior Notes, we paid $34.3 million, representing the present value of interest through the first call date of November 1, 2013 and related call premium pursuant to the terms of the indenture governing the 10.25% Senior Notes. This, along with $19.8 million of deferred financing costs and unamortized debt discount related to the redeemed notes, is being amortized over the life of the New Issuances to the extent deemed to be a modification of terms with creditors participating in both the New Issuances and the 10.25% Senior Notes redemption. The remaining amount of those costs plus certain New Issuance costs amounting to $35.9 million in aggregate was expensed as an early extinguishment of debt in the quarter ended September 30, 2013.

Convertible Senior Subordinated Notes

In April 2013, LGEI issued $60.0 million in aggregate principal amount of 1.25% Convertible Senior Subordinated Notes with a maturity date of April 15, 2018.

In July 2013, $3.2 million of the principal amount of 4.00% Convertible Senior Subordinated Notes issued in January 2012 (the "January 2012 4.00% Notes") were converted into common shares at a conversion price of approximately $10.50 per share for an aggregate of 299,999 common shares.

In March 2014, $24.3 million of the principal amount of the April 2009 3.625% Notes were converted into common shares at a conversion price of approximately $8.25 per share for an aggregate of 2,943,513 common shares (plus cash in lieu of fractional shares).
Production Loans
The amounts outstanding under our production loans as of June 30, 2014, and March 31, 2014 were as follows:
 
 
June 30,
 
March 31,
 
 
2014
 
2014
 
 
(Amounts in thousands)
 
 
 
 
 
Production loans (1)
 
$
589,977

 
$
418,883

 ______________________
(1)
Represents individual loans for the production of film and television programs that we produce. Production loans have contractual repayment dates either at or near the expected film or television program completion date, with the exception of certain loans containing repayment dates on a longer term basis, and incur interest at rates ranging from 3.24% to 3.49%.

Dividends

On June 13, 2014, our Board of Directors declared a quarterly cash dividend of $0.05 per common share payable on August 8, 2014, to shareholders of record as of June 30, 2014. The amount of dividends, if any, that we pay to our shareholders is determined by our Board of Directors, at its discretion, and is dependent on a number of factors, including our financial position, results of operations, cash flows, capital requirements and restrictions under our credit agreements, and shall be in compliance with applicable law. We cannot guarantee the amount of dividends paid in the future, if any.




55



Share Repurchase Plan

On December 17, 2013, our Board of Directors authorized to increase our previously announced share repurchase plan from a total authorization of $150 million to $300 million. Since the December 17, 2013 increase in share repurchase authorization, through July 25, 2014, we have repurchased a total of 4.7 million common shares for an aggregate price of $126.4 million. As a result of these repurchases, the Company has $108.4 million of remaining capacity in its $300.0 million share repurchase plan as of July 25, 2014.
 

Discussion of Operating, Investing, Financing Cash Flows

Cash Flows Used In Operating Activities. Cash flows used in operating activities for the three months ended June 30, 2014 and 2013 were as follows:
 
 
Three Months Ended
 
 
 
 
June 30,
 
 
 
 
2014
 
2013
 
Net Change
 
 
(Amounts in thousands)
Operating Activities:
 
 
 
 
 
 
Operating income
 
$
47,764

 
$
33,428

 
$
14,336

Amortization of films and television programs
 
158,808

 
219,364

 
(60,556
)
Non-cash stock-based compensation
 
16,537

 
13,220

 
3,317

Cash interest
 
(9,442
)
 
(16,273
)
 
6,831

Current income tax provision
 
(5,654
)
 
(5,941
)
 
287

Other non-cash charges included in operating activities
 
8,594

 
12,970

 
(4,376
)
Cash flows from operations before changes in operating assets and liabilities
 
216,607

 
256,768

 
(40,161
)
 
 
 
 
 
 
 
Changes in operating assets and liabilities:
 
