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EX-10.36 - EXHIBIT 10.36 - EXECUTIVE ANNUAL BONUS PROGRAM - LIONS GATE ENTERTAINMENT CORP /CN/exhibit1036lionsgateexecut.htm
EX-32.1 - EXHIBIT 32.1 - CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906 - LIONS GATE ENTERTAINMENT CORP /CN/ex321q1f2018.htm
EX-31.2 - EXHIBIT 31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - LIONS GATE ENTERTAINMENT CORP /CN/ex312q1f2018.htm
EX-31.1 - EXHIBIT 31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - LIONS GATE ENTERTAINMENT CORP /CN/ex311q1f2018.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________
Form 10-Q 
___________________________________________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
þ
 
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
 
Smaller reporting company
o
 
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 August 3, 2017
Class A Voting Shares, no par value per share
 
81,264,879 shares
Class B Non-Voting Shares, no par value per share
 
127,308,418 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, 2017, 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; potential adverse reactions or changes to business or employee relationships, including those resulting from the recent acquisition of Starz; competitive responses to the transaction; the possibility that the anticipated benefits of the transaction are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies; diversion of management’s attention from ongoing business operations and opportunities; our ability to complete the integration of Starz successfully; litigation relating to the 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, 2017, 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
 
June 30,
2017
 
March 31,
2017
 
(Amounts in millions)
ASSETS
 
 
 
Cash and cash equivalents
$
156.5

 
$
321.9

Restricted cash

 
2.8

Accounts receivable, net
822.9

 
908.1

Program rights
238.8

 
261.7

Other current assets
209.6

 
195.9

Total current assets
1,427.8

 
1,690.4

Investment in films and television programs and program rights, net
1,660.4

 
1,729.5

Property and equipment, net
162.6

 
165.5

Investments
179.2

 
371.5

Intangible assets
2,019.5

 
2,046.7

Goodwill
2,704.5

 
2,700.5

Other assets
446.2

 
472.8

Deferred tax assets
33.5

 
20.0

Total assets
$
8,633.7

 
$
9,196.9

LIABILITIES
 
 
 
Accounts payable and accrued liabilities
$
328.2

 
$
573.0

Participations and residuals
498.9

 
514.9

Film obligations and production loans
168.8

 
367.2

Debt - short term portion
78.0

 
77.9

Deferred revenue
161.1

 
156.9

Total current liabilities
1,235.0

 
1,689.9

Debt
2,623.2

 
3,047.0

Participations and residuals
372.1

 
359.7

Film obligations and production loans
156.8

 
116.0

Other liabilities
44.2

 
50.3

Dissenting shareholders' liability
826.2

 
812.9

Deferred revenue
73.1

 
72.7

Deferred tax liabilities
432.3

 
440.2

Redeemable noncontrolling interest
95.0

 
93.8

Commitments and contingencies (Note 15)

 

SHAREHOLDERS' EQUITY
 
 
 
Class A voting common shares, no par value, 500.0 shares authorized, 81.2 shares issued (March 31, 2017 - 81.1 shares issued)
611.1

 
605.7

Class B non-voting common shares, no par value, 500.0 shares authorized, 126.9 shares issued (March 31, 2017 - 126.4 shares issued)
1,934.8

 
1,914.1

Retained earnings
244.1

 
10.6

Accumulated other comprehensive loss
(14.2
)
 
(16.0
)
Total shareholders' equity
2,775.8

 
2,514.4

Total liabilities and shareholders' equity
$
8,633.7

 
$
9,196.9

See accompanying notes.

4


LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended
 
June 30,
 
2017
 
2016
 
(Amounts in millions, except per share amounts)
Revenues
$
1,005.3

 
$
553.6

Expenses:
 
 
 
Direct operating
554.9

 
366.3

Distribution and marketing
198.1

 
125.0

General and administration
111.7

 
71.0

Depreciation and amortization
40.0

 
5.6

Restructuring and other
10.9

 
7.7

Total expenses
915.6

 
575.6

Operating income (loss)
89.7

 
(22.0
)
Other expenses (income):
 
 
 
Interest expense
 
 
 
Cash interest
34.6

 
12.9

Interest on dissenters' liability
13.3

 

Discount and financing costs amortization
4.4

 
2.3

Total interest expense
52.3

 
15.2

Interest and other income
(2.8
)
 
(0.9
)
Loss on extinguishment of debt
11.6

 

Total other expenses, net
61.1

 
14.3

Income (loss) before equity interests and income taxes
28.6

 
(36.3
)
Equity interests income (loss)
(8.3
)
 
10.8

Gain on sale of equity interest in EPIX
201.0

 

Income (loss) before income taxes
221.3

 
(25.5
)
Income tax provision (benefit)
46.8

 
(26.3
)
Net income
174.5

 
0.8

Less: Net (income) loss attributable to noncontrolling interest
(0.7
)
 
0.5

Net income attributable to Lions Gate Entertainment Corp. shareholders
$
173.8

 
$
1.3

 
 
 
 
Per share information attributable to Lions Gate Entertainment Corp. shareholders:
 
 
 
Basic net income per common share
$
0.84

 
$
0.01

Diluted net income per common share
$
0.80

 
$
0.01

 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
Basic
206.8

 
147.2

Diluted
217.9

 
149.6

 
 
 
 
Dividends declared per common share
$

 
$
0.09

See accompanying notes.

5


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

 
Three Months Ended
 
June 30,
 
2017
 
2016
 
(Amounts in millions)
Net income
$
174.5

 
$
0.8

Foreign currency translation adjustments, net of tax
2.0

 
(4.3
)
Net unrealized gain (loss) on available-for-sale securities, net of tax
(0.9
)
 
16.9

Net unrealized gain (loss) on foreign exchange contracts, net of tax
0.7

 
(2.6
)
Comprehensive income
176.3

 
10.8

Less: Comprehensive (income) loss attributable to noncontrolling interest
(0.7
)
 
0.5

Comprehensive income attributable to Lions Gate Entertainment Corp. shareholders
$
175.6

 
$
11.3

See accompanying notes.


6

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



 
Class A Voting
Common Shares
 
Class B Non-Voting
Common Shares
 
Retained Earnings
 
Accumulated
 Other
Comprehensive
Income (Loss)
 
 
 
Number
 
Amount
 
Number
 
Amount
 
 
 
Total
 
(Amounts in millions)
Balance at March 31, 2017
81.1

 
$
605.7

 
126.4

 
$
1,914.1

 
$
10.6

 
$
(16.0
)
 
$
2,514.4

Cumulative effect of accounting changes for excess tax benefits on equity-based compensation awards and the tax effects of intra-entity transfers

 

 

 

 
62.0

 

 
62.0

Exercise of stock options

 
0.3

 
0.5

 
8.9

 

 

 
9.2

Share-based compensation, net
0.1

 
5.0

 

 
11.7

 

 

 
16.7

Issuance of common shares to directors for services

 
0.1

 

 
0.1

 

 

 
0.2

Net income attributable to Lions Gate Entertainment Corp. shareholders

 

 

 

 
173.8

 

 
173.8

Other comprehensive income

 

 

 

 

 
1.8

 
1.8

Noncontrolling interest adjustments to redemption value

 

 

 

 
(2.3
)
 

 
(2.3
)
Balance at June 30, 2017
81.2

 
$
611.1

 
126.9

 
$
1,934.8

 
$
244.1

 
$
(14.2
)
 
$
2,775.8



See accompanying notes.

