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EX-32.1 - EXHIBIT 32.1 - CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906 - LIONS GATE ENTERTAINMENT CORP /CN/ex321q2f2017.htm
EX-31.2 - EXHIBIT 31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - LIONS GATE ENTERTAINMENT CORP /CN/ex312q2f2017.htm
EX-31.1 - EXHIBIT 31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - LIONS GATE ENTERTAINMENT CORP /CN/ex311q2f2017.htm
EX-10.127 - EXHIBIT 10.127 - LIONS GATE ENTERTAINMENT CORP. 2012 PERFORMANCE INCENTIVE PLAN - LIONS GATE ENTERTAINMENT CORP /CN/ex10127lionsgate2012perfor.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 September 30, 2016
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 November 1, 2016
Common Shares, no par value per share
 
148,332,947 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 25, 2016, 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, technological changes and other trends affecting the entertainment industry, uncertainties related to the Company's proposed acquisition of Starz, including the possibility that the transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events; diversion of management's attention from ongoing business operations and opportunities; potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the Starz transaction, 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 25, 2016, 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
 
 
September 30,
2016
 
March 31,
2016
 
(Amounts in thousands,
except share amounts)
ASSETS
 
 
 
Cash and cash equivalents
$
105,953

 
$
57,742

Restricted cash
2,900

 
2,906

Accounts receivable, net of reserves for returns and allowances of $42,355 (March 31, 2016 - $51,809) and provision for doubtful accounts of $5,519 (March 31, 2016 - $6,014)
953,251

 
1,049,289

Investment in films and television programs, net
1,328,798

 
1,478,296

Property and equipment, net
42,655

 
43,384

Investments
502,287

 
464,346

Goodwill
534,780

 
534,780

Other assets
71,207

 
69,075

Deferred tax assets
223,127

 
134,421

Total assets
$
3,764,958

 
$
3,834,239

LIABILITIES
 
 
 
Senior revolving credit facility
$
297,803

 
$
156,136

5.25% Senior Notes
221,689

 
220,796

Term Loan
389,197

 
388,207

Accounts payable and accrued liabilities
348,690

 
377,698

Participations and residuals
651,594

 
607,358

Film obligations and production loans
512,678

 
715,018

Convertible senior subordinated notes
101,140

 
99,984

Deferred revenue
292,038

 
328,244

Total liabilities
2,814,829

 
2,893,441

Commitments and contingencies (Note 16)

 

Redeemable noncontrolling interest
93,025

 
90,525

SHAREHOLDERS' EQUITY
 
 
 
Common shares, no par value, 500,000,000 shares authorized, 148,301,707 shares issued (March 31, 2016 - 146,785,940 shares)
904,255

 
885,800

Retained earnings (accumulated deficit)
(18,453
)
 
7,584

Accumulated other comprehensive loss
(28,698
)
 
(43,111
)
Total shareholders' equity
857,104

 
850,273

Total liabilities and shareholders' equity
$
3,764,958

 
$
3,834,239

See accompanying notes.

4


LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
(Amounts in thousands, except per share amounts)
Revenues
$
639,534

 
$
476,759

 
$
1,193,109

 
$
885,700

Expenses:
 
 
 
 
 
 
 
Direct operating
386,908

 
292,810

 
753,184

 
523,120

Distribution and marketing
221,953

 
153,140

 
346,992

 
225,064

General and administration
84,491

 
67,577

 
163,158

 
128,289

Depreciation and amortization
4,347

 
2,520

 
9,963

 
4,350

Total expenses
697,699

 
516,047

 
1,273,297

 
880,823

Operating income (loss)
(58,165
)
 
(39,288
)
 
(80,188
)
 
4,877

Other expenses (income):
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
Cash interest
13,522

 
10,357

 
26,414

 
20,728

Amortization of debt discount and deferred financing costs
2,360

 
2,273

 
4,702

 
4,527

Total interest expense
15,882

 
12,630

 
31,116

 
25,255

Interest and other income
(1,231
)
 
(555
)
 
(2,180
)
 
(1,155
)
Total other expenses, net
14,651

 
12,075

 
28,936

 
24,100

Loss before equity interests and income taxes
(72,816
)
 
(51,363
)
 
(109,124
)
 
(19,223
)
Equity interests income
1,908

 
7,149

 
12,754

 
18,537

Loss before income taxes
(70,908
)
 
(44,214
)
 
(96,370
)
 
(686
)
Income tax provision (benefit)
(53,604
)
 
(2,145
)
 
(79,906
)
 
699

Net loss
(17,304
)
 
(42,069
)
 
(16,464
)
 
(1,385
)
Less: Net (income) loss attributable to noncontrolling interest
(154
)
 

 
260

 

Net loss attributable to Lions Gate Entertainment Corp. shareholders
$
(17,458
)
 
$
(42,069
)
 
$
(16,204
)
 
$
(1,385
)
 
 
 
 
 
 
 
 
Per share information attributable to Lions Gate Entertainment Corp. shareholders:
 
 
 
 
 
 
 
Basic net loss per common share
$
(0.12
)
 
$
(0.28
)
 
$
(0.11
)
 
$
(0.01
)
Diluted net loss per common share
$
(0.12
)
 
$
(0.28
)
 
$
(0.11
)
 
$
(0.01
)
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
147,804

 
148,345

 
147,511

 
147,984

Diluted
147,804

 
148,345

 
147,511

 
147,984

 
 
 
 
 
 
 
 
Dividends declared per common share
$

 
$
0.09

 
$
0.09

 
$
0.16

See accompanying notes.

5


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

 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
(Amounts in thousands)
Net loss
$
(17,304
)
 
$
(42,069
)
 
$
(16,464
)
 
$
(1,385
)
Foreign currency translation adjustments, net of tax
(1,159
)
 
(1,497
)
 
(5,485
)
 
1,993

Net unrealized gain (loss) on available-for-sale securities, net of tax
5,980

 
(30,232
)
 
22,884

 
12,002

Net unrealized gain (loss) on foreign exchange contracts, net of tax
(383
)
 
2,987

 
(2,986
)
 
2,994

Comprehensive income (loss)
(12,866
)
 
(70,811
)
 
(2,051
)
 
15,604

Less: Comprehensive (income) loss attributable to noncontrolling interest
(154
)
 

 
260

 

Comprehensive income (loss) attributable to Lions Gate Entertainment Corp. shareholders
$
(13,020
)
 
$
(70,811
)
 
$
(1,791
)
 
$
15,604

See accompanying notes.