 
 
 
 
 
Accounts receivable, net
 
169,514

 
(32,516
)
 
202,030

Investment in films and television programs
 
(263,851
)
 
(160,933
)
 
(102,918
)
Other changes in operating assets and liabilities
 
(134,904
)
 
(92,608
)
 
(42,296
)
Changes in operating assets and liabilities
 
(229,241
)
 
(286,057
)
 
56,816

Net Cash Flows Used In Operating Activities
 
$
(12,634
)
 
$
(29,289
)
 
$
16,655


Cash flows used in operating activities for the three months ended June 30, 2014 were $12.6 million compared to cash flows used in operating activities for the three months ended June 30, 2013 of $29.3 million. The decrease in cash used in operating activities for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 is primarily due to lower cash used from changes in operating assets and liabilities, offset by lower cash flows provided by operations before changes in operating assets and liabilities. Changes in operating assets and liabilities positively affected cash provided by operating activities as compared to the prior period due to decreases in accounts receivable, primarily due to collections from the theatrical release of Divergent and the home entertainment release of The Hunger Games: Catching Fire in March 2014, offset by increases in investment in films and television programs production activity and changes in other operating assets and liabilities. These other changes in operating assets and liabilities were driven by a decrease in accounts payable.


56

Cash Flows Provided by Investing Activities. Cash flows provided by investing activities for the three months ended June 30, 2014 and 2013 were as follows:
 
 
Three Months Ended
 
 
 
 
June 30,
 
 
 
 
2014
 
2013
 
Net Change
 
 
(Amounts in thousands)
Investing Activities:
 
 
 
 
 
 
Proceeds from the sale of equity method investees
 
$
14,575

 
$
9,000

 
$
5,575

Investment in equity method investees
 
(9,650
)
 
(3,750
)
 
(5,900
)
Purchases of property and equipment
 
(1,427
)
 
(1,428
)
 
1

Other investing activities
 
—

 
4,169

 
(4,169
)
Net Cash Flows Provided By Investing Activities
 
$
3,498

 
$
7,991

 
$
(4,493
)
Cash provided by investing activities of $3.5 million for the three months ended June 30, 2014 compared to cash provided by investing activities of $8.0 million for the three months ended June 30, 2013, primarily due to cash provided from the sale of an equity method investee due to the April 2014 sale of FEARnet (see Note 3 to our unaudited consolidated financial statements), offset by an increase in investment in equity method investees, which includes $7.5 million invested in TVGN (see Note 3 to our unaudited consolidated financial statements) in the three months ended June 30, 2014.
Cash Flows Provided by Financing Activities. Cash flows provided by financing activities for the three months ended June 30, 2014 and 2013 were as follows:
 
 
Three Months Ended
 
 
 
 
June 30,
 
 
 
 
2014
 
2013
 
Net Change
 
 
(Amounts in thousands)
Financing Activities:
 
 
 
 
 
 
Senior revolving credit facility - borrowings
 
$
170,000

 
$
173,000

 
$
(3,000
)
Senior revolving credit facility - repayments
 
(183,619
)
 
(172,000
)
 
(11,619
)
Net proceeds from (repayments of) senior revolving credit facility
 
(13,619
)
 
1,000

 
(14,619
)
 
 
 
 
 
 
 
Senior secured second-priority notes - repurchases
 
—

 
(4,280
)
 
4,280

Convertible senior subordinated notes - borrowings
 
—

 
60,000

 
(60,000
)
Convertible senior subordinated notes - repurchases
 
(16
)
 
—

 
(16
)
Net proceeds from (repayments of) corporate debt
 
(13,635
)
 
56,720

 
(70,355
)
 
 
 
 
 
 
 
Production loans - borrowings
 
207,953

 
108,605

 
99,348

Production loans - repayments
 
(36,859
)
 
(82,292
)
 