7



LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
 
June 30,
 
2017
 
2016
 
(Amounts in millions)
Operating Activities:
 
 
 
Net income
$
174.5

 
$
0.8

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
40.0

 
5.6

Amortization of films and television programs and program rights
393.6

 
292.4

Interest on dissenters' liability
13.3

 

Discount and financing costs amortization
4.4

 
2.3

Non-cash share-based compensation
22.7

 
21.7

Other non-cash items
0.9

 
1.3

Loss on extinguishment of debt
11.6

 

Equity interests loss (income)
8.3

 
(10.8
)
Gain on sale of equity interest in EPIX
(201.0
)
 

Deferred income taxes (benefit)
45.1

 
(30.7
)
Changes in operating assets and liabilities:
 
 
 
Restricted cash
2.8

 
(7.9
)
Accounts receivable, net and other assets
101.3

 
146.7

Investment in films and television programs and program rights, net
(289.1
)
 
(250.0
)
Accounts payable and accrued liabilities
(253.7
)
 
(70.9
)
Participations and residuals
(13.5
)
 
43.6

Film obligations
3.9

 
5.5

Deferred revenue
4.5

 
(6.5
)
Net Cash Flows Provided By Operating Activities
69.6

 
143.1

Investing Activities:
 
 
 
Proceeds from the sale of equity method investee, net of transaction costs
393.7

 

Investment in equity method investees
(9.5
)
 
(4.2
)
Capital expenditures
(9.4
)
 
(2.9
)
Net Cash Flows Provided By (Used In) Investing Activities
374.8

 
(7.1
)
Financing Activities:
 
 
 
Debt - borrowings
115.0

 
185.0

Debt - repayments
(554.0
)
 
(121.0
)
Production loans - borrowings
38.5

 
63.3

Production loans - repayments
(209.1
)
 
(222.7
)
Dividends paid

 
(13.2
)
Distributions to noncontrolling interest
(3.0
)
 
(2.2
)
Exercise of stock options
9.2

 
0.4

Tax withholding required on equity awards
(5.5
)
 
(13.8
)
Net Cash Flows Used In Financing Activities
(608.9
)
 
(124.2
)
Net Change In Cash And Cash Equivalents
(164.5
)
 
11.8

Foreign Exchange Effects on Cash
(0.9
)
 
0.4

Cash and Cash Equivalents - Beginning Of Period
321.9

 
57.7

Cash and Cash Equivalents - End Of Period
$
156.5

 
$
69.9


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 vertically integrated next generation global content leader with a diversified presence in motion picture production and distribution, television programming and syndication, premium pay television networks, home entertainment, global distribution and sales, 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 months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2018. The balance sheet at March 31, 2017 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, 2017.
Certain amounts presented in prior periods have been reclassified to conform to the current period presentation. Historically, the Company has presented an unclassified balance sheet.
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 used for the amortization of investment in films and television programs; the allocations made in connection with the amortization of program rights; 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 including the assessment of valuation allowances for deferred tax assets; 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
Accounting Guidance Adopted in Fiscal 2018
Employee Share-Based Payment Accounting: In March 2016, the Financial Accounting Standards Board ("FASB") issued amended guidance related to employee share-based payment accounting. The Company adopted this new guidance effective April 1, 2017. The new guidance and the impact on the consolidated financial statements upon adoption are summarized as follows:
Excess Tax Benefits and Tax Deficiencies: Effective on a prospective basis, excess tax benefits and deficiencies that arise when share-based awards vest or are settled are recognized in the income statement. In addition, the new guidance eliminates the requirement that excess tax benefits be realized (i.e., through a reduction in income taxes payable) before companies can recognize them. Under the previous guidance, the tax effects were recorded in additional paid-in capital, when realized. Historically, the Company has not recorded significant excess tax benefits, because such benefits have not been realized. Upon adoption, the Company recorded a cumulative-effect adjustment of $55.5 million in retained earnings for the net excess tax benefits not previously realized.

9

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



Statement of Cash Flows Presentation: The new guidance requires presentation of excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity, and requires presentation of cash paid to a tax authority when shares are withheld to satisfy the employer's statutory income tax withholding obligation as a financing activity. The Company applied the change to the presentation of excess tax benefits as an operating activity on a retrospective basis; however, there was no impact to the statement of cash flows since there were no excess tax benefits in the consolidated statements of cash flows for the three months ended June 30, 2016. The Company has historically presented cash paid for shares withheld to satisfy employee taxes as a financing activity in the consolidated statements of cash flows, and accordingly there was no impact from adopting this aspect of the standard.
Forfeitures: The new 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 previous guidance). As allowed by the standard, the Company elected to continue to estimate potential forfeitures.
Statutory Withholding: The new guidance 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. There was no material impact upon adoption related to this change.
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 Company adopted the new guidance effective April 1, 2017, with no material impact on the Company's consolidated financial statements.
Intra-Entity Transfers of Assets Other Than Inventory: In October 2016, the FASB issued guidance that will require the tax effects of intercompany transactions, other than sales of inventory, to be recognized when the transfer occurs, eliminating an exception under current U.S. GAAP in which the tax effects of intra-entity asset transfers are deferred until the transferred asset is sold to a third party or otherwise recovered through use. This guidance is effective for the Company's fiscal year beginning April 1, 2018, with early adoption permitted. Upon adoption, the cumulative-effect of the new standard is to be recorded as an adjustment to retained earnings. The Company adopted this guidance, effective April 1, 2017, and as a result, the Company recorded a cumulative-effect adjustment of $6.5 million in retained earnings for the tax effects (net benefit) of intra-entity transfers. Under the new guidance, the consolidated tax provision in the quarter ended June 30, 2017 was $3.2 million higher than would have been recorded under the previous guidance.
Accounting Guidance Not Yet Adopted
Revenue Recognition: In May 2014, the 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 in the process of evaluating which method of transition will be utilized.
Subsequent to the issuance of the May 2014 guidance, several clarifications and updates have been issued by the FASB on this topic, the most recent of which was issued in December 2016. Many of these clarifications and updates to the guidance, as well as a number of interpretive issues, apply to companies in the media and entertainment industry.
The Company is currently evaluating the impact of the new standard. While there may be additional areas impacted by the new standard, the Company has identified certain areas that may be impacted as follows:
Sales or Usage Based Royalties:  The Company currently receives royalties from certain international distributors and other transactional digital distribution partners based on the sales made by these distributors after recoupment of a minimum guarantee, if applicable. The Company currently records these sales and usage based royalties after receiving statements from the licensee and/or film distributor. Under the new revenue recognition rules, revenues will be recorded based on best estimates available in the period of sales or usage. While the timing of the revenue recognition will be accelerated, the Company will continue to have a consistent number of periods of sales or usage based royalties earned in each period.
Renewals of Licenses of Intellectual Property:  Under the current guidance, when the term of an existing license agreement is extended, without any other changes to the provisions of the license, revenue for the renewal period is recognized when the

10

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



agreement is renewed or extended. Under the new guidance, revenue associated with renewals or extensions of existing license agreements will be recognized as revenue when the license content becomes available under the renewal or extension. This change will impact the timing of revenue recognition as compared with current revenue recognition guidance. While revenues from renewal do occur, they are not a significant portion of our revenue and thus are not expected to have a material impact on our revenue recognition.
Licenses of Symbolic Intellectual Property: Certain intellectual property, such as brands, tradenames and logos, is categorized in the new guidance as symbolic. Under the new guidance, a licensee’s ability to derive benefit from a license of symbolic intellectual property is assumed to depend on the licensor continuing to support or maintain the intellectual property throughout the license term. Accordingly, under the new guidance, revenue from licenses of symbolic intellectual property is generally recognized over the corresponding license term. Therefore, the new guidance will impact the timing of revenue recognition as compared to current guidance. The Company does not currently have a significant amount of revenue from the license of symbolic intellectual property.
Principal vs. Agent: The new standard includes new guidance as to how to determine whether the Company is acting as a principal, in which case revenue would be recognized on a gross basis, or whether the Company is acting as an agent, in which case revenues would be recognized on a net basis. The Company is currently evaluating whether the new principal versus agent guidance will have an impact (i.e., changing from gross to net recognition or from net to gross recognition) under certain of its distribution arrangements.

