10-Q 1 lgf2016123110-q.htm FORM 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________
Form 10-Q 
___________________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No.: 1-14880
___________________________________________________________
Lions Gate Entertainment Corp.
(Exact name of registrant as specified in its charter)
___________________________________________________________
British Columbia, Canada
 
N/A
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
 Identification No.)
250 Howe Street, 20th Floor
Vancouver, British Columbia V6C 3R8
and
2700 Colorado Avenue
Santa Monica, California 90404
(Address of principal executive offices)
___________________________________________________________
(877) 848-3866
(Registrant’s telephone number, including area code)
___________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
 
Accelerated filer o
 
Non accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨  No  ý
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Title of Each Class
 
Outstanding at February 6, 2017
Class A Voting Shares, no par value per share
 
81,056,905 shares
Class B Non-Voting Shares, no par value per share
 
123,729,449 shares





 


2


FORWARD-LOOKING STATEMENTS

This report includes statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “potential,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “forecasts,” “may,” “will,” “could,” “would” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those discussed under Part I, Item 1A. “Risk Factors” found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on May 25, 2016, which risk factors are incorporated herein by reference, as updated by the risk factors found under Part II, Item 1A. "Risk Factors" herein. These risk factors should not be construed as exhaustive and should be read with the other cautionary statements and information in our Annual Report on Form 10-K, and this report.
We caution you that forward-looking statements made in this report or anywhere else are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially and adversely from those made in or suggested by the forward-looking statements contained in this report as a result of various important factors, including, but not limited to: the substantial investment of capital required to produce and market films and television series, increased costs for producing and marketing feature films and television series; budget overruns; limitations imposed by our credit facilities and notes; unpredictability of the commercial success of our motion pictures and television programming; risks related to acquisition and integration of acquired businesses; the effects of dispositions of businesses or assets, including individual films or libraries; the cost of defending our intellectual property; technological changes and other trends affecting the entertainment industry; 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, 2016, which risk factors are incorporated herein by reference, as updated by the risk factors found under Part II, Item 1A. "Risk Factors" herein. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods.
Any forward-looking statements, which we make in this report, speak only as of the date of such statement, and we undertake no obligation to update such statements. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
This Quarterly Report on Form 10-Q  may contain references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Quarterly Report on Form 10-Q, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other company.
Unless otherwise indicated or the context requires, all references to the “Company,” “Lionsgate,” “we,” “us,” and “our” refer to Lions Gate Entertainment Corp., a corporation organized under the laws of the province of British Columbia, Canada, and its direct and indirect subsidiaries.


3


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
December 31,
2016
 
March 31,
2016
 
(Amounts in millions,
except share amounts)
ASSETS
 
 
 
Cash and cash equivalents
$
595

 
$
58

Restricted cash
3

 
3

Accounts receivable, net
777

 
570

Program rights
236

 

Other current assets
259

 
237

Total current assets
1,870

 
868

Investment in films and television programs and program rights, net
1,816

 
1,458

Property and equipment, net
168

 
43

Investments
357

 
464

Intangible assets
2,024

 
11

Goodwill
2,734

 
535

Other assets
405

 
321

Deferred tax assets
6

 
134

Total assets
$
9,380

 
$
3,834

LIABILITIES
 
 
 
Accounts payable and accrued liabilities
$
531

 
$
355

Participations and residuals
499

 
437

Film obligations and production loans
257

 
663

Debt - short term portion
118

 
40

Deferred revenue
180

 
246

Total current liabilities
1,585

 
1,741

Debt
3,457

 
825

Participations and residuals
304

 
170

Film obligations and production loans
162

 
52

Other liabilities
33

 
23

Dissenting shareholders' liability
886

 

Deferred revenue
76

 
82

Deferred tax liabilities
461

 

Redeemable noncontrolling interest
94

 
91

Commitments and contingencies (Note 16)

 

SHAREHOLDERS' EQUITY
 
 
 
Class A voting common shares, no par value, 500,000,000 shares authorized, 78,811,162 shares issued (March 31, 2016 - no shares issued)
582

 

Class B non-voting common shares, no par value, 500,000,000 shares authorized, 120,964,447 shares issued (March 31, 2016 - no shares issued)
1,813

 

Common shares, no par value, no shares issued (March 31, 2016 - 146,785,940 shares issued)

 
886

Retained earnings (accumulated deficit)
(52
)
 
8

Accumulated other comprehensive loss
(21
)
 
(44
)
Total shareholders' equity
2,322

 
850

Total liabilities and shareholders' equity
$
9,380

 
$
3,834

See accompanying notes.

