Attached files

file filename
EX-10.116 - EXHIBIT 10.116 - AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT - LIONS GATE ENTERTAINMENT CORP /CN/ex10116.htm
EX-32.1 - EXHIBIT 32.1 - CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906 - LIONS GATE ENTERTAINMENT CORP /CN/ex321q3f2016.htm
EX-31.2 - EXHIBIT 31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - LIONS GATE ENTERTAINMENT CORP /CN/ex312q3f2016.htm
EX-31.1 - EXHIBIT 31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - LIONS GATE ENTERTAINMENT CORP /CN/ex311q3f2016.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, 2015
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
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 1, 2016
Common Shares, no par value per share
 
149,990,683 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 21, 2015, 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 21, 2015, 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.
This Quarterly Report on Form 10-Q  may contain references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Quarterly Report on Form 10-Q, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other company.
Unless otherwise indicated or the context requires, all references to the “Company,” “Lionsgate,” “we,” “us,” and “our” refer to Lions Gate Entertainment Corp., a corporation organized under the laws of the province of British Columbia, Canada, and its direct and indirect subsidiaries.


3


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
December 31,
2015
 
March 31,
2015
 
(Amounts in thousands,
except share amounts)
ASSETS
 
 
 
Cash and cash equivalents
$
88,292

 
$
102,697

Restricted cash
2,650

 
2,508

Accounts receivable, net of reserves for returns and allowances of $52,613 (March 31, 2015 - $64,362) and provision for doubtful accounts of $5,245 (March 31, 2015 - $4,120)
943,998

 
891,880

Investment in films and television programs, net
1,561,968

 
1,381,829

Property and equipment, net
41,914

 
26,651

Investments
475,109

 
438,298

Goodwill
534,143

 
323,328

Other assets
84,822

 
74,784

Deferred tax assets
105,503

 
50,114

Total assets
$
3,838,399

 
$
3,292,089

LIABILITIES
 
 
 
Senior revolving credit facility
$

 
$

5.25% Senior Notes
225,000

 
225,000

Term Loan
400,000

 
375,000

Accounts payable and accrued liabilities
327,828

 
332,473

Participations and residuals
549,985

 
471,661

Film obligations and production loans
895,558

 
656,755

Convertible senior subordinated notes
99,508

 
114,126

Deferred revenue
295,971

 
274,787

Total liabilities
2,793,850

 
2,449,802

Commitments and contingencies (Note 16)

 

Redeemable noncontrolling interest
89,175

 

SHAREHOLDERS' EQUITY
 
 
 
Common shares, no par value, 500,000,000 shares authorized, 150,252,445 shares issued (March 31, 2015 - 145,532,978 shares)
951,360

 
830,786

Retained earnings
7,673

 
13,720

Accumulated other comprehensive loss
(3,659
)
 
(2,219
)
Total shareholders' equity
955,374

 
842,287

Total liabilities and shareholders' equity
$
3,838,399

 
$
3,292,089

See accompanying notes.

4


LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2015
 
2014
 
2015
 
2014
 
(Amounts in thousands, except per share amounts)
Revenues
$
670,522

 
$
751,299

 
$
1,556,222

 
$
1,753,558

Expenses:
 
 
 
 
 
 
 
Direct operating
404,068

 
400,576

 
927,188

 
945,840

Distribution and marketing
203,121

 
171,439

 
428,185

 
421,637

General and administration
70,083

 
61,407

 
198,372

 
186,975

Depreciation and amortization
2,970

 
1,708

 
7,320

 
4,685

Total expenses
680,242

 
635,130

 
1,561,065

 
1,559,137

Operating income (loss)
(9,720
)
 
116,169

 
(4,843
)
 
194,421

Other expenses (income):
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
Cash interest
11,833

 
10,567

 
32,561

 
29,546

Amortization of debt discount and deferred financing costs
2,336

 
2,984

 
6,863

 
10,048

Total interest expense
14,169

 
13,551

 
39,424

 
39,594

Interest and other income
(521
)
 
(623
)
 
(1,676
)
 
(2,188
)
Loss on extinguishment of debt

 
690

 

 
1,276

Total other expenses, net
13,648

 
13,618

 
37,748

 
38,682

Income (loss) before equity interests and income taxes
(23,368
)
 
102,551

 
(42,591
)
 
155,739

Equity interests income
10,826

 
10,898

 
29,363

 
37,353

Income (loss) before income taxes
(12,542
)
 
113,449

 
(13,228
)
 
193,092

Income tax provision (benefit)
(45,140
)
 
15,264

 
(44,441
)
 
30,865

Net income
32,598

 
98,185

 
31,213

 
162,227

Less: Net loss attributable to noncontrolling interest
8,119

 

 
8,119

 

Net income attributable to Lions Gate Entertainment Corp. shareholders
$
40,717

 
$
98,185

 
$
39,332

 
$
162,227

 
 
 
 
 
 
 
 
Per share information attributable to Lions Gate Entertainment Corp. shareholders:
 
 
 
 
 
 
 
Basic net income per common share
$
0.27

 
$
0.70

 
$
0.26

 
$
1.17

Diluted net income per common share
$
0.26

 
$
0.65

 
$
0.26

 
$
1.10

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
149,480

 
139,963

 
148,484

 
138,618

Diluted
159,412

 
151,713

 
154,412

 
151,716

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.09

 
$
0.07

 
$
0.25

 
$
0.19

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,
 
2015
 
2014
 
2015
 
2014
 
(Amounts in thousands)
Net income
$
32,598

 
$
98,185

 
$
31,213

 
$
162,227

Foreign currency translation adjustments, net of tax
(1,407
)
 
(2,373
)
 
586

 
(4,166
)
Net unrealized loss on available-for-sale securities, net of tax of $2,351 and $557 in the three and nine months ended December 31, 2015, respectively
(15,730
)
 

 
(3,728
)
 

Net unrealized gain (loss) on foreign exchange contracts, net of tax
(1,292
)
 
277

 
1,702

 
693

Comprehensive income
14,169

 
96,089

 
29,773

 
158,754

Less: Comprehensive loss attributable to noncontrolling interest
8,119

 

 
8,119

 

Comprehensive income attributable to Lions Gate Entertainment Corp. shareholders
$
22,288

 
$
96,089

 
$
37,892

 
$
158,754

See accompanying notes.


