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EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - LIONS GATE ENTERTAINMENT CORP /CN/ex311q1f2015.htm
EXCEL - IDEA: XBRL DOCUMENT - LIONS GATE ENTERTAINMENT CORP /CN/Financial_Report.xls
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - LIONS GATE ENTERTAINMENT CORP /CN/ex312q1f2015.htm
EX-32.1 - CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906 - LIONS GATE ENTERTAINMENT CORP /CN/ex321q1f2015.htm

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