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EXCEL - IDEA: XBRL DOCUMENT - LIONS GATE ENTERTAINMENT CORP /CN/Financial_Report.xls
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EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - LIONS GATE ENTERTAINMENT CORP /CN/ex311q3f2015.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - LIONS GATE ENTERTAINMENT CORP /CN/ex312q3f2015.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 December 31, 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 February 2, 2015
Common Shares, no par value per share
 
139,853,866 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
 
 
December 31,
2014
 
March 31,
2014
 
(Amounts in thousands,
except share amounts)
ASSETS
 
 
 
Cash and cash equivalents
$
28,886

 
$
25,692

Restricted cash
7,508

 
8,925

Accounts receivable, net of reserves for returns and allowances of $64,815 (March 31, 2014 - $106,680) and provision for doubtful accounts of $4,074 (March 31, 2014 - $4,876)
974,579

 
885,571

Investment in films and television programs, net
1,447,393

 
1,274,573

Property and equipment, net
22,430

 
14,552

Equity method investments
211,680

 
181,941

Goodwill
323,328

 
323,328

Other assets
71,372

 
71,067

Deferred tax assets
54,329

 
65,983

Total assets
$
3,141,505

 
$
2,851,632

LIABILITIES
 
 
 
Senior revolving credit facility
$
160,500

 
$
97,619

5.25% Senior Notes
225,000

 
225,000

Term Loan
223,021

 
222,753

Accounts payable and accrued liabilities
271,101

 
332,457

Participations and residuals
463,093

 
469,390

Film obligations and production loans
737,565

 
499,787

Convertible senior subordinated notes
113,271

 
131,788

Deferred revenue
279,958

 
288,300

Total liabilities
2,473,509

 
2,267,094

Commitments and contingencies

 

SHAREHOLDERS’ EQUITY
 
 
 
Common shares, no par value, 500,000,000 shares authorized, 140,259,641 shares issued (March 31, 2014 - 141,007,461 shares)
668,492

 
743,788

Retained earnings (accumulated deficit)
4,352

 
(157,875
)
Accumulated other comprehensive loss
(4,848
)
 
(1,375
)
Total shareholders’ equity
667,996

 
584,538

Total liabilities and shareholders’ equity
$
3,141,505

 
$
2,851,632

See accompanying notes.

4


LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
 
(Amounts in thousands, except per share amounts)
Revenues
$
751,299

 
$
839,939

 
$
1,753,558

 
$
1,908,396

Expenses:
 
 
 
 
 
 
 
Direct operating
400,576

 
397,513

 
945,840

 
965,756

Distribution and marketing
171,439

 
233,535

 
421,637

 
550,497

General and administration
61,407

 
65,577

 
186,975

 
186,120

Depreciation and amortization
1,708

 
1,530

 
4,685

 
4,766

Total expenses
635,130

 
698,155

 
1,559,137

 
1,707,139

Operating income
116,169

 
141,784

 
194,421

 
201,257

Other expenses (income):
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
Cash interest
10,567

 
11,484

 
29,546

 
39,682

Amortization of debt discount and deferred financing costs
2,984

 
4,090

 
10,048

 
12,878

Total interest expense
13,551

 
15,574

 
39,594

 
52,560

Interest and other income
(623
)
 
(1,771
)
 
(2,188
)
 
(4,750
)
Loss on extinguishment of debt
690

 

 
1,276

 
36,653

Total other expenses, net
13,618

 
13,803

 
38,682

 
84,463

Income before equity interests and income taxes
102,551

 
127,981

 
155,739

 
116,794

Equity interests income (loss)
10,898

 
(1,321
)
 
37,353

 
13,158

Income before income taxes
113,449

 
126,660

 
193,092

 
129,952

Income tax provision
15,264

 
37,897

 
30,865

 
27,067

Net income
$
98,185

 
$
88,763

 
$
162,227

 
$
102,885

 
 
 
 
 
 
 
 
Basic net income per common share
$
0.70

 
$
0.64

 
$
1.17

 
$
0.75

Diluted net income per common share
$
0.65

 
$
0.59

 
$
1.10

 
$
0.71

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
139,963

 
137,946

 
138,618

 
137,097

Diluted
151,713

 
155,137

 
151,716

 
154,197

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.07

 
$
0.05

 
$
0.19

 
$
0.05

See accompanying notes.