6

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



 
Common Shares
 
Retained Earnings (Accumulated Deficit)
 
Accumulated
 Other
Comprehensive
Income (Loss)
 
 
 
Number
 
Amount
 
 
 
Total
 
(Amounts in thousands, except share amounts)
Balance at March 31, 2016
146,785,940

 
$
885,800

 
$
7,584

 
$
(43,111
)
 
$
850,273

Exercise of stock options
561,612

 
500

 

 

 
500

Share-based compensation, net of withholding tax obligations of $26,732
943,240

 
24,740

 

 

 
24,740

Issuance of common shares to directors for services
10,915

 
236

 

 

 
236

Dividends declared

 
(7,021
)
 
(6,264
)
 

 
(13,285
)
Net loss attributable to Lions Gate Entertainment Corp. shareholders

 

 
(16,204
)
 

 
(16,204
)
Foreign currency translation adjustments, net of tax

 

 

 
(5,485
)
 
(5,485
)
Net unrealized gain on available-for-sale securities, net of tax

 

 

 
22,884

 
22,884

Net unrealized loss on foreign exchange contracts, net of tax

 

 

 
(2,986
)
 
(2,986
)
Noncontrolling interest adjustments to redemption value

 

 
(3,569
)
 

 
(3,569
)
Balance at September 30, 2016
148,301,707

 
$
904,255

 
$
(18,453
)
 
$
(28,698
)
 
$
857,104


See accompanying notes.

7



LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended
 
September 30,
 
2016
 
2015
 
(Amounts in thousands)
Operating Activities:
 
 
 
Net loss
$
(16,464
)
 
$
(1,385
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
9,963

 
4,350

Amortization of films and television programs
588,549

 
361,290

Amortization of debt discount and deferred financing costs
4,702

 
4,527

Non-cash share-based compensation
46,200

 
33,983

Other non-cash items
2,500

 

Equity interests income
(12,754
)
 
(18,537
)
Deferred income taxes
(86,861
)
 
(2,612
)
Changes in operating assets and liabilities:
 
 
 
Restricted cash
6

 

Accounts receivable, net
89,346

 
12,007

Investment in films and television programs
(446,670
)
 
(535,470
)
Other assets
(4,234
)
 
(1,828
)
Accounts payable and accrued liabilities
(8,449
)
 
(34,300
)
Participations and residuals
44,524

 
44,938

Film obligations
19,891

 
(11,148
)
Deferred revenue
(35,851
)
 
(24,423
)
Net Cash Flows Provided By (Used In) Operating Activities
194,398

 
(168,608
)
Investing Activities:
 
 
 
Investment in equity method investees
(5,344
)
 
(3,659
)
Distributions from equity method investees
2,263

 

Purchases of property and equipment
(6,301
)
 
(6,880
)
Net Cash Flows Used In Investing Activities
(9,382
)
 
(10,539
)
Financing Activities:
 
 
 
Senior revolving credit facility - borrowings
454,000

 
48,000

Senior revolving credit facility - repayments
(314,000
)
 
(48,000
)
Term Loan - borrowings, net of deferred financing costs of $964 in 2015

 
24,036

Convertible senior subordinated notes - repurchases

 
(5
)
Production loans - borrowings
152,296

 
370,945

Production loans - repayments
(373,726
)
 
(112,474
)
Dividends paid
(26,819
)
 
(20,563
)
Distributions to noncontrolling interest
(3,309
)
 

Exercise of stock options
500

 
4,453

Tax withholding required on equity awards
(27,253
)
 
(18,983
)
Net Cash Flows Provided By (Used In) Financing Activities
(138,311
)
 
247,409

Net Change In Cash And Cash Equivalents
46,705

 
68,262

Foreign Exchange Effects on Cash
1,506

 
(542
)
Cash and Cash Equivalents - Beginning Of Period
57,742

 
102,697

Cash and Cash Equivalents - End Of Period
$
105,953

 
$
170,417


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 diversified presence in motion picture production and distribution, television programming and syndication, home entertainment, international distribution and sales, branded channel platforms, interactive ventures and games, and location-based entertainment.
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 six months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2017. The balance sheet at March 31, 2016 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, 2016.
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
Revenue Recognition: 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 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.
Presentation of Debt Issuance Costs: 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, and must be applied on a retrospective basis to all prior periods presented in the financial statements. The Company adopted the new guidance effective April 1, 2016, which resulted in the reclassification of approximately $21.3 million of debt issuance costs from other assets to their respective debt liabilities in the unaudited condensed consolidated balance sheets as of March 31, 2016.


9

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



Recognition and Measurement of Financial Instruments: In January 2016, the FASB issued new guidance that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other provisions, the new guidance requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. For investments without readily determinable fair values, entities have the option to either measure these investments at fair value or at cost adjusted for changes in observable prices minus impairment. The guidance is effective for the Company's fiscal year beginning April 1, 2018. Early adoption is not permitted, except for certain provisions relating to financial liabilities. The Company is currently evaluating the impact that the adoption of this new guidance will have on its consolidated financial statements.

Accounting for Leases: In February 2016, the FASB issued guidance on accounting for leases which requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The new guidance also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. The guidance is effective for the Company's fiscal year beginning April 1, 2019, with early adoption permitted, and is required to be implemented using a modified retrospective approach. The Company is currently evaluating the impact that the adoption of this new guidance will have on its consolidated financial statements.

Employee Share-Based Payment Accounting: In March 2016, the FASB issued amended guidance related to employee share-based payment accounting. One aspect of the guidance, which will become effective on a prospective basis, requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. In addition, the guidance eliminates the requirement that excess tax benefits be realized (i.e., through a reduction in income taxes payable) before companies can recognize them. This part of the guidance will be applied using a modified retrospective transition method and will result in the Company recording a cumulative-effect adjustment in retained earnings for excess tax benefits not previously recognized. The guidance also requires presentation of excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity, and can be applied retrospectively or prospectively. The guidance also increases the amount companies can withhold to cover income taxes on awards without triggering liability classification for shares used to satisfy statutory income tax withholding obligations and requires application of a modified retrospective transition method. Finally, the guidance provides for an election to account for forfeitures of share-based payments either by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change (as is required under the current guidance). The guidance is effective for the Company's fiscal year beginning April 1, 2017, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this new guidance will have on its consolidated financial statements.