45,433

Pennsylvania Regional Center Credit Facility - repayments
 
—

 
(65,000
)
 
65,000

Net proceeds from (repayments of) production loans
 
171,094

 
(38,687
)
 
209,781

 
 
 
 
 
 
 
Repurchase of common shares
 
(109,529
)
 
—

 
(109,529
)
Other financing activities
 
(14,136
)
 
(8,476
)
 
(5,660
)
Net Cash Flows Provided By Financing Activities
 
$
33,794

 
$
9,557

 
$
24,237

Cash flows provided by financing activities of $33.8 million for the three months ended June 30, 2014 increased from cash flows provided by financing activities of $9.6 million for the three months ended June 30, 2013. Cash flows provided by financing activities for the three months ended June 30, 2014 primarily reflects an increase in production loan borrowings in order to fund productions and lower production loan repayments, offset by net repayments of our senior revolving credit facility of $13.6 million and cash used for share repurchases and other financing activities which includes dividend payments and tax withholding required on equity awards. Cash flows provided by financing activities for the three months ended June 30,

57

2013 reflects net proceeds from our senior revolving credit facility of $1.0 million, borrowings under our production loans of $108.6 million, and $60.0 million from the issuance of our April 2013 1.25% Notes, offset partially by repayments of production loans of $82.3 million and the $65.0 million repayment of the Pennsylvania Regional Center credit facility during the three months ended June 30, 2013.
Anticipated Cash Requirements. The nature of our business is such that significant initial expenditures are required to produce, acquire, distribute and market films and television programs, while revenues from these films and television programs are earned over an extended period of time after their completion or acquisition. We believe that cash flow from operations, cash on hand, senior revolving credit facility availability, tax-efficient financing, and available production financing will be adequate to meet known operational cash, dividends, and debt service (i.e. principal and interest payments) requirements for the foreseeable future, including the funding of future film and television production, film rights acquisitions and theatrical and video release schedules, and future equity method investment funding requirements. We monitor our cash flow liquidity, availability, fixed charge coverage, capital base, film spending and leverage ratios with the long-term goal of maintaining our credit worthiness.
Our current financing strategy is to fund operations and to leverage investment in films and television programs through our cash flow from operations, our senior revolving credit facility, single-purpose production financing, government incentive programs, film funds, and distribution commitments. In addition, we may acquire businesses or assets, including individual films or libraries that are complementary to our business. Any such transaction could be financed through our cash flow from operations, credit facilities, equity or debt financing. If additional financing beyond our existing cash flows from operations and credit facilities cannot fund such transactions, there is no assurance that such financing will be available on terms acceptable to us. We may also dispose of businesses or assets, including individual films or libraries, and use the net proceeds from such dispositions to fund operations or such acquisitions, or to repay debt.
Filmed Entertainment Backlog
Backlog represents the amount of future revenue not yet recorded from contracts for the licensing of films and television product for television exhibition and in international markets. Backlog at June 30, 2014 and March 31, 2014 was $1.3 billion and $1.2 billion, respectively.


58

Table of Debt and Contractual Commitments
The following table sets forth our future annual repayment of debt, and our contractual commitments as of June 30, 2014:
 
 
Nine Months Ended March 31,
 
Year Ended March 31,
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
Future annual repayment of debt recorded as of June 30, 2014 (on-balance sheet arrangements)
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior revolving credit facility
$
—

 
$
—

 
$
—

 
$
84,000

 
$
—

 
$
—

 
$
84,000

5.25% Senior Notes and July 2013 7-Year Term Loan
—

 
—

 
—

 
—

 
225,000

 
225,000

 
450,000

Film obligations and production loans (1)
118,388

 
438,457

 
77,302

 
2,000

 
1,000

 
—

 
637,147

Principal amounts of convertible senior subordinated notes (2)
40,210

 
—

 
41,850

 
—

 
60,000

 
—

 
142,060

 
158,598

 
438,457

 
119,152

 
86,000

 
286,000

 
225,000

 
1,313,207

Contractual commitments by expected repayment date (off-balance sheet arrangements)
 