5


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

 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
 
(Amounts in thousands)
Net income
$
98,185

 
$
88,763

 
$
162,227

 
$
102,885

Foreign currency translation adjustments
(2,373
)
 
517

 
(4,166
)
 
4,104

Net unrealized gain (loss) on foreign exchange contracts, net of tax
277

 
(114
)
 
693

 
(770
)
Comprehensive income
$
96,089

 
$
89,166

 
$
158,754

 
$
106,219

See accompanying notes.


6


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



 
Common Shares
 
Retained Earnings (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
268,247

 
4,404

 
 
 
 
 
4,404

Share-based compensation, net of withholding tax obligations of $14,939
621,604

 
38,901

 
 
 
 
 
38,901

Conversion of October 2004 2.9375% Notes and April 2009 3.625% Notes
2,938,533

 
24,024

 
 
 
 
 
24,024

Issuance of common shares to directors for services
18,390

 
521

 
 
 
 
 
521

Repurchase of common shares, no par value
(4,594,594
)
 
(123,626
)
 
 
 
 
 
(123,626
)
Dividends declared
 
 
(26,287
)
 


 
 
 
(26,287
)
Excess tax benefits on equity-based compensation awards
 
 
6,767

 
 
 
 
 
6,767

Net income
 
 
 
 
162,227

 
 
 
162,227

Foreign currency translation adjustments
 
 
 
 
 
 
(4,166
)
 
(4,166
)
Net unrealized gain on foreign exchange contracts, net of tax
 
 
 
 
 
 
693

 
693

Balance at December 31, 2014
140,259,641

 
$
668,492

 
$
4,352

 
$
(4,848
)
 
$
667,996


See accompanying notes.

7



LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
December 31,
 
2014
 
2013
 
(Amounts in thousands)
Operating Activities:
 
 
 
Net income
$
162,227

 
$
102,885

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
4,685

 
4,766

Amortization of films and television programs
639,472

 
636,818

Amortization of debt discount and deferred financing costs
10,048

 
12,878

Non-cash share-based compensation
48,691

 
41,044

Distribution from equity method investee
7,788

 
9,849

Loss on extinguishment of debt
1,276

 
36,653

Equity interests income
(37,353
)
 
(13,158
)
Deferred income taxes
11,243

 
13,272

Changes in operating assets and liabilities:
 
 
 
Restricted cash
1,417

 
(29,754
)
Accounts receivable, net
(94,803
)
 
(46,376
)
Investment in films and television programs
(815,469
)
 
(692,943
)
Other assets
(1,416
)
 
(1,696
)
Accounts payable and accrued liabilities
(52,700
)
 
4,205

Participations and residuals
(6,070
)
 
38,236

Film obligations
(33,953
)
 
11,208

Deferred revenue
(8,124
)
 
17,947

Net Cash Flows Provided By (Used In) Operating Activities
(163,041
)
 
145,834

Investing Activities:
 
 
 
Proceeds from the sale of equity method investees
14,575

 
9,000

Investment in equity method investees
(14,750
)
 
(17,250
)
Distributions from equity method investee in excess of earnings

 
4,169

Other investments
(2,000
)
 

Repayment of loans receivable

 
4,275

Purchases of property and equipment
(11,293
)
 
(6,116
)
Net Cash Flows Used In Investing Activities
(13,468
)
 
(5,922
)
Financing Activities:
 
 
 
Senior revolving credit facility - borrowings
681,500

 
782,219

Senior revolving credit facility - repayments
(618,619
)
 
(926,574
)
5.25% Senior Notes and Term Loan - borrowings, net of deferred financing costs of $6,860 in 2013

 
440,640

10.25% Senior Notes - repurchases and redemptions

 
(470,584
)
Convertible senior subordinated notes - borrowings

 
60,000

Convertible senior subordinated notes - repurchases
(16
)
 

Production loans - borrowings
533,781

 
359,582

Production loans - repayments
(261,868
)
 
(301,385
)
Pennsylvania Regional Center credit facility - repayments

 
(65,000
)
Repurchase of common shares
(129,859
)
 

Dividends paid
(23,536
)
 

Excess tax benefits on equity-based compensation awards
6,767

 

Exercise of stock options
4,404

 
10,869

Tax withholding required on equity awards
(14,939
)
 