4


LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2016
 
2015
 
2016
 
2015
 
(Amounts in millions, except per share amounts)
Revenues
$
752

 
$
671

 
$
1,945

 
$
1,556

Expenses:
 
 
 
 
 
 
 
Direct operating
430

 
404

 
1,183

 
927

Distribution and marketing
175

 
203

 
522

 
428

General and administration
89

 
57

 
235

 
180

Depreciation and amortization
13

 
3

 
23

 
7

Restructuring and other
52

 
13

 
70

 
18

Total expenses
759

 
680

 
2,033

 
1,560

Operating loss
(7
)
 
(9
)
 
(88
)
 
(4
)
Other expenses (income):
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
Cash interest
24

 
12

 
50

 
33

Discount and financing costs amortization
3

 
2

 
8

 
7

Total interest expense
27

 
14

 
58

 
40

Interest and other income
(1
)
 

 
(4
)
 
(2
)
Gain on Starz investment
(20
)
 

 
(20
)
 

Loss on extinguishment of debt
28

 

 
28

 

Total other expenses, net
34

 
14

 
62

 
38

Loss before equity interests and income taxes
(41
)
 
(23
)
 
(150
)
 
(42
)
Equity interests income (loss)
(2
)
 
11

 
11

 
29

Loss before income taxes
(43
)
 
(12
)
 
(139
)
 
(13
)
Income tax benefit
(12
)
 
(45
)
 
(92
)
 
(44
)
Net income (loss)
(31
)
 
33

 
(47
)
 
31

Less: Net loss attributable to noncontrolling interest

 
8

 

 
8

Net income (loss) attributable to Lions Gate Entertainment Corp. shareholders
$
(31
)
 
$
41

 
$
(47
)
 
$
39

 
 
 
 
 
 
 
 
Per share information attributable to Lions Gate Entertainment Corp. shareholders:
 
 
 
 
 
 
 
Basic net income (loss) per common share
$
(0.19
)
 
$
0.27

 
$
(0.31
)
 
$
0.26

Diluted net income (loss) per common share
$
(0.19
)
 
$
0.26

 
$
(0.31
)
 
$
0.26

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
161.4

 
149.5

 
152.2

 
148.5

Diluted
161.4

 
159.4

 
152.2

 
154.4

 
 
 
 
 
 
 
 
Dividends declared per common share
$

 
$
0.09

 
$
0.09

 
$
0.25

See accompanying notes.

5


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

 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2016
 
2015
 
2016
 
2015
 
(Amounts in millions)
Net income (loss)
$
(31
)
 
$
33

 
$
(47
)
 
$
31

Foreign currency translation adjustments, net of tax
(2
)
 
(1
)
 
(8
)
 
1

Net unrealized gain (loss) on available-for-sale securities, net of tax
32

 
(16
)
 
55

 
(4
)
Reclassification adjustment for gain on available-for-sale securities realized in net loss
(20
)
 

 
(20
)
 

Net unrealized gain (loss) on foreign exchange contracts, net of tax
(2
)
 
(1
)
 
(5
)
 
2

Comprehensive income (loss)
(23
)
 
15

 
(25
)
 
30

Less: Comprehensive loss attributable to noncontrolling interest

 
8

 

 
8

Comprehensive income (loss) attributable to Lions Gate Entertainment Corp. shareholders
$
(23
)
 
$
23

 
$
(25
)
 
$
38

See accompanying notes.