The Company is continuing to evaluate the impact of the new standard on its consolidated financial statements for the above areas and other areas of revenue recognition. 
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.
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.
Restricted Cash: In November 2016, the FASB issued guidance to clarify how entities should present restricted cash and restricted cash equivalents in the statement of cash flows.  The guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows.  As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows.  The guidance will be applied retrospectively and is effective for the Company’s fiscal year beginning April 1, 2018, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
Definition of a Business: In January 2017, the FASB issued guidance that changes the definition of a business for accounting purposes. Under the new guidance, an entity first determines whether substantially all of the fair value of a set of assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set of assets is not deemed to be a business. If the threshold is not met, the entity then evaluates whether the set of assets meets the requirement to be deemed a business, which at a minimum, requires there to be an input and a substantive process that together significantly contribute to the ability to create outputs. The guidance is effective on a prospective basis for the

11

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



Company's fiscal year beginning April 1, 2018. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

Stock Compensation - Scope of Modification Accounting: In May 2017, the FASB issued guidance which clarifies that an entity will not apply modification accounting to a share-based payment award if all of the fair value, vesting conditions, and classification of the modified award as an equity or liability instrument are the same immediately before and after the modification. The guidance will be applied prospectively, and is effective for the Company's fiscal year beginning April 1, 2018, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

2. Mergers and Acquisitions

Starz Merger
On December 8, 2016, upon shareholder approval, pursuant to the Agreement and Plan of Merger dated June 30, 2016 ("Merger Agreement"), Lionsgate and Starz consummated the merger, under which Lionsgate acquired Starz for a combination of cash and common stock (the "Starz Merger"). The following table summarizes the components of the estimated purchase consideration, inclusive of Lions Gate’s existing ownership of Starz common stock and Starz’s share-based equity awards outstanding as of December 8, 2016:
 
 
 
(Amounts in millions)
Market value, as of December 8, 2016, of Starz Series A and Series B common stock already owned by Lionsgate(1)
 
 
$
179.3

Cash consideration paid to Starz stockholders
 
 
 
Starz Series A common stock at $18.00
$
1,123.3

 
 
Starz Series B common stock at $7.26
52.8

 
 
 
 
 
1,176.1

Fair value of Lionsgate voting and non-voting shares issued to Starz's stockholders
 
 
 
Starz Series A common stock at exchange ratio of 0.6784 Lionsgate non-voting shares
$
1,088.0

 
 
Starz Series B common stock at exchange ratio of 0.6321 Lionsgate voting shares
121.6

 
 
Starz Series B common stock at exchange ratio of 0.6321 Lionsgate non-voting shares
118.1

 
 
 
 
 
1,327.7

Replacement of Starz share-based payment awards(2)
 
 
186.5

Liability for dissenting shareholders
 
 
797.3

Total preliminary estimated purchase consideration
 
 
$
3,666.9

(1)The difference between the fair value of the Starz available-for-sale securities owned by Lionsgate and the original cost of the Starz available-for-sale securities of $158.9 million, of $20.4 million, was reflected as a gain on Starz investment in the consolidated statement of operations for the fiscal year ended March 31, 2017.
(2)Upon the closing of the merger, each outstanding share-based equity award (i.e., stock options, restricted stock, and restricted stock units) of Starz was replaced by a Lions Gate non-voting share-based equity award (“Lions Gate replacement award”) with terms equivalent to the existing awards based on the exchange ratio set forth in the Merger Agreement. Each Starz outstanding award was measured at fair value on the date of acquisition and the portion attributable to pre-combination service was recorded as part of the purchase consideration. The fair value of the Lions Gate replacement award measured on the date of acquisition in excess of the fair value of the Starz award attributed to and recorded as part of the purchase consideration was attributed to post-combination services and will be recognized as share-based compensation expense over the remaining post-combination service period. The estimated aggregate fair value of the Lions Gate replacement awards recorded as part of the purchase consideration was $186.5 million, and the estimated remaining aggregate fair value totaling $43.3 million is being recognized in future periods in accordance with each respective award’s vesting terms. The fair value of the Lions Gate replacement restricted stock and restricted stock unit awards was determined based on the value estimated for the Class A voting shares and Class B non-voting shares as of the acquisition date as discussed above. The fair value of Lions Gate replacement stock option awards was determined using

12

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



the Black-Scholes option valuation model using the estimated fair value of the Class B non-voting shares underlying the replacement stock options. For purposes of valuing the Lions Gate replacement awards, the following weighted-average applicable assumptions were used in the Black-Scholes option valuation model:
Weighted average assumptions:
 
Risk-free interest rate
0.39% - 1.83%
Expected option lives (years)
0.01 - 5.50 years
Expected volatility
35%
Expected dividend yield
0%

The risk-free rate assumed in valuing the options is based on the U.S. Treasury Yield curve in effect applied against the expected term of the option at the time of the grant. The expected option lives represents the period of time that options are expected to be outstanding. Expected volatilities are based on implied volatilities from traded options on Lions Gate’s stock, historical volatility of Lions Gate’s stock and other factors. The expected dividend yield is based on an assumption that the combined company has suspended the quarterly dividend.

In connection with the Starz Merger, Starz received demands for appraisal from purported holders of approximately 25.0 million shares of Starz Series A common stock. Neither the Company nor Starz has determined at this time whether any of such demands satisfy the requirements of Delaware law for perfecting appraisal rights. At any time within 60 days after the effective date of the merger, or February 6, 2017, dissenting shareholders had the right to withdraw their demand for appraisal rights and accept the merger consideration in accordance with the Merger Agreement. The Company received notices from dissenting shareholders withdrawing such demands totaling 2,510,485 shares during that 60 day period. See Note 15 for a discussion of these proceedings.  Should the pending appraisal proceedings reach a verdict, stockholders that are determined to have validly perfected their appraisal rights will be entitled to a cash payment equal to the fair value of their shares, plus interest, as determined by the court. The amounts that the Company may be required to pay to stockholders in connection with the pending appraisal proceedings is uncertain at this time, but could be greater than the merger consideration to which such stockholders would have been entitled had they not demanded appraisal. As of June 30, 2017, the Company has not paid the merger consideration for the shares that have demanded appraisal but has recorded a liability of $826.2 million that is included in dissenting shareholders' liability on the unaudited condensed consolidated balance sheet for the estimated value of the merger consideration that would have been payable for such shares, plus interest accrued at the Federal Reserve discount rate plus 5%, compounded quarterly.

Allocation of Preliminary Purchase Consideration. The Company has made a preliminary allocation of the estimated purchase price of Starz to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value. The preliminary allocation of the estimated purchase price is based upon management's estimates and is subject to revision, as a more detailed analysis of program rights, investment in films and television programs, intangible assets, certain tangible capital assets, and tax and other liabilities is completed and additional information on the fair value of assets and liabilities becomes available, including receipt of final appraisals of the net assets acquired. A change in the fair value of the net assets may change the amount of the purchase price allocable to goodwill, and could impact the amounts of amortization expense. The preliminary estimated purchase price of Starz has been allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value as follows:

13

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



 
(Amounts in millions)
Cash and cash equivalents
$
73.5

Accounts receivable
254.9

Investment in films and television programs and program rights
851.9

Property and equipment
121.4

Investments
12.1

Intangible assets
2,071.0

Other assets
129.2

Accounts payable and accrued liabilities
(131.0
)
Corporate debt and capital lease obligations
(1,013.1
)
Deferred tax liabilities
(716.1
)
Other liabilities
(156.6
)
Fair value of net assets acquired
1,497.2

Goodwill
2,169.7

Total estimated purchase consideration
$
3,666.9

Goodwill of $2.2 billion represents the excess of the estimated purchase price over the fair value of the underlying tangible and identifiable intangible assets acquired and liabilities assumed. The acquisition goodwill arises from the increase in the combined company’s content creation capability and enhanced scale to its global distribution footprint across mobile, broadband, cable and satellite platforms. In addition, the acquisition goodwill arises from the opportunity for a broad range of new content partnerships and accelerates the growth of Lionsgate and Starz’s over-the-top (which primarily represent internet streaming services and which the Company refers to as “OTT”) services, as well as other anticipated revenue and cost synergies. The goodwill recorded as part of this acquisition is included in the Motion Pictures and Media Networks segment (see Note 5). The goodwill will not be amortized for financial reporting purposes. An insignificant portion of goodwill will be deductible for federal tax purposes.