 
 
 
 
 
 
 
 
 
 
 
 
Film obligation and production loan commitments (3)
251,251

 
325,890

 
91,282

 
—

 
—

 
—

 
668,423

Interest payments (4)
24,145

 
25,538

 
27,063

 
26,967

 
21,480

 
18,989

 
144,182

Operating lease commitments
9,812

 
12,720

 
12,460

 
12,772

 
13,119

 
62,655

 
123,538

Other contractual obligations
44,594

 
37,529

 
16,320

 
6,037

 
1,527

 
—

 
106,007

 
329,802

 
401,677

 
147,125

 
45,776

 
36,126

 
81,644

 
1,042,150

Total future commitments under contractual obligations
$
488,400

 
$
840,134

 
$
266,277

 
$
131,776

 
$
322,126

 
$
306,644

 
$
2,355,357

 ___________________
(1)
Film obligations include minimum guarantees and theatrical marketing obligations. Production loans represent loans for the production of film and television programs that we produce. Repayment dates are based on anticipated delivery or release date of the related film or contractual due dates of the obligation.
(2)
The future repayment dates of the convertible senior subordinated notes represent the next possible redemption date by the holder for each note respectively.
(3)
Film obligation commitments include distribution and marketing commitments and minimum guarantee commitments. Distribution and marketing commitments represent contractual commitments for future expenditures associated with distribution and marketing of films which we will distribute. The payment dates of these amounts are primarily based on the anticipated release date of the film. Minimum guarantee commitments represent contractual commitments related to the purchase of film rights for pictures to be delivered in the future. Production loan commitments represent amounts committed for future film production and development to be funded through production financing and recorded as a production loan liability when incurred. Future payments under these commitments are based on anticipated delivery or release dates of the related film or contractual due dates of the commitment. The amounts include future interest payments associated with the commitment.
(4)
Includes cash interest payments on our corporate debt, excluding the interest payments on the senior revolving credit facility as future amounts are not fixed or determinable due to fluctuating balances and interest rates.
Undistributed Foreign Earnings
Deferred taxes are not provided on undistributed earnings of our foreign subsidiaries because we do not intend to repatriate the funds. Should we repatriate the funds in the future, we would have to record and pay taxes on those earnings; however, the potential tax on the undistributed earnings for these subsidiaries is not material as of June 30, 2014.
Off-Balance Sheet Arrangements
We do not have any transactions, arrangements and other relationships with unconsolidated entities that will affect our liquidity or capital resources. We have no special purpose entities that provided off-balance sheet financing, liquidity or market

59

or credit risk support, nor do we engage in leasing, hedging or research and development services, that could expose us to liability that is not reflected on the face of our consolidated financial statements. Our commitments to fund operating leases, minimum guarantees, production loans, equity method investment funding requirements and all other contractual commitments not reflected on the face of our consolidated financial statements are presented in the table above.


Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Currency and Interest Rate Risk Management
Market risks relating to our operations result primarily from changes in interest rates and changes in foreign currency exchange rates. Our exposure to interest rate risk results from the financial debt instruments that arise from transactions entered into during the normal course of business. As part of our overall risk management program, we evaluate and manage our exposure to changes in interest rates and currency exchange risks on an ongoing basis. Hedges and derivative financial instruments will be used in the future in order to manage our interest rate and currency exposure. We have no intention of entering into financial derivative contracts, other than to hedge a specific financial risk.
Currency Rate Risk. We enter into forward foreign exchange contracts to hedge our foreign currency exposures on future production expenses denominated in various foreign currencies. As of June 30, 2014, we had the following outstanding forward foreign exchange contracts with maturities of less than 10 months from June 30, 2014:
June 30, 2014
Foreign Currency
 