6

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



 
 
 
 
 
Class A
 
Class B
 
Retained Earnings (Accumulated Deficit)
 
Accumulated
 Other
Comprehensive
Income (Loss)
 
 
 
Common Shares
 
Voting Common Shares
 
Non-Voting Common Shares
 
 
 
 
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
 
 
Total
 
(Amounts in millions, except share amounts)
Balance at March 31, 2016
146,785,940

 
$
886

 

 
$

 

 
$

 
$
8

 
$
(44
)
 
$
850

Exercise of stock options
575,426

 
1

 

 

 

 

 

 

 
1

Share-based compensation
1,043,342

 
36

 

 

 

 

 

 

 
36

Issuance of common shares to directors for services
18,912

 

 

 

 

 

 

 

 

Dividends declared

 
(7
)
 

 

 

 

 
(6
)
 

 
(13
)
Reclassification of common shares
(148,423,620
)
 
(916
)
 
74,212,042

 
458

 
74,212,042

 
458

 

 

 

Issuance of common shares related to Starz Merger

 

 
4,593,885

 
122

 
45,226,998

 
1,162

 

 

 
1,284

Issuance of replacement equity awards related to the Starz Merger

 

 

 

 
1,347,526

 
187

 

 

 
187

Exercise of stock options

 

 

 

 
13,175

 

 

 

 

Share-based compensation

 

 
5,235

 
2

 
164,706

 
6

 

 

 
8

Net loss attributable to Lions Gate Entertainment Corp. shareholders

 

 

 

 

 

 
(47
)
 

 
(47
)
Foreign currency translation adjustments, net of tax

 

 

 

 

 

 
(1
)
 
(7
)
 
(8
)
Net unrealized gain on available-for-sale securities, net of tax

 

 

 

 

 

 

 
55

 
55

Reclassification adjustment for gain on available-for-sale securities realized in net loss

 

 

 

 

 

 

 
(20
)
 
(20
)
Net unrealized loss on foreign exchange contracts, net of tax

 

 

 

 

 

 

 
(5
)
 
(5
)
Noncontrolling interest adjustments to redemption value

 

 

 

 

 

 
(6
)
 

 
(6
)
Balance at December 31, 2016

 
$

 
78,811,162

 
$
582

 
120,964,447

 
$
1,813

 
$
(52
)
 
$
(21
)
 
$
2,322



See accompanying notes.

7



LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
December 31,
 
2016
 
2015
 
(Amounts in millions)
Operating Activities:
 
 
 
Net income (loss)
$
(47
)
 
$
31

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
23

 
7

Amortization of films and television programs and program rights
902

 
655

Discount and financing costs amortization
8

 
7

Non-cash share-based compensation
74

 
47

Other non-cash items
4

 
1

Distribution from equity method investee
14

 

Gain on Starz investment
(20
)
 

Loss on extinguishment of debt
28

 

Equity interests income
(11
)
 
(29
)
Deferred income taxes
(109
)
 
(55
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
59

 
(37
)
Investment in films and television programs and program rights, net
(660
)
 
(771
)
Other assets
(6
)
 
(2
)
Accounts payable and accrued liabilities
79

 
(8
)
Participations and residuals
126

 
77

Film obligations
24

 
(30
)
Deferred revenue
(72
)
 
(4
)
Net Cash Flows Provided By (Used In) Operating Activities
416

 
(111
)
Investing Activities:
 
 
 
Investment in equity method investees and other
(13
)
 
(4
)
Distributions from equity method investees
2

 

Purchase of Starz, net of cash acquired of $73 (see Note 2)
(1,057
)
 

Purchase of Pilgrim Media Group, net of cash acquired of $16 (see Note 2)

 
(127
)
Capital expenditures
(16
)
 
(14
)
Net Cash Flows Used In Investing Activities
(1,084
)
 
(145
)
Financing Activities:
 
 
 
Debt - borrowings
3,911

 
262

Debt - repayments
(2,252
)
 
(238
)
Production loans - borrowings
231

 
510

Production loans - repayments
(623
)
 