14

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



3. Investment in Films and Television Programs and Program Rights
 
June 30,
2017
 
March 31,
2017
 
(Amounts in millions)
Motion Pictures Segment - Theatrical and Non-Theatrical Films
 
 
 
Released, net of accumulated amortization
$
475.1

 
$
610.5

Acquired libraries, net of accumulated amortization
2.9

 
2.3

Completed and not released
45.3

 
24.1

In progress
207.6

 
169.3

In development
32.4

 
29.7

 
763.3

 
835.9

Television Production Segment - Direct-to-Television Programs
 
 
 
Released, net of accumulated amortization
182.4

 
179.3

In progress
132.8

 
104.1

In development
4.2

 
7.3

 
319.4

 
290.7

Media Networks Segment
 
 
 
Licensed program rights, net of accumulated amortization
495.0

 
526.9

Produced programming
 
 
 
Released, net of accumulated amortization
170.7

 
132.7

In progress
136.8

 
200.9

In development
14.0

 
4.1

 
816.5

 
864.6

Investment in films and television programs and program rights, net
1,899.2

 
1,991.2

Less current portion of program rights
(238.8
)
 
(261.7
)
Non-current portion
$
1,660.4

 
$
1,729.5

During the three months ended June 30, 2017 and 2016, the Company performed fair value measurements related to films having indicators of impairment. 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 months ended June 30, 2017 and 2016, the Company recorded $0.4 million and $1.9 million, respectively, of fair value film write-downs.

4. Investments
The carrying amounts of investments, by category, at June 30, 2017 and March 31, 2017 were as follows:
 
 
June 30,
2017
 
March 31,
2017
 
 
(Amounts in millions)
Equity method investments
 
$
131.5

 
$
322.9

Available-for-sale securities
 
7.1

 
8.0

Cost method investments
 
40.6

 
40.6

 
 
$
179.2

 
$
371.5


15

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




Equity Method Investments:
The carrying amounts of equity method investments at June 30, 2017 and March 31, 2017 were as follows:
 
 
June 30,
2017
 
 
 
 
Equity Method Investee
Ownership
Percentage
 
June 30,
2017
 
March 31,
2017
 
 
 
(Amounts in millions)
EPIX(1)
n/a(1)
 
$

 
$
188.8

Pop
50.0%
 
96.3

 
96.8

Other
Various
 
35.2

 
37.3

 
 
 
$
131.5

 
$
322.9

________________
(1)
In May 2017, the Company sold all of its 31.15% equity interest in EPIX to MGM (see further details below).
Equity interests in equity method investments for the three months ended June 30, 2017 and 2016 were as follows (income (loss)):
 
 
Three Months Ended
 
June 30,
Equity Method Investee
2017
 
2016
 
(Amounts in millions)
EPIX
$
4.0

 
$
11.0

Pop
(3.0
)
 
0.3

Other
(9.3
)
 
(0.5
)
 
$
(8.3
)
 
$
10.8

EPIX. In April 2008, the Company formed a joint venture with Viacom, its Paramount Pictures unit and Metro-Goldwyn-Mayer Studios ("MGM") 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 received distributions from EPIX of $42.0 million through March 31, 2017.
On May 11, 2017, pursuant to the Membership Interest Purchase Agreement dated April 5, 2017 (the “Purchase Agreement”), Lionsgate, Viacom and Paramount, each completed the sale to MGM of 100% of their respective equity interests in EPIX, representing, in the aggregate, an 80.91% interest in EPIX. Lions Gate's 31.15% equity interest in EPIX represented approximately $397.2 million of the sale, of which $23.4 million was paid to Lions Gate between the signing of the Purchase Agreement and the closing of the sale as a member distribution, and $373.8 million was paid upon closing. Prior to the sale of its 31.15% interest in EPIX, the Company had accounted for such interest as an equity method investment.

Based on the carrying value of the Company’s interest in EPIX as of the date of closing and transaction expenses, the Company has recorded a gain before income taxes of approximately $201.0 million which is reflected as a gain on sale of equity interest in EPIX in the consolidated statement of income for the three months ended June 30, 2017.
EPIX Financial Information:
The following table presents the summarized statements of income for EPIX for the period from April 1, 2017 through the date of sale of May 11, 2017, and for the three months ended June 30, 2016 and a reconciliation of the net income reported by EPIX to equity interest income recorded by the Company:

16

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



 
Period from
 
Three Months Ended
 
April 1, 2017 to
 
 
May 11, 2017
 
June 30, 2016
 
(Amounts in millions)
Revenues
$
44.8

 
$
98.3

Expenses:
 
 
 
Operating expenses
32.3

 
49.2

Selling, general and administrative expenses
2.4

 
6.2

Operating income
10.1

 
42.9

Interest and other expense

 

Net income
$
10.1

 
$
42.9

Reconciliation of net income reported by EPIX to equity interest income:
 
 
 
Net income reported by EPIX
$
10.1

 
$
42.9

Ownership interest in EPIX
31.15
%
 
31.15
%
The Company's share of net income
3.1

 
13.4

Eliminations of the Company’s share of profits on licensing sales to EPIX(1)
(0.1
)
 
(3.7
)
Realization of the Company’s share of profits on licensing sales to EPIX(2)
1.0

 
1.3

Total equity interest income recorded
$
4.0

 
$
11.0

_________________________
(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. Pop is the Company's joint venture with CBS. The Company’s investment interest in Pop consists of an equity investment in its common stock units and mandatorily redeemable preferred stock units. 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 months ended June 30, 2017, the Company made contributions of $2.5 million to Pop (2016 - none).
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.

17

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



Pop Financial Information:
The following table presents the summarized statements of operations for the three months ended June 30, 2017 and 2016 for Pop and a reconciliation of the net loss reported by Pop to equity interest income (loss) recorded by the Company:
 
 
Three Months Ended
 
June 30,
 
2017
 
2016
 
 
Revenues
$
24.7

 
$
24.9

Expenses:
 
 
 
Cost of services
16.9

 
11.5

Selling, marketing, and general and administration
12.1

 
10.4

Depreciation and amortization
2.0

 
2.0

Operating income (loss)
(6.3
)
 
1.0

Interest expense, net
0.2

 
0.1

Accretion of redeemable preferred stock units(1)
18.6

 
16.0

Total interest expense, net
18.8

 
16.1

Net loss
$
(25.1
)
 
$
(15.1
)
Reconciliation of net loss reported by Pop to equity interest loss:
 
 
 
Net loss reported by Pop
$
(25.1
)
 
$
(15.1
)
Ownership interest in Pop
50
%
 
50
%
The Company's share of net loss
(12.6
)
 
(7.5
)
Accretion of dividend and interest income on redeemable preferred stock units(1)
9.3

 
8.0

Elimination of the Company's share of profits on licensing sales to Pop
(0.1
)
 
(0.2
)
Realization of the Company’s share of profits on licensing sales to Pop
0.4

 

Total equity interest income (loss) recorded
$
(3.0
)
 
$
0.3

 ___________________
(1)
Accretion of mandatorily redeemable preferred stock units represents Pop's 10% dividend and the amortization of discount on its mandatorily redeemable preferred stock units held by the Company and the other interest holder. The Company recorded its share of this expense as income from the accretion of dividend and discount on mandatorily redeemable preferred stock units within equity interest income (loss).
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 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 11%. 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% interest in Roadside Attractions.
Pantelion Films. Pantelion Films is a joint venture with Videocine, an affiliate of Televisa, which produces, acquires and distributes a slate of English and Spanish language feature films that target Hispanic moviegoers in the U.S. The Company owns a 49% interest in Pantelion Films.
Atom Tickets. Atom Tickets is the first-of-its-kind theatrical mobile ticketing platform and app. The Company owns an interest of approximately 15% 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.

18

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



Playco. Playco Holdings Limited ("Playco") offers a STARZ-branded online subscription video-on-demand service in the Middle East and North Africa. The Company owns an approximately 41.3% interest in Playco.
Other. In addition to the equity method investments discussed above, the Company holds ownership interests in other immaterial equity method investees.

Available-for-Sale Securities:

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

 
 
June 30,
2017
 
March 31,
2017
 
 
(Amounts in millions)
Cost basis
 
$
2.6

 
$
2.6

Gross unrealized gain
 
4.5

 
5.4

Fair value
 
$
7.1

 
$
8.0

Next Games. At June 30, 2017 and March 31, 2017, the Company's available-for-sale securities consisted of the Company's minority ownership interest in Next Games. Next Games is a mobile games development company headquartered in Helsinki, Finland, with a focus on crafting visually impressive, highly engaging games.
 