Equity Method of Accounting: In March 2016, the FASB issued guidance that changes the requirements for equity method accounting when an investment qualifies for use of the equity method as a result of an increase in the investor’s ownership interest in or degree of influence over an investee. The guidance (i) eliminates the need to retroactively apply the equity method of accounting upon qualifying for such treatment, (ii) requires that the cost of acquiring the additional interest in an investee be added to the basis of the previously held interest and (iii) requires that unrealized holding gains or losses for available-for-sale equity securities that qualify for the equity method of accounting be recognized in earnings at the date the investment becomes qualified for use of the equity method of accounting. The guidance is effective for the Company's fiscal year beginning April 1, 2017, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this new guidance will have on its consolidated financial statements.

Classification of Certain Cash Receipts and Cash Payments: In August 2016, the FASB issued guidance that clarifies how entities should classify certain cash receipts and payments on the statement of cash flows. The guidance primarily relates to the classification of cash flows associated with certain (i) debt transactions including debt prepayment or extinguishment costs, (ii) contingent consideration arrangements related to a business combination, (iii) insurance claims and policies, (iv) distributions from equity method investees and (v) securitization transactions. This guidance is effective for the Company's fiscal year beginning April 1, 2018, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this new guidance will have on its statement of cash flows.




10

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



2. Investment in Films and Television Programs
 
September 30,
2016
 
March 31,
2016
 
(Amounts in thousands)
Motion Pictures Segment - Theatrical and Non-Theatrical Films
 
 
 
Released, net of accumulated amortization
$
554,132

 
$
584,419

Acquired libraries, net of accumulated amortization
2,849

 
3,612

Completed and not released
63,534

 
33,806

In progress
276,279

 
421,687

In development
35,031

 
28,148

Product inventory
22,730

 
20,693

 
954,555

 
1,092,365

Television Production Segment - Direct-to-Television Programs
 
 
 
Released, net of accumulated amortization
194,049

 
189,246

In progress
174,462

 
191,161

In development
5,732

 
5,524

 
374,243

 
385,931

 
$
1,328,798

 
$
1,478,296

The Company expects approximately 49% of completed films and television programs, net of accumulated amortization, will be amortized during the one-year period ending September 30, 2017. 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, 2019.
During the three and six months ended September 30, 2016 and 2015, 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 six months ended September 30, 2016, the Company recorded $4.4 million and $6.3 million, respectively, of fair value film write-downs, as compared to $7.8 million and $8.5 million, respectively, of fair value film write-downs recorded during the three and six months ended September 30, 2015.

3. Investments
The carrying amounts of investments, by category, at September 30, 2016 and March 31, 2016 were as follows:
 
 
September 30,
2016
 
March 31,
2016
 
 
(Amounts in thousands)
Equity method investments
 
$
312,234

 
$
297,546

Available-for-sale securities
 
146,862

 
123,978

Cost method investments
 
43,191

 
42,822

 
 
$
502,287

 
$
464,346


11

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




Equity Method Investments:
The carrying amounts of equity method investments at September 30, 2016 and March 31, 2016 were as follows:
 
 
September 30,
2016
 
 
 
 
Equity Method Investee
Ownership
Percentage
 
September 30,
2016
 
March 31,
2016
 
 
 
(Amounts in thousands)
EPIX
31.2%
 
$
187,864

 
$
171,837

Pop
50.0%
 
99,012

 
98,719

Other
Various
 
25,358

 
26,990

 
 
 
$
312,234

 
$
297,546

Equity interests in equity method investments for the three and six months ended September 30, 2016 and 2015 were as follows (income (loss)):
 
 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
Equity Method Investee
2016
 
2015
 
2016
 
2015
 
(Amounts in thousands)
EPIX
$
5,070

 
$
8,157

 
$
16,027

 
$
21,229

Pop
(2,388
)
 
1,032

 
(2,074
)
 
665

Other
(774
)
 
(2,040
)
 
(1,199
)
 
(3,357
)
 
$
1,908

 
$
7,149

 
$
12,754

 
$
18,537

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. Since the Company's original investment in April 2008, the Company has received distributions from EPIX of $28.0 million. No distributions were received during the three and six months ended September 30, 2016 or 2015.
EPIX Financial Information:
The following table presents summarized balance sheet data as of September 30, 2016 and March 31, 2016 for EPIX:
 
 
September 30,
2016
 
March 31,
2016
 
(Amounts in thousands)
Current assets
$
380,847

 
$
355,735

Non-current assets
$
412,167

 
$
360,441

Current liabilities
$
101,067

 
$
90,837

Non-current liabilities
$
27,083

 
$
23,948

The following table presents the summarized statements of income for the three and six months ended September 30, 2016 and 2015 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
 
Six Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
(Amounts in thousands)
Revenues
$
98,580

 
$
105,243

 
$
196,875

 
$
216,593

Expenses:
 
 
 
 
 
 
 
Operating expenses
71,199

 
70,153

 
120,350

 
133,090

Selling, general and administrative expenses
6,654

 
6,345

 
12,815

 
12,135

Operating income
20,727

 
28,745

 
63,710

 
71,368

Interest and other expense
(227
)
 
(892
)
 
(210
)
 
(1,401
)
Net income
$
20,500

 
$
27,853

 
$
63,500

 
$
69,967

Reconciliation of net income reported by EPIX to equity interest income:
 
 
 
 
 
 
 
Net income reported by EPIX
$
20,500

 
$
27,853

 
$
63,500

 
$
69,967

Ownership interest in EPIX
31.15
%
 
31.15
%
 
31.15
%
 
31.15
%
The Company's share of net income
6,386

 
8,676

 
19,780

 
21,795

Eliminations of the Company’s share of profits on licensing sales to EPIX(1)
(3,068
)
 
(2,906
)
 
(6,774
)
 
(5,701
)
Realization of the Company’s share of profits on licensing sales to EPIX(2)
1,752

 
2,387

 
3,021

 
5,135

Total equity interest income recorded
$
5,070

 
$
8,157

 
$
16,027

 
$
21,229

_________________________
(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 three and six months ended September 30, 2016, the Company made no contributions to Pop (2015 - none and $0.8 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.
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 10.3%. 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.