Foreign Currency Amount
 
US Dollar Amount
 
Weighted Average Exchange Rate Per $1 USD
 
 
(Amounts in millions)
 
(Amounts in millions)
 
 
British Pound Sterling
 

£16.6

in exchange for

$27.9

 
£0.60
Australian Dollar
 

A$26.4

in exchange for

$23.2

 
A$1.14
Euro
 

€0.5

in exchange for

$0.6

 
€0.74
Canadian Dollar
 

C$11.3

in exchange for

$10.3

 
C$1.09
Changes in the fair value representing a net unrealized fair value gain (loss) on foreign exchange contracts that qualified as effective hedge contracts outstanding during the three months ended June 30, 2014 were losses of $0.8 million, and are included in accumulated other comprehensive loss, a separate component of shareholders’ equity. As of June 30, 2013, there were no outstanding forward foreign exchange contracts. These contracts are entered into with major financial institutions as counterparties. We are exposed to credit loss in the event of nonperformance by the counterparty, which is limited to the cost of replacing the contracts, at current market rates. We do not require collateral or other security to support these contracts.
Interest Rate Risk. Certain of our borrowings, primarily borrowings under our amended and restated senior revolving credit facility and certain production loans, are, and are expected to continue to be, at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income would decrease. The applicable margin with respect to loans under the amended and restated senior revolving credit facility is a percentage per annum equal to 2.50% plus an adjusted rate based on LIBOR. Assuming the amended and restated senior revolving credit facility is drawn up to its maximum borrowing capacity of $800 million, based on the applicable LIBOR in effect as of June 30, 2014, each quarter point change in interest rates would result in a $2.0 million change in annual interest expense on the amended and restated senior revolving credit facility. The applicable margin with respect to the July 2013 7-Year Term Loan is 3.00% in the case of base rate loans, and 4.00% in the case of LIBOR loans. The base rate on the July 2013 7-Year Term Loan is subject to a floor of 2.00%, and the LIBOR rate is subject to a floor of 1.00%. Assuming the July 2013 7-Year Term Loan outstanding balance and the applicable LIBOR in effect as of June 30, 2014, a quarter point change in interest rates would result in a $0.6 million change in annual interest expense.
The variable interest production loans incur interest at rates ranging from approximately 3.24% to 3.49% and applicable margins ranging from 2.5% over the one, two, three, or six-month LIBOR to 3.0% over the one, three or six month LIBOR. A quarter point increase of the interest rates on the outstanding principal amount of our variable rate production loans would result in $1.5 million in additional costs capitalized to the respective film or television asset.


60

At June 30, 2014, our 5.25% Senior Notes and convertible senior subordinated notes had an aggregate outstanding carrying value of $358.3 million, and an estimated fair value of $366.6 million. A 1% increase or decrease in the level of interest rates would decrease or increase the fair value of the 5.25% Senior Notes and convertible senior subordinated notes by approximately $10.9 million and $11.9 million, respectively.

The following table presents our financial instruments that are sensitive to changes in interest rates. The table also presents the cash flows of the principal amounts of the financial instruments with the related weighted-average interest rates by expected maturity dates and the fair value of the instrument as of June 30, 2014:
 
 
Nine Months Ended
March 31,
 
Year Ended March 31,
 
Fair Value
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
 
June 30,
2014
Variable Rates:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Revolving Credit Facility (1)
$
—

 
$
—

 
$
—

 
$
84,000

 
$
—

 
$
—

 
$
84,000

 
$
84,000

Average Interest Rate
—

 
—

 
—

 
2.66
%
 
—

 
—

 
 
 
 
July 2013 7-Year Term Loan (2)
—

 
—

 
—

 
—

 
—

 
225,000

 
225,000

 
227,813

Average Interest Rate
—

 
—

 
—

 
—

 
—

 
5.00
%
 
 
 