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. The Company owns an approximately 14% economic interest in Telltale.


5. Goodwill
Changes in the carrying value of goodwill by reporting segment were as follows:
 
Motion Pictures
 
Television Production
 
Media Networks
 
Total
 
(Amounts in millions)
Balance as of March 31, 2017
$
361.9

 
$
240.4

 
$
2,098.2

 
$
2,700.5

Measurement period adjustments for Starz Merger(1)
4.5

 

 
(0.5
)
 
4.0

Balance as of June 30, 2017
$
366.4

 
$
240.4

 
$
2,097.7

 
$
2,704.5

______________________
(1)
Measurement period adjustments for the Starz Merger include a decrease to deferred tax liabilities of $2.4 million, and an increase to other liabilities assumed of $6.4 million. These adjustments resulted in a net decrease of $4.0 million of the fair value of net assets acquired and an increase of $4.0 million to goodwill.





19

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



6. Debt

Total debt of the Company, excluding film obligations and production loans, was as follows as of June 30, 2017 and March 31, 2017:

 
June 30,
2017
 
March 31,
2017
 
(Amounts in millions)
Corporate debt:
 
 
 
Revolving credit facilities
$

 
$

Term Loan A
975.0

 
987.5

Term Loan B
1,175.0

 
1,600.0

5.875% Senior Notes
520.0

 
520.0

Total corporate debt
2,670.0

 
3,107.5

Convertible senior subordinated notes(1)
60.0

 
60.0

Capital lease obligations
56.2

 
57.7

Total debt
2,786.2

 
3,225.2

Unamortized discount and debt issuance costs, net of fair value adjustment on capital lease obligations
(85.0
)
 
(100.3
)
Total debt, net
2,701.2

 
3,124.9

Less current portion
(78.0
)
 
(77.9
)
Non-current portion of debt
$
2,623.2

 
$
3,047.0

_____________________
(1)
Represents 1.25% convertible senior subordinated notes due April 2018, with a conversion price of $29.19 per share at June 30, 2017.

Senior Credit Facilities

Issuance and Prepayments. On December 8, 2016, Lions Gate Entertainment Corp. entered into a credit and guarantee agreement (the "Credit Agreement"), providing for a $1.0 billion five-year revolving credit facility (ii) a $1.0 billion five-year term loan A facility (the "Term Loan A") and (iii) a $2.0 billion seven-year term loan B facility (the "Term Loan B" and together with the revolving credit facility and Term Loan A, the "Senior Credit Facilities"). The Term Loan B facility was issued at 99.5%.

In February 2017, the Company prepaid $400.0 million in principal amount of the Term Loan B, together with accrued and unpaid interest with respect to such principal amount.

In the three months ended June 30, 2017, the Company prepaid $420.0 million in principal amount of the Term Loan B, together with accrued and unpaid interest with respect to such principal amount. In connection with the prepayment, the Company recorded a loss on extinguishment of debt in the three months ended June 30, 2017 amounting to $11.6 million associated with the write-off of deferred financing costs.
Revolving Credit Facility Availability of Funds & Commitment Fee. The revolving credit facility provides for borrowings and letters of credit up to an aggregate of $1.0 billion, and at June 30, 2017 there was $1.0 billion available. However, borrowing levels are subject to certain financial covenants as discussed below. There were no letters of credit outstanding at June 30, 2017. The Company is required to pay a quarterly commitment fee on the revolving credit facility of 0.250% to 0.375% per annum, depending on the achievement of certain leverage ratios, as defined in the Credit Agreement, on the total revolving credit facility of $1.0 billion less the amount drawn.
Maturity Date:
Revolving Credit Facility & Term Loan A: December 8, 2021.
Term Loan B: December 8, 2023.
Interest:

20

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



Revolving Credit Facility & Term Loan A: Initially bore interest at a rate per annum equal to LIBOR plus 2.5% (or an alternative base rate plus 1.5%) margin. The margin is subject to reductions of up to 50 basis points (two reductions of 25 basis points each) upon achievement of certain net first lien leverage ratios, as defined in the Credit Agreement. The margin as of June 30, 2017 is 2.0% (effective interest rate of 3.22% as of June 30, 2017).
Term Loan B: Initially bears interest at a rate per annum equal to LIBOR (subject to a LIBOR floor of 0.75%) plus 3.00% (or an alternative base rate plus 2.00%) margin (effective interest rate of 4.22% as of June 30, 2017).
Required Principal Payments:
Term Loan A: Quarterly principal payments which began the last day of the first full fiscal quarter ending after December 8, 2016, at quarterly rates of 1.25% for the first and second years, 1.75% for the third year, and 2.50% for the fourth and fifth years, with the balance payable at maturity.
Term Loan B: Quarterly principal payments which began the last day of the first full fiscal quarter ending after December 8, 2016, at a quarterly rate of 0.25%, with the balance payable at maturity.
The Term Loan A and Term Loan B also require mandatory prepayments in connection with certain asset sales, subject to certain significant exceptions, and the Term Loan B is subject to additional mandatory repayment from specified percentages of excess cash flow, as defined in the Credit Agreement.
Optional Prepayment:
Revolving Credit Facility & Term Loan A: The Company may voluntarily prepay the revolving credit facility and Term Loan A at any time without premium or penalty.
Term Loan B: The Company may voluntarily prepay the Term Loan B at any time, provided that if prepaid in connection with a Repricing Transaction (as defined in the Credit Agreement) on or before 12 months after the Closing Date (as defined in the Credit Agreement), the Company shall pay to lenders a prepayment premium of 1.0% of the loans prepaid.
Security. The Senior Credit Facilities are guaranteed by the Guarantors (as defined in the Credit Agreement) and are secured by a security interest in substantially all of the assets of Lionsgate and the Guarantors (as defined in the Credit Agreement), subject to certain exceptions.
Covenants. The Senior Credit Facilities contain representations and warranties, events of default and affirmative and negative covenants that are customary for similar financings and which include, among other things and subject to certain significant exceptions, restrictions on the ability to declare or pay dividends, create liens, incur additional indebtedness, make investments, dispose of assets and merge or consolidate with any other person. In addition, a net first lien leverage maintenance covenant and an interest coverage ratio maintenance covenant apply to the revolving credit facility and the Term Loan A and are tested quarterly. As of June 30, 2017, 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.

5.875% Senior Notes

Issuance. On October 27, 2016, Lions Gate Entertainment Corp. issued $520.0 million aggregate principal amount of 5.875% senior notes due 2024 (the "5.875% Senior Notes").

Interest. Bears interest at 5.875% annually.

Maturity Date. November 1, 2024.

Optional Redemption:
(i)
Prior to November 1, 2019, the 5.875% Senior Notes are redeemable under certain circumstances (as defined in the indenture governing the 5.875% Senior Notes), in whole at any time or in part from time to time, at a price equal to 100% of the principal amount, plus the Applicable Premium (as defined in the indenture governing the 5.875% Senior Notes). The Applicable Premium is the greater of (i) 1.0% of the principal amount redeemed and (ii) the excess of the present value of the redemption amount at November 1, 2019 (see below) of the notes redeemed plus interest through the redemption date (discounted at the treasury rate on the redemption date plus 50 basis points) over the principal amount of the notes redeemed on the redemption date.

21

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



(ii)
On and after November 1, 2019, redeemable by the Company, in whole or in part, at the redemption prices set forth as follows (as a percentage of the principal amount redeemed), plus accrued and unpaid interest to the redemption date: (i) on or after November 1, 2019 - 104.406%; (ii) on or after November 1, 2020 - 102.938%; (iii) on or after November 1, 2021 - 101.439%; and (iv) on or after November 1, 2022 - 100%.

Security. The 5.875% Senior Notes are guaranteed on an unsubordinated, unsecured basis.