13

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



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. During the year ended March 31, 2016, the Company agreed to participate in an equity offering of Atom Tickets and subscribed for an additional $7.9 million. The Company owns an interest of approximately 19.3% 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 service. The Company made an initial investment of $2.1 million during the year ended March 31, 2015, and during the year ended March 31, 2016, 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 losses and fair market value of available-for-sale securities are set forth below:

 
 
September 30,
2016
 
March 31,
2016
 
 
(Amounts in thousands)
Cost basis
 
$
158,916

 
$
158,916

Gross unrealized loss
 
(12,054
)
 
(34,938
)
Fair value
 
$
146,862

 
$
123,978


Starz. At September 30, 2016 and March 31, 2016, 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 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 September 30, 2016, 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 November 7, 2016, the fair value of the Company's minority interest in Starz was $155.2 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

14

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



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 year ended March 31, 2016, 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 September 30, 2016 and March 31, 2016:
 
 
September 30,
2016
 
March 31,
2016
 
(Amounts in thousands)
Prepaid expenses and other
$
60,783

 
$
57,725

Finite-lived intangible assets
10,424

 
11,350

 
$
71,207

 
$
69,075

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 September 30, 2016 and March 31, 2016:
 
September 30, 2016
 
March 31, 2016
 
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
$
9,500

 
$
1,052

 
$
8,448

 
$
9,500

 
$
449

 
$
9,051

Trademarks and trade names
8,600

 
6,699

 
1,901

 
8,600

 
6,451

 
2,149

Sales agency relationships
6,200

 
6,125

 
75

 
6,200

 
6,050

 
150

 
$
24,300

 
$
13,876

 
$
10,424

 
$
24,300

 
$
12,950

 
$
11,350


Amortization expense associated with the Company's intangible assets for the three and six months ended September 30, 2016 was approximately $0.5 million and $0.9 million, respectively (2015 - $0.4 million and $0.6 million, respectively). Amortization expense remaining relating to intangible assets for each of the years ending March 31, 2017 through 2021 is estimated to be approximately $0.9 million$1.4 million$1.4 million$1.4 million, and $1.4 million, respectively.



15

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, 2016 and March 31, 2016, and are reflected net of unamortized debt issuance costs and unamortized discount if applicable:

 
September 30,
2016
 
March 31,
2016
 
(Amounts in thousands)
Senior revolving credit facility, net of debt issuance costs of $3,197 (March 31, 2016 - $4,864)
$
297,803

 
$
156,136

5.25% Senior Notes, net of debt issuance costs of $3,311 (March 31, 2016 - $4,204)
221,689

 
220,796

Term Loan Due 2022, net of debt issuance costs of $10,803 (March 31, 2016 - $11,793)
389,197

 
388,207

Convertible senior subordinated notes, net of debt issuance costs and unamortized discount of $710 (March 31, 2016 - $1,866)
101,140

 
99,984

 
$
1,009,829

 
$
865,123


The following table sets forth future annual contractual principal payment commitments of corporate debt as of September 30, 2016:
 
 
 
Conversion Price Per Share at September 30, 2016
 
Maturity Date
 
Year Ended March 31,
Debt Type
 
 
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
 
 
 
 
 
 
(Amounts in thousands)
Senior revolving credit facility
 
N/A
 
September 2017
 
$

 
$
301,000

 
$

 
$

 
$

 
$

 
$
301,000

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
 
$10.21
 
January 2017
 
41,850

 

 

 

 

 

 
41,850

April 2013 1.25% Notes
 
$29.19
 
April 2018
 

 

 
60,000

 

 

 

 
60,000

 
 
 
 
 
 
$
41,850

 
$
301,000

 
$
285,000

 
$

 
$

 
$
400,000

 
1,027,850

Less aggregate unamortized discount & debt issuance costs
 
 
 
 
 
 
 
 
 
 
 
 
 
(18,021
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,009,829


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 September 30, 2016 there was $499.0 million available (March 31, 2016$639.0 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 September 30, 2016 (March 31, 2016none).
Maturity Date. September 27, 2017.
Interest. Interest is payable at an alternative base rate, as defined, plus 1.5%, or LIBOR plus 2.5%, as designated by the Company. As of September 30, 2016, borrowings under the senior revolving credit facility bore interest of 2.5% over the LIBOR rate (effective interest rate of 3.03% and 2.94% on borrowings outstanding as of September 30, 2016 and March 31, 2016, respectively).

16

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



Commitment Fee. The Company is required to pay a quarterly commitment fee of 0.375% to 0.5% per annum, depending on the average balance of borrowings outstanding during the period, on the total senior revolving credit facility of $800 million less the amount drawn.
Security. Obligations are secured by collateral (as defined in the credit agreement) granted by the Company and certain subsidiaries of the Company, as well as a pledge of equity interests in certain of the Company’s subsidiaries.
Covenants. The senior revolving credit facility contains a number of covenants that, among other things, require the Company to satisfy certain financial covenants and restrict the ability of the Company to incur additional debt, pay dividends, make certain investments and acquisitions, repurchase its stock, prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of its business, enter into sale-leaseback transactions, transfer and sell material assets and merge or consolidate. As of September 30, 2016, 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.

Maturity Date. August 1, 2018.

Optional Redemption. Redeemable by the Company, in whole or in part, at a price equal to 100% of the principal amount, plus the Applicable Premium, as defined in the indenture governing the 5.25% Senior Notes, plus accrued and unpaid interest, if any, to the date of redemption. The Applicable Premium amounts to the greater of (i) 1.0% of the principal amount redeemed and (ii) the excess of the present value of the principal amount of the notes redeemed plus interest through the maturity date over the principal amount of the notes redeemed on the redemption date.

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 September 30, 2016, 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.

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.

Optional Prepayment. The Company may voluntarily prepay the Term Loan Due 2022 at any time, provided that if prepaid (i) on or before March 17, 2017, the Company shall pay to lenders a prepayment premium of 2.0% on the principal amount prepaid; (ii) after March 17, 2017 and on or before March 17, 2018, the Company shall pay to lenders a prepayment premium of 1.0% on the principal amount prepaid; and (iii) on or after March 17, 2018, no prepayment premium shall be payable.