 
Production loans (3)
93,862

 
421,777

 
74,338

 
—

 
—

 
—

 
589,977

 
589,977

Average Interest Rate
3.37
%
 
3.28
%
 
3.24
%
 
—

 
—

 
—

 
 
 
 
Fixed Rates:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Second-Priority Notes (4)
—

 
—

 
—

 
—

 
225,000

 
—

 
225,000

 
231,750

Average Interest Rate
—

 
—

 
—

 
—

 
5.25
%
 
—

 
 
 
 
Principal Amounts of Convertible Senior Subordinated Notes (5):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
April 2009 3.625% Notes
40,210

 
—

 
—

 
—

 
—

 
—

 
40,210

 
40,548

Average Interest Rate
3.63
%
 
—

 
—

 
—

 
—

 
—

 
 
 
 
January 2012 4.00% Notes
—

 
—

 
41,850

 
—

 
—

 
—

 
41,850

 
42,038

Average Interest Rate
—

 
—

 
4.00
%
 
—

 
—

 
—

 
 
 
 
April 2013 1.25% Notes
—

 
—

 
—

 
—

 
60,000

 
—

 
60,000

 
52,238

Average Interest Rate
—

 
—

 
—

 
—

 
1.25
%
 
—

 
 
 
 
 
$
134,072

 
$
421,777

 
$
116,188

 
$
84,000

 
$
285,000

 
$
225,000

 
$
1,266,037

 
$
1,268,364

 ____________________
(1)
Amended and restated senior revolving credit facility, which expires September 27, 2017 and bears interest of 2.50% over the Adjusted LIBOR rate.
(2)
The July 2013 7-Year Term Loan matures on July 19, 2020, and bears interest by reference to a base rate or the LIBOR rate, plus an applicable margin of 3.00% in the case of base rate loans and 4.00% in the case of LIBOR loans. The base rate is subject to a floor of 2.0%, and the LIBOR rate is subject to a floor of 1.0%.
(3)
Represents amounts owed to film production entities on anticipated delivery date or release date of the titles or the contractual due dates of the obligation, that incur interest at rates ranging from approximately 3.24% to 3.49%.
(4)
Senior secured second-priority notes with a fixed interest rate equal to 5.25%.
(5)
The future repayment dates of the convertible senior subordinated notes represent the next possible redemption date by the holder for each note respectively.

61

Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”). These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within required time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of June 30, 2014, the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures were effective as of June 30, 2014.
Changes in Internal Control over Financial Reporting
As required by Rule 13a-15(d) of the Exchange Act, the Company, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, also evaluated whether any
changes occurred to the Company’s internal control over financial reporting during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, such control. Based on that evaluation, there has been no such
change during the period covered by this report.



62

PART II

Item 1. Legal Proceedings.

From time to time, the Company is involved in certain claims and legal proceedings arising in the normal course of business. While the resolution of these matters cannot be predicted with certainty, we do not believe, based on current knowledge, that the outcome of any currently pending legal proceedings in which the Company is currently involved will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flow.

For a discussion of certain claims and legal proceedings, see Note 14 - Contingencies to our unaudited consolidated financial statements, which discussion is incorporated by reference into this Part II, Item 1, Legal Proceedings.



Item 1A.  Risk Factors.

Other than as set forth below, there were no other material changes to the risk factors previously reported in our Annual Report on Form 10-K for the fiscal year ended March 31, 2014.

Despite our current indebtedness levels, we and our subsidiaries may be able to incur additional debt in the future.

