10-Q 1 lgf201293010-q.htm FORM 10-Q LGF 2012.9.30 10-Q
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 September 30, 2012
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.)
1055 West Hastings Street, Suite 2200
Vancouver, British Columbia V6E 2E9
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 o
 
Accelerated filer þ
 
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 November 1, 2012
Common Shares, no par value per share
 
146,090,466 shares





 


2


FORWARD-LOOKING STATEMENTS

This report includes statements that are, or may deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act, 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 1.A. “Risk Factors” found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on May 30, 2012, which risk factors are incorporated herein by reference, as updated by the risk factors found under Part II, Item 1A. Risk Factors herein. These 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, as amended, 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 our acquisition strategy 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 1.A. “Risk Factors” found in our Annual Report on Form 10-K filed with the SEC on May 30, 2012, 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
 
 
September 30,
2012
 
March 31,
2012
 
(Amounts in thousands,
except share amounts)
ASSETS
 
 
 
Cash and cash equivalents
$
54,399

 
$
64,298

Restricted cash
6,634

 
11,936

Accounts receivable, net of reserves for returns and allowances of $114,861 (March 31, 2012 - $93,860) and provision for doubtful accounts of $3,849 (March 31, 2012 - $4,551)
701,354

 
784,530

Investment in films and television programs, net
1,350,672

 
1,329,053

Property and equipment, net
8,728

 
9,772

Equity method investments
172,606

 
171,262

Goodwill
326,004

 
326,633

Other assets
89,966

 
90,511

Total assets
$
2,710,363

 
$
2,787,995

LIABILITIES
 
 
 
Senior revolving credit facility
$
268,724

 
$
99,750

Senior secured second-priority notes
431,881

 
431,510

Term loan
294,929

 
477,514

Accounts payable and accrued liabilities
367,921

 
371,092

Participations and residuals
418,547

 
420,325

Film obligations and production loans
437,579

 
561,150

Convertible senior subordinated notes and other financing obligations
83,704

 
108,276

Deferred revenue
260,863

 
228,593

Total liabilities
2,564,148

 
2,698,210

Commitments and contingencies

 

SHAREHOLDERS’ EQUITY
 
 
 
Common shares, no par value, 500,000,000 shares authorized, 145,785,044 and 143,980,754 shares issued at September 30, 2012 and March 31, 2012, respectively
736,663

 
712,623

Accumulated deficit
(510,710
)
 
(542,039
)
Accumulated other comprehensive loss
(2,650
)
 
(3,711
)
 
223,303

 
166,873

Treasury shares, no par value, 11,040,493 shares at September 30, 2012 and March 31, 2012
(77,088
)
 
(77,088
)
Total shareholders’ equity
146,215

 
89,785

Total liabilities and shareholders’ equity
$
2,710,363

 
$
2,787,995

See accompanying notes.

4


LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
 
September 30,
2012
 
September 30,
2011
 
September 30,
2012
 
September 30,
2011
 
 
 
As adjusted
(Note 1)
 
 
 
As adjusted
(Note 1)
 
(Amounts in thousands, except per share amounts)
Revenues
$
706,968

 
$
358,081

 
$
1,178,788

 
$
619,340

Expenses:
 
 
 
 
 
 
 
Direct operating
323,230

 
206,344

 
569,048

 
345,702

Distribution and marketing
236,442

 
141,642

 
415,151

 
206,388

General and administration
44,030

 
29,428

 
96,374

 
57,350

Gain on sale of asset disposal group

 
(10,967
)
 

 
(10,967
)
Depreciation and amortization
2,115

 
681

 
4,220

 
1,915

Total expenses
605,817

 
367,128

 
1,084,793

 
600,388

Operating income (loss)
101,151

 
(9,047
)
 
93,995

 
18,952

Other expenses (income):
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
Contractual cash based interest
18,908

 
14,160

 
41,636

 
25,875

Amortization of debt discount (premium) and deferred financing costs
4,377

 
3,409

 
9,139

 
8,029

Total interest expense
23,285

 
17,569

 
50,775

 
33,904

Interest and other income
(1,029
)
 
(928
)
 
(1,979
)
 
(1,370
)
Loss on extinguishment of debt
1,000

 
436

 
9,159

 
967

Total other expenses, net
23,256

 
17,077

 
57,955

 
33,501

Income (loss) before equity interests and income taxes
77,895

 
(26,124
)
 
36,040

 
(14,549
)
Equity interests income
1,755

 
1,889

 
1,610

 
1,849

Income (loss) before income taxes
79,650

 
(24,235
)
 
37,650

 
(12,700
)
Income tax provision
4,121

 
1,071

 
6,321

 
2,272

Net income (loss)
$
75,529

 
$
(25,306
)
 
$
31,329

 
$
(14,972
)
Basic Net Income (Loss) Per Common Share
$
0.56

 
$
(0.19
)
 
$
0.23

 
$
(0.11
)
Diluted Net Income (Loss) Per Common Share
$
0.53

 
$
(0.19
)
 
$
0.23

 
$
(0.11
)
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
134,390

 
133,755

 
133,815

 
135,374

Diluted
148,696

 
133,755

 
134,610

 
135,374

See accompanying notes.

5


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

 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
 
September 30,
2012
 
September 30,
2011
 
September 30,
2012
 
September 30,
2011
 
 
 
As adjusted
(Note 1)
 
 
 
As adjusted
(Note 1)
 
(Amounts in thousands)
Net income (loss)
$
75,529

 
$
(25,306
)
 
$
31,329

 
$
(14,972
)
Foreign currency translation adjustments
2,999

 
(4,433
)
 
1,078

 
(4,359
)
Net unrealized gain (loss) on foreign exchange contracts
(512
)
 
626

 
(17
)
 
662

Comprehensive income (loss)
$
78,016

 
$
(29,113
)
 
$
32,390

 
$
(18,669
)
 
 
 
 
 
 
 
 
See accompanying notes.


6

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



 
Common Shares
 
Accumulated
Deficit
 
Accumulated
 Other
Comprehensive
Income (Loss)
 
Treasury Shares
 
 
 
Number
 
Amount
 
 
 
Number
 
Amount
 
Total
 
(Amounts in thousands, except share amounts)
Balance at March 31, 2012
143,980,754

 
$
712,623

 
$
(542,039
)
 
$
(3,711
)
 
11,040,493

 
$
(77,088
)
 
$
89,785

Exercise of stock options
10,000

 
52

 

 

 

 

 
52

Stock based compensation, net of withholding tax obligations of $4,005
546,665

 
6,906

 

 

 

 

 
6,906

Conversion of February 2005 3.625% and April 2009 3.625% Notes, net of reacquisition of the equity component
1,230,010

 
16,832

 
 
 
 
 
 
 
 
 
16,832

Issuance of common shares to directors for services
17,615

 
250

 

 

 

 

 
250

Net income

 

 
31,329

 

 

 

 
31,329

Foreign currency translation adjustments

 

 

 
1,078

 

 

 
1,078

Net unrealized loss on foreign exchange contracts

 

 

 
(17
)
 

 

 
(17
)
Balance at September 30, 2012
145,785,044

 
$
736,663

 
$
(510,710
)
 
$
(2,650
)
 
11,040,493

 
$
(77,088
)
 
$
146,215

See accompanying notes.