Covenants. Substantially similar to the 5.25% Senior Notes discussed above. As of September 30, 2016, 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 September 30, 2016 and March 31, 2016:
 
 
 
Maturity Date
 
Conversion Price Per Share at September 30, 2016
 
September 30, 2016
 
March 31, 2016
Convertible Senior Subordinated Notes
 
 
 
Principal
 
Unamortized Discount & Debt Issuance Costs
 
Net Carrying Amount
 
Principal
 
Unamortized Discount & Debt Issuance Costs
 
Net Carrying Amount
 
 
 
 
 
 
(Amounts in thousands)
January 2012 4.00% Notes
 
January 11, 2017
 
$10.21
 
$
41,850

 
$
(691
)
 
$
41,159

 
$
41,850

 
$
(1,840
)
 
$
40,010

April 2013 1.25% Notes
 
April 15, 2018
 
$29.19
 
60,000

 
(19
)
 
59,981

 
60,000

 
(26
)
 
59,974

 
 
 
 
 
 
$
101,850

 
$
(710
)
 
$
101,140

 
$
101,850

 
$
(1,866
)
 
$
99,984


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.

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, including upon the issuance of dividends.
 
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 six months ended September 30, 2015 (none in the six months ended September 30, 2016):

 
Six Months Ended
 
September 30,
 
2015
 
(Amounts in thousands, except share amounts)
April 2009 3.625% Notes
 
Principal amount converted
$
16,162

Common shares issued upon conversion
1,983,058

Weighted average conversion price per share
$
8.15


18

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



Interest Expense. Interest expense recognized for the convertible senior subordinated notes for the three and six months ended September 30, 2016 and 2015 is presented below:
 
 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
(Amounts in thousands)
Interest Expense
 
 
 
 
 
 
 
Contractual interest coupon
$
605

 
$
606

 
$
1,212

 
$
1,155

Amortization of discount on liability component and debt issuance costs
580

 
529

 
1,148

 
1,046

 
$
1,185

 
$
1,135

 
$
2,360

 
$
2,201



6. Participations and Residuals
The Company expects approximately 65% of accrued participations and residuals will be paid during the one-year period ending September 30, 2017.

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 unaudited condensed consolidated balance sheet and amounted to $126.5 million at September 30, 2016 (March 31, 2016 - $61.3 million). The difference between the ultimate 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
 
 
September 30,
2016
 
March 31,
2016
 
(Amounts in thousands)
Film obligations
$
44,576

 
$
24,989

Production loans, net of debt issuance costs of $838 (March 31, 2016 - $342)
468,102

 
690,029

Total film obligations and production loans
$
512,678

 
$
715,018



19

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



The following table sets forth future annual repayment of film obligations and production loans as of September 30, 2016:
 
 
Six Months Ending
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31,
 
Year Ended March 31,
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
 
(Amounts in thousands)
Film obligations
$
42,560

 
$
1,085

 
$
1,000

 
$

 
$

 
$

 
$
44,645

Production loans
285,786

 
183,154

 

 

 

 

 
468,940

 
$
328,346

 
$
184,239

 
$
1,000

 
$

 
$

 
$

 
$
513,585

Less imputed interest on film obligations and debt issuance costs on production loans
 
 
 
 
 
 
 
 
 
 
 
 
(907
)
 
 
 
 
 
 
 
 
 
 
 
 
 
$
512,678

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 3.53% to 3.79%.


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:

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.

20

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



The following table sets forth the assets and liabilities required to be carried at fair value on a recurring basis as of September 30, 2016 and March 31, 2016:
 
September 30, 2016
 
March 31, 2016
 
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
$
66,062

 
$

 
$
66,062

 
$
55,768

 
$

 
$
55,768

Starz Series B common stock

 
80,800

 
80,800

 

 
68,210

 
68,210

 
 
 
 
 
 
 
 
 
 
 
 
Forward exchange contracts (see Note 18)

 
7,085

 
7,085

 

 
9,417

 
9,417

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Forward exchange contracts (see Note 18)

 
(158
)
 
(158
)
 

 
(748
)
 
(748
)
 
$
66,062

 
$
87,727

 
$
153,789

 
$
55,768

 
$
76,879

 
$
132,647


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 September 30, 2016 and March 31, 2016:
 
 
September 30, 2016
 
March 31, 2016
 
(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
$
99,012

 
$
114,500

 
$
98,719

 
$
114,500

 
 
 
 
 
 
 
 
 
Carrying
Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
 
 
(Level 2)
 
 
 
(Level 2)
Liabilities:
 
 
 
 
 
 
 
January 2012 4.00% Notes
41,159

 
42,135

 
40,010

 
41,477

April 2013 1.25% Notes
59,981

 
56,950

 
59,974

 
54,188

Production loans
468,102

 
468,940

 
690,029

 
690,371

5.25% Senior Notes
221,689

 
239,063

 
220,796

 
229,500

Term Loan
389,197

 
404,500

 
388,207

 
400,500

 
$
1,180,128

 
$
1,211,588

 
$
1,399,016

 
$
1,416,036



21

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



9. Mergers and Acquisitions

Starz Transaction. On June 30, 2016, Lionsgate and Starz entered into an Agreement and Plan of Merger (the "Merger Agreement") under which Lionsgate will acquire Starz for a combination of cash and common stock totaling approximately $4.4 billion enterprise value (the "Starz Transaction"). Under the terms of the Merger Agreement, immediately prior to consummation of the proposed merger, Lionsgate will effect the reclassification of its capital stock, pursuant to which each existing Lionsgate common share will be converted into 0.5 shares of a newly issued class of Lionsgate Class A voting shares and 0.5 shares of a newly issued class of Lionsgate Class B non-voting shares, subject to the terms and conditions of the Merger Agreement. Following the reclassification, in the proposed merger, (a) each share of Starz Series A common stock will be converted into the right to receive $18.00 in cash and 0.6784 of a share of Lionsgate Class B non-voting shares, and (b) each share of Starz Series B common stock will be converted into the right to receive $7.26 in cash, 0.6321 of a share of Lionsgate Class B non-voting shares and 0.6321 of a share of Lionsgate Class A voting shares, in each case, subject to the terms and conditions of the Merger Agreement. The total enterprise value of Starz based on the estimated value of purchase price consideration is approximately $4.4 billion, including cash, equity and Starz debt to be assumed. The Merger Agreement has been approved by the boards of directors of Lionsgate and Starz and will be submitted to their respective shareholders for approval as well as to regulatory authorities.
At the time of the Merger Agreement, Lionsgate had commitments of approximately $4.57 billion from banks to provide for (i) a $1.9 billion term loan B facility, (ii) a $1.0 billion term loan A facility, (iii) a $1.0 billion revolving credit facility (iv) a $520 million unsecured bridge facility and (v) a $150 million unsecured funded bridge facility. See Note 20 - Subsequent Events for further information.
In connection with the Merger Agreement, on June 30, 2016, Lions Gate entered into a Stock Exchange Agreement (the "Starz Exchange Agreement") with Orion Arm Acquisition Inc., a Delaware corporation and an indirect wholly-owned subsidiary of Lions Gate Entertainment Corp. ("Merger Sub") and certain stockholders of Starz (the "Exchange Stockholders"), pursuant to which, if the Merger Agreement is terminated (1) by Lionsgate because Starz' board of directors changes its recommendation in favor of the transactions (2) by Starz in order to enter into a superior transaction or (3) by either party because Starz' stockholders fail to approve the transactions, then the Exchange Stockholders will sell to Merger Sub all shares of Starz Series B Common Stock held by the Exchange Stockholders (the "Starz Exchange Shares"), which as of June 30, 2016 constituted approximately 69.9% of the total voting power of the issued and outstanding shares of Starz Series B Common Stock, in exchange for per share consideration of $7.26 in cash and 1.2642 newly issued shares of Lionsgate Common Stock (the "Lions Gate Exchange Shares"). At the election of Dr. John C. Malone, or if Lionsgate should fail to receive the required stockholder approval to issue the Lions Gate Exchange Shares, the Exchange Stockholders will instead receive per share consideration of $36.30 in cash for each Starz Exchange Share. Lions Gate plans to seek such required stockholder approval at the same meeting where it will seek the required approvals pursuant to the Merger Agreement.

The Merger Agreement contains certain termination rights for Lions Gate and Starz. The Merger Agreement can be terminated by either party (1) by mutual written consent; (2) if the Merger has not been consummated by an outside date of December 31, 2016 (which either party may generally extend to March 31, 2017 if the only closing condition that would not have been met was related to the receipt of certain regulatory approvals); (3) if there is a permanent, non-appealable injunction or law restraining or prohibiting the consummation of the Merger; (4) if either party’s stockholders fail to approve the transactions; (5) if the other party’s board of directors changes its recommendation in favor of the transactions; (6) if the other party materially breaches its non-solicitation covenant; or (7) if the other party has breached its representations or covenants in a way that prevents satisfaction of a closing condition, subject to a cure period. The Merger Agreement can also be terminated by Starz (x) in order to enter into a superior transaction (subject to compliance with certain terms and conditions included in the Merger Agreement) or (y) if Lions Gate fails to consummate the Merger when otherwise required because of a failure to receive its debt financing.
 
Subject to the terms and conditions of the Merger Agreement, Starz will pay Lions Gate a termination fee of $150 million if (1) Starz terminates the Merger Agreement in order to enter into a superior transaction (subject to compliance with certain terms and conditions included in the Merger Agreement), (2) Lions Gate terminates the Merger Agreement because Starz’ board of directors changes its recommendation in favor of the transactions, (3) Lions Gate terminates the Merger Agreement because Starz materially breaches its non-solicitation covenant or (4) (a) an alternative transaction proposal is made to Starz, (b) thereafter the Merger Agreement is terminated (i) by either party for failure to consummate the Merger by the outside date (at such time as Starz’ stockholders have failed to approve the transactions and such termination does not result in the payment of a termination fee by Lions Gate), (ii) by either party because Starz’ stockholders fail to approve the transactions or (iii) by Lions Gate because Starz has breached its representations or covenants in a way that prevents satisfaction of a closing condition,

22

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



subject to a cure period, and (c) within 18 months of such termination, Starz enters into or consummates an alternative transaction.
 
Subject to the terms and conditions of the Merger Agreement, Lions Gate will pay Starz (1) a termination fee of $150 million if either party terminates the Merger Agreement because Lions Gate’s stockholders fail to approve the transactions, (2) a termination fee of $175 million if Starz terminates the Merger Agreement because Lions Gate’s board of directors changes its recommendation in favor of the transactions or because Lions Gate materially breaches its non-solicitation covenant, (3) a termination fee of $250 million if Starz terminates the Merger Agreement because Lions Gate fails to consummate the Merger when it would otherwise be required because of a failure to receive the debt financing and (4) a termination fee of $175 million if (a) an alternative transaction proposal is made to Lions Gate, (b) thereafter the Merger Agreement is terminated (i) by either party for failure to consummate the Merger by the outside date (at such time as Lions Gate’s stockholders have failed to approve the transactions and such termination does not result in the payment of a termination fee by Starz), (ii) by either party because Lions Gate’s stockholders fail to approve the transactions or (iii) by Starz because Lions Gate has breached its representations or covenants in a way that prevents satisfaction of a closing condition, subject to a cure period, and (c) within 18 months of such termination, Lions Gate enters into or consummates an alternative transaction.
A description of the Merger Agreement and other transactional documents was disclosed by the Company on a Current Report on Form 8-K dated June 30, 2016, filed with the SEC on July 1, 2016. On August 1, 2016, the Company filed a Form S-4 Registration Statement with the SEC, as amended, which includes detailed information regarding the merger.
Acquisition of Pilgrim Media Group. On November 12, 2015, the Company purchased 62.5% of the membership interests in Pilgrim Media Group, LLC ("Pilgrim Media Group"), a worldwide independent reality television producer and distributor. The aggregate purchase price was approximately $201.7 million.
The purchase price consisted of $144.7 million in cash and 1,517,451 of the Company's common shares, valued at $57.0 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 $3.4 million of acquisition-related costs that were expensed in general and administrative expenses during the year ended March 31, 2016.
The acquisition was accounted for as a purchase, with the results of operations of Pilgrim Media Group included in the Company's consolidated results from November 12, 2015. The purchase price of Pilgrim Media Group has been allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value. The Company used DCF analyses, which represent Level 3 fair value measurements, to assess certain components of its purchase price allocation. The allocation of the purchase price, including the fair value of redeemable noncontrolling interest recognized, is as follows:

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

Accounts receivable, net
15,248

Investment in films and television programs, net
63,387

Other assets acquired
7,019

Finite-lived intangible assets:
 
Noncompete agreements
9,500

Trade name
2,000

Other liabilities assumed
(32,638
)
Fair value of net assets acquired
80,332

Goodwill
211,452

Redeemable noncontrolling interest (Note 10)
(90,128
)
 
$
201,656


Goodwill of $211.5 million represents the excess of the purchase price over 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

23

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



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 following unaudited pro forma condensed consolidated statement of operations information presented below illustrate the results of operations of the Company as if the acquisition of Pilgrim Media Group as described above occurred on April 1, 2015. The statements of operations information below includes the statement of income of Pilgrim Media Group for the six months ended June 30, 2015 combined with the Company's statement of operations for the six months ended September 30, 2015.
 
 
Six Months Ended
 
 
September 30,
 
 
2015
 
 
(Amounts in thousands, except per share amounts)
Revenues
 
$
964,348

Net loss attributable to Lions Gate Entertainment Corp. shareholders
 
$
(2,438
)
Basic Net Loss Per Common Share attributable to Lions Gate Entertainment Corp. shareholders
 
$
(0.02
)
Diluted Net Loss Per Common Share attributable to Lions Gate Entertainment Corp. shareholders
 
$
(0.02
)
The unaudited pro forma condensed consolidated statement of operations information does 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 expensed in connection with the transaction, as well as $3.4 million of acquisition-related costs that were expensed in general and administrative expenses during the year ended March 31, 2016.
There were no changes in the carrying amount of goodwill by reporting segment in the three and six months ended September 30, 2016.



10. Redeemable Noncontrolling Interest

In connection with the acquisition of a controlling interest in Pilgrim Media Group on November 12, 2015, the Company recorded a redeemable noncontrolling interest of $90.1 million, representing 37.5% of Pilgrim Media Group. 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 Media Group, 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 sheets.

In addition, the noncontrolling interest holder is the President and CEO of Pilgrim Media Group, who will continue in this role pursuant to an employment contract entered into at the time of closing. 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 Media Group 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

24

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



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.

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

 
Six Months Ended
 
September 30,
 
2016
 
(Amounts in thousands)
Beginning balance
$
90,525

Net loss of Pilgrim Media Group attributable to noncontrolling interest
(260
)
Noncontrolling interest discount accretion
2,500

Adjustments to redemption value
3,569

Cash distributions
(3,309
)
Ending balance
$
93,025



11. Net Loss Per Share
Basic net loss per share is calculated based on the weighted average common shares outstanding for the period. Basic and diluted net loss per share for the three and six months ended September 30, 2016 and 2015 are presented below:
 
 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
(Amounts in thousands, except per share amounts)
Basic and Diluted Net Loss Per Common Share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net loss attributable to Lions Gate Entertainment Corp. shareholders
$
(17,458
)
 
$
(42,069
)
 
$
(16,204
)
 
$
(1,385
)
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
147,804

 
148,345

 
147,511

 
147,984

Basic and diluted net loss per common share
$
(0.12
)
 
$
(0.28
)
 
$
(0.11
)
 
$
(0.01
)

The exercise of common share equivalents including stock options, the conversion of convertible senior subordinated notes and restricted share units ("RSUs") could potentially dilute net income (loss) per share in the future, but were not reflected in diluted net loss per common share during the periods presented because their effect is anti-dilutive.



12. Capital Stock

(a) Common Shares
The Company had 500 million authorized common shares at September 30, 2016 and March 31, 2016. The table below outlines common shares reserved for future issuance:
 

25

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



 
September 30,
2016
 
March 31,
2016
 
(Amounts in thousands)
Stock options outstanding, average exercise price $26.88 (March 31, 2016 - $24.55)
14,040

 
15,332

Restricted share units — unvested
1,318

 
1,647

Share purchase options and restricted share units available for future issuance
968

 
2,093

Shares issuable upon conversion of January 2012 4.00% Notes at conversion price of $10.21 per share (March 31, 2016 - $10.26)
4,099

 
4,079

Shares issuable upon conversion of April 2013 1.25% Notes at conversion price of $29.19 per share (March 31, 2016 - $29.32)
2,055

 
2,046

Shares reserved for future issuance
22,480

 
25,197


The Company's 2012 Performance Incentive Plan was amended on October 3, 2016 (the "2012 Plan") to provide for the issuance of up to 31.6 million (an increase of 4.0 million) common shares of the Company, stock options, share appreciation rights, restricted shares, stock bonuses and other forms of awards granted or denominated in common shares or units of common shares of the Company, as well as certain cash bonus awards to eligible directors of the Company, officers or employees of the Company or any of its subsidiaries, and certain consultants and advisors to the Company or any of its subsidiaries.

(b) Share-based Compensation

The Company recognized the following share-based compensation expense during the three and six months ended September 30, 2016, and 2015:
 
 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
(Amounts in thousands)
Compensation Expense:
 
 
 
 
 
 
 
Stock Options
$
8,481

 
$
10,289

 
$
16,206

 
$
19,523

Restricted Share Units and Other Share-based Compensation
13,156

 
7,103

 
27,611

 
14,460

Share Appreciation Rights

 

 

 
288

 
21,637

 
17,392

 
43,817

 
34,271

Impact of accelerated vesting on stock options and restricted share units(1)
2,383

 

 
2,383

 

Total share-based compensation expense
$
24,020

 
$
17,392

 
$
46,200

 
$
34,271

 
 
 
 
 
 
 
 
Tax impact(2)
(8,355
)
 
(6,378
)
 
(16,040
)
 
(12,567
)
Reduction in net income
$
15,665

 
$
11,014

 
$
30,160

 
$
21,704

___________________
(1)
Represents the impact of the acceleration of certain vesting schedules for stock options and restricted share units pursuant to certain severance arrangements.
(2)
Represents the income tax benefit recognized in the statements of operations for share-based compensation arrangements.


26

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



The following table sets forth the stock option and restricted share unit activity during the six months ended September 30, 2016:
 
Stock Options
 
Weighted-Average Exercise Price
 
Restricted Share Units
 
Weighted-Average Grant-Date Fair Value
Outstanding at March 31, 2016
16,093,896

 
$23.83
 
1,647,432

 
$31.74
Granted
1,197,067

 
$27.66
 
1,390,073

 
$20.93
Options exercised or RSUs vested
(2,132,038
)
 
$9.76
 
(1,626,789
)
 
$24.64
Forfeited or expired
(356,589
)
 
$31.36
 
(92,582
)
 
$32.44
Outstanding at September 30, 2016
14,802,336

 
$25.99
 
1,318,134

 
$29.05
There were no excess tax benefits realized from tax deductions associated with option exercises and RSU activity for the six months ended September 30, 2016 (2015 - none).
Total unrecognized compensation cost related to unvested stock options and restricted share unit awards at September 30, 2016 are $34.5 million and $24.5 million, respectively, and are expected to be recognized over a weighted average period of 1.0 and 1.6 years, respectively.

(c) Dividends

On September 22, 2016, the Company announced that, as contemplated in the Registration Statement on Form S-4 filed with the Securities and Exchange Commission on August 1, 2016, as amended, its Board of Directors suspended the Company’s quarterly cash dividend beginning immediately due to its anticipated merger with Starz.

(d) Shareholder Transactions

In November 2015, the Company was advised that each of Liberty Global Incorporated Limited (“Liberty”), a limited company organized under the laws of the United Kingdom and a wholly owned subsidiary of Liberty Global plc, and Discovery Lightning Investments Ltd. (“Discovery”), a limited company organized under the laws of the United Kingdom and a wholly owned subsidiary of Discovery Communications, Inc., agreed to each purchase 5,000,000 common shares, no par value per share, of the Company from funds affiliated with MHR Fund Management, LLC (“MHR Fund Management”). In connection with the purchases, the Company entered into separate registration rights agreements with each of Liberty and Discovery, and amended the registration rights agreement with MHR Fund Management, which provide Liberty, Discovery and MHR Fund Management (together with certain of their affiliates) with certain registration rights, subject to the terms and conditions set forth therein. The Company also entered into an underwriting agreement with J.P. Morgan Securities LLC, as underwriter, Liberty, Discovery and Bank of America, N.A. in connection with a registered underwritten secondary public offering of the common shares. Among other transaction costs, the Company has incurred expenses on behalf of MHR Fund Management for certain costs related to the registration and offering of the common shares. Such costs, amounting to approximately $0.8 million, were included in general and administration expense in the consolidated statement of income for the year ended March 31, 2016. Mark H. Rachesky, the Chairman of the Board of the Company, is the principal of MHR Fund Management, which holds approximately 20.4% of the Company’s outstanding common stock as of November 1, 2016. The registration and offering were disclosed by the Company on Current Reports on Form 8-K dated November 10, 2015 and November 13, 2015.


13. Income Taxes
In the quarter ended September 30, 2016, the Company determined that a small change in its estimated pretax results for the year ending March 31, 2017 would create a large change in its expected annual effective rate. Accordingly, it was determined that a reliable estimate of the expected annual effective tax rate could not be made. As a result, the Company computed its tax provision (benefit) using the cut-off method which resulted in an income tax benefit of $53.6 million and $79.9 million for the three and six months ended September 30, 2016, respectively, based on the actual taxes attributable to its year-to-date earnings. This tax benefit is primarily related to the mix of the Company's pre-tax income (loss) generated across the various jurisdictions in which the Company operates in addition to the tax deductions generated by the Company's capital structure.

27

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



The income tax provision for the three and six months ended September 30, 2015 was calculated by estimating the Company's annual effective tax rate, and then applying the effective tax rate to income before income taxes for the period, along with any items that relate discretely to the period.
The Company's effective tax rate differs from the federal statutory rate, has changed from the prior period and could fluctuate significantly in the future, as the Company's effective tax rates are affected by many factors, including the overall level of pre-tax income, the mix of pre-tax income generated across the various jurisdictions in which the Company operates, changes in tax laws and regulations in those jurisdictions, changes in valuation allowances on its deferred tax assets, tax planning strategies available to the Company, and other discrete items.


14. Government Assistance
Tax credits earned for film and television production activity for the three and six months ended September 30, 2016 and 2015 totaled $30.1 million and $54.2 million, respectively (2015 - $85.9 million and $103.6 million, respectively) and are recorded as a reduction of the cost of the related film and television program. Accounts receivable at September 30, 2016 includes $290.7 million with respect to tax credits receivable (March 31, 2016 - $257.1 million).
The Company is subject to routine inquiries and review by regulatory authorities of its various incentive claims which have been received or are receivable. Adjustments of claims have generally not been material historically.

15. Segment Information
The Company’s reportable segments are determined based on the distinct nature of their operations and each segment is a strategic business unit that offers different products and services and is managed separately. The Company has two reportable business segments as of September 30, 2016: Motion Pictures and Television Production.
Motion Pictures consists of the development and production of feature films, acquisition of North American and worldwide distribution rights, North American theatrical, home entertainment and television distribution of feature films produced and acquired, and worldwide licensing of distribution rights to feature films produced and acquired.
Television Production consists of the development, production and worldwide distribution of television productions including television series, television movies and mini-series, and non-fiction programming.


28

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



Segment information by business unit is as follows:

 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
(Amounts in thousands)
Segment revenues
 
 
 
 
 
 
 
Motion Pictures
$
464,398

 
$
353,929

 
$
826,875

 
$
629,317

Television Production
175,136

 
122,830

 
366,234

 
256,383

 
$
639,534

 
$
476,759

 
$
1,193,109

 
$
885,700

Gross segment contribution
 
 
 
 
 
 
 
Motion Pictures
$
27,700

 
$
18,376

 
$
84,133

 
$
98,000

Television Production
20,325

 
9,554

 
38,069

 
32,703

 
$
48,025

 
$
27,930

 
$
122,202

 
$
130,703

Segment general and administration