(241
)
Dividends paid
(27
)
 
(34
)
Distributions to noncontrolling interest
(6
)
 

Exercise of stock options
1

 
6

Tax withholding required on equity awards
(32
)
 
(23
)
Net Cash Flows Provided By Financing Activities
1,203

 
242

Net Change In Cash And Cash Equivalents
535

 
(14
)
Foreign Exchange Effects on Cash
2

 
(1
)
Cash and Cash Equivalents - Beginning Of Period
58

 
103

Cash and Cash Equivalents - End Of Period
$
595

 
$
88


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 and nine months ended December 31, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2017. The balance sheet at March 31, 2016 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read together with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2016.
Balance Sheet Reclassifications: 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. As a result of the merger with Starz (see Note 2), the Company is now presenting a classified balance sheet and, accordingly, reclassification adjustments to the Company's historical unclassified balance sheet have been made to present an unaudited condensed consolidated classified balance sheet. In addition to these reclassification adjustments, the Company has made the following reclassifications to the unaudited condensed consolidated balance sheet as of March 31, 2016 to conform to the current year presentation: (i) reclassified $21 million of product inventory from investment in film and television programs to other current assets; (ii) reclassified $222 million of long-term accounts receivable to other non-current assets; (iii) reclassified $190 million of short-term tax credits receivable to other current assets and $67 million of long-term tax credits receivable to other non-current assets; (iv) reclassified $11 million of intangible assets from other assets to the new separate line item for intangible assets; (v) reclassified the carrying value of its previous senior revolving credit facility ($156 million), former 5.25% senior notes ($221 million), former term loan ($388 million) and convertible senior subordinated notes ($100 million) into the new separate line item for debt (current and non-current) on the unaudited condensed consolidated 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.

9

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



Significant Accounting Policies
The Company's significant accounting policies are summarized in Note 1 to the consolidated financial statements included in our Form 10-K for the year ended March 31, 2016. An update and supplement to these accounting policies associated with our merger with Starz (see Note 2) is below.
Program Rights: The cost of program rights for films and television programs exhibited on the Starz premium networks are generally amortized on a title-by-title or episode-by-episode basis over the anticipated number of exhibitions. The number of exhibitions is estimated based on the number of exhibitions allowed in the agreement (if specified) and the expected usage of the content. Certain other program rights are amortized to expense on a straight-line basis over the respective lives of the agreements. Programming rights may include rights to more than one exploitation window under its output and library agreements. For films with multiple windows, the license fee is allocated between the windows based upon the proportionate estimated fair value of each window which generally results in the majority of the cost allocated to the first window.
The cost of original series in the Company's new Media Networks reporting segment (see Note 15) is allocated between the pay television market, and the ancillary revenue markets (e.g., home video, digital platforms, international television, etc.) based on the estimated relative fair values of these markets. The amount associated with the pay television market is reclassified from investment in film and television programs to program rights when the program is aired and the portion attributable to the ancillary markets remains in investment in films and television programs within the Media Networks segment. All the costs of original programming that is produced by the Media Networks segment are classified as long term. Amounts included in program rights, other than internally produced programming, that are expected to be amortized within a year from the balance sheet date are classified as short-term.

Revenue Recognition: Programming revenue is recognized in the period during which programming is provided, pursuant to affiliation agreements. If an affiliation agreement has expired, revenue is recognized based on the terms of the expired agreement or the actual payment from the distributor, whichever is less. Any funds received in excess of fixed and determinable programming revenue are recorded as a liability in deferred revenue until the discrepancy is resolved. Payments to distributors for marketing support costs for which the Company does not receive a direct benefit are recorded as a reduction of revenue.