Covenants. The 5.875% 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 June 30, 2017, the Company was in compliance with all applicable covenants.
Change in Control. The occurrence of a change of control will be a triggering event requiring the Company to offer to purchase from holders all of the 5.875% Senior Notes, at a price equal to 101% of the principal amount, plus accrued and unpaid interest, if any, to the date of purchase. In addition, certain asset dispositions will be triggering events that may require the Company to use the excess proceeds from such dispositions to make an offer to purchase the 5.875% Senior Notes at 100% of their principal amount, plus accrued and unpaid interest, if any to the date of purchase.



7. Film Obligations and Production Loans
 
 
June 30,
2017
 
March 31,
2017
 
(Amounts in millions)
Film obligations
$
142.5

 
$
129.9

Production loans
183.4

 
353.8

Total film obligations and production loans
325.9

 
483.7

Unamortized debt issuance costs
(0.3
)
 
(0.5
)
Total film obligations and production loans, net
325.6

 
483.2

Less current portion
(168.8
)
 
(367.2
)
Total non-current film obligations and production loans
$
156.8

 
$
116.0

Film Obligations
Film obligations include minimum guarantees and accrued licensed program rights obligations, 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 4.06% to 4.42%.


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

22

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



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, 5.875% Senior Notes, Term Loan A and Term Loan B, which are priced using discounted cash flow techniques that use observable market inputs, such as LIBOR-based yield curves, swap rates, and credit ratings.
Level 3 — Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. The Company measures the fair value of its investment in Pop's mandatorily redeemable preferred stock units using primarily a discounted cash flow analysis based on the expected cash flows of the investment. The analysis reflects the contractual terms of the investment, including the period to maturity, and uses a discount rate commensurate with the risk associated with the investment.
The following table sets forth the assets and liabilities required to be carried at fair value on a recurring basis as of June 30, 2017 and March 31, 2017:
 
June 30, 2017
 
March 31, 2017
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
Assets:
(Amounts in millions)
Available-for-sale securities (see Note 4):
 
 
 
 
 
 
 
 
 
 
 
Investment in Next Games
$
7.1

 
$

 
$
7.1

 
$
8.0

 
$

 
$
8.0

 
 
 
 
 
 
 
 
 
 
 
 
Forward exchange contracts (see Note 17)

 
1.5

 
1.5

 

 
0.6

 
0.6

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Forward exchange contracts (see Note 17)

 
(0.6
)
 
(0.6
)
 

 
(0.5
)
 
(0.5
)
 
$
7.1

 
$
0.9

 
$
8.0

 
$
8.0

 
$
0.1

 
$
8.1



23

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



The following table sets forth the carrying values and fair values of the Company’s investment in Pop's mandatorily redeemable preferred stock units and outstanding debt at June 30, 2017 and March 31, 2017:
 
 
June 30, 2017
 
March 31, 2017
 
(Amounts in millions)
 
Carrying
Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
 
 
(Level 3)
 
 
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Investment in Pop's mandatorily redeemable preferred stock units
$
96.3

 
$
122.1

 
$
96.8

 
$
122.1

 
 
 
 
 
 
 
 
 
Carrying
Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
 
 
(Level 2)
 
 
 
(Level 2)
Liabilities:
 
 
 
 
 
 
 
Term Loan A
950.5

 
961.6

 
961.8

 
983.8

Term Loan B
1,142.7

 
1,182.3

 
1,554.7

 
1,610.0

5.875% Senior Notes
498.9

 
548.0

 
498.3

 
542.1

April 2013 1.25% Notes
60.0

 
59.0

 
60.0

 
58.5

Production loans
183.1

 
183.4

 
353.3

 
353.8

 
$
2,835.2

 
$
2,934.3

 
$
3,428.1

 
$
3,548.2


The Company’s financial instruments also include cash and cash equivalents, accounts receivable, accounts payable, borrowings under our revolving credit facility, if any, capital lease obligations and dissenting shareholders' liability. The carrying values of these financial instruments approximated the fair values at June 30, 2017 and March 31, 2017.



9. Redeemable Noncontrolling Interest

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

 
Three Months Ended
 
June 30,
 
2017
 
2016
 
(Amounts in millions)
Beginning balance
$
93.8

 
$
90.5

Net income (loss) attributable to noncontrolling interest
0.7

 
(0.5
)
Noncontrolling interest discount accretion
1.2

 
1.3

Adjustments to redemption value
2.3

 
2.7

Cash distributions
(3.0
)
 
(2.2
)
Ending balance
$
95.0

 
91.8


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 if applicable, 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. The amount of the redemption value in excess of the historical values of the noncontrolling interest, if any, is recognized as an increase to noncontrolling interest and a charge to retained earnings.


24

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



10. Net Income Per Share
Basic net income per share is calculated based on the weighted average common shares outstanding for the period. Basic net income per share for the three months ended June 30, 2017 and 2016 is presented below:
 
 
Three Months Ended
 
June 30,
 
2017
 
2016
 
(Amounts in millions, except per share amounts)
Basic Net Income Per Common Share:
 
 
 
Numerator:
 
 
 
Net income attributable to Lions Gate Entertainment Corp. shareholders
$
173.8

 
$
1.3

Denominator:
 
 
 
Weighted average common shares outstanding(1)
206.8

 
147.2

Basic net income per common share
$
0.84

 
$
0.01

___________________
(1)
The weighted average common shares outstanding for the three months ended June 30, 2017 do not include the equity portion of the merger consideration related to the dissenting Starz shareholders as discussed in Note 2 and Note 15.

Diluted net income per common share reflects the potential dilutive effect, if any, of the conversion of convertible senior subordinated notes under the "if converted" method. Diluted net income per common share also reflects share purchase options, including equity-settled share appreciation rights, restricted share units ("RSUs") and restricted stock using the treasury stock method when dilutive, and any contingently issuable shares when dilutive. Diluted net income per common share for the three months ended June 30, 2017 and 2016 is presented below:

 
Three Months Ended
 
June 30,
 
2017
 
2016
 
(Amounts in millions, except per share amounts)
Diluted Net Income Per Common Share:
 
 
 
Numerator:
 
 
 
Net income attributable to Lions Gate Entertainment Corp. shareholders
$
173.8

 
$
1.3

Add:
 
 
 
Interest on convertible notes, net of tax
0.1

 

Numerator for diluted net income per common share
$
173.9

 
$
1.3

 
 
 
 
Denominator:
 
 
 
Weighted average common shares outstanding
206.8

 
147.2

Effect of dilutive securities:
 
 
 
Conversion of notes
2.1

 

Share purchase options
6.3

 
2.3

Restricted share units and restricted stock
0.7

 
0.1

Contingently issuable shares
2.0

 

Adjusted weighted average common shares outstanding
217.9

 
149.6

Diluted net income per common share
$
0.80

 
$
0.01



25

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



For the three months ended June 30, 2017 and 2016, the outstanding common shares issuable presented below were excluded from diluted net income per common share because their inclusion would have had an anti-dilutive effect.

 
Three Months Ended
 
June 30,
 
2017
 
2016
 
(Amounts in millions)
Anti-dilutive shares issuable
 
 
 
Conversion of notes

 
6.2

Share purchase options
17.0

 
9.4

Restricted share units
0.2

 
0.9

Other issuable shares
1.5

 
1.2

Total weighted average anti-dilutive shares issuable excluded from diluted net income per common share
18.7

 
17.7






11. Capital Stock

(a) Common Shares
The Company had 500 million authorized Class A voting shares and 500 million authorized Class B non-voting shares at June 30, 2017 and March 31, 2017. The table below outlines common shares reserved for future issuance:
 
 
June 30,
2017
 
March 31,
2017
 
(Amounts in millions)
Stock options outstanding, Class A voting shares average exercise price $26.78, Class B non-voting shares average exercise price $19.54 (March 31, 2017 - Class A voting shares average exercise price $26.67, Class B non-voting shares average exercise price $19.43)
32.3

 
32.6

Restricted stock and restricted share units — unvested
2.4

 
2.7

Common shares available for future issuance under Lionsgate plan
1.0

 
0.8

Common shares available for future issuance under Starz plan
12.0

 
11.8

Shares issuable upon conversion of April 2013 1.25% Notes at conversion price of $29.19 per share (March 31, 2017 - $29.19)
2.1