6


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



 
Common Shares
 
Retained Earnings
 
Accumulated
 Other
Comprehensive
Income (Loss)
 
 
 
Number
 
Amount
 
 
 
Total
 
(Amounts in thousands, except share amounts)
Balance at March 31, 2015
145,532,978

 
$
830,786

 
$
13,720

 
$
(2,219
)
 
$
842,287

Exercise of stock options
397,183

 
6,007

 

 

 
6,007

Share-based compensation, net of withholding tax obligations of $22,278
811,031

 
41,939

 

 

 
41,939

Conversion of April 2009 3.625% Notes
1,983,058

 
16,162

 

 

 
16,162

Issuance of common shares to directors for services
10,744

 
377

 

 

 
377

Issuance of common shares related to Pilgrim Studios acquisition
1,517,451

 
56,089

 

 

 
56,089

Dividends declared

 

 
(37,260
)
 

 
(37,260
)
Net income attributable to Lions Gate Entertainment Corp. shareholders

 

 
39,332

 

 
39,332

Foreign currency translation adjustments, net of tax

 

 

 
586

 
586

Net unrealized loss on available-for-sale securities, net of tax

 

 

 
(3,728
)
 
(3,728
)
Net unrealized gain on foreign exchange contracts, net of tax

 

 

 
1,702

 
1,702

Noncontrolling interest adjustments to redemption value

 

 
(8,119
)
 

 
(8,119
)
Balance at December 31, 2015
150,252,445

 
$
951,360

 
$
7,673

 
$
(3,659
)
 
$
955,374


See accompanying notes.

7



LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
December 31,
 
2015
 
2014
 
(Amounts in thousands)
Operating Activities:
 
 
 
Net income
$
31,213

 
$
162,227

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
7,320

 
4,685

Amortization of films and television programs
655,288

 
639,472

Amortization of debt discount and deferred financing costs
6,863

 
10,048

Non-cash share-based compensation
47,399

 
48,691

Other non-cash items
681

 

Distribution from equity method investee

 
7,788

Loss on extinguishment of debt

 
1,276

Equity interests income
(29,363
)
 
(37,353
)
Deferred income taxes
(54,733
)
 
11,243

Changes in operating assets and liabilities:
 
 
 
Restricted cash
(142
)
 
1,417

Accounts receivable, net
(36,663
)
 
(94,803
)
Investment in films and television programs
(771,255
)
 
(815,469
)
Other assets
(2,254
)
 
(1,416
)
Accounts payable and accrued liabilities
(8,018
)
 
(52,700
)
Participations and residuals
77,428

 
(6,070
)
Film obligations
(30,176
)
 
(33,953
)
Deferred revenue
(4,139
)
 
(8,124
)
Net Cash Flows Used In Operating Activities
(110,551
)
 
(163,041
)
Investing Activities:
 
 
 
Proceeds from the sale of equity method investees

 
14,575

Investment in equity method investees
(3,954
)
 
(14,750
)
Purchase of Pilgrim Studios, net of cash acquired of $15,816 (see Note 9)
(126,892
)
 

Purchases of other investments
(750
)
 
(2,000
)
Purchases of property and equipment
(13,680
)
 
(11,293
)
Net Cash Flows Used In Investing Activities
(145,276
)
 
(13,468
)
Financing Activities:
 
 
 
Senior revolving credit facility - borrowings
238,000

 
681,500

Senior revolving credit facility - repayments
(238,000
)
 
(618,619
)
Term Loan - borrowings, net of deferred financing costs of $964
24,036

 

Convertible senior subordinated notes - repurchases
(5
)
 
(16
)
Production loans - borrowings
509,569

 
533,781

Production loans - repayments
(240,565
)
 
(261,868
)
Repurchase of common shares

 
(129,859
)
Dividends paid
(33,927
)
 
(23,536
)
Excess tax benefits on equity-based compensation awards

 
6,767

Exercise of stock options
6,007

 
4,404

Tax withholding required on equity awards
(22,871
)
 
(14,939
)
Net Cash Flows Provided By Financing Activities
242,244

 
177,615

Net Change In Cash And Cash Equivalents
(13,583
)
 
1,106

Foreign Exchange Effects on Cash
(822
)
 
2,088

Cash and Cash Equivalents - Beginning Of Period
102,697

 
25,692

Cash and Cash Equivalents - End Of Period
$
88,292

 
$
28,886

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 premier next generation global content leader with a strong and diversified presence in motion picture production and distribution, television programming and syndication, home entertainment, digital distribution, 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, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2016. The balance sheet at March 31, 2015 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, 2015.
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; 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. Based on the current guidance, the new framework will become effective on either a full or modified retrospective basis for the Company on April 1, 2018. The Company is currently evaluating the impact that the adoption of this new guidance will have on its consolidated financial statements.
In April 2015, the FASB issued an accounting standards update relating to the presentation of debt issuance costs. The accounting update requires companies to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, rather than as an asset.  The guidance is effective for the Company's fiscal year beginning April 1, 2016, with early adoption permitted. The Company plans to adopt the new guidance effective April 1, 2016. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

9

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



In September 2015, the FASB issued new guidance on adjustments to provisional amounts recognized in a business combination, which are currently recognized on a retrospective basis. Under the new requirements, adjustments will be recognized in the reporting period in which the adjustments are determined. The effects of changes in depreciation, amortization, or other income arising from changes to the provisional amounts, if any, are included in earnings of the reporting period in which the adjustments to the provisional amounts are determined. An entity is also required to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The guidance is effective for the Company's fiscal year beginning April 1, 2016, with early adoption permitted, and is required to be implemented on a prospective basis. The Company adopted the new guidance effective October 1, 2015 and it did not have an impact on the Company's consolidated financial statements.