(14,376
)
Net Cash Flows Provided By (Used In) Financing Activities
177,615

 
(124,609
)
Net Change In Cash And Cash Equivalents
1,106

 
15,303

Foreign Exchange Effects on Cash
2,088

 
(2,264
)
Cash and Cash Equivalents - Beginning Of Period
25,692

 
62,363

Cash and Cash Equivalents - End Of Period
$
28,886

 
$
75,402

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,” "Lions Gate," “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 Securities Exchange Act of 1934, as amended, 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 and nine months ended December 31, 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 May 2014, the Financial Accounting Standards Board ("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
 
December 31,
2014
 
March 31,
2014
 
(Amounts in thousands)
Motion Pictures Segment - Theatrical and Non-Theatrical Films
 
 
 
Released, net of accumulated amortization
$
454,576

 
$
509,831

Acquired libraries, net of accumulated amortization
11,153

 
14,329

Completed and not released
124,674

 
50,785

In progress
473,052

 
351,047

In development
30,765

 
22,336

Product inventory
22,342

 
31,248

 
1,116,562

 
979,576

Television Production Segment - Direct-to-Television Programs
 
 
 
Released, net of accumulated amortization
227,513

 
212,929

In progress
96,441

 
76,459

In development
6,877

 
5,609

 
330,831

 
294,997

 
$
1,447,393

 
$
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
 
 
 
December 31,
2014
 
March 31,
2014
 
 
 
 
(In years)
 
(Amounts in thousands)
Artisan Entertainment
December 2003
 
20.00
 
9.00
 
$
6,702

 
$
10,236

Summit Entertainment
January 2012
 
20.00
 
17.00
 
4,451

 
4,093

Total acquired libraries
 
 
 
 
 
 
$
11,153

 
$
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 December 31, 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 December 31, 2017.

3. Equity Method Investments
The carrying amounts of equity method investments at December 31, 2014 and March 31, 2014 were as follows:
 
 
December 31,
2014
 
 
 
 
Equity Method Investee
Ownership
Percentage
 
December 31,
2014
 
March 31,
2014
 
 
 
(Amounts in thousands)
EPIX
31.2%
 
$
98,416

 
$
78,758

POP (formerly TVGN)
50.0%
 
92,134

 
86,298

Other Equity Method Investments(1)
Various
 
21,130

 
16,885

 
 
 
$
211,680

 
$
181,941


10

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



Equity interests in equity method investments for the three and nine months ended December 31, 2014 and 2013 were as follows (income (loss)):
 
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
Equity Method Investee
2014
 
2013
 
2014
 
2013
 
(Amounts in thousands)
EPIX
$
11,214

 
$
5,614

 
$
27,446

 
$
21,236

POP (formerly TVGN)
(1,115
)
 
(5,223
)
 
(4,663
)
 
(3,166
)
Other Equity Method Investments(1)
799

 
(1,712
)
 
14,570

 
(4,912
)
 
$
10,898

 
$
(1,321
)
 
$
37,353

 
$
13,158

_________________________
(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 and nine months ended December 31, 2014 and 2013, the Company recorded its share of the income or loss generated by these entities for the three and nine months ended September 30, 2014 and 2013, respectively. Equity interest income from Other Equity Method Investments of $14.6 million for the nine months ended December 31, 2014 includes a gain on the sale of the Company's investment in FEARnet of $11.4 million. The Company sold all of its 34.5% interest in FEARnet on April 14, 2014, for a sales price of approximately $14.6 million. As a result of this transaction, the Company's equity interest in FEARnet was 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 POP (formerly 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 and nine months ended December 31, 2014, the Company received distributions from EPIX of nil and $7.8 million, respectively. During the three and nine months ended December 31, 2013, the Company received distributions from EPIX of nil and $14.0 million, respectively. Since the Company's original investment in April 2008, the Company has received distributions from EPIX of $28.0 million through December 31, 2014.
EPIX Financial Information:
The following table presents summarized balance sheet data as of December 31, 2014 and March 31, 2014 for EPIX:
 
 
December 31,
2014
 
March 31,
2014
 
(Amounts in thousands)
Current assets
$
221,417

 
$
184,471

Non-current assets
$
267,544

 
$
247,231

Current liabilities
$
117,394

 
$
126,217

Non-current liabilities
$
9,515

 
$
9,459

The following table presents the summarized statement of operations for the three and nine months ended December 31, 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
 