Although each of our credit facilities and the indentures governing our senior secured notes contains covenants that, among other things, limit our ability to incur additional indebtedness, including guarantees, make restricted payments and investments, and grant liens on our assets, the covenants contained in such debt documents provide a number of important exceptions and thus, do not prohibit us or our subsidiaries from doing so. Such exceptions will provide us substantial flexibility to incur indebtedness, grant liens and expend funds to operate our business. For example, under the terms of the indenture governing our senior secured notes (i) with few restrictions, we may incur indebtedness in connection with certain film and television financing arrangements, including without limitation, purchasing or acquiring rights in film or television productions or financing print and advertising expenses, and such indebtedness may be secured by liens senior to the liens in respect of our senior secured notes, and (ii) in limited circumstances, we may make investments in assets that are not included in the borrowing base supporting our senior secured notes, in each case, without having to meet the leverage ratio tests for debt incurrence or to fit such investments within the restricted payments “build up basket” or within other categories of funds applicable to making investments and other restricted payments under the indenture governing our senior secured notes.

In addition, we may incur additional indebtedness through our senior secured credit facility. Prior to July 19, 2013, due to restrictions in the Company's indenture governing the Company's 10.25% Senior Notes, the maximum borrowing allowed under our senior secured credit facility was $650.0 million. With the full redemption and discharge of the indenture governing the 10.25% Senior Notes on July 19, 2013, we may now borrow up to $800 million under the senior secured credit facility. At June 30, 2014, we have borrowed approximately $84.0 million under our senior secured credit facility, and have less than $0.1 million in letters of credit outstanding. We could borrow some or all of the remaining permitted amount in the future. The amount we have available to borrow under this facility depends upon our borrowing base, which in turn depends on the value of our existing library of films and television programs, as well as accounts receivable and cash held in collateral accounts. If new debt is added to our and our subsidiaries' existing debt levels, this has the potential to magnify the risks discussed above relating to our ability to service our indebtedness and the potential adverse impact our high level of indebtedness could have on us.

An increase in the ownership of our common shares by certain shareholders could trigger a change in control under the agreements governing our long-term indebtedness.

The agreements governing certain of our long-term indebtedness contain change in control provisions that are triggered when any of our shareholders, directly or indirectly, acquires ownership or control in excess of a certain percentage of our common shares. As of July 18, 2014, three of our shareholders, Mark H. Rachesky, M.D., Capital Research Global Investors and Capital World Investors and their respective affiliates, beneficially owned approximately 37.4%, 6.5% and 5.5%, respectively, of our outstanding common shares.

Under certain circumstances, including the acquisition of ownership or control by a person or group in excess of 50% of our common shares, the holders of our senior secured notes and our convertible senior subordinated notes may require us to repurchase all or a portion of such notes upon a change in control and the holders of our convertible senior subordinated notes may be entitled to receive a make whole premium based on the price of our common shares on the change in control date. We may not be able to repurchase these notes upon a change in control because we may not have sufficient funds. Further, we may be contractually

63

restricted under the terms of our secured credit facilities from repurchasing all of the notes tendered by holders upon a change in control. Our failure to repurchase our senior secured notes upon a change in control would cause a default under the indentures governing the senior secured notes and the convertible senior subordinated notes and a cross-default under our secured credit facilities.

Our secured credit facilities also provide that a change in control, which includes a person or group acquiring ownership or control in excess of 50% of our outstanding common shares, will be an event of default that permits lenders to accelerate the maturity of borrowings thereunder and to enforce security interests in the collateral securing such debt, thereby limiting our ability to raise cash to purchase our outstanding senior secured notes and convertible senior subordinated notes. Any of our future debt agreements may contain similar provisions.

Certain shareholders own a majority of our outstanding common shares.

As of July 18, 2014, three of our shareholders beneficially owned an aggregate of 67,771,628 of our common shares, or approximately 49.4% of the outstanding shares. In addition, one of these shareholders, Mark H. Rachesky, M.D., the beneficial owner of approximately 37.4% of our outstanding common shares, currently serves as the Chairman of our Board of Directors. Accordingly, these three shareholders, collectively, have the power to exercise substantial influence over us and on matters requiring approval by our shareholders, including the election of directors, the approval of mergers and other significant corporate transactions. This concentration of ownership may make it more difficult for other shareholders to effect substantial changes in our company and may also have the effect of delaying, preventing or expediting, as the case may be, a change in control of our company.