7



LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended
 
Six Months Ended
 
September 30,
2012
 
September 30,
2011
 
 
 
As adjusted (Note 1)
 
(Amounts in thousands)
Operating Activities:
 
 
 
Net income (loss)
$
31,329

 
$
(14,972
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation of property and equipment
1,525

 
1,765

Amortization of intangible assets
2,695

 
150

Amortization of films and television programs
394,664

 
219,214

Amortization of debt discount (premium) and deferred financing costs
9,139

 
8,029

Non-cash stock-based compensation
10,917

 
4,802

Gain on sale of asset disposal group

 
(10,967
)
Loss on extinguishment of debt
9,159

 
967

Equity interests income
(1,610
)
 
(1,849
)
Changes in operating assets and liabilities:
 
 
 
Restricted cash
5,302

 
23,996

Accounts receivable, net
84,026

 
(23,381
)
Investment in films and television programs
(423,120
)
 
(433,384
)
Other assets
(1,544
)
 
1,522

Accounts payable and accrued liabilities
2,149

 
15,425

Participations and residuals
(1,015
)
 
12,331

Film obligations
(13,820
)
 
10,998

Deferred revenue
32,339

 
44,792

Net Cash Flows Provided By (Used In) Operating Activities
142,135

 
(140,562
)
Investing Activities:
 
 
 
Proceeds from the sale of asset disposal group, net of transaction costs and cash disposed of $3,943

 
9,119

Investment in equity method investees

 
(828
)
Increase in loans receivable

 
(1,500
)
Repayment of loans receivable
4,274

 

Purchases of property and equipment
(976
)
 
(1,253
)
Net Cash Flows Provided By Investing Activities
3,298

 
5,538

Financing Activities:
 
 
 
Exercise of stock options
52

 

Tax withholding requirements on equity awards
(4,005
)
 
(1,932
)
Repurchase of common shares

 
(77,088
)
Borrowings under senior revolving credit facility
681,424

 
153,650

Repayments of borrowings under senior revolving credit facility
(512,450
)
 
(200,400
)
Deferred financing costs associated with the amended and restated senior revolving credit facility
(15,198
)
 

Borrowings under individual production loans
108,948

 
134,870

Repayment of individual production loans
(182,930
)
 
(122,886
)
Production loan borrowings under film credit facility
3,897

 
33,002

Production loan repayments under film credit facility
(39,055
)
 
(9,187
)
Change in restricted cash collateral associated with financing activities

 
(3,043
)
Repayments of borrowings under Term Loan associated with the acquisition of Summit
(185,504
)
 

Proceeds from sale of senior secured second-priority notes, net of deferred financing costs

 
201,955

Repurchase of senior secured second-priority notes

 
(9,852
)
Repurchase of convertible senior subordinated notes
(7,639
)
 
(19,476
)
Repayment of other financing obligations
(3,710
)
 

Net Cash Flows Provided By (Used In) Financing Activities
(156,170
)
 
79,613

Net Change In Cash And Cash Equivalents
(10,737
)
 
(55,411
)
Foreign Exchange Effects on Cash
838

 
(1,482
)
Cash and Cash Equivalents - Beginning Of Period
64,298

 
86,419

Cash and Cash Equivalents - End Of Period
$
54,399

 
$
29,526

See accompanying notes.

8



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

1. General
Nature of Operations
Lions Gate Entertainment Corp. (the “Company,” “Lionsgate,” “we,” “us” or “our”) is a leading global entertainment company with a strong and diversified presence in motion picture production and distribution, television programming and syndication, home entertainment, family entertainment, digital distribution and new channel platforms.
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 (the “U.S.”) accounting principles generally accepted (“GAAP”) for interim financial information and the instructions to quarterly report on Form 10-Q under the Exchange Act, and Article 10 of Regulation S-X under the Exchange Act. 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 six months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2013. The balance sheet at March 31, 2012 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 and Amendment No. 1 to the Form 10-K for the fiscal year ended March 31, 2012 (collectively "Form 10-K").
Adjustments to prior period for elimination of lag in reporting of EPIX

As a result of the elimination of a one quarter lag in recording the Company's share of EPIX's results (discussed in Note 7 to the consolidated financial statements as included in the Company's Form 10-K) for the year ended March 31, 2012, prior year amounts presented for fiscal 2012 have been adjusted from amounts previously reported.
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 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.



9

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




2. Investment in Films and Television Programs
 
 
September 30,
2012
 
March 31,
2012
 
(Amounts in thousands)
Motion Picture Segment - Theatrical and Non-Theatrical Films
 
 
 
Released, net of accumulated amortization
$
530,856

 
$
557,003

Acquired libraries, net of accumulated amortization
24,507

 
29,320

Completed and not released
72,850

 
53,258

In progress
472,393

 
512,712

In development
25,625

 
19,399

Product inventory
34,056

 
31,000

 
1,160,287

 
1,202,692

Television Segment - Direct-to-Television Programs
 
 
 
Released, net of accumulated amortization
112,127

 
93,499

In progress
74,636

 
30,781

In development
3,622

 
2,081

 
190,385

 
126,361

 
$
1,350,672

 
$
1,329,053

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
 
 
 
September 30, 2012
 
March 31, 2012
 
 
 
 
(In years)
 
(Amounts in thousands)
Trimark Holdings
October 2000
 
20.00
 
8.00
 
$
1,129

 
$
1,660

Artisan Entertainment
December 2003
 
20.00
 
11.25
 
19,093

 
22,112

Lionsgate UK
October 2005
 
20.00
 
13.00
 
474

 
532

Summit Entertainment
January 2012
 
20.00
 
19.25
 
3,811

 
5,016

Total acquired libraries
 
 
 
 
 
 
$
24,507

 
$
29,320

The Company expects approximately 45% of completed films and television programs, net of accumulated amortization, will be amortized during the one-year period ending September 30, 2013. 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 September 30, 2015.

3. Equity Method Investments
The carrying amount of significant equity method investments at September 30, 2012 and March 31, 2012 were as follows:
 

10

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



 
September 30,
2012
 
 
 
 
Equity Method Investee
Ownership
Percentage
 
September 30,
2012
 
March 31,
2012
 
 
 
(Amounts in thousands)
Horror Entertainment, LLC (“FEARnet”)
34.5%
 
$
2,934

 
$
2,880

NextPoint, Inc. (“Break Media”)
42.0%
 
5,994

 
8,477

Roadside Attractions, LLC (“Roadside”)
43.0%
 
2,938

 
3,118

Studio 3 Partners, LLC (“EPIX”)
31.2%
 
62,493

 
50,381

TV Guide Network
51.0%
 
98,247

 
106,406

 
 
 
$
172,606

 
$
171,262

Equity interests in equity method investments in our consolidated statements of operations represent our portion of the income or loss of our equity method investees based on our percentage ownership and the elimination of profits on sales to equity method investees. Equity interests in equity method investments for the three and six months ended September 30, 2012, and 2011 were as follows (income (loss)):
 
 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
Equity Method Investee
September 30,
2012
 
September 30,
2011
 
September 30,
2012
 
September 30,
2011
 
 
 
As adjusted
 
 
 
As adjusted
 
(Amounts in thousands)
Horror Entertainment, LLC (“FEARnet”)
$
2

 
$
(48
)
 
$
54

 
$
8

NextPoint, Inc. (“Break Media”)
(828
)
 
(660
)
 
(2,483
)
 
(1,976
)
Roadside Attractions, LLC (“Roadside”)
203

 
246

 
87

 
207

Studio 3 Partners, LLC (“EPIX”)
5,525

 
5,333

 
12,112

 
8,215

TV Guide Network
(3,147
)
 
(2,304
)
 
(8,160
)
 
(3,240
)
Tiger Gate Entertainment Limited (“Tiger Gate”)

 
(678
)
 

 
(1,365
)
 
$
1,755

 
$
1,889

 
$
1,610

 
$
1,849

Horror Entertainment, LLC. Horror Entertainment, LLC (“FEARnet”), is a multiplatform programming and content service provider of horror genre films operating under the branding of “FEARnet.” The Company licenses content to FEARnet for video-on-demand and broadband exhibition. The Company is recording its share of the FEARnet results on a one quarter lag and, accordingly, during the three and six months ended September 30, 2012, the Company recorded its share of the income generated by FEARnet for the three and six months ended June 30, 2012.
NextPoint, Inc. NextPoint, Inc. (“Break Media”), is an online home entertainment service provider operating under the branding of “Break Media.” The Company is recording its share of the Break Media results on a one quarter lag and, accordingly, during the three and six months ended September 30, 2012, the Company recorded its share of losses incurred by Break Media for the three and six months ended June 30, 2012.
Roadside Attractions, LLC. Roadside Attractions, LLC (“Roadside”), is an independent theatrical releasing company. The Company is recording its share of the Roadside results on a one quarter lag and, accordingly, during the three and six months ended September 30, 2012, the Company recorded its share of the income generated by Roadside for the three and six months ended June 30, 2012.
Studio 3 Partners, LLC (“EPIX”). In April 2008, the Company formed a joint venture with Viacom Inc. (“Viacom”), its Paramount Pictures unit (“Paramount Pictures”) and Metro-Goldwyn-Mayer Studios Inc. (“MGM”) to create a premium television channel and subscription video-on-demand service named “EPIX”. The Company had invested $80.4 million through September 30, 2010, and no additional amounts have been funded since.
Transactions with EPIX:
The Company licenses certain of its theatrical releases and other films and television programs to EPIX. A portion of the profits of these licenses reflecting the Company’s ownership share in the venture are eliminated through an adjustment to the

11

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



equity interest income (loss) of the venture. These profits are recognized as they are realized by EPIX through the amortization of the related asset, recorded on EPIX's balance sheet, over the license period. The table below sets forth the revenues and gross profits recognized by Lionsgate and the calculation of the amounts eliminated in the equity interest line item on the statement of operations:
 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
 
September 30,
2012
 
September 30,
2011
 
September 30,
2012
 
September 30,
2011
 
(Amounts in thousands)
Revenue recognized on sales to EPIX
$
6,256

 
$
14,721

 
$
22,772

 
$
49,875

 
 
 
 
 
 
 
 
Gross profit on sales to EPIX
$
2,185

 
$
10,838

 
$
9,170

 
$
32,480

Ownership interest in EPIX
31.15
%
 
31.15
%
 
31.15
%
 
31.15
%
Elimination of the Company's share of profits on sales to EPIX
$
681

 
$
3,376

 
$
2,856

 
$
10,118

EPIX Financial Information:
The following table presents summarized balance sheet data as of September 30, 2012 and March 31, 2012 for EPIX:
 
 
September 30,
2012
 
March 31,
2012
 
(Amounts in thousands)
Current assets
$
194,777

 
$
196,903

Non-current assets
$
172,495

 
$
140,532

Current liabilities
$
131,250

 
$
140,684

Non-current liabilities
$
9,321

 
$
4,723

The following table presents the summarized statement of operations for the three and six months ended September 30, 2012 and 2011 for EPIX and a reconciliation of the net income reported by EPIX to equity interest income recorded by the Company:
 

12

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



 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
 
September 30,
2012
 
September 30,
2011
 
September 30,
2012
 
September 30,
2011
 
(Amounts in thousands)
Revenues
$
82,842

 
$
79,457

 
$
170,606

 
$
158,861

Expenses:
 
 
 
 
 
 
 
Operating expenses
62,959

 
60,698

 
123,692

 
116,867

Selling, general and administrative expenses
6,498

 
5,777

 
12,241

 
11,698

Operating income
13,385

 
12,982

 
34,673

 
30,296

Interest income

 
3

 

 
6

Net income
$
13,385

 
$
12,985

 
$
34,673

 
$
30,302

Reconciliation of net income reported by EPIX to equity interest income:
 
 
 
 
 
 
 
Net income reported by EPIX
$
13,385

 
$
12,985

 
$
34,673

 
$
30,302

Ownership interest in EPIX
31.15
%
 
31.15
%
 
31.15
%
 
31.15
%
The Company's share of net income
4,169

 
4,045

 
10,801

 
9,439

Eliminations of the Company’s share of profits on sales to EPIX (1)
(681
)
 
(3,376
)
 
(2,856
)
 
(10,118
)
Realization of the Company’s share of profits on sales to EPIX (2)
2,037

 
4,664

 
4,167

 
8,894

Total equity interest income recorded
$
5,525

 
$
5,333

 
$
12,112

 
$
8,215

__________________
(1)
Represents the elimination of the gross profit recognized by Lionsgate on sales to EPIX in proportion to Lionsgate's ownership interest in EPIX. The amount of intra-entity profit is calculated as the total gross profit recognized on a title by title basis multiplied by Lionsgate's percentage ownership of EPIX. The table above in the Transactions with EPIX section shows the calculation of the profit eliminated.
(2)
Represents the realization of a portion of the profits previously eliminated. This profit remains eliminated until realized by EPIX. EPIX initially records the license fee for the title as inventory on its balance sheet and amortizes the inventory over the license period. Accordingly, the profit is realized as the inventory on EPIX's books is amortized. The profit amount realized is calculated by multiplying the percentage of the EPIX inventory amortized in the period reported by EPIX, by the amount of profit initially eliminated, on a title by title basis.
TV Guide Network. The Company’s investment interest in TV Guide Network consists of an equity investment in its common stock units and mandatorily redeemable preferred stock units. On February 28, 2009, the Company purchased all of the issued and outstanding equity interests of TV Guide Network. The Company paid approximately $241.6 million for all of the equity interest of TV Guide Network. On May 28, 2009, the Company sold 49% of the Company’s interest in TV Guide Network for approximately $122.4 million in cash.
The February 28, 2009 acquisition was accounted for as a purchase, with the results of operations of TV Guide Network included in the Company’s consolidated results from February 28, 2009 through May 27, 2009. Subsequent to the sale of the 49% interest in TV Guide Network, the Company determined it is not the primary beneficiary of TV Guide Network because pursuant to the operating agreement of the entity, the power to direct the activities that most significantly impact the economic performance of TV Guide Network is shared with the 49% owner of TV Guide Network. Accordingly, the Company’s interest in TV Guide Network is being accounted for under the equity method of accounting.
Investment in Mandatorily Redeemable Preferred Stock Units. The mandatorily redeemable preferred stock carries a dividend rate of 10% compounded annually and is 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.

13

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




Transactions with TV Guide Network:

The Company licenses certain films and/or television programs to TV Guide Network. 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 loss of the venture. These profits are recognized as they are realized by TV Guide Network through the amortization of the related asset, recorded on TV Guide Network's balance sheet, over the license period. The table below sets forth the revenues and gross profits recognized by Lionsgate and the calculation of the amounts eliminated in the equity interest line item on the statement of operations:

 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
 
September 30,
2012
 
September 30,
2011
 
September 30,
2012
 
September 30,
2011
 
(Amounts in thousands)
Revenue recognized on sales to TV Guide Network
$

 
$

 
$
2,925

 
$
2,925

 
 
 
 
 
 
 
 
Gross profit on sales to TV Guide Network
$

 
$

 
$
735

 
$
948

Ownership interest in TV Guide Network
51
%
 
51
%
 
51
%
 
51
%
Elimination of the Company's share of profit on sales to TV Guide Network
$

 
$

 
$
375

 
$
483


TV Guide Network Financial Information:
The following table presents summarized balance sheet data as of September 30, 2012 and March 31, 2012 for TV Guide Network:
 
 
September 30,
2012
 
March 31,
2012
 
(Amounts in thousands)
Current assets
$
30,792

 
$
41,548

Non-current assets
$
228,744

 
$
236,855

Current liabilities
$
30,659

 
$
30,979

Non-current liabilities
$
31,068

 
$
33,407

Redeemable preferred stock
$
246,863

 
$
230,412


14

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



The following table presents the summarized statement of operations for the three and six months ended September 30, 2012 and 2011 for TV Guide Network and a reconciliation of the net loss reported by TV Guide Network to equity interest loss recorded by the Company:
 
 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
 
September 30,
2012
 
September 30,
2011
 
September 30,
2012
 
September 30,
2011
 
(Amounts in thousands)
Revenues
$
19,931

 
$
22,589

 
$
41,995

 
$
50,849

Expenses:
 
 
 
 
 
 
 
Cost of services
12,197

 
11,228

 
26,836

 
21,417

Selling, marketing, and general and administration
11,143

 
12,842

 
25,419

 
28,635

Depreciation and amortization
2,621

 
2,925

 
5,330

 
5,876

Operating loss
(6,030
)
 
(4,406
)
 
(15,590
)
 
(5,079
)
Interest expense, net
427

 
454

 
868

 
910

Accretion of redeemable preferred stock units (1)
8,368

 
7,290

 
16,452

 
14,332

Total interest expense, net
8,795

 
7,744

 
17,320

 
15,242

Net loss
$
(14,825
)
 
$
(12,150
)
 
$
(32,910
)
 
$
(20,321
)
Reconciliation of net loss reported by TV Guide Network to equity interest loss:
 
 
 
 
 
 
 
Net loss reported by TV Guide Network
$
(14,825
)
 
$
(12,150
)
 
$
(32,910
)
 
$
(20,321
)
Ownership interest in TV Guide Network
51
%
 
51
%
 
51
%
 
51
%
The Company's share of net loss
(7,561
)
 
(6,197
)
 
(16,784
)
 
(10,364
)
Accretion of dividend and interest income on redeemable preferred stock units (1)
4,268

 
3,717

 
8,390

 
7,309

Eliminations of the Company’s share of profit on sales to TV Guide Network (2)

 

 
(375
)
 
(483
)
Realization of the Company’s share of profits on sales to TV Guide Network (3)
146

 
176

 
609

 
298

Total equity interest loss recorded
$
(3,147
)
 
$
(2,304
)
 
$
(8,160
)
 
$
(3,240
)
 ___________________
(1)
Accretion of mandatorily redeemable preferred stock units represents TV Guide Network’s 10% dividend and the amortization of discount on its mandatorily redeemable preferred stock units held by the Company and the 49% interest holder. The Company records 51% of this expense as income from the accretion of dividend and discount on mandatorily redeemable preferred stock units within equity interest loss.
(2)
Represents the elimination of the gross profit recognized by Lionsgate on sales to TV Guide Network in proportion to Lionsgate's ownership interest in TV Guide Network. The amount of intra-entity profit is calculated as the total gross profit recognized on a title by title basis multiplied by Lionsgate's percentage ownership of TV Guide Network. The table above in the Transactions with TV Guide Network section shows the calculation of the profit eliminated.
(3)
Represents the realization of a portion of the profits previously eliminated. This profit remains eliminated until realized by TV Guide Network. TV Guide Network 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 TV Guide Network's books is amortized. The profit amount realized is calculated by multiplying the percentage of the TV Guide Network inventory amortized in the period reported by TV Guide Network by the amount of profit initially eliminated, on a title by title basis.



15

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



4. Other Assets
The composition of the Company’s other assets is as follows as of September 30, 2012 and March 31, 2012:
 
 
September 30,
2012
 
March 31,
2012
 
(Amounts in thousands)
Deferred financing costs, net of accumulated amortization
$
44,433

 
$
39,130

Loans receivable
21,530

 
24,767

Prepaid expenses and other
14,721

 
14,637

Finite-lived intangible assets
9,282

 
11,977

 
$
89,966

 
$
90,511

Deferred Financing Costs. Deferred financing costs primarily include costs incurred in connection with (1) the amended and restated senior revolving credit facility, (2) the issuance of the Senior Secured Second-Priority Notes, (3) the Term Loan associated with the acquisition of Summit and (4) the issuance of the April 2009 3.625% Notes and the January 2012 4.00% Notes (see Note 5) that are deferred and amortized to interest expense using the effective interest method.
Loans Receivable. The following table sets forth the Company’s loans receivable at September 30, 2012 and March 31, 2012:
 
 
Interest Rate
 
September 30,
2012
 
March 31,
2012
 
(Amounts in thousands)
Third-party producer
3.2%
 
$
4,592

 
$
9,049

NextPoint, Inc. (“Break Media”)
5.46% - 20.0%
 
16,938

 
15,718

 
 
 
$
21,530

 
$
24,767


Prepaid Expenses and Other. Prepaid expenses and other primarily include prepaid expenses and security deposits.
Finite-lived Intangible Assets. Finite-lived intangibles consist primarily of sales agency relationships and trademarks. The composition of the Company's finite-lived intangible assets and the associated accumulated amortization is as follows as of September 30, 2012 and March 31, 2012:

 
 
 
 
 
September 30, 2012
 
March 31, 2012
 
Weighted Average Remaining Life
 
Range of Remaining Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
(in years)
 
(Amounts in thousands)
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks
5
 
1 - 5
 
$
8,200

 
$
2,918

 
$
5,282

 
$
8,200

 
$
1,623

 
$
6,577

Sales agency relationships
5
 
5
 
6,200

 
2,200

 
4,000

 
6,200

 
800

 
5,400

 
 
 
 
 
$
14,400

 
$
5,118

 
$
9,282

 
$
14,400

 
$
2,423

 
$
11,977


The aggregate amount of amortization expense associated with the Company's intangible assets for the three and six months ended September 30, 2012 was approximately $1.3 million and $2.7 million, respectively (2011 - $0.1 million and $0.2 million, respectively). The estimated aggregate amortization expense for each of the years ending March 31, 2013 through 2017 is approximately $2.6 million, $3.7 million, $1.8 million, $0.8 million, and $0.4 million, respectively.



16

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 September 30, 2012 and March 31, 2012:
 
September 30, 2012
 
March 31, 2012
 
(Amounts in thousands)
Senior revolving credit facility
$
268,724

 
$
99,750

Senior secured second-priority notes
431,881

 
431,510

Term loan
294,929

 
477,514

Convertible senior subordinated notes
83,704

 
104,498

Other financing obligations

 
3,778

 
$
1,079,238

 
$
1,117,050

The following table sets forth future annual contractual principal payment commitments under corporate debt as of September 30, 2012:
 
 
Maturity Date or
 
Year Ended March 31,
Debt Type
Next Holder Redemption Date (1)
 
2013
 
2014
 
2015
 
2016
 
2017
 
Thereafter
 
Total
 
 
 
(Amounts in thousands)
Senior revolving credit facility
May 2016 (2)
 
$

 
$

 
$

 
$

 
$
268,724

 
$

 
$
268,724

Senior secured second-priority notes
November 2016
 

 

 

 

 
436,000

 

 
436,000

Term loan
September 2016 (3)
 

 

 
3,762

 
35,587

 
259,811

 

 
299,160

Principal amounts of convertible senior subordinated notes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
October 2004 2.9375% Notes (conversion price of $11.50 per share)
October 2014
 

 

 
348

 

 

 

 
348

April 2009 3.625% Notes (conversion price of $8.25 per share)
March 2015
 

 

 
65,574

 

 

 

 
65,574

January 2012 4.00% Notes (conversion price of $10.50 per share)
January 2017
 

 

 

 

 
45,000

 

 
45,000

 
 
 
$

 
$

 
$
69,684

 
$
35,587

 
$
1,009,535

 
$

 
1,114,806

Less aggregate unamortized (discount) premium, net
 
 
 
 
 
 
 
 
 
 
 
 
 
(35,568
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,079,238

(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.
(2) Amended and restated senior revolving credit facility expires the earlier of (i) September 27, 2017 or (ii) six (6) months prior to the maturity of the senior secured second-priority notes
(3) The Term Loan was to mature on September 7, 2016. On October 18, 2012, the Company terminated and paid off all amounts outstanding under the Term Loan of $299.2 million, as well as all accrued but unpaid interest (see Note 18).

Senior Revolving Credit Facility
On September 27, 2012, the Company amended and restated its senior revolving credit facility. The amended and restated senior revolving credit facility provides for borrowings up to $800 million, subject to a borrowing base and other restrictions. The amended credit agreement amends and restates the previous $340 million senior revolving credit facility.

17

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



As of September 30, 2012, the indenture governing the Company's senior secured second-priority notes restricted the Company from borrowing in excess of $340 million under the Company's credit facility, unless certain financial ratios were met. Subsequently on October 15, 2012, the Company entered into a supplemental indenture to amend the indenture (the “Indenture”) governing the Company's senior secured second-priority notes. The supplemental indenture amends the previous Indenture to, among other things, enable the Company to incur additional secured indebtedness under the amended and restated senior revolving credit facility, in an aggregate principal amount not to exceed $650 million (an increase from the $340 million limit previously specified in the Indenture) (see Note 18).
Outstanding Amount. At September 30, 2012, the Company had borrowings of $268.7 million outstanding (March 31, 2012$99.8 million).
Availability of Funds. At September 30, 2012, there was $62.7 million available (March 31, 2012$230.2 million). The senior revolving credit facility provides for borrowings and letters of credit up to an aggregate of $800 million, however, due to restrictions in the Company's senior secured second-priority notes indenture as discussed above, the maximum borrowing capacity as of September 30, 2012 was $340 million, which was subsequently adjusted on October 15, 2012 to $650 million pursuant to a supplemental indenture which amended the indenture governing the senior secured second-priority notes. The availability of funds is also limited by a borrowing base and reduced by outstanding letters of credit which amounted to $8.6 million at September 30, 2012 (March 31, 2012$10.0 million).
Maturity Date. The senior revolving credit facility expires the earlier of (i) September 27, 2017 or (ii) six (6) months prior to the maturity of the Company’s senior secured second-priority notes.
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 September 30, 2012, the senior revolving credit facility bore interest of 2.5% over the LIBOR rate (effective interest rate of 2.71% and 2.74% on borrowings outstanding as of September 30, 2012 and March 31, 2012, respectively).
Commitment Fee. The Company is required to pay a quarterly commitment fee of 0.0375% to 0.5% per annum, depending on the average balance of borrowings outstanding during the period, on the total senior revolving credit facility of $800 million less the amount drawn.
Security. Obligations under the senior revolving credit facility are secured by collateral (as defined in the credit agreement) granted by the Company and certain subsidiaries of the Company, as well as a pledge of equity interests in certain of the Company’s subsidiaries.
Covenants. The senior revolving credit facility contains a number of affirmative and negative 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 and make distributions, make certain investments and acquisitions, repurchase its stock and 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.

Change in Control. Under the senior revolving credit facility, the Company may also be subject to an event of default upon a change in control (as defined in the credit agreement) which, among other things, includes a person or group acquiring ownership or control in excess of 50% (amended from 20% on June 22, 2010) of the Company’s common shares.

Senior Secured Second-Priority Notes
On October 21, 2009, Lions Gate Entertainment Inc. (“LGEI”), the Company’s wholly-owned subsidiary, issued $236.0 million aggregate principal amount of senior secured second-priority notes due 2016 (the “October 2009 Senior Notes”) in a private offering conducted pursuant to Rule 144A and Regulation S under the Securities Act.
On May 13, 2011, LGEI issued approximately $200.0 million aggregate principal amount of senior secured second-priority notes due 2016 (the “May 2011 Senior Notes,” and collectively with the October 2009 Senior Notes, the “Senior Notes”) in a private offering conducted pursuant to Rule 144A and Regulation S under the Securities Act. The May 2011 Senior Notes have the same terms as the October 2009 Senior Notes, except for the issue date, issue price and first interest payment.
In August 2011, a subsidiary of LGEI paid $9.9 million to repurchase $10.0 million of aggregate principal amount (carrying value — $9.9 million) of the Senior Notes. The Company recorded a loss on extinguishment in the quarter ended September 30, 2011 of $0.4 million, which included $0.5 million of deferred financing costs written off. In September 2011, LGEI resold such Senior Notes at 99.0% of the $10.0 million face amount thereof, plus accrued interest thereon from May 1, 2011, resulting in gross proceeds of approximately $10.2 million.

18

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



Outstanding Amount. The outstanding amount is set forth in the table below:
 
September 30,
2012
 
March 31,
2012
 
(Amounts in thousands)
Principal amount of Senior Secured Second-Priority Notes
$
436,000

 
$
436,000

Unamortized Aggregate Premium/ (Discount), net
(4,119
)
 
(4,490
)
Net carrying amount of Senior Secured Second-Priority Notes
$
431,881

 
$
431,510


Maturity Date. The Senior Notes are due November 1, 2016.
Original Issue Discount/Premium. The October 2009 Senior Notes were issued by LGEI at an initial price of 95.222% (original issue discount — 4.778%) of the principal amount. The May 2011 Senior Notes were issued by LGEI at an initial price of 102.219% (original issue premium — 2.219%) of the principal amount. The original issue discount/premium and deferred financing costs are being amortized through November 1, 2016 using the effective interest method. As of September 30, 2012, the remaining amortization period was 4.1 years.
Interest. The Senior Notes pay interest semi-annually on May 1 and November 1 of each year at a rate of 10.25% per year.
Security. The Senior Notes are guaranteed on a senior secured basis by the Company, and certain wholly-owned subsidiaries of both the Company and LGEI. The Senior Notes are ranked junior in right of payment to the Company’s senior revolving credit facility, ranked equally in right of payment to the Company’s convertible senior subordinated notes, and ranked senior to any of the Company’s unsecured debt.

Covenants. The 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.

Term Loan
In connection with the acquisition of Summit (see Note 9), the Company entered into a new $500.0 million principal amount term loan agreement (the "Term Loan") and received net proceeds of $476.2 million, after original issue discount and offering fees and expenses. The net proceeds were used in connection with the acquisition of Summit to pay off Summit's existing term loan.

During the three months ended June 30, 2012 , the Company made voluntary early repayments of the Term Loan of approximately $163.3 million, in addition to required repayments of $22.2 million. As a result, the Company wrote off a proportionate amount of the related deferred financing costs and unamortized discount in the aggregate of $8.2 million, which is included in loss on extinguishment of debt in the consolidated statements of operations.

On October 18, 2012, the Company terminated and paid off all amounts outstanding under the Term Loan of $299.2 million, as well as all accrued but unpaid interest (see Note 18).
 
Outstanding Amount. The outstanding amount of the Term Loan is set forth in the table below:
 
September 30,
2012
 
March 31,
2012
 
(Amounts in thousands)
Principal amount
$
299,160

 
$
484,664

Unamortized discount
(4,231
)
 
(7,150
)
Net carrying amount
$
294,929

 
$
477,514

Maturity Date. The Term Loan was to mature on September 7, 2016. The Term Loan was repayable in quarterly installments equal to $13.75 million, with the balance payable on the final maturity date.

19

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



Interest. Interest was based on a base rate, as defined, or the LIBOR rate (subject to a LIBOR floor of 1.25%), in either case plus an applicable margin of 4.50% in the case of base rate loans and 5.50% in the case of LIBOR loans (effective interest rate of 7.75% and 6.75%, respectively as of September 30, 2012).
Security. The Term Loan was secured by collateral of the Summit assets.
Covenants. The Term Loan contained a number of affirmative and negative covenants that, among other things, require Summit to satisfy certain financial covenants.

Convertible Senior Subordinated Notes
Outstanding Amount. The following table sets forth the convertible senior subordinated notes outstanding at September 30, 2012 and March 31, 2012:
 
 
September 30, 2012
 
March 31, 2012
 
Principal
 
Unamortized
Discount
 
Net Carrying
Amount
 
Principal
 
Unamortized
Discount
 
Net Carrying
Amount
 
(Amounts in thousands)
Convertible Senior Subordinated Notes
 
 
 
 
 
 
 
 
 
 
 
October 2004 2.9375% Notes (conversion price of $11.50 per share)
$
348

 
$

 
$
348

 
$
348

 
$

 
$
348

February 2005 3.625% Notes (conversion price of $14.28 per share)

 

 

 
23,464

 

 
23,464

April 2009 3.625% Notes (conversion price of $8.25 per share)
65,574

 
(18,266
)
 
47,308

 
66,581

 
(21,119
)
 
45,462

January 2012 4.00% Notes (conversion price of $10.50 per share)
45,000

 
(8,952
)
 
36,048

 
45,000

 
(9,776
)
 
35,224

 
$
110,922

 
$
(27,218
)
 
$
83,704

 
$
135,393

 
$
(30,895
)
 
$
104,498


Interest Expense. The effective interest rate on the liability component and the amount of interest expense, which includes both the contractual interest coupon and amortization of the discount on the liability component, for the three and six months ended September 30, 2012 and 2011 are presented below.
 

20

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



 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
 
September 30,
2012
 
September 30,
2011
 
September 30,
2012
 
September 30,
2011
 
(Amounts in thousands)
 
 
 
 
October 2004 2.9375% Convertible Senior Subordinated Notes:
 
 
 
 
 
 
 
Effective interest rate of liability component (9.65%)
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
Contractual interest coupon
$

 
$
198

 
$
5

 
$
464

Amortization of discount on liability component and debt issuance costs

 
484

 

 
1,100

 

 
682

 
5

 
1,564

February 2005 3.625% Convertible Senior Subordinated Notes:
 
 
 
 
 
 
 
Effective interest rate of liability component (10.03%)
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
Contractual interest coupon
80

 
212

 
328

 
425

Amortization of discount on liability component and debt issuance costs

 
386

 
6

 
760

 
80

 
598

 
334

 
1,185

April 2009 3.625% Convertible Senior Subordinated Notes:
 
 
 
 
 
 
 
Effective interest rate of liability component (17.26%)
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
Contractual interest coupon
604

 
604

 
1,207

 
1,207

Amortization of discount on liability component and debt issuance costs
1,470

 
1,238

 
2,868

 
2,413

 
2,074

 
1,842

 
4,075

 
3,620

January 2012 4.00% Convertible Senior Subordinated Notes:
 
 
 
 
 
 
 
Effective interest rate of liability component (9.56%)
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
Contractual interest coupon
450

 

 
900

 

Amortization of discount on liability component and debt issuance costs
429

 

 
849

 

 
879

 

 
1,749

 

Total
 
 
 
 
 
 
 
Contractual interest coupon
1,134

 
1,014

 
2,440

 
2,096

Amortization of discount on liability component and debt issuance costs
1,899

 
2,108

 
3,723

 
4,273

 
$
3,033

 
$
3,122

 
$
6,163

 
$
6,369


Fiscal 2013 Convertible Senior Subordinated Notes Transactions

February 2005 3.625% Notes. On July 17, 2012, the Company completed the optional redemption of the February 2005 3.625% Notes. Of the $23.5 million of February 2005 3.625% notes called for redemption, $7.7 million were redeemed for cash at 100% of their principal amount, plus accrued and unpaid interest and $15.8 million were converted into common shares at a conversion rate of 70.0133 common shares per $1,000 in principal amount, or a conversion price of approximately $14.28 per share for an aggregate of 1,107,950 common shares (plus cash in lieu of fractional shares). Following the redemption, the February 2005 3.625% Notes are no longer outstanding. There was no gain or loss on the redemption because the fair value of the liability equaled the carrying value of the liability and all deferred financing costs were fully amortized.


21

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



April 2009 3.625% Notes. On September 18, 2012, $1.0 million of the principal amount of the April 2009 3.625% Notes were converted into common shares at a conversion rate of 121.2121 common shares per $1,000 in principal amount, or a conversion price of approximately $8.25 per share for an aggregate of 122,060 common shares (plus cash in lieu of fractional shares). The gain on the conversion was not significant because the carrying value of the April 2009 3.625% Notes plus the unamortized deferred financing costs approximated the fair value of the liability component of the notes.
Convertible Senior Subordinated Notes Terms
October 2004 2.9375% Notes. In October 2004, LGEI sold $150.0 million of the October 2004 2.9375% Notes, of which $50.1 million was allocated to the equity component.
Outstanding Amount: As of September 30, 2012, $0.3 million of aggregate principal amount (carrying value —$0.3 million) of the October 2004 2.9375% Notes remains outstanding.
Interest: Interest on the October 2004 2.9375% Notes is payable semi-annually on April 15 and October 15.
Maturity Date: The October 2004 2.9375% Notes mature on October 15, 2024.
Redeemable by LGEI: LGEI may redeem the October 2004 2.9375% Notes at 100%.
Redeemable by Holder: The holder may require LGEI to repurchase the October 2004 2.9375% Notes on October 15, 2014 and 2019 or upon a change in control at a price equal to 100% of the principal amount, together with accrued and unpaid interest through the date of repurchase.
Conversion Features: The holder may convert the October 2004 2.9375% Notes into the Company’s common shares prior to maturity only if the price of the Company’s common shares issuable upon conversion of a note reaches or falls below a certain specific threshold over a specified period, the notes have been called for redemption, a change in control occurs or certain other corporate transactions occur. Before the close of business on or prior to the trading day immediately before the maturity date, the holder may convert the notes into the Company’s common shares at a conversion rate equal to 86.9565 shares per $1,000 principal amount of the October 2004 2.9375% Notes, subject to adjustment in certain circumstances, which represents a conversion price of approximately $11.50 per share. Upon conversion of the October 2004 2.9375% Notes, the Company has the option to deliver, in lieu of common shares, cash or a combination of cash and common shares of the Company.
Make Whole Premium: Under certain circumstances, if the holder requires LGEI to repurchase all or a portion of their notes or the holder converts the notes upon a change in control, they will be entitled to receive a make whole premium. The amount of the make whole premium, if any, will be based on the price of the Company’s common shares on the effective date of the change in control. No make whole premium will be paid if the price of the Company’s common shares at such time is less than $8.79 per share or exceeds $50.00 per share.
April 2009 3.625% Notes. In April 2009, LGEI issued approximately $66.6 million of 3.625% Convertible Senior Subordinated Notes (the “April 2009 3.625% Notes”), of which $16.2 million was allocated to the equity component.
Outstanding Amount: As of September 30, 2012, $65.6 million of aggregate principal amount (carrying value — $47.3 million) of the April 2009 3.625% Notes remains outstanding.
Interest: Interest on the April 2009 3.625% Notes is payable at 3.625% per annum semi-annually on March 15 and September 15 of each year.
Maturity Date: The April 2009 3.625% Notes will mature on March 15, 2025.
Redeemable by LGEI: On or after March 15, 2015, the Company may redeem the April 2009 3.625% Notes, in whole or in part, at a price equal to 100% of the principal amount of the April 2009 3.625% Notes to be redeemed, plus accrued and unpaid interest through the date of redemption.

Redeemable by Holder: 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,” at a price equal to 100% of the principal amount of the April 2009 3.625% Notes to be repurchased plus accrued and unpaid interest.
Conversion Features: The April 2009 3.625% Notes may be converted into common shares of the Company at any time before maturity, redemption or repurchase. The initial conversion rate of the April 2009 3.625% Notes is 121.2121 common shares per $1,000 principal amount of the April 2009 3.625% Notes, subject to adjustment in certain circumstances, which represents a conversion price of approximately $8.25 per share. Upon conversion of the April 2009 3.625% Notes, the Company has the option to deliver, in lieu of common shares, cash or a combination of cash and common shares of the Company.

22

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



Make Whole Premium: Under certain circumstances, if the holder requires LGEI to repurchase all or a portion of their notes upon a change in control, they will be entitled to receive a make whole premium. The amount of the make whole premium, if any, will be based on the price of the Company’s common shares on the effective date of the change in control. No make whole premium will be paid if the price of the Company’s common shares at such time is less than $5.36 per share or exceeds $50.00 per share.
January 2012 4.00% Notes. In January 2012, LGEI issued approximately $45.0 million of January 2012 4.00% Notes, of which $10.1 million was allocated to the equity component.
Outstanding Amount: As of September 30, 2012, $45.0 million of aggregate principal amount (carrying value — $36.0 million) of the January 2012 4.00% Notes remains outstanding.
Interest: Interest on the January 2012 4.00% Notes is payable at 4.00% per annum semi-annually on January 15 and July 15 of each year, commencing on July 15, 2012.
Maturity Date: The January 2012 4.00% Notes will mature on January 11, 2017.
Redeemable by Holder: The holder may require LGEI to repurchase the January 2012 4.00% Notes upon a “designated event” consisting of certain changes in control, change of management or termination of trading, at a price equal to 100% of the principal amount of the January 2012 4.00% Notes to be repurchased plus accrued and unpaid interest.
Conversion Features: The January 2012 4.00% Notes are convertible into common shares of the Company at any time prior to maturity or repurchase by the Company, at an initial conversion price of approximately $10.50  per share, subject to adjustment in certain circumstances as specified in the Indenture. Upon conversion of the January 2012 4.00% Notes, the Company has the option to deliver, in lieu of common shares, cash or a combination of cash and common shares of the Company.
Other Financing Obligations
On June 1, 2007, the Company entered into a bank financing agreement for $3.7 million to fund the acquisition of certain capital assets. Interest was payable in monthly payments totaling $0.3 million per year at an interest rate of 8.02%, with the entire principal due June 2012. In June 2012, the Company repaid this financing obligation.

6. Participations and Residuals
The Company expects approximately 69% of accrued participations and residuals will be paid during the one-year period ending September 30, 2013.

7. Film Obligations and Production Loans
 
 
September 30,
2012
 
March 31,
2012
 
(Amounts in thousands)
Film obligations
$
84,319

 
$
98,750

Production loans
 
 
 
Individual production loans
278,978

 
352,960

Pennsylvania Regional Center production loans
65,500

 
65,500

Film credit facility
8,782

 
43,940

Total film obligations and production loans
$
437,579

 
$
561,150


The following table sets forth future annual repayment of film obligations and production loans as of September 30, 2012:
 

23


 
Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31,
 
Year Ended March 31,
 
2013
 
2014
 
2015
 
2016
 
2017
 
Thereafter
 
Total
 
(Amounts in thousands)
Film obligations
$
36,161

 
$
19,440

 
$
16,020

 
$
11,680

 
$
2,000

 
$
3,000

 
$
88,301

Production loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Individual production loans
125,295

 
114,949

 
38,734

 

 

 

 
278,978

Pennsylvania Regional Center production loans

 
65,500

 

 

 

 

 
65,500

Film credit facility

 
8,782

 

 

 

 

 
8,782

 
$
161,456

 
$
208,671

 
$
54,754

 
$
11,680

 
$
2,000

 
$
3,000

 
441,561

Less imputed interest on film obligations
 
 
 
 
 
 
 
 
 
 
 
 
(3,982
)
 
 
 
 
 
 
 
 
 
 
 
 
 
$
437,579

Film Obligations
Film obligations include minimum guarantees, which represent amounts payable for film rights that the Company has acquired and certain theatrical marketing obligations, which represent amounts received from third parties that are contractually committed for theatrical marketing expenditures associated with specific titles.
Individual Production Loans
Production loans represent individual loans for the production of film and television programs that the Company produces. Individual 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. Individual production loans of $264.0 million incur interest at rates ranging from 3.36% to 3.69%, and approximately $15.0 million of production loans are non-interest bearing.
Pennsylvania Regional Center
General. On April 9, 2008, the Company entered into a loan agreement with the Pennsylvania Regional Center, which provides for the availability of production loans up to $65.5 million on a five-year term for use in film and television productions in the State of Pennsylvania. The amount that was borrowed was limited to approximately one half of the qualified production costs incurred in the State of Pennsylvania through the two-year period ended April 2010, and is subject to certain other limitations. Under the terms of the loan, for every dollar borrowed, the Company’s production companies are required (within a two-year period) to either create a specified number of jobs, or spend a specified amount in certain geographic regions in the State of Pennsylvania.
Outstanding Amount. At September 30, 2012, the Company had borrowings of $65.5 million (March 31, 2012$65.5 million).
Availability of Funds. At September 30, 2012, there were no amounts available under this agreement (March 31, 2012nil).
Maturity Date. All amounts borrowed under this loan agreement with the Pennsylvania Regional Center are due April 11, 2013, five years from the date that the Company began to borrow under this agreement.
Interest. Amounts borrowed under the agreement carry an interest rate of 1.5%, which is payable semi-annually.
Security. The loan is secured by a first priority security interest in the Company’s film library pursuant to an intercreditor agreement with the Company’s senior lender under the Company’s senior revolving credit facility. Pursuant to the terms of the Company’s senior revolving credit facility, the Company is required to maintain certain collateral equal to the loans outstanding plus 5% under this facility. Such collateral can consist of cash, cash equivalents or debt securities, including the Company’s convertible senior subordinated notes repurchased. As of September 30, 2012, $59.4 million principal value (fair value — $72.1 million) of the Company’s convertible senior subordinated notes repurchased was held as collateral under the Company’s senior revolving credit facility (March 31, 2012$72.8 million principal value, $83.1 million fair value).

24



Film Credit Facility
On October 6, 2009, the Company entered into a revolving film credit facility agreement, as amended effective December 31, 2009 and June 22, 2010 (the “Film Credit Facility”), which provides for borrowings for the acquisition or production of motion pictures.
Outstanding Amount. At September 30, 2012, the Company had borrowings of $8.8 million (March 31, 2012 — $43.9 million).
Availability of Funds. Currently, the Film Credit Facility provides for total borrowings up to $20 million, subject to a borrowing base, which can vary based on the amount of sales contracts in place on pictures financed under the facility. The Company reduced the borrowing commitment from $130 million to $60 million in July 2012 and then to $20 million in September 2012.
Maturity Date. The Film Credit Facility has a maturity date of April 6, 2013. Borrowings under the Film Credit Facility are due the earlier of (a) nine months after delivery of each motion picture or (b) April 6, 2013.
Interest. As of September 30, 2012, the Film Credit Facility bore interest of 3.25% over the “LIBO” rate (as defined in the credit agreement). The weighted average interest rate on borrowings outstanding as of September 30, 2012 was 3.46% (March 31, 2012 — 3.49%).
Commitment Fee. The Company is required to pay a quarterly commitment fee of 0.75% per annum on the unused commitment under the Film Credit Facility.
Security. Borrowings under the Film Credit Facility are subject to a borrowing base calculation and are secured by interests in the related motion pictures, together with certain other receivables from other motion picture and television productions pledged by the Company, including a minimum pledge of such receivables of $25 million. Receivables pledged to the Film Credit Facility must be excluded from the borrowing base calculation under the Company’s senior revolving credit facility.

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, individual production loans, Pennsylvania Regional Center Loan, 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 TV Guide Network's Mandatorily Redeemable Preferred Stock Units using primarily a discount 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.

25

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 TV Guide Network's mandatorily redeemable preferred stock units and outstanding debt at September 30, 2012 and March 31, 2012:
 
 
September 30, 2012
 
March 31, 2012
 
(Amounts in thousands)
 
Carrying
Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
 
 
(Level 3)
 
 
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Investment in TV Guide Network's Mandatorily Redeemable Preferred Stock Units
$
98,247

 
$
150,466

 
$
106,406

 
$
145,029

 
 
 
 
 
 
 
 
 
Carrying
Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
 
 
(Level 2)
 
 
 
(Level 2)
Liabilities:
 
 
 
 
 
 
 
October 2004 2.9375% convertible senior subordinated notes
$
348

 
$
256

 
$
348

 
$
237

February 2005 3.625% convertible senior subordinated notes

 

 
23,464

 
19,295

April 2009 3.625% convertible senior subordinated notes
47,308

 
53,567

 
45,462

 
59,083

January 2012 4.00% convertible senior subordinated notes
36,048

 
36,423

 
35,224

 
35,619

Individual production loans
278,978

 
278,269

 
352,960

 
351,911

Pennsylvania Regional Center production loans
65,500

 
64,567

 
65,500

 
63,679

Senior secured second-priority notes
431,881

 
482,195

 
431,510

 
479,055

Term Loan
294,929

 
294,900

 
477,514

 
480,423

 
$
1,154,992

 
$
1,210,177

 
$
1,431,982

 
$
1,489,302


9. Acquisitions and Divestitures
Summit
On January 13, 2012, the Company purchased all of the membership interests in Summit Entertainment, LLC (“Summit”), a worldwide independent film producer and distributor. The aggregate purchase price was approximately $412.1 million, which consisted of $361.9 million in cash and 5,837,781 in the Company's common shares (a part of which are included in escrow for indemnification purposes). Approximately $279.4 million of the purchase price and acquisition co