Advertising and Marketing Costs: Advertising and marketing costs are expensed as incurred. Certain of Starz’s affiliation agreements require Starz to provide marketing support to the distributor based upon certain criteria as stipulated in the agreements. Marketing support includes cooperative advertising and marketing efforts between Starz and its distributors such as cross channel, direct mail and point of sale incentives. Marketing support is recorded as an expense and not a reduction of revenue when Starz has received a direct benefit and the fair value of such benefit is determinable.
Recent Accounting Pronouncements
Revenue Recognition: In May 2014, the Financial Accounting Standards Board (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 evaluating the impact that the adoption of this new guidance will have on its consolidated financial statements.
Presentation of Debt Issuance Costs: In April 2015, the FASB issued an accounting standards update relating to the presentation of debt issuance costs. The accounting update requires companies to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, rather than as an asset. The guidance is effective for the Company's fiscal year beginning April 1, 2016, and must be applied on a retrospective basis to all prior periods presented in the financial statements. The Company adopted the new guidance effective April 1, 2016, which resulted in the reclassification of approximately $21 million of debt issuance costs from other assets to their respective debt liabilities in the unaudited condensed consolidated balance sheets as of March 31, 2016.
Balance Sheet Classification of Deferred Taxes: In April 2015, the FASB issued guidance to simplify the presentation of deferred income taxes, which removes the requirement to separate deferred tax liabilities and assets into current and non-current amounts and instead requires all such amounts be classified as non-current on the Company's consolidated balance sheets. The guidance is effective for the Company's fiscal year beginning April 1, 2017, with early adoption permitted, and can be adopted on either a retrospective or prospective basis. The Company adopted the new guidance on a retrospective basis effective October 1, 2016. As discussed in Note 1, the Company previously presented an unclassified balance sheet and upon changing to presenting a classified balance sheet, all deferred tax assets and liabilities have been classified as long-term.

10

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



Recognition and Measurement of Financial Instruments: In January 2016, the FASB issued new guidance that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other provisions, the new guidance requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. For investments without readily determinable fair values, entities have the option to either measure these investments at fair value or at cost adjusted for changes in observable prices minus impairment. The guidance is effective for the Company's fiscal year beginning April 1, 2018. Early adoption is not permitted, except for certain provisions relating to financial liabilities. The Company is currently evaluating the impact that the adoption of this new guidance will have on its consolidated financial statements.
Accounting for Leases: In February 2016, the FASB issued guidance on accounting for leases which requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The new guidance also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. The guidance is effective for the Company's fiscal year beginning April 1, 2019, with early adoption permitted, and is required to be implemented using a modified retrospective approach. The Company is currently evaluating the impact that the adoption of this new guidance will have on its consolidated financial statements.
Employee Share-Based Payment Accounting: In March 2016, the FASB issued amended guidance related to employee share-based payment accounting. One aspect of the guidance, which will become effective on a prospective basis, requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. In addition, the guidance eliminates the requirement that excess tax benefits be realized (i.e., through a reduction in income taxes payable) before companies can recognize them. This part of the guidance will be applied using a modified retrospective transition method and will result in the Company recording a cumulative-effect adjustment in retained earnings for excess tax benefits not previously recognized. The guidance also requires presentation of excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity, and can be applied retrospectively or prospectively. The guidance also increases the amount companies can withhold to cover income taxes on awards without triggering liability classification for shares used to satisfy statutory income tax withholding obligations and requires application of a modified retrospective transition method. Finally, the guidance provides for an election to account for forfeitures of share-based payments either by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change (as is required under the current guidance). The guidance is effective for the Company's fiscal year beginning April 1, 2017. The Company is currently evaluating the impact that the adoption of this new guidance will have on its consolidated financial statements.
Equity Method of Accounting: In March 2016, the FASB issued guidance that changes the requirements for equity method accounting when an investment qualifies for use of the equity method as a result of an increase in the investor’s ownership interest in or degree of influence over an investee. The guidance (i) eliminates the need to retroactively apply the equity method of accounting upon qualifying for such treatment, (ii) requires that the cost of acquiring the additional interest in an investee be added to the basis of the previously held interest and (iii) requires that unrealized holding gains or losses for available-for-sale equity securities that qualify for the equity method of accounting be recognized in earnings at the date the investment becomes qualified for use of the equity method of accounting. The guidance is effective for the Company's fiscal year beginning April 1, 2017. The adoption of this guidance is not expected to have a material impact on the Company's 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.