 
2.1

Shares reserved for future issuance
49.8

 
50.0


The Company's 2012 Performance Incentive Plan, as amended on October 3, 2016 (the "2012 Plan") provides for the issuance of up to 31.6 million common shares of the Company, stock options, share appreciation rights, restricted shares, stock bonuses and other forms of awards granted or denominated in common shares or units of common shares of the Company, as well as certain cash bonus awards to eligible directors of the Company, officers or employees of the Company or any of its subsidiaries, and certain consultants and advisors to the Company or any of its subsidiaries. At the effective time of the closing of the merger, Starz had outstanding equity awards under the Starz Transitional Stock Adjustment Plan, Starz 2011 Incentive Plan, Starz 2011 Nonemployee Director Plan and Starz 2016 Omnibus Incentive Plan (collectively, the “Starz Plans”). In accordance with the Merger Agreement, at the effective time of the closing of the merger, Lions Gate assumed the Starz Plans and the restricted stock unit awards, unvested stock options and restricted stock awards, in each case, granted under the Starz Plans (collectively, the “Assumed Awards”). As a result of this assumption, at the effective time of the closing of the Merger, the Assumed Awards were converted into corresponding awards relating to Class B non-voting shares, after giving effect to appropriate adjustments to reflect the consummation of the merger. There are currently 26.8 million Class B non-voting shares issuable in connection with the Assumed Awards held by Starz employees and awards to be granted under the Starz Plans following the merger.


26

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



(b) Share-based Compensation

The Company recognized the following share-based compensation expense during the three months ended June 30, 2017, and 2016:
 
 
Three Months Ended
 
June 30,
 
2017
 
2016
 
(Amounts in millions)
Compensation Expense:
 
 
 
Stock options
$
12.3

 
$
7.7

Restricted share units and other share-based compensation
10.4

 
6.0

Share appreciation rights
1.1

 

 
23.8

 
13.7

Immediately vested restricted share units issued under annual bonus program(1)

 
8.5

Total share-based compensation expense
$
23.8

 
$
22.2

 
 
 
 
Tax impact(2)
(8.5
)
 
(8.1
)
Reduction in net income
$
15.3

 
$
14.1

___________________
(1)
Represents the impact of immediately vested stock awards granted as part of our annual bonus program, and issued in lieu of cash bonuses.
(2)
Represents the income tax benefit recognized in the statements of income for share-based compensation arrangements.

Share-based compensation expense, by expense category, consisted of the following:
 
Three Months Ended
 
June 30,
 
2017
 
2016
 
(Amounts in millions)
Compensation Expense:
 
 
 
Direct operating
$
0.2

 
$

Distribution and marketing
0.2

 

General and administration
23.4

 
22.2

 
$
23.8

 
$
22.2


The following table sets forth the stock option, restricted stock and restricted share unit activity during the three months ended June 30, 2017:


27

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



 
Stock Options
 
Restricted Stock and Restricted Share Units
 
Class A Voting Shares
 
Class B Non-Voting Shares
 
Class A Voting Shares
 
Class B Non-Voting Shares
 
Number of Shares
 
Weighted-Average Exercise Price
 
Number of Shares
 
Weighted-Average Exercise Price
 
Number of Shares
 
Weighted-Average Grant-Date Fair Value
 
Number of Shares
 
Weighted-Average Grant-Date Fair Value
Outstanding at March 31, 2017
9,089,915

 
$26.67
 
23,464,929

 
$19.43
 
519,148

 
$27.85
 
2,258,006

 
$26.07
Granted
230,303

 
$30.36
 
230,303

 
$29.35
 
43,860

 
$26.10
 
111,604

 
$24.04
Options exercised or restricted stock or RSUs vested
(19,547
)
 
$16.95
 
(511,084
)
 
$17.32
 
(135,052
)
 
$26.62
 
(329,795
)
 
$26.06
Forfeited or expired
(6,732
)
 
$31.00
 
(144,566
)
 
$24.79
 
(3,925
)
 
$37.53
 
(63,616
)
 
$26.42
Outstanding at June 30, 2017
9,293,939

 
$26.78
 
23,039,582

 
$19.54
 
424,031

 
$27.98
 
1,976,199

 
$25.95

During the three months ended June 30, 2017, the Company granted 0.3 million share-appreciation rights ("SARs"). The SARs are currently accounted for as cash-settled, and are revalued each reporting period until settlement using a closed-form option pricing model (Black Scholes).
The Company wrote off tax deficiencies of $0.4 million associated with its equity awards in its tax provision during the three months ended June 30, 2017 (2016 - none).
Total unrecognized compensation cost related to unvested stock options, and related to restricted stock and restricted share unit awards at June 30, 2017 are $66.4 million and $36.4 million, respectively, and are expected to be recognized over a weighted average period of 2.6 and 1.8 years, respectively.

(c) Other

In connection with an amendment of an affiliation agreement with a customer and effective upon the close of the Starz Merger (December 8, 2016), Lionsgate has agreed to issue to the customer three $16.67 million annual installments of equity (or cash at Lionsgate's election). The total value of the contract of $50 million is being amortized as a reduction of revenue over the period from December 8, 2016 to August 31, 2019.


12. Income Taxes
In the quarters ended June 30, 2017 and 2016, the Company determined that a small change in its estimated pretax results for the years ending March 31, 2018 and 2017, respectively, 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 reflects the actual taxes attributable to year-to-date earnings.
The Company's income tax provision (benefit) differs from the federal statutory rate multiplied by pre-tax income (loss) and has changed from the prior period. The tax provision (benefit) recorded in these periods are 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.
The Company's income tax provision (benefit) can be 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.


28

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



13. Restructuring and Other

Restructuring and other includes restructuring and severance costs, certain transaction related costs, and certain unusual items, when applicable, and were as follows for the three months ended June 30, 2017 and 2016:

 
Three Months Ended
 
June 30,
 
2017
 
2016
 
(Amounts in millions)
Restructuring and other:
 
 
 
Severance(1)
$
1.0

 
$

Transaction related costs(2)
6.9

 
6.7

Litigation and other(3)
3.0

 
1.0

 
$
10.9

 
$
7.7

_______________________
(1)
Severance costs were primarily related to workforce reductions for redundancies in connection with the Starz Merger. As of June 30, 2017, the remaining severance liability was approximately $17.3 million, which is expected to be paid in the next 12 months.
(2)
Transaction related costs in the three months ended June 30, 2017 consist of certain bonuses related to the sale of the Company's equity interest in EPIX (see Note 4) and costs associated with the integration of Starz. Transaction related costs in the three months ended June 30, 2016 represented primarily legal and professional fees, and other transaction related costs associated with the Starz Merger.
(3)
Litigation and other in the three months ended June 30, 2017 primarily consists of litigation expenses incurred in connection with the class action lawsuits related to the Starz Merger (see Note 15).

14. Segment Information
The Company’s reportable segments have been determined based on the distinct nature of their operations, the Company's internal management structure, and the financial information that is evaluated regularly by the Company's chief operating decision maker. Following the Starz Merger (see Note 2), the Company has added a new segment from the Starz business and realigned business operations within Lionsgate and Starz under three reporting segments and made some changes in what is included and excluded from segment profit.
The Company previously had two reportable business segments, consisting of the Motion Pictures and Television Production segments. Beginning in the quarter ended December 31, 2016, the Company now manages and reports its operating results in three reportable business segments: (1) Motion Pictures, (2) Television Production and (3) Media Networks.
As a result, the Company has presented prior period segment data in a manner that conforms to the current period presentation (see further discussion below).
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. As a result of the Starz Merger (see Note 2), beginning December 8, 2016, the Motion Pictures segment includes Starz's third-party distribution business, which is substantially the same as the Motion Pictures existing business.
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.
Media Networks (which was previously not a reportable segment) consists of (i) Starz Networks, which includes the licensing of premium subscription video programming to U.S. multichannel video programming distributors ("MVPDs") including cable operators, satellite television providers and telecommunication companies, and online video providers, and on an over-the-top ("OTT") basis (ii) Content and Other, which includes the licensing of the Media Networks' original series programming to digital media platforms, international television networks, home entertainment and other ancillary markets and (iii) Streaming Services, which represents the Lionsgate legacy start-up direct to consumer streaming services on its

29

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



subscription video-on-demand ("SVOD") platforms which were moved under the Media Networks segment in connection with the Starz Merger.
In the ordinary course of business, the Company's reportable segments enter into transactions with one another. The most common types of intersegment transactions include licensing motion pictures or television programming from the Motion Pictures and Television Production segments to the Media Networks segment. In addition, intersegment transactions include distribution fees charged to the Media Networks segment by the Television Production segment for the distribution of Media Networks' original series programming in ancillary markets. While intersegment transactions are treated like third-party transactions to determine segment performance, the revenues (and corresponding expenses or assets recognized by the segment that is the counterparty to the transaction) are eliminated in consolidation and, therefore, do not affect consolidated results.