Nine Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
 
(Amounts in thousands)
Revenues
$
101,124

 
$
89,768

 
$
288,424

 
$
261,998

Expenses:
 
 
 
 
 
 
 
Operating expenses
59,224

 
60,973

 
178,690

 
182,259

Selling, general and administrative expenses
5,863

 
5,791

 
17,503

 
17,054

Operating income
36,037

 
23,004

 
92,231

 
62,685

Interest and other expense
(399
)
 
(163
)
 
(1,130
)
 
(1
)
Net income
$
35,638

 
$
22,841

 
$
91,101

 
$
62,684

Reconciliation of net income reported by EPIX to equity interest income:
 
 
 
 
 
 
 
Net income reported by EPIX
$
35,638

 
$
22,841

 
$
91,101

 
$
62,684

Ownership interest in EPIX
31.15
%
 
31.15
%
 
31.15
%
 
31.15
%
The Company's share of net income
11,101

 
7,115

 
28,378

 
19,526

Eliminations of the Company’s share of profits on licensing sales to EPIX(1)
(1,935
)
 
(3,606
)
 
(7,007
)
 
(9,226
)
Realization of the Company’s share of profits on licensing sales to EPIX(2)
2,048

 
2,105

 
6,075

 
10,936

Total equity interest income recorded
$
11,214

 
$
5,614

 
$
27,446

 
$
21,236

__________________
(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 table below sets forth the revenues and gross profits recognized by the Company and the calculation of the profit eliminated for the three and nine months ended December 31, 2014 and 2013:
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
 
(Amounts in thousands)
Revenue recognized on licensing sales to EPIX
$
15,349

 
$
24,740

 
$
41,281

 
$
47,871

 
 
 
 
 
 
 
 
Gross profit on licensing sales to EPIX
$
6,213

 
$
11,576

 
$
22,493

 
$
29,619

Ownership interest in EPIX
31.15
%
 
31.15
%
 
31.15
%
 
31.15
%
Elimination of the Company's share of profits on licensing sales to EPIX
$
1,935

 
$
3,606

 
$
7,007

 
$
9,226

(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.
POP (formerly TVGN). In January 2015, TVGN was rebranded as POP, a multi-platform destination dedicated to celebrating the fun of being a fan. The Company’s investment interest in POP 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 POP because the power to direct the activities that most significantly impact the economic performance of POP is shared with CBS Corporation ("CBS"). Accordingly, the Company's interest in POP is being accounted for under the equity method of accounting. During the three and nine months ended December 31, 2014, the Company made contributions to POP of nil and $10.5 million, respectively.
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

12

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



determined using an option pricing model. The mandatorily redeemable preferred stock units and the 10% dividend are being accreted up to their redemption amount over the ten-year period to the redemption date, which is recorded as income within equity interest.
POP Financial Information:
The following table presents summarized balance sheet data as of December 31, 2014 and March 31, 2014 for POP:
 
December 31,
2014
 
March 31,
2014
 
(Amounts in thousands)
Current assets
$
31,594

 
$
27,150

Non-current assets
$
192,430

 
$
196,011

Current liabilities
$
29,583

 
$
30,653

Non-current liabilities
$
6,970

 
$
12,334

Redeemable preferred stock
$
377,062

 
$
325,204

The following table presents the summarized statement of operations for the three and nine months ended December 31, 2014 and 2013 for POP and a reconciliation of the net loss reported by POP to equity interest loss recorded by the Company:
 
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
 
(Amounts in thousands)
Revenues
$
20,507

 
$
20,058

 
$
59,073

 
$
55,023

Expenses:
 
 
 
 
 
 
 
Cost of services
8,645

 
13,874

 
26,938

 
27,877

Selling, marketing, and general and administration
11,934

 
12,446

 
34,527

 
32,923

Depreciation and amortization
1,928

 
2,040

 
5,866

 
6,034

Operating loss
(2,000
)
 
(8,302
)
 
(8,258
)
 
(11,811
)
Other expense (income)
6

 
160

 
391

 
(1,230
)
Interest expense, net
160

 
297

 
551

 
979

Accretion of redeemable preferred stock units(1)
12,461

 
10,347

 
35,361

 
29,498

Total interest expense, net
12,627

 
10,804

 
36,303

 
29,247

Loss from continuing operations
(14,627
)
 
(19,106
)
 
(44,561
)
 
(41,058
)
Loss from discontinued operations

 
(1,685
)
 

 
(2,799
)
Net loss
$
(14,627
)
 
$
(20,791
)
 
$
(44,561
)
 
$
(43,857
)
Reconciliation of net loss reported by POP to equity interest loss:
 
 
 
 
 
 
 
Net loss reported by POP
$
(14,627
)
 
$
(20,791
)
 
$
(44,561
)
 
$
(43,857
)
Ownership interest in POP
50
%
 
50
%
 
50
%
 
50
%
The Company's share of net loss
(7,314
)
 
(10,396
)
 
(22,281
)
 
(21,929
)
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)
6,231

 
5,173

 
17,681

 
14,749

Elimination of the Company's share of profits on licensing sales to POP

 

 
(367
)
 

Realization of the Company’s share of profits on licensing sales to POP
(32
)
 

 
304

 
54

Total equity interest loss recorded
$
(1,115
)
 
$
(5,223
)
 
$
(4,663
)
 
$
(3,166
)
 ___________________

13

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



(1)
Accretion of mandatorily redeemable preferred stock units represents POP'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 the May 31, 2013 sale of the Company's 50% interest in TVGuide.com. As a result of the sale, TVGuide.com is considered a discontinued operation by POP, 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 POP.

Other Equity Method Investments
Defy Media. In June 2007, the Company acquired an interest in Break Media, a multi-platform digital media company and a leader in male-targeted content creation and distribution. In October 2013, Break Media merged with Alloy Digital, a multi-platform digital media company with a strong presence in the youth market, to create Defy Media. The Company's effective economic interest in Defy Media through its investment in Break Media and its direct investment in Defy Media is approximately 16.0%. 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.
Tribeca Short List. Tribeca Short List is a subscription video-on-demand (SVOD) service. The Company made an initial investment of $2.1 million during the three months ended December 31, 2014. The Company holds a 75.0% economic interest, however, the power to direct the activities that most significantly impact the economic performance of Tribeca Short List is shared equally with Tribeca Enterprises. Accordingly, the Company's interest in Tribeca Short List is being accounted for under the equity method of accounting.


4. Other Assets
The composition of the Company’s other assets is as follows as of December 31, 2014 and March 31, 2014:
 
 
December 31,
2014
 
March 31,
2014
 
(Amounts in thousands)
Deferred financing costs, net of accumulated amortization
$
29,084

 
$
34,722

Prepaid expenses and other
40,648

 
33,347

Finite-lived intangible assets
1,640

 
2,998

 
$
71,372

 
$
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, security deposits, and other investments.
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 December 31, 2014 and March 31, 2014:
 
December 31, 2014
 
March 31, 2014
 
(Amounts in thousands)
Senior revolving credit facility
$
160,500

 
$
97,619

5.25% Senior Notes
225,000

 
225,000

Term Loan, net of unamortized discount of $1,979 (March 31, 2014 - $2,247)
223,021

 
222,753

Convertible senior subordinated notes, net of unamortized discount of $4,753 (March 31, 2014 - $10,397)
113,271

 
131,788

 
$
721,792

 
$
677,160

The following table sets forth future annual contractual principal payment commitments of corporate debt as of December 31, 2014:
 
 
 
Conversion Price Per Share at December 31, 2014
 
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
 
$

 
$

 
$

 
$
160,500

 
$

 
$

 
$
160,500

5.25% Senior Notes
 
N/A
 
August 2018
 

 

 

 

 
225,000

 

 
225,000

Term Loan
 
N/A
 
July 2020
 

 

 

 

 

 
225,000

 
225,000

Principal amounts of convertible senior subordinated notes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
April 2009 3.625% Notes
 
$8.17
 
March 2015
 
16,174

 

 

 

 

 

 
16,174

January 2012 4.00% Notes
 
$10.40
 
January 2017
 

 

 
41,850

 

 

 

 
41,850

April 2013 1.25% Notes
 
$29.71
 
April 2018
 

 

 

 

 
60,000

 

 
60,000

 
 
 
 
 
 
$
16,174

 
$

 
$
41,850

 
$
160,500

 
$
285,000

 
$
225,000

 
728,524

Less aggregate unamortized discount
 
 
 
 
 
 
 
 
 
 
 
 
 
(6,732
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
721,792

____________________
(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. The senior revolving credit facility provides for borrowings and letters of credit up to an aggregate of $800 million, and at December 31, 2014 there was $639.5 million available (March 31, 2014$702.3 million). The availability of funds is limited by a borrowing base and also reduced by outstanding letters of credit which amounted to nil at December 31, 2014 (March 31, 2014$0.1 million).
Maturity Date. 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 December 31, 2014, the senior revolving credit facility bore interest of 2.5% over the LIBOR rate (effective interest rate of 2.67% and 2.65% on borrowings outstanding as of December 31, 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 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 December 31, 2014, the Company was in compliance with all applicable covenants.
Change in Control. 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 Term Loan

Issuance. In July 2013, contemporaneous with the redemption of the 10.25% Senior Secured Second-Priority Notes (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 "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)
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 December 31, 2014 was approximately 5.00% (March 31, 2014 - 5.00%).

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

Covenants. The 5.25% Senior Notes and 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 December 31, 2014, the Company was in compliance with all applicable covenants.

10.25% Senior Notes
Repurchases. 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 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.

Redemptions. 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

16

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



proceeds from the issuance of the 5.25% Senior Notes and the 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.

Convertible Senior Subordinated Notes
Outstanding Amount and Terms. The following table sets forth the convertible senior subordinated notes outstanding and certain key terms of these notes at December 31, 2014 and March 31, 2014:
 
 
 
Maturity Date or Next Holder Redemption
Date
 
Conversion Price at December 31, 2014
 
December 31, 2014
 
March 31, 2014
Convertible Senior Subordinated Notes
 
 
 
Principal
 
Unamortized Discount
 
Net Carrying Amount
 
Principal
 
Unamortized Discount
 
Net Carrying Amount
 
 
 
 
 
 
(Amounts in thousands)
October 2004 2.9375% Notes
 
 N/A
 
 N/A
 
$

 
$

 
$

 
$
115

 
$

 
$
115

April 2009 3.625% Notes
 
March 15, 2015
 
$8.17
 
16,174

 
(370
)
 
15,804

 
40,220

 
(4,605
)
 
35,615

January 2012 4.00% Notes
 
January 11, 2017
 
$10.40
 
41,850

 
(4,383
)
 
37,467

 
41,850

 
(5,792
)
 
36,058

April 2013 1.25% Notes
 
April 15, 2018
 
$29.71
 
60,000

 

 
60,000

 
60,000

 

 
60,000

 
 
 
 
 
 
$
118,024

 
$
(4,753
)
 
$
113,271

 
$
142,185

 
$
(10,397
)
 
$
131,788


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. Interest is payable semi-annually on March 15 and September 15 of each year. The notes mature on March 15, 2025, and are redeemable by the Company on or after March 15, 2015, at a price equal to 100% of the principal amount to be redeemed, plus unpaid interest through the date of redemption. 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 to be repurchased plus unpaid interest.

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. Interest is payable semi-annually on January 15 and July 15 of each year.

April 2013 1.25% Notes: In April 2013, LGEI issued approximately $60.0 million in aggregate principal amount of April 2013 1.25% Notes. Interest is payable semi-annually on April 15 and October 15 of each year, and commenced on October 15, 2013.

Conversion Features: The convertible senior subordinated notes are convertible, at any time, into the number of common shares of the Company determined by the principal amount being converted divided by the conversion price, subject to adjustment in certain circumstances.
 
The April 2009 3.625% Notes and the January 2012 4.00% Notes provide that 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. 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 these notes is as follows: April 2009 3.625% Notes - 17.26%; January 2012 4.00% Notes - 9.56%.

17

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




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, and accordingly, have been recorded at their principal amount (not reduced by a debt discount for the equity component).
Conversions. In the nine months ended December 31, 2014, $24.0 million of the principal amount of the April 2009 3.625% Notes were converted into 2,929,899 common shares at a conversion price of approximately $8.21 per share, and $0.1 million of the principal amount of the October 2004 2.9375% Notes were converted into 8,634 common shares at a conversion price of approximately $11.46 per share. The Company recorded a loss on extinguishment of debt in the three and nine months ended December 31, 2014 of $0.7 million and $1.3 million, respectively, representing the excess of the fair value of the liability component of the April 2009 3.625% Notes converted over their carrying values, plus the deferred financing costs written off.
Interest Expense. Interest expense recognized for the convertible senior subordinated notes for the three and nine months ended December 31, 2014 and 2013 is presented below:
 
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
 
(Amounts in thousands)
Interest Expense
 
 
 
 
 
 
 
Contractual interest coupon
$
776

 
$
1,191

 
$
2,705

 
$
3,581

Amortization of discount on liability component and debt issuance costs
1,061

 
2,195

 
4,322

 
6,432

 
$
1,837

 
$
3,386

 
$
7,027

 
$
10,013



6. Participations and Residuals
The Company expects approximately 58% of accrued participations and residuals will be paid during the one-year period ending December 31, 2015.


7. Film Obligations and Production Loans
 
 
December 31,
2014
 
March 31,
2014
 
(Amounts in thousands)
Film obligations
$
46,769

 
$
80,904

Production loans
690,796

 
418,883

Total film obligations and production loans
$
737,565

 
$
499,787



18


The following table sets forth future annual repayment of film obligations and production loans as of December 31, 2014:
 
 
Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31,
 
Year Ended March 31,
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
 
(Amounts in thousands)
Film obligations
$
24,612

 
$
16,680

 
$
2,964

 
$
2,000

 
$
1,000

 
$

 
$
47,256

Production loans
85,884

 
391,781

 
213,131

 

 

 

 
690,796

 
$
110,496

 
$
408,461

 
$
216,095

 
$
2,000

 
$
1,000

 
$

 
738,052

Less imputed interest on film obligations
 
 
 
 
 
 
 
 
 
 
 
 
(487
)
 
 
 
 
 
 
 
 
 
 
 
 
 
$
737,565

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. The majority of 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 3.26% to 3.51%.


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, 5.25% Senior Notes, and 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 POP's (formerly 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.

19

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



The following table sets forth the carrying values and fair values of the Company’s investment in POP's mandatorily redeemable preferred stock units and outstanding debt at December 31, 2014 and March 31, 2014:
 
 
December 31, 2014
 
March 31, 2014
 
(Amounts in thousands)
 
Carrying
Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
 
 
(Level 3)
 
 
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Investment in POP's Mandatorily Redeemable Preferred Stock Units
$
92,134

 
$
116,938

 
$
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
15,804

 
16,305

 
35,615

 
40,140

January 2012 4.00% Notes
37,467

 
41,435

 
36,058

 
41,401

April 2013 1.25% Notes
60,000

 
51,834

 
60,000

 
51,411

Production loans
690,796

 
690,796

 
418,883

 
418,883

5.25% Senior Notes
225,000

 
229,923

 
225,000

 
223,313

Term Loan
223,021

 
226,125

 
222,753

 
225,844

 
$
1,252,088

 
$
1,256,418

 
$
998,424

 
$
1,001,103


9. 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 and nine months ended December 31, 2014 and 2013 is presented below:
 
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
 
(Amounts in thousands, except per share amounts)
Basic Net Income Per Common Share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
98,185

 
$
88,763

 
$
162,227

 
$
102,885

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
139,963

 
137,946

 
138,618

 
137,097

Basic Net Income Per Common Share
$
0.70

 
$
0.64

 
$
1.17

 
$
0.75


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 ("RSUs") using the treasury stock method when dilutive, and any contingently issuable shares when dilutive. Diluted net income per common share for the three and nine months ended December 31, 2014 and 2013 is presented below:


20

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



 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
 
(Amounts in thousands, except per share amounts)
Diluted Net Income Per Common Share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
98,185

 
$
88,763

 
$
162,227

 
$
102,885

Add:
 
 
 
 
 
 
 
Interest on convertible notes, net of tax
1,163

 
2,137

 
4,456

 
6,315

Numerator for Diluted Net Income Per Common Share
$
99,348

 
$
90,900

 
$
166,683

 
$
109,200

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
139,963

 
137,946

 
138,618

 
137,097

Effect of dilutive securities:
 
 
 
 
 
 
 
Conversion of notes
8,360

 
13,815

 
9,995

 
13,842

Share purchase options
2,943

 
2,797

 
2,662

 
2,619

Restricted share units
447

 
579

 
441

 
639

Adjusted weighted average common shares outstanding
151,713

 
155,137

 
151,716

 
154,197

Diluted Net Income Per Common Share
$
0.65

 
$
0.59

 
$
1.10

 
$
0.71

For the three and nine months ended December 31, 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
 
Nine Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
 
(Amounts in thousands)
Anti-dilutive shares issuable
 
 
 
 
 
 
 
Share purchase options
3,122

 
2,630

 
4,334

 
2,203

Restricted share units
97

 
117

 
144

 
52

Contingently issuable shares
298

 
451

 
286

 
446

Total weighted average anti-dilutive shares issuable excluded from Diluted Net Income Per Common Share
3,517

 
3,198

 
4,764

 
2,701





10. Capital Stock

(a) Common Shares
The Company had 500 million authorized common shares at December 31, 2014 and March 31, 2014. The table below outlines common shares reserved for future issuance:
 

21

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



 
December 31,
2014
 
March 31,
2014
 
(Amounts in thousands)
Stock options outstanding, average exercise price $22.06 (March 31, 2014 - $20.83)
12,104

 
10,894

Restricted share units — unvested
1,784

 
2,139

Share purchase options and restricted share units available for future issuance
7,643

 
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 $8.17 per share (March 31, 2014 - $8.22)
1,980

 
4,893

Shares issuable upon conversion of January 2012 4.00% Notes at conversion price of $10.40 per share (March 31, 2014 - $10.46)
4,024

 
4,001

Shares issuable upon conversion of April 2013 1.25% Notes at conversion price of $29.71 per share (March 31, 2014 - $29.89)
2,020

 
2,007

Shares reserved for future issuance
29,555

 
27,415


In September 2012, the Company adopted the 2012 Performance Incentive Plan, as amended on September 9, 2014 (the "2012 Plan"). The 2012 Plan provides for the issuance of up to 27.6 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.

(b) Share-based Compensation

The Company recognized the following share-based compensation expense during the three and nine months ended December 31, 2014, and 2013:
 
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
 
(Amounts in thousands)
Compensation Expense:
 
 
 
 
 
 
 
Stock Options
$
7,551

 
$
5,393

 
$
25,560

 
$
15,131

Restricted Share Units and Other Share-based Compensation
6,477

 
6,597

 
19,515

 
22,032

Share Appreciation Rights
1,104

 
74

 
3,800

 
15,036

 
15,132

 
12,064

 
48,875

 
52,199

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

 

 
1,194

 

Total share-based compensation expense
$
15,132

 
$
12,064

 
$
50,069

 
$
52,199

 
 
 
 
 
 
 
 
Tax impact(2)
(5,547
)
 
(4,464
)
 
(18,355
)
 
(19,314
)
Reduction in net income
$
9,585

 
$
7,600

 
$
31,714

 
$
32,885

____________________________
(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.


22

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



The following table sets forth the stock option and restricted share unit activity during the nine months ended December 31, 2014:
 
Stock Options
 
Weighted-Average Exercise Price
 
Restricted Share Units
 
Weighted-Average Grant-Date Fair Value
Outstanding at March 31, 2014
10,894,010

 
$20.83
 
2,139,175

 
$23.38
Granted
1,505,267

 
$29.89
 
766,652

 
$29.48
Options exercised or RSUs vested
(268,247
)
 
$16.42
 
(1,108,305
)
 
$22.17
Forfeited or expired
(27,238
)
 
$17.65
 
(14,011
)
 
$18.98
Outstanding at December 31, 2014
12,103,792

 
$22.06
 
1,783,511

 
$27.02
During the nine months ended December 31, 2014, 75,000 cash-settled share appreciation rights were exercised resulting in a cash payment of $1.7 million.
The excess tax benefits realized from tax deductions associated with option exercises and RSU activity were $6.8 million and nil for the nine months ended December 31, 2014 and 2013, respectively.
Total unrecognized compensation cost related to unvested stock options and restricted share unit awards at December 31, 2014 are $57.4 million and $30.1 million, respectively, and are expected to be recognized over a weighted average period of 2.1 and 1.7 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 December 31, 2014, 4.6 million common shares were repurchased for an aggregate price of $123.6 million (weighted average repurchase price of $26.91 per share). See Note 18 for shares repurchased through January 21, 2015.

(d) Dividends

On December 12, 2014, the Company's Board of Directors declared a quarterly cash dividend of $0.07 per common share payable on February 6, 2015, to shareholders of record as of December 31, 2014. As the Company had an accumulated deficit at the time this dividend was declared, this dividend was recorded as a reduction to common shares on the unaudited consolidated statement of shareholders' equity at De