11

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



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").
Reclassification of Capital Stock and Purchase Consideration. Immediately prior to the consummation of the Starz Merger, Lionsgate effected the reclassification of its capital stock, pursuant to which each existing Lionsgate common share was converted into 0.5 shares of a newly issued class of Lionsgate Class A voting shares and 0.5 shares of a newly issued class of Lionsgate Class B non-voting shares, subject to the terms and conditions of the Merger Agreement. Following the reclassification (a) each share of Starz Series A common stock was converted into the right to receive $18.00 in cash and 0.6784 of a share of Lionsgate Class B non-voting shares, and (b) each share of Starz Series B common stock was converted into the right to receive $7.26 in cash, 0.6321 of a share of Lionsgate Class B non-voting shares and 0.6321 of a share of Lionsgate Class A voting shares, in each case, subject to the terms and conditions of the Merger Agreement.
As a result of the reclassification discussed above, the fair value of Lions Gate Class A voting shares and Lions Gate Class B non-voting shares was estimated based on the closing price of the common shares on December 8, 2016 (i.e., $26.09) before the reclassification and applying a small premium or discount to the Class A voting and Class B non-voting shares, based on a historical analysis of the spread of trading prices of voting and non-voting stock of comparable companies. Accordingly, a value of $26.48 was estimated with respect to the Class A voting shares, and $25.70 was estimated with respect to the Class B non-voting shares for purposes of recording the share portion of the consideration to be paid to Starz stockholders.
In connection with the merger between the Company and Starz, as of December 31, 2016, Starz has 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.  As of December 31, 2016, the Company has not paid the merger consideration for the shares that have demanded appraisal but has recorded a liability of $886 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. Since the merger closed on December 8, 2016, three petitions for appraisal have been filed in the Court of Chancery of the State of Delaware. See Note 16 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, if any, 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. 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.
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:

12

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



 
 
 
(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

Cash consideration paid to Starz stockholders
 
 
 
Starz Series A common stock at $18.00
$
1,077

 
 
Starz Series B common stock at $7.26
53

 
 
 
 
 
1,130

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
$
1,044

 
 
Starz Series B common stock at exchange ratio of 0.6321 Lionsgate voting shares
122

 
 
Starz Series B common stock at exchange ratio of 0.6321 Lionsgate non-voting shares
118

 
 
 
 
 
1,284

Replacement of Starz share-based payment awards(2)
 
 
187

Liability for dissenting shareholders
 
 
886

Total preliminary estimated purchase consideration
 
 
$
3,666

(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 $159 million, of $20 million, has been reflected in the gain on Starz investment line item in the unaudited condensed consolidated statement of operations for the three and nine months ended December 31, 2016. See Note 4.
(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 to be recorded as part of the purchase consideration is $187 million, and the estimated remaining aggregate fair value totaling $43 million will be 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 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
0.00% - 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.


13

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




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:
 
(Amounts in millions)
Cash and cash equivalents
$
73

Accounts receivable
257

Investment in films and television programs and program rights
843

Property and equipment
121

Investments
12

Intangible assets
2,021

Other assets
128

Accounts payable and accrued liabilities
(114
)
Corporate debt and capital lease obligations
(1,016
)
Deferred tax liabilities
(701
)
Other liabilities
(157
)
Fair value of net assets acquired
1,467