2. Investment in Films and Television Programs
 
December 31,
2015
 
March 31,
2015
 
(Amounts in thousands)
Motion Pictures Segment - Theatrical and Non-Theatrical Films
 
 
 
Released, net of accumulated amortization
$
526,903

 
$
507,628

Acquired libraries, net of accumulated amortization
5,134

 
9,357

Completed and not released
21,835

 
76,968

In progress
583,493

 
478,879

In development
33,644

 
21,054

Product inventory
19,210

 
23,023

 
1,190,219

 
1,116,909

Television Production Segment - Direct-to-Television Programs
 
 
 
Released, net of accumulated amortization
208,322

 
231,470

In progress
158,270

 
28,585

In development
5,157

 
4,865

 
371,749

 
264,920

 
$
1,561,968

 
$
1,381,829

The Company expects approximately 49% of completed films and television programs, net of accumulated amortization, will be amortized during the one-year period ending December 31, 2016. 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, 2018.
During the three and nine months ended December 31, 2015 and 2014, the Company performed fair value measurements related to certain films. In determining the fair value of its films, the Company employs a discounted cash flows ("DCF") methodology that includes cash flow estimates of a film’s ultimate revenue and costs as well as a discount rate. The discount rate utilized in the DCF analysis is based on the Company’s weighted average cost of capital plus a risk premium representing the risk associated with producing a particular film. As the primary determination of fair value is determined using a DCF model, the resulting fair value is considered a Level 3 measurement (see Note 8). During the three and nine months ended December 31, 2015, the Company recorded $3.1 million and $11.6 million, respectively, of fair value film write-downs, as compared to $13.5 million and $16.9 million of fair value film write-downs recorded during the three and nine months ended December 31, 2014.


10

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



3. Investments
The carrying amounts of investments, by category, at December 31, 2015 and March 31, 2015 were as follows:
 
 
December 31,
2015
 
March 31,
2015
 
 
(Amounts in thousands)
Equity method investments
 
$
274,548

 
$
234,202

Available-for-sale securities
 
157,739

 
162,024

Cost method investments
 
42,822

 
42,072

 
 
$
475,109

 
$
438,298


Equity Method Investments:
The carrying amounts of equity method investments at December 31, 2015 and March 31, 2015 were as follows:
 
 
December 31,
2015
 
 
 
 
Equity Method Investee
Ownership
Percentage
 
December 31,
2015
 
March 31,
2015
 
 
 
(Amounts in thousands)
EPIX
31.2%
 
$
153,745

 
$
119,688

Pop
50.0%
 
93,085

 
91,683

Other(1)
Various
 
27,718

 
22,831

 
 
 
$
274,548

 
$
234,202

Equity interests in equity method investments for the three and nine months ended December 31, 2015 and 2014 were as follows (income (loss)):
 
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
Equity Method Investee
2015
 
2014
 
2015
 
2014
 
(Amounts in thousands)
EPIX
$
12,826

 
$
11,214

 
$
34,055

 
$
27,446

Pop
(63
)
 
(1,115
)
 
602

 
(4,663
)
Other(1)
(1,937
)
 
799

 
(5,294
)
 
14,570

 
$
10,826

 
$
10,898

 
$
29,363

 
$
37,353

_________________________
(1)The Company records its share of the net income or loss of other equity method investments on a one quarter lag. Equity interest income from other equity method investments for the nine months ended December 31, 2014 includes a gain on sale of the Company's investment in FEARnet of $11.4 million.
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. No distributions were made during the three and nine months ended December 31, 2015. Since the Company's original investment in April 2008, the Company has received distributions from EPIX of $28.0 million.
EPIX Financial Information:
The following table presents summarized balance sheet data as of December 31, 2015 and March 31, 2015 for EPIX:

11

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



 
 
December 31,
2015
 
March 31,
2015
 
(Amounts in thousands)
Current assets
$
304,263

 
$
285,819

Non-current assets
$
353,169

 
$
277,888

Current liabilities
$
95,000

 
$
121,451

Non-current liabilities
$
21,426

 
$
6,753

The following table presents the summarized statements of income for the three and nine months ended December 31, 2015 and 2014 for EPIX and a reconciliation of the net income reported by EPIX to equity interest income recorded by the Company:
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2015
 
2014
 
2015
 
2014
 
(Amounts in thousands)
Revenues
$
98,381

 
$
101,124

 
$
314,974

 
$
288,424

Expenses:
 
 
 
 
 
 
 
Operating expenses
56,476

 
59,224

 
189,566

 
178,690

Selling, general and administrative expenses
5,932

 
5,863

 
18,067

 
17,503

Operating income
35,973

 
36,037

 
107,341

 
92,231

Interest and other expense
(376
)
 
(399
)
 
(1,777
)
 
(1,130
)
Net income
$
35,597

 
$
35,638

 
$
105,564

 
$
91,101

Reconciliation of net income reported by EPIX to equity interest income:
 
 
 
 
 
 
 
Net income reported by EPIX
$
35,597

 
$
35,638

 
$
105,564

 
$
91,101

Ownership interest in EPIX
31.15
%
 
31.15
%
 
31.15
%
 
31.15
%
The Company's share of net income
11,088

 
11,101

 
32,883

 
28,378

Eliminations of the Company’s share of profits on licensing sales to EPIX(1)
(240
)
 
(1,935
)
 
(5,941
)
 
(7,007
)
Realization of the Company’s share of profits on licensing sales to EPIX(2)
1,978

 
2,048

 
7,113

 
6,075

Total equity interest income recorded
$
12,826

 
$
11,214

 
$
34,055

 
$
27,446

_________________________
(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.
(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. 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's partner in Pop, CBS TVG Inc. ("CBS"), has a call option to purchase a portion of the Company's ownership interest in Pop at fair market value, which would result in CBS owning 80% of Pop, exercisable beginning March 26, 2018 for a period of 30 days. During the nine months ended December 31, 2015, the Company made contributions to Pop of $0.8 million (no contributions were made during the three months ended December 31, 2015). 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 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.

12

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



Pop Financial Information:
The following table presents summarized balance sheet data as of December 31, 2015 and March 31, 2015 for Pop:
 
December 31,
2015
 
March 31,
2015
 
(Amounts in thousands)
Current assets
$
38,126

 
$
32,815

Non-current assets
$
187,316

 
$
187,985

Current liabilities
$
26,697

 
$
26,048

Non-current liabilities
$
8,589

 
$
7,196

Redeemable preferred stock
$
443,155

 
$
399,247

The following table presents the summarized statements of operations for the three and nine months ended December 31, 2015 and 2014 for Pop and a reconciliation of the net loss reported by Pop to equity interest income (loss) recorded by the Company:
 
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2015
 
2014
 
2015
 
2014
 
(Amounts in thousands)
Revenues
$
22,481

 
$
20,507

 
$
63,872

 
$
59,073

Expenses:
 
 
 
 
 
 
 
Cost of services
10,880

 
8,645

 
28,171

 
26,938

Selling, marketing, and general and administration
9,940

 
11,934

 
28,540

 
34,527

Depreciation and amortization
1,940

 
1,928

 
5,829

 
5,866

Operating income (loss)
(279
)
 
(2,000
)
 
1,332

 
(8,258
)
Other expense

 
6

 

 
391

Interest expense, net
120

 
160

 
334

 
551

Accretion of redeemable preferred stock units(1)
14,575

 
12,461

 
42,308

 
35,361

Total interest expense, net
14,695

 
12,627

 
42,642

 
36,303

Net loss
$
(14,974
)
 
$
(14,627
)
 
$
(41,310
)
 
$
(44,561
)
Reconciliation of net loss reported by Pop to equity interest income (loss):
 
 
 
 
 
 
 
Net loss reported by Pop
$
(14,974
)
 
$
(14,627
)
 
$
(41,310
)
 
$
(44,561
)
Ownership interest in Pop
50
%
 
50
%
 
50
%
 
50
%
The Company's share of net loss
(7,487
)
 
(7,314
)
 
(20,655
)
 
(22,281
)
Accretion of dividend and interest income on redeemable preferred stock units(1)
7,287

 
6,231

 
21,154

 
17,681

Elimination of the Company's share of profits on licensing sales to Pop
(424
)
 

 
(774
)
 
(367
)
Realization of the Company’s share of profits on licensing sales to Pop
561

 
(32
)
 
877

 
304

Total equity interest income (loss) recorded
$
(63
)
 
$
(1,115
)
 
$
602

 
$
(4,663
)
 ___________________
(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).

13

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



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.
Atom Tickets. Atom Tickets is the first-of-its-kind theatrical mobile ticketing platform and app. The Company made initial investments totaling $4.3 million in Atom Tickets during the year ended March 31, 2015. In December 2015, the Company agreed to participate in an equity offering of Atom Tickets and funded $7.9 million in January 2016. The Company owns an interest of approximately 20.1% in Atom Tickets. The Company is accounting for its investment in Atom Tickets, 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 year ended March 31, 2015, and during the nine months ended December 31, 2015, the Company made capital contributions to Tribeca Short List of $2.4 million, net of cash acquired of $0.4 million (see below). The Company holds a 75.0% economic interest in Tribeca Short List. Through October 17, 2015, the power to direct the activities that most significantly impact the economic performance of Tribeca Short List was shared equally with Tribeca Enterprises, and accordingly through October 17, 2015, the Company's interest in Tribeca Short List was accounted for under the equity method of accounting. Subsequent to October 17, 2015, the terms of the arrangement increased the Company's power to control the board, and the Company now has the power to direct the activities that most significantly impact the economic performance of Tribeca Short List. Accordingly, the Company has consolidated Tribeca Short List beginning in the quarter ended December 31, 2015, with no gain or loss recognized upon consolidation since the carrying value of the net assets approximated the fair value.

Available-for-Sale Securities:

The cost basis, unrealized gains and fair market value of available-for-sale securities are set forth below:

 
 
December 31,
2015
 
March 31,
2015
 
 
(Amounts in thousands)
Cost basis
 
$
158,916

 
$
158,916

Gross unrealized gain (loss)
 
(1,177
)
 
3,108

Fair value
 
$
157,739

 
$
162,024


Starz. At December 31, 2015 and March 31, 2015, available-for-sale securities consisted of the Company's minority interest in Starz. On March 27, 2015, pursuant to the terms of a stock exchange agreement entered into on February 10, 2015 (the "Exchange Agreement"), the Company exchanged 4,967,695 of its newly issued common shares for 2,118,038 shares of Series A common stock of Starz and 2,590,597 shares of Series B common stock of Starz held by certain affiliates of John C. Malone ("Dr. Malone") (the exchange transaction, the "Exchange"). The Exchange Agreement placed certain restrictions on the ability to transfer the shares issued by the Company.

The Company classifies the Series A common stock of Starz within Level 1 of the fair value hierarchy as the valuation inputs are based on quoted prices in active markets (see Note 8). The Series B common stock of Starz are considered a Level 2 security because the quoted market prices are based on infrequent transactions. Therefore, the fair value of the Series B

14

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



common stock, which is convertible, at the holder’s option, into Series A common stock of Starz is based on the quoted market price of the Series A common stock, which is an equivalent security other than for the voting rights.

As of December 31, 2015, the Company's investment in Starz was in an unrealized loss position, however due to the fluctuation of the security's market price in an active market and the short-term duration of the unrealized loss, the Company has the intent and ability to hold the securities until the fair value recovers. As of February 3, 2016, the fair value of the Company's minority interest in Starz was $137.4 million, compared to the Company's original cost basis of $158.9 million.


Cost Method Investments:
Telltale. Telltale Games ("Telltale") is a creator, developer and publisher of interactive software episodic games based upon popular stories and characters across all major gaming and entertainment platforms. In February 2015, the Company invested $40.0 million in Telltale, which consisted of a cash investment in Telltale of $28.0 million in exchange for 2,628,072 of Telltale's Series D Convertible Preferred Stock, and 361,229 newly issued common shares of the Company with a fair value of approximately $12.0 million in exchange for approximately 1,126,316 existing common shares of Telltale, representing in the aggregate an approximately 14% economic interest in Telltale.
Next Games. Next Games is a mobile games development company headquartered in Helsinki, Finland, with a focus on crafting visually impressive, highly engaging games. In July 2014, the Company invested $2.0 million in Next Games for a small minority ownership interest, and during the three months ended December 31, 2015, the Company invested an additional $0.2 million in Next Games.


4. Other Assets
The composition of the Company’s other assets is as follows as of December 31, 2015 and March 31, 2015:
 
 
December 31,
2015
 
March 31,
2015
 
(Amounts in thousands)
Deferred financing costs, net of accumulated amortization
$
23,170

 
$
28,060

Prepaid expenses and other
49,826

 
45,537

Finite-lived intangible assets
11,826

 
1,187

 
$
84,822

 
$
74,784

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 assets.
Finite-lived Intangible Assets. Finite-lived intangibles consist primarily of noncompete agreements, trademarks and trade names, and sales agency relationships. The composition of the Company's finite-lived intangible assets and the associated accumulated amortization is as follows as of December 31, 2015 and March 31, 2015:
 
December 31, 2015
 
March 31, 2015
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
(Amounts in thousands)
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Noncompete agreements
$
9,300

 
$
158

 
$
9,142

 
$

 
$

 
$

Trademarks and trade names
9,100

 
6,653

 
2,447

 
6,600

 
5,913

 
687

Sales agency relationships
6,200

 
5,963

 
237

 
6,200

 
5,700

 
500

 
$
24,600

 
$
12,774

 
$
11,826

 
$
12,800

 
$
11,613

 
$
1,187


15

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




The increase in the carrying value of finite-lived intangible assets from March 31, 2015 was primarily due to the November 12, 2015 acquisition of Pilgrim Studios (see Note 9). Amortization expense associated with the Company's intangible assets for the three and nine months ended December 31, 2015 was approximately $0.8 million and $1.6 million, respectively (2014 - $0.5 million and $1.4 million, respectively). Amortization expense remaining relating to intangible assets for each of the years ending March 31, 2016 through 2020 is estimated to be approximately $0.6 million$1.6 million$1.2 million$1.2 million, and $1.2 million, respectively.


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, 2015 and March 31, 2015:
 
December 31,
2015
 
March 31,
2015
 
(Amounts in thousands)
Senior revolving credit facility
$

 
$

5.25% Senior Notes
225,000

 
225,000

Term Loan Due 2022
400,000

 
375,000

Convertible senior subordinated notes, net of unamortized discount of $2,342 (March 31, 2015 - $3,891)
99,508

 
114,126

 
$
724,508

 
$
714,126

The following table sets forth future annual contractual principal payment commitments of corporate debt as of December 31, 2015:
 
 
 
Conversion Price Per Share at December 31, 2015
 
Maturity Date
 
Year Ended March 31,
Debt Type
 
 
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
 
 
 
 
 
 
(Amounts in thousands)
Senior revolving credit facility
 
N/A
 
September 2017
 
$

 
$

 
$

 
$

 
$

 
$

 
$

5.25% Senior Notes
 
N/A
 
August 2018
 

 

 

 
225,000

 

 

 
225,000

Term Loan Due 2022
 
N/A
 
March 2022
 

 

 

 

 

 
400,000

 
400,000

Principal amounts of convertible senior subordinated notes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 2012 4.00% Notes
 
$10.30
 
January 2017
 

 
41,850

 

 

 

 

 
41,850

April 2013 1.25% Notes
 
$29.44
 
April 2018
 

 

 

 
60,000

 

 

 
60,000

 
 
 
 
 
 
$

 
$
41,850

 
$

 
$
285,000

 
$

 
$
400,000

 
726,850

Less aggregate unamortized discount
 
 
 
 
 
 
 
 
 
 
 
 
 
(2,342
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
724,508


Senior Revolving Credit Facility
Availability of Funds. The senior revolving credit facility provides for borrowings and letters of credit up to an aggregate of $800.0 million, and at December 31, 2015 there was $800.0 million available (March 31, 2015$800.0 million). The availability of funds is limited by a borrowing base and also reduced by outstanding letters of credit, if any. There were no letters of credit outstanding at December 31, 2015 (March 31, 2015none).
Maturity Date. September 27, 2017.

16

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



Interest. Interest is payable at an alternative base rate, as defined, plus 1.5%, or LIBOR plus 2.5%, as designated by the Company.
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, 2015, 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

Issuance Date. On July 19, 2013, Lions Gate Entertainment Corp. issued $225.0 million aggregate principal amount of 5.25% Senior Secured Second-Priority Notes (the "5.25% Senior Notes").

Interest. 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.

Maturity Date. August 1, 2018.

Covenants. The 5.25% Senior Notes 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, 2015, the Company was in compliance with all applicable covenants.

Term Loan Due 2022

Issuance Date. On March 17, 2015, Lions Gate Entertainment Corp. entered into a second lien credit and guarantee agreement (the "Credit Agreement"), and pursuant to the Credit Agreement, borrowed a term loan in an aggregate amount of $375.0 million (the "Term Loan Due 2022"). In May 2015, Lions Gate Entertainment Corp. amended the Credit Agreement governing its Term Loan Due 2022, and pursuant to the amended Credit Agreement, borrowed an additional term loan in an aggregate amount of $25.0 million. Contemporaneously with the issuance of the Term Loan Due 2022 (which carries a fixed interest rate of 5.00%), the Company used a portion of the proceeds to redeem its $225.0 million principal amount term loan (the "Term Loan Due 2020") (which carried a variable interest rate of LIBOR, subject to a 1.00% floor, plus 4.00%).

Interest. Interest on the Term Loan Due 2022 is payable on the last business day of each April, July, October and January at a rate of 5.00% per year.

Maturity Date. The Term Loan Due 2022 matures on March 17, 2022.

Covenants. Substantially similar to the 5.25% Senior Notes discussed above. As of December 31, 2015, the Company was in compliance with all applicable covenants.


17

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



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, 2015 and March 31, 2015:
 
 
 
Maturity Date
 
Conversion Price Per Share at December 31, 2015
 
December 31, 2015
 
March 31, 2015
Convertible Senior Subordinated Notes
 
 
 
Principal
 
Unamortized Discount
 
Net Carrying Amount
 
Principal
 
Unamortized Discount
 
Net Carrying Amount
 
 
 
 
 
 
(Amounts in thousands)
April 2009 3.625% Notes(1)
 
N/A
 
 N/A
 
$

 
$

 
$

 
$
16,167

 
$

 
$
16,167

January 2012 4.00% Notes
 
January 11, 2017
 
$10.30
 
41,850

 
(2,342
)
 
39,508

 
41,850

 
(3,891
)
 
37,959

April 2013 1.25% Notes
 
April 15, 2018
 
$29.44
 
60,000

 

 
60,000

 
60,000

 

 
60,000

 
 
 
 
 
 
$
101,850

 
$
(2,342
)
 
$
99,508

 
$
118,017

 
$
(3,891
)
 
$
114,126

__________________________
(1)
On March 17, 2015, the April 2009 3.625% Notes were called for redemption and in April 2015, the holders of the notes converted substantially all of the outstanding principal amounts into common shares.

January 2012 4.00% Notes: In January 2012, Lions Gate Entertainment Inc. ("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 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. 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 January 2012 4.00% Notes is 9.56%.

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. The following conversions were completed with respect to the Company's convertible senior subordinated notes in the nine months ended December 31, 2015 and 2014, which resulted in a loss on extinguishment of debt of $1.3 million in the nine months ended December 31, 2014 (2015 - none):


18

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



 
Nine Months Ended
 
December 31,
 
2015
 
2014
 
(Amounts in thousands, except share amounts)
April 2009 3.625% Notes
 
 
 
Principal amount converted
$
16,162

 
$
24,046

Common shares issued upon conversion
1,983,058

 
2,929,899

Weighted average conversion price per share
$
8.15

 
$
8.21

October 2004 2.9375% Notes
 
 
 
Principal amount converted
$

 
$
99

Common shares issued upon conversion

 
8,634

Weighted average conversion price per share
$

 
$
8.23

Total
 
 
 
Principal amount converted
$
16,162

 
$
24,145

Common shares issued upon conversion
1,983,058

 
2,938,533

Weighted average conversion price per share
$
8.15

 
$
8.22

Interest Expense. Interest expense recognized for the convertible senior subordinated notes for the three and nine months ended December 31, 2015 and 2014 is presented below:
 
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2015
 
2014
 
2015
 
2014
 
(Amounts in thousands)
Interest Expense
 
 
 
 
 
 
 
Contractual interest coupon
$
606

 
$
776

 
$
1,761

 
$
2,705

Amortization of discount on liability component and debt issuance costs
542

 
1,061

 
1,588

 
4,322

 
$
1,148

 
$
1,837

 
$
3,349

 
$
7,027



6. Participations and Residuals
The Company expects approximately 72% of accrued participations and residuals will be paid during the one-year period ending December 31, 2016.

Theatrical Slate Participation

On March 10, 2015, the Company entered into a theatrical slate participation arrangement with TIK Films (U.S.), Inc. and TIK Films (Hong Kong) Limited (collectively, "TIK Films"), both wholly owned subsidiaries of Hunan TV & Broadcast Intermediary Co. Ltd. Under the arrangement, TIK Films, in general and subject to certain limitations including per picture and annual caps, will contribute a minority share of 25% of the Company’s production or acquisition costs of “qualifying” theatrical feature films, released during the three-year period ending January 23, 2018, and participate in a pro-rata portion of the pictures’ net profits or losses similar to a co-production arrangement based on the portion of costs funded. The arrangement excludes among others, any theatrical feature film incorporating any elements from the Twilight, Hunger Games or Divergent franchises. The percentage of the contribution could vary on certain pictures.

Amounts provided from TIK Films are reflected as a participation liability in the Company's consolidated balance sheet and amounted to $33.5 million at December 31, 2015 (March 31, 2015 - $13.6 million). The difference between the ultimate

19

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



participation expected to be paid to TIK Films and the amount provided by TIK Films is amortized as a charge to or a reduction of participation expense under the individual-film-forecast method.



7. Film Obligations and Production Loans
 
 
December 31,
2015
 
March 31,
2015
 
(Amounts in thousands)
Film obligations
$
25,610

 
$
55,811

Production loans
869,948

 
600,944

Total film obligations and production loans
$
895,558

 
$
656,755


The following table sets forth future annual repayment of film obligations and production loans as of December 31, 2015:
 
 
Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31,
 
Year Ended March 31,
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
 
(Amounts in thousands)
Film obligations
$
20,831

 
$
1,923

 
$
2,000

 
$
1,000

 
$

 
$

 
$
25,754

Production loans
138,099

 
710,249

 
21,600

 

 

 

 
869,948

 
$
158,930

 
$
712,172

 
$
23,600

 
$
1,000

 
$

 
$

 
895,702

Less imputed interest on film obligations
 
 
 
 
 
 
 
 
 
 
 
 
(144
)
 
 
 
 
 
 
 
 
 
 
 
 
 
$
895,558

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 3.35% to 3.85%.


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
Fair value hierarchy 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:


20

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



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, 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 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 assets and liabilities required to be carried at fair value on a recurring basis as of December 31, 2015 and March 31, 2015:
 
December 31, 2015
 
March 31, 2015
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
Assets:
(Amounts in thousands)
Available-for-sale securities (see Note 3):
 
 
 
 
 
 
 
 
 
 
 
Starz Series A common stock
$
70,954

 
$

 
$
70,954

 
$
72,882

 
$

 
$
72,882

Starz Series B common stock

 
86,785

 
86,785

 

 
89,142

 
89,142

 
 
 
 
 
 
 
 
 
 
 
 
Forward exchange contracts (see Note 18)

 
10,933

 
10,933

 

 
8,335

 
8,335

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Forward exchange contracts (see Note 18)

 
(2,119
)
 
(2,119
)
 

 
(2,024
)
 
(2,024
)
 
$
70,954

 
$
95,599

 
$
166,553

 
$
72,882

 
$
95,453

 
$
168,335



21

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, 2015 and March 31, 2015:
 
 
December 31, 2015
 
March 31, 2015
 
(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
$
93,085

 
$
110,000

 
$
91,683

 
$
110,000

 
 
 
 
 
 
 
 
 
Carrying
Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
 
 
(Level 2)
 
 
 
(Level 2)
Liabilities:
 
 
 
 
 
 
 
April 2009 3.625% Notes
$

 
$

 
$
16,167

 
$
16,167

January 2012 4.00% Notes
39,508

 
41,707

 
37,959

 
41,473

April 2013 1.25% Notes
60,000

 
53,218

 
60,000

 
53,241

Production loans
869,948

 
869,948

 
600,944

 
600,944

5.25% Senior Notes
225,000

 
231,750

 
225,000

 
233,438

Term Loan
400,000

 
396,500

 
375,000

 
375,938

 
$
1,594,456

 
$
1,593,123

 
$
1,315,070

 
$
1,321,201


9. Acquisition

Acquisition of Pilgrim Studios. On November 12, 2015, the Company purchased 62.5% of the membership interests in Pilgrim Media Group, LLC ("Pilgrim Studios"), a worldwide independent reality television producer and distributor. The aggregate purchase price was approximately $198.8 million, net of $7.7 million allocated to certain transactional costs attributable to the noncontrolling shareholder. These costs are included in the general and administrative expense of Pilgrim Studios, however, pursuant to the profit sharing provisions in the operating agreement, the amount is included in net loss attributable to noncontrolling interest in our unaudited condensed consolidated statement of income and thus does not impact earnings per share attributable to Lions Gate Entertainment Corp. shareholders.
The purchase price consisted of $142.7 million in cash and 1,517,451 of the Company's common shares, valued at $56.1 million. These shares were valued based on the closing price of the Company’s common shares on the date of closing of the acquisition, discounted to the fair value of the shares considering certain transfer restrictions. The Company incurred approximately $2.9 million of acquisition-related costs that were expensed in general and administrative expenses during the nine months ended December 31, 2015.
The acquisition was accounted for as a purchase, with the results of operations of Pilgrim Studios included in the Company's consolidated results from November 12, 2015. Revenues and net loss for the period from November 12, 2015 through December 31, 2015 of Pilgrim Studios were $22.9 million and $8.8 million, respectively. The net loss of Pilgrim Studios includes the $7.7 million charge discussed above, approximately $4.0 million ($3.6 million included in direct operating expense and $0.4 million in depreciation and amortization) of incremental cost associated with the amortization of the increase in the carrying value of the assets to fair value as discussed below, and the $0.7 million charge associated with the noncontrolling interest discount as discussed in Note 10. The Company has made a preliminary allocation of the purchase price of Pilgrim Studios to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value. The preliminary purchase price allocation is subject to revision, as a more detailed analysis of investment in television programs and intangible assets is completed and additional information on the fair value of assets and liabilities becomes available, including receipt of final appraisals of the net assets acquired. A change in the fair value of the net assets may change the amount of the purchase price allocable to goodwill, and could impact the amounts of amortization expense. The Company used DCF analyses, which represent Level 3 fair value measurements, to assess certain components of its purchase price allocation. Based on the preliminary valuation and other information currently available, the preliminary allocation of the purchase price, including the fair value of redeemable noncontrolling interest recognized, is as follows:


22

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



Preliminary allocation of the total purchase consideration:
(Amounts in thousands)
Cash and cash equivalents
$
15,816

Accounts receivable, net
15,781

Investment in films and television programs, net
63,387

Other assets acquired
7,019

Finite-lived intangible assets:
 
Noncompete agreements
9,300

Trade name
2,000

Other liabilities assumed
(36,827
)
Fair value of net assets acquired
76,476

Goodwill
210,815

Redeemable noncontrolling interest (Note 10)
(88,494
)
 
$
198,797


Goodwill of $210.8 million represents the excess of the purchase price over the preliminary estimate of the fair value of the underlying tangible and identifiable intangible assets acquired and liabilities assumed. The acquisition goodwill arises from the opportunity for synergies of the combined companies to grow and diversify the Company's television operations by adding nonfiction programming to complement its existing scripted production and syndication operations and leverage the strength of the Company's global distribution infrastructure. The goodwill recorded as part of this acquisition is included in the Television Production segment. Although the goodwill will not be amortized for financial reporting purposes, it is anticipated that substantially all of the goodwill will be deductible for federal tax purposes over the statutory period of 15 years. The noncompete agreements and trade name have a weighted average estimated useful life of eight years.

The following unaudited pro forma condensed consolidated statements of income presented below illustrate the results of operations of the Company as if the acquisition of Pilgrim Studios as described above occurred on April 1, 2014. The information below is based on a preliminary estimate of the purchase price allocation to the assets and liabilities acquired. The statements of income information below includes the statements of income of Pilgrim Studios for the nine months ended September 30, 2015 and 2014 combined with the Company's statements of income for the nine months ended December 31, 2015 and 2014.
 
 
Nine Months Ended
 
 
December 31,
 
 
2015
 
2014
 
 
(Amounts in thousands, except per share amounts)
Revenues
 
$
1,662,131

 
$
1,857,099

Net income attributable to Lions Gate Entertainment Corp. shareholders
 
$
46,142

 
$
162,007

Basic Net Income Per Common Share attributable to Lions Gate Entertainment Corp. shareholders
 
$
0.31

 
$
1.16

Diluted Net Income Per Common Share attributable to Lions Gate Entertainment Corp. shareholders
 
$
0.30

 
$
1.09

The unaudited pro forma condensed consolidated statements of income do not include adjustments for any restructuring activities, operating efficiencies or cost savings, and exclude certain one-time transactional costs of $7.7 million attributable to the noncontrolling shareholder (see Note 10) expensed in connection with the transaction, as well as $2.9 million of acquisition-related costs that were expensed in general and administrative expenses.

23

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



Goodwill. The changes in the carrying amount of goodwill by reporting segment in the nine months ended December 31, 2015 were as follows:
 
Motion
Pictures
 
Television
Production
 
Total
 
(Amounts in thousands)
Balance as of March 31, 2015
$
294,367

 
$
28,961

 
$
323,328

Acquisition of Pilgrim Studios

 
210,815

 
210,815

Balance as of December 31, 2015
$
294,367

 
$
239,776

 
$
534,143




10. Redeemable Noncontrolling Interest

In connection with the acquisition of a controlling interest in Pilgrim Studios on November 12, 2015, the Company recorded a redeemable noncontrolling interest of $88.5 million, representing 37.5% of Pilgrim Studios. The noncontrolling interest holder has a right to put and the Company has a right to call a portion of the noncontrolling interest, equal to 17.5% of Pilgrim Studios, at fair value, subject to a cap, exercisable at five years after the acquisition date of November 12, 2015. In addition, the noncontrolling interest holder has a right to put and the Company has a right to call the remaining amount of noncontrolling interest at fair value, subject to a cap, exercisable at seven years after the acquisition date of November 12, 2015. The put and call options have been determined to be embedded in the noncontrolling interest, and because the put rights are outside the control of the Company and require partial cash settlement, the noncontrolling interest holder's interest is presented as redeemable noncontrolling interest outside of shareholders' equity on the Company's unaudited condensed consolidated balance sheet.

In addition, the noncontrolling interest holder is the President and CEO of Pilgrim Studios, who will continue in this role pursuant to an employment contract entered into at the time of close. Pursuant to the operating agreement, if the employment of the noncontrolling interest holder is terminated, under certain circumstances as defined in the operating agreement, the Company can call and the noncontrolling interest holder can put the noncontrolling interest at a discount to fair value. The amount of the discount related to the 17.5% noncontrolling interest is being expensed through the five-year call period, and the portion of the discount related to the remaining noncontrolling interest is being expensed over the seven-year call period. The amounts are included in general and administrative expense of Pilgrim Studios and reflected as an addition to redeemable noncontrolling interest.

Redeemable noncontrolling interest is measured at the greater of (i) the redemption amount that would be paid if settlement occurred at the balance sheet date less the amount attributed to unamortized noncontrolling interest discount, as discussed above, or (ii) the historical value resulting from the original acquisition date value plus or minus any earnings or loss attribution, plus the amount of unamortized noncontrolling interest discount as discussed above. The amount of the redemption value in excess of the historical values of the noncontrolling interest, if any, is recognized as an increase to noncontrolling interest and a charge to retained earnings.


24

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



The table below presents the reconciliation of changes in redeemable noncontrolling interest:

 
Nine Months Ended
 
December 31,
 
2015
 
(Amounts in thousands)
Beginning balance
$

Initial fair value of redeemable noncontrolling interest of Pilgrim Studios
88,494

Net loss of Pilgrim Studios attributable to noncontrolling interest
(8,119
)
Noncontrolling interest discount accretion
681

Adjustments to redemption value
8,119

Ending balance
$
89,175

 
The net loss of Pilgrim Studios attributable to noncontrolling interest includes certain transactional costs of $7.7 million of Pilgrim Studios attributable to the noncontrolling shareholder (see Note 9). These costs are included in the general and administrative expense of Pilgrim Studios, however, pursuant to the profit sharing provisions in the operating agreement, the amount is included in net loss attributable to noncontrolling interest in our unaudited condensed consolidated statement of income and thus does not impact earnings per share attributable to Lions Gate Entertainment Corp. shareholders.


11. 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, 2015 and 2014 is presented below:
 
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2015
 
2014
 
2015
 
2014
 
(Amounts in thousands, except per share amounts)
Basic Net Income Per Common Share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income attributable to Lions Gate Entertainment Corp. shareholders
$
40,717

 
$
98,185

 
$
39,332

 
$
162,227

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
149,480

 
139,963

 
148,484

 
138,618

Basic net income per common share
$
0.27

 
$
0.70

 
$
0.26

 
$
1.17


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, 2015 and 2014 is presented below:


25

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



 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,