Sales of a substantial number of shares of our common shares, or the perception that such sales might occur, could have an adverse effect on the price of our common shares, and therefore our ability to raise additional capital to fund our operations.

As of July 18, 2014, approximately 49.4% of our common shares were held beneficially by certain individuals and institutional investors who each had ownership of equal to or greater than 5% of our common shares. We also filed a resale registration statement to enable certain shareholders who received our common shares in connection with our acquisition of Summit Entertainment in January 2012 and certain holders of debt convertible into our common shares, to resell our common shares. Sales by such individuals and institutional investors of a substantial number of shares of our common shares into the public market, or the perception that such sales might occur, could have an adverse effect on the price of our common shares, which could materially impair our ability to raise capital through the sale of common shares or debt that is convertible into our common shares.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Securities

On May 31, 2007, our Board of Directors authorized the repurchase of up to $50 million of our common shares. On each of May 29, 2008 and November 6, 2008, our Board of Directors authorized additional repurchases up to an additional $50 million of our common shares. Thereafter, on December 17, 2013, our Board of Directors authorized the Company to further increase its stock repurchase plan to $300 million. To date, approximately $191.6 million of the Company’s common shares have been purchased, leaving approximately $108.4 million of authorized potential purchases. The remaining $108.4 million of the Company’s common shares may be purchased from time to time at the Company’s discretion, including quantity, timing and price thereof, and will be subject to market conditions. Such purchases may be made in the open market or through privately negotiated transactions and will be structured as permitted by securities laws and other legal requirements.

During the period from the authorization date through June 30, 2014, 10,933,672 common shares have been repurchased at a cost of approximately $174.8 million, including commission costs (and, from July 1, 2014 to July 25, 2014, 587,701 common shares at a cost of approximately $16.9 million, including commission costs). The share repurchase program has no expiration date.

The following table sets forth information with respect to shares of our common stock purchased by us during the three months ended June 30, 2014:


64

ISSUER PURCHASES OF EQUITY SECURITIES
Period
(a) Total Number of Shares Purchased
 
(b) Average Price Paid per Share
 
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
(d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
April1, 2014 - April 30, 2014
2,684,081

 
$
26.42

 
2,684,081

 
$
155,525,935

May 1, 2014 - May 31, 2014
436,230

 
$
25.90

 
436,230

 
$
144,229,460

June 1, 2014 - June 30, 2014
710,345

 
$
26.73

 
710,345

 
$
125,243,412

Total
3,830,656

 
$
26.42

 
3,830,656

 
$
125,243,412


Additionally, during the three months ended June 30, 2014, 390,785 common shares were withheld upon the vesting of restricted share units and share issuances to satisfy minimum statutory federal, state and local tax withholding obligations.




Item 3. Defaults Upon Senior Securities.
None

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.
None
Item 6. Exhibits.
Exhibit
 
 
Number
 
Description of Documents
3.1(1)
 
Articles
3.2(2)
 
Notice of Articles
3.3(3)
 
Vertical Short Form Amalgamation Application
3.4(3)
 
Certificate of Amalgamation
31.1
 
Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2
 
Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1
 
Certification of CEO and CFO pursuant to Section 906 of Sarbanes-Oxley Act of 2002
101
 
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements
__________________________

(1)
Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2005 as filed on June 29, 2005.
(2)
Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2010 as filed on February 9, 2011.
(3)
Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2007 as filed on May 30, 2007.





65

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
LIONS GATE ENTERTAINMENT CORP.
 
 
 
By:  
/s/ JAMES W. BARGE
 
 
 
Name:
James W. Barge
 
DATE: August 7, 2014
 
Title:
Duly Authorized Officer and Chief Financial Officer
 




66

LIONS GATE ENTERTAINMENT CORP /CN/ Reports