Goodwill
2,199

Total estimated purchase consideration
$
3,666


Fair Value Estimates: The fair value of the assets acquired and liabilities assumed were preliminarily determined using income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, other than the long-term debt assumed in the acquisition. The income approach was primarily used to value the intangible assets, consisting primarily of acquired customer relationships and tradenames.
The intangible assets acquired include customer relationships with a weighted average estimated useful life of 17 years and tradenames with an indefinite useful life (see Note 5). The fair value of customer relationships was preliminarily estimated based on the estimated future cash flows to be generated from the customer affiliation contracts considering assumptions related to contract renewal rates and revenue growth based on the number of subscribers and contract rates. The earnings expected to be generated by the customer relationships were forecasted over the estimated duration of the intangible asset. The earnings were then adjusted by taxes and the required return for the use of the contributory assets and discounted to present value at a rate commensurate with the risk of the asset. The fair value of tradenames was preliminarily estimated based on the present value of the theoretical cost savings that could be realized by the owner of the tradenames as a result of not having to pay a stream of royalty payments to another party. These cost savings were calculated based on the hypothetical royalty payment that a licensee would be required to pay in exchange for use of the tradenames, reduced by the tax shield realized by the licensee on the royalty payments. The cost savings were discounted to present value at a rate commensurate with the risk of the asset.
Investment in films and television programs include the cost of completed films and television programs (including original series) which have been produced by Starz or for which Starz has acquired distribution rights, as well as the costs of films and television programs in production, pre-production and development. For film and television programs in production, pre-production and development, the fair value has been preliminarily estimated to be the recorded book value. For completed films and television programs, the fair value was preliminarily estimated based on forecasted cash flows discounted to present value at a rate commensurate with the risk of the assets.
For tangible capital assets held under capital leases the income approach was utilized in valuing the tangible capital assets, including the satellite transponders and the real property, under a right-to-use scenario. The fair value of the capital asset was

14

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



estimated by forecasting a market lease rate over the remaining term of the contract and discounting the payments using a market participant lease rate reflective of the riskiness of the asset. The fair value of the capital lease liability was estimated by forecasting the contract lease rate over the remaining term of the contract and discounting payments using a market participant debt rate reflective of the riskiness of the lessee. We estimated the fair value of the asset retirement obligation by utilizing an estimate of cost to retire the asset, inflating it to the end of the contract term and discounting it at a market participant debt rate reflective of the riskiness of the lessee.
The cost approach was utilized in valuing the tangible personal property using standard methodologies to estimate a replacement cost new and depreciation effects for each asset. Replacement cost new was estimated using historical costs and acquisition dates of the assets along with inflationary measures specific to the types of assets included in the valuation. Depreciation effects encompass physical deterioration, functional obsolescence, and economic obsolescence. Replacement cost new less depreciation results in an estimate of fair value when using the cost approach.
The fair value of program rights has been preliminarily assumed to be the recorded book value, based on an assessment that such content is acquired or produced at fair value and aired over relatively short periods (a few years) and thus the amortization of the cost reflects the decline in the fair value of the content over time.
As part of the acquisition, we assumed and immediately extinguished Starz's senior notes, which had a principal amount outstanding of $675 million, and Starz's credit facility, which had an outstanding amount of $255 million (see Note 6). The former Starz senior notes were adjusted to fair value prior to extinguishment using quoted market values, and the fair value of the outstanding amounts under Starz's credit facility were estimated to approximate their carrying value.
Deferred taxes were adjusted to record the deferred tax impact of acquisition accounting adjustments primarily related to intangible assets. The incremental deferred tax liabilities were calculated based on the tax effect of the step-up in book basis of the net assets of Starz, excluding the amount attributable to goodwill, using the estimated statutory tax rates.
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, and will not be deductible for federal tax purposes.

Pro Forma Statement of Operations Information. The merger was accounted for under the acquisition method of accounting, with the results of operations of Starz included in the Company's consolidated results from December 8, 2016. Revenues and income before income taxes for the period from December 8, 2016 through December 31, 2016 of Starz were $97 million and $40 million, respectively. The following unaudited pro forma condensed consolidated statements of operations information presented below illustrate the results of operations of the Company as if the Starz Merger and related debt financing (see Note 6) occurred on April 1, 2015.
 
 
Nine Months Ended
 
 
December 31,
 
 
2016
 
2015
 
 
(Amounts in millions, except per share amounts)
Revenues
 
$
3,063

 
$
2,806

Net income attributable to Lions Gate Entertainment Corp. shareholders
 
$
119

 
$
134

Basic Net Income Per Common Share attributable to Lions Gate Entertainment Corp. shareholders
 
$
0.61

 
$
0.68

Diluted Net Income Per Common Share attributable to Lions Gate Entertainment Corp. shareholders
 
$
0.60

 
$
0.63

The unaudited pro forma condensed consolidated statement of operations information does not include adjustments for any operating efficiencies or cost savings, and exclude $61 million of acquisition-related and restructuring costs that were expensed in restructuring and other expenses during the nine months ended December 31, 2016. During the three months ended

15

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



December 31, 2016, the Company incurred approximately $49 million of merger-related costs that were expensed in restructuring and other expenses in the unaudited condensed consolidated statements of operations.

Pilgrim Media Group
On November 12, 2015, the Company purchased 62.5% of the membership interests in Pilgrim Media Group, LLC ("Pilgrim Media Group"), a worldwide independent reality television producer and distributor. The aggregate purchase price was approximately $202 million.
The purchase price consisted of $145 million in cash and 1,517,451 of the Company's former common shares, valued at $57 million. These shares were valued based on the closing price of the Company’s common shares on the date of closing of the acquisition, discounted to the fair value of the shares considering certain transfer restrictions. The Company incurred approximately $3 million of acquisition-related costs that were expensed in restructuring and other expenses during the year ended March 31, 2016.

Pro Forma Statement of Operations Information. The following unaudited pro forma condensed consolidated statement of operations information presented below illustrate the results of operations of the Company as if the acquisition of Pilgrim Media Group as described above occurred on April 1, 2015. The statement of operations information below includes the statement of income of Pilgrim Media Group for the nine months ended September 30, 2015 combined with the Company's statement of operations for the nine months ended December 31, 2015.
 
 
Nine Months Ended
 
 
December 31,
 
 
2015
 
 
(Amounts in millions, except per share amounts)
Revenues
 
$
1,662

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

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

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

The unaudited pro forma condensed consolidated statement of operations information does not include adjustments for any restructuring activities, operating efficiencies or cost savings, and exclude certain one-time transactional costs of $8 million attributable to the noncontrolling shareholder expensed in connection with the transaction, as well as $3 million of acquisition-related costs that were expensed in restructuring and other expenses during the year ended March 31, 2016.


16

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



3. Investment in Films and Television Programs and Program Rights
 
December 31,
2016
 
March 31,
2016
 
(Amounts in millions)
Motion Pictures Segment - Theatrical and Non-Theatrical Films
 
 
 
Released, net of accumulated amortization
$
576

 
$
584

Acquired libraries, net of accumulated amortization
3

 
4

Completed and not released
35

 
34

In progress
279

 
422

In development
38

 
28

 
931

 
1,072

Television Production Segment - Direct-to-Television Programs
 
 
 
Released, net of accumulated amortization
210

 
189

In progress
119

 
191

In development
7

 
6

 
336

 
386

Media Networks Segment
 
 
 
Licensed program rights, net of accumulated amortization
503

 

Produced programming
 
 
 
Released, net of accumulated amortization
107

 

In progress
168

 

In development
7

 

 
785

 

Investment in films and television programs and program rights, net
2,052

 
1,458

Less current portion of program rights
(236
)
 

Non-current portion
$
1,816

 
$
1,458

The Company expects approximately 51% of completed films and television programs, excluding licensed program rights, will be amortized during the one-year period ending December 31, 2017. Additionally, the Company expects approximately 83% of completed and released films and television programs, excluding licensed program rights and acquired libraries, will be amortized during the three-year period ending December 31, 2019. Licensed program rights expected to be amortized within one-year from the balance sheet date are classified as short-term in the unaudited condensed consolidated balance sheet.
During the three and nine months ended December 31, 2016 and 2015, 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 9). During the three and nine months ended December 31, 2016, the Company recorded $2 million and $7 million, respectively, of fair value film write-downs, as compared to $3 million and $12 million, respectively, of fair value film write-downs recorded during the three and nine months months ended December 31, 2015.


17

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



4. Investments
The carrