United states securities and exchange commission


Description of Business, Organization, and Basis of Presentation (continued)



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1. Description of Business, Organization, and Basis of Presentation (continued)

Sale of Interest in the Company. On May 28, 2009, Lions Gate entered into a Purchase Agreement with One Equity Partners (“OEP”), the global private equity investment arm of JPMorgan Chase Bank N.A., pursuant to which OEP purchased 49% of Lions Gate's interest in TV Guide Entertainment Group, LLC. In addition, OEP reserved the option of buying another 1% of TV Guide Entertainment Group, LLC under certain circumstances. The arrangement contains joint control rights, as evidenced in an operating agreement, as well as certain transfer restrictions and exit rights. In connection with the transaction, the Company issued 49,000 Series A Preferred Units (“Preferred Units”) and 49,000 Series B-1 Common Units (“B-1 Common Units”) to OEP in exchange for cash consideration paid to Lions Gate, and 51,000 Preferred Units and 51,000 B-1 Common Units to Lions Gate in exchange for Lions Gate's membership interest.

2. Significant Accounting Policies

Generally Accepted Accounting Principles

These consolidated financial statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”). The U.S. dollar is the functional currency of the Company's businesses.



Reclassifications

The Company has made certain reclassifications to the prior year's financial statements to conform to classifications in the current year. These reclassifications had no impact on previously reported results of operations.



Principles of Consolidation

All material intercompany balances and transactions between the entities that comprise the Company have been eliminated.



Revenue Recognition

Revenues primarily consist of advertising revenues and subscriber fees.

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2. Significant Accounting Policies (continued)

Advertising Revenues. Advertising revenues are earned and recognized when the advertising spot is displayed or aired on the Company's distribution platforms. Advertising revenues are recorded net of agency commissions and discounts. Cash payments received in advance for advertising are deferred until earned, at which time revenue is recognized.

Network advertising contracts may guarantee the advertiser a minimum audience for its advertisements over the term of the contracts. Revenues are only recognized when those minimum requirements are met. The determination of whether such audience minimums have been met is based on information provided by ratings services companies and historical experience. If the minimum guaranteed audience requirements are not met, the Company provides the advertiser additional advertising time until the minimum audience guarantees have been met. A liability is recorded for the amount of the contract fee that has not yet achieved the minimum audience guarantee. This liability is recognized as revenue when minimum audience guarantees have been met.



Subscriber Fees. The Company has entered into agreements with cable operators and digital broadcast satellite providers for the licensing or distribution of its services in exchange for “subscriber fees,” generally calculated on a per-subscriber basis. Subscriber fees revenue from the distribution of TV Guide Network programming is recognized in the month the services are provided. Payments received in advance for subscription services are deferred until the month earned, at which time revenue is recognized. The Company defers launch support assets (capitalized fees paid to a cable or direct broadcast satellite operator to facilitate the launch of a cable network) and amortizes the amounts on a straight-line basis over the contract period. The Company classifies the amortization of launch support as a reduction of revenue.

Barter Transactions

The Company enters into transactions that exchange advertising time for program license rights or advertising time on the other party's network. Advertising barter transactions are recorded at the estimated fair value of the advertising surrendered and recognized as the related advertising units are aired.

For the years ended March 31, 2012 and 2011, the Company recognized barter revenues and expenses of $0.5 million and $1.6 million, respectively. Such amounts are included in Advertising Revenues and Programming Cost of Services, respectively, in the accompanying consolidated statements of operations.

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2. Significant Accounting Policies (continued)

Advertising Expense

Marketing and promotion costs to promote the Company's distribution platforms are expensed when incurred and are classified as advertising expense in the accompanying consolidated statements of operations.



Cash and Cash Equivalents

Cash and cash equivalents consist of cash deposits at financial institutions and money market mutual funds. The Company considers all highly liquid investments with maturities of three months or less when acquired to be cash equivalents.



Programming Costs

For programs produced by the Company, capitalized costs include all direct production costs and production overhead. Costs for programs produced are expensed over the economic life of the program in relation to revenues generated. If the content of the program deals with current events, program costs are generally expensed upon first airing. The valuation of the cost of programs produced is evaluated on a program-by-program basis. When an event or change in circumstances indicates that the fair value of the program is less than its unamortized cost, the program is written down to its estimated fair value.

For acquired programs, the cost of acquired programming is capitalized and a liability is recorded upon delivery of the episodes acquired that are available for broadcast. The liability represents the present value of the contractual cash payments scheduled over the license period. Capitalized costs of programs acquired are allocated to the estimated number of projected runs over the program license period and subsequently amortized as those runs are aired. Acquired programming costs are stated at the lower of unamortized cost or net realizable value.

Property and Equipment and Amortizable Intangible Assets

Property and equipment and amortizable intangible assets are recorded at cost, or fair value, as of the date of the acquisition by Lions Gate. Property and equipment and amortizable intangible assets are depreciated using the straight-line method over the estimated useful lives of the assets. Assets acquired under capital lease arrangements are recorded at the present value of the minimum lease payments and are amortized over the shorter of the lease term or useful life of the leased asset.


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2. Significant Accounting Policies (continued)

Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the useful life of the leasehold improvement.

Estimated useful lives of property and equipment and amortizable intangible assets are as follows:











Machinery and equipment, furniture and fixtures

3 - 7 years

Computer equipment and software

3 years

Transponder under capital lease

15 years

Customer relationships

7 - 11 years

Trademark/tradename

2 - 20 years

License agreements

2 - 6 years

Internal use software

2 years

The Company periodically reviews and evaluates the recoverability of property and equipment and amortizable intangible assets. Where applicable, estimates of net future cash flows, on an undiscounted basis, are calculated based on future revenue and cost estimates. If undiscounted cash flow estimates are less than the carrying value, a reduction in the carrying amount is recorded to adjust the carrying amount to fair value, which approximates discounted cash flows.



Goodwill

Goodwill represents the excess of acquisition costs over the fair value of the tangible and intangible assets acquired and liabilities assumed in the acquisition of the Company by Lions Gate on February 28, 2009. Goodwill is not amortized but is reviewed for impairment annually within each fiscal year or between the annual tests if an event occurs or circumstances change that indicates it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. The impairment test follows a two-step approach. The first step determines if the goodwill is potentially impaired, and the second step measures the amount of the impairment loss, if necessary. Under the first step, goodwill is considered potentially impaired if the fair value of the reporting unit is less than the reporting unit's carrying amount, including goodwill. Under the second step, the impairment loss is then measured as the excess of recorded goodwill over the fair value of the goodwill, as calculated. The fair value of goodwill is calculated by allocating the fair value of the reporting unit to all the assets and liabilities of the reporting unit as if the reporting unit was purchased in a business combination and the purchase price was the fair value of the reporting unit. The Company performs its annual impairment test as of January 1 in each fiscal year. The Company performed its annual impairment test on its goodwill as of January 1, 2012. No goodwill impairment was identified.


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2. Significant Accounting Policies (continued)

Other Assets

Other assets include prepaid expenses and security deposits.



Share-Based Compensation

Accounting rules require the measurement of all share-based awards using a fair value method and the recognition of the related share-based compensation expense in the consolidated financial statements over the requisite service period.



Income Taxes

The Company mainly operates as limited liability companies (there are two corporate entities within the consolidated group that are not limited liability companies), so any federal and state tax exposure is minimal. For limited liability companies, federal and state income taxes are liabilities of the individual members. The Company's tax returns and the amount of allocable profits or losses are subject to examination by federal and state taxing authorities. If such examinations result in changes to profits and losses, the income tax liability of the members may also change. As a result, only minimal federal and state income tax expense has been recorded in these consolidated financial statements for the years ending March 31, 2012 and 2011. Such amounts are included in selling, general, and administrative expenses in the accompanying consolidated statements of operations. The Company paid $19,400 and $61,300 in taxes for each of the years ended March 31, 2012 and 2011.



Fair Value of Financial Instruments

Carrying amounts of certain of the Company's financial instruments, including accounts receivable, accounts payable, and accrued liabilities, approximate their fair value due to their short maturities.



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

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2. Significant Accounting Policies (continued)

estimates made by management in the preparation of the accompanying consolidated financial statements relate to estimating the provision for doubtful accounts; estimating the number of program runs for acquired programming amortization; estimating the useful lives of property and equipment and amortizable intangible assets; and impairment assessments for programming cost, property and equipment, goodwill, and amortizable intangible assets. Actual results could differ from such estimates.



Credit Risk and Significant Concentrations

Accounts that potentially subject the Company to a concentration of credit risk principally consist of trade receivables. For the years ended March 31, 2012 and 2011, there were no revenues from one single customer in excess of 10% of total revenues. As of March 31, 2012 and 2011, there was no single customer that accounted for 10% or more of the total accounts receivable balance. The Company does not require collateral and evaluates its outstanding accounts receivable each period for collectability. This evaluation involves assessing the aging of the amounts due and reviewing the creditworthiness of each customer. Based on this evaluation, the Company records an allowance for accounts receivable that are estimated to not be collectible.



Subsequent Events

The Company has evaluated all events and transactions subsequent to March 31, 2012 through the date of issuance, May 30, 2012. There were no material subsequent events that required recognition or additional disclosure in these consolidated financial statements.



Recent Accounting Pronouncements

In October 2009, new guidance was issued related to the accounting for multiple-deliverable revenue arrangements. This new guidance amends the existing guidance for separating consideration in multiple-deliverable arrangements and establishes a hierarchy for determining the selling price of a deliverable. The Company adopted this standard beginning in first quarter of fiscal 2012 and it did not have a material impact on its consolidated financial statements.

In May 2011, the FASB issued an accounting standards update related to fair value measurements and disclosures to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and

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2. Significant Accounting Policies (continued)

International Financial Reporting Standards. This guidance includes amendments that clarify the intent about the application of existing fair value measurement requirements, while other amendments change a principle or requirement for measuring fair value or for disclosing information about fair value measurements. Specifically, the guidance requires additional disclosures for fair value measurements that are based on significant unobservable inputs. The updated guidance is to be applied prospectively and is effective for the Company's annual periods beginning April 1, 2012. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

In September 2011, the FASB issued an accounting standard update to simplify the annual goodwill impairment test. The guidance provides companies with the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is determined through the qualitative assessment that a reporting unit's fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. This guidance is effective for the Company's fiscal year beginning April 1, 2012, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

3. Accounts Receivable

Accounts receivable consists of the following (in thousands):




























 

March 31

 

2012

2011

 

 

 

Accounts receivable

$

19,649




$

22,874




Allowance for doubtful accounts

(1,701

)

(1,706

)

Accounts receivable, net

$

17,948




$

21,168



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4 . Property and Equipment

Property and equipment consists of the following (in thousands):




























 

March 31

 

2012

2011

 

 

 

Equipment under capital lease

$

12,065




$

12,065




Furniture and fixtures

1,050




1,050




Computer equipment and software

9,528




8,539




Machinery and equipment

7,462




7,497




Assets under construction

16









Leasehold improvements

3,593




3,588




 

33,714




32,739




Less accumulated depreciation and amortization

(20,170

)

(15,744

)

Property and equipment, net

$

13,544




$

16,995






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