Segment information by business unit is presented in the table below. The Media Networks segment reflects the Starz network business from the date of acquisition (December 8, 2016), and the Lionsgate direct to consumer streaming services on SVOD platforms for the historical periods presented.

 
Three Months Ended
 
June 30,
 
2017
 
2016
 
(Amounts in millions)
Segment revenues
 
 
 
Motion Pictures
$
472.4

 
$
362.2

Television Production
156.6

 
191.1

Media Networks
390.5

 
0.3

Intersegment eliminations
(14.2
)
 

 
$
1,005.3

 
$
553.6

Intersegment revenues
 
 
 
Motion Pictures
$
5.1

 
$

Television Production
9.1

 

 
$
14.2

 
$

Gross contribution
 
 
 
Motion Pictures
$
113.8

 
$
56.3

Television Production
21.7

 
17.1

Media Networks
135.1

 
(6.8
)
Intersegment eliminations
(2.0
)
 

 
$
268.6

 
$
66.6

Segment general and administration
 
 
 
Motion Pictures
$
26.9

 
$
24.5

Television Production
9.1

 
7.5

Media Networks
25.6

 
2.7

 
$
61.6

 
$
34.7

Segment profit (loss)
 
 
 
Motion Pictures
$
86.9

 
$
31.8

Television Production
12.6

 
9.6

Media Networks
109.5

 
(9.5
)
Intersegment eliminations
(2.0
)
 

 
$
207.0

 
$
31.9


Following the Starz Merger, beginning in the quarter ended December 31, 2016, the Company has revised what it will include and exclude from segment profit (loss), the primary measure used by management to evaluate segment performance. Segment profit (loss) continues to be defined as gross contribution (segment revenues, less segment direct operating and

30

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



distribution and marketing expense) less segment general and administration expenses. However, segment direct operating expenses, distribution and marketing expenses and general and administrative expenses will exclude share-based compensation, other than annual bonuses granted in stock, and will include annual bonuses paid in cash. All share-based compensation was previously excluded from segment profit, and annual bonuses were previously included in corporate general and administrative expenses. In addition, segment profit will no longer exclude start-up costs of direct to consumer streaming services on SVOD platforms, non-cash imputed interest charge, and backstopped prints and advertising ("P&A") expense. Segment profit will continue to exclude purchase accounting and related adjustments. As a result of the changes to the segments and definition of segment profit, the Company has presented prior period segment data in a manner that conforms to the current period presentation.


The reconciliation of total segment profit to the Company’s income (loss) before income taxes is as follows:
 
 
Three Months Ended
 
June 30,
 
2017
 
2016
 
(Amounts in millions)
Company’s total segment profit
$
207.0

 
$
31.9

Corporate general and administrative expenses
(25.5
)
 
(21.3
)
Adjusted depreciation and amortization(1)
(10.1
)
 
(4.8
)
Restructuring and other(2)
(10.9
)
 
(7.7
)
Adjusted share-based compensation expense(3)
(23.8
)
 
(13.7
)
Purchase accounting and related adjustments(4)
(47.0
)
 
(6.4
)
Operating income (loss)
89.7

 
(22.0
)
Interest expense
(52.3
)
 
(15.2
)
Interest and other income
2.8

 
0.9

Loss on extinguishment of debt
(11.6
)
 

Equity interests income (loss)
(8.3
)
 
10.8

Gain on sale of equity interest in EPIX
201.0

 

Income (loss) before income taxes
$
221.3

 
$
(25.5
)
___________________
(1)
Adjusted depreciation and amortization represents depreciation and amortization as presented on our unaudited condensed consolidated statements of income less the depreciation and amortization related to the non-cash fair value adjustments to property and equipment and intangible assets acquired in the acquisition of Starz and Pilgrim Media Group which are included in the purchase accounting and related adjustments line item above, as shown in the table below:
 
Three Months Ended
 
June 30,
 
2017
 
2016
 
(Amounts in millions)
Depreciation and amortization
$
40.0

 
$
5.6

Less: Amount included in purchase accounting and related adjustments
(29.9
)
 
(0.8
)
Adjusted depreciation and amortization
$
10.1

 
$
4.8

 
(2)
Restructuring and other includes restructuring and severance costs, certain transaction related costs, and certain unusual items, when applicable (see Note 13).
(3)
The following table reconciles total share-based compensation expense to adjusted share-based compensation expense:

31

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



 
Three Months Ended
 
June 30,
 
2017
 
2016
 
(Amounts in millions)
Share-based compensation
$
23.8

 
$
22.2

Less:
 
 
 
Bonus related share-based compensation included in segment and corporate general and administrative expense(1)

 
(8.5
)
Adjusted share-based compensation
$
23.8

 
$
13.7

(1)Represents immediately vested stock awards granted as part of our annual bonus program issued in lieu of cash bonuses, which are, when granted, included in segment or corporate general and administrative expense.
(4)
Purchase accounting and related adjustments represent the amortization of non-cash fair value adjustments to the assets and liabilities acquired in the acquisition of Starz and Pilgrim Media Group. The following sets forth the amounts included in each line item in the financial statements:
 
Three Months Ended
 
June 30,
 
2017
 
2016
 
(Amounts in millions)
Purchase accounting and related adjustments:
 
 
 
Direct operating
$
15.9

 
$
4.3

General and administrative expense
1.2

 
1.3

Depreciation and amortization
29.9

 
0.8

 
$
47.0

 
$
6.4



32

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



The following table sets forth revenues by media or product line as broken down by segment for the three months ended June 30, 2017 and 2016:
 
Three Months Ended
 
June 30,
 
2017
 
2016
 
(Amounts in millions)
Segment revenues:
 
 
 
Motion Pictures
 
 
 
Theatrical
$
50.8

 
$
47.2

Home Entertainment
234.0

 
143.2

Television
57.7

 
53.3

International
122.8

 
113.8

Other
7.1

 
4.7

Total Motion Pictures revenues
472.4

 
362.2

Television Production
 
 
 
Domestic Television
128.2

 
153.0

International
23.0

 
27.7

Home Entertainment
3.6

 
6.8

Other
1.8

 
3.6

Total Television Production revenues
156.6

 
191.1

Media Networks
 
 
 
Starz Networks
343.2

 

Content and Other
45.9

 

Streaming Services
1.4

 
0.3

Total Media Networks revenues
390.5

 
0.3

Intersegment eliminations
(14.2
)
 

Total revenues
$
1,005.3

 
$
553.6




33

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



The following table reconciles segment general and administration to the Company's total consolidated general and administration expense:
 
Three Months Ended
 
June 30,
 
2017
 
2016
 
(Amounts in millions)
General and administration
 
 
 
Segment general and administrative expenses
$
61.6

 
$
34.7

Corporate general and administrative expenses
25.5

 
21.3

Share-based compensation expense included in general and administrative expense
23.4

 
13.7

Purchase accounting and related adjustments
1.2

 
1.3

 
$
111.7

 
$
71.0


The reconciliation of total segment assets to the Company’s total consolidated assets is as follows:
 
 
June 30,
2017
 
March 31,
2017
 
(Amounts in millions)
Assets
 
 
 
Motion Pictures
$
1,691.2

 
$
1,802.3

Television Production
1,124.3

 
1,142.8

Media Networks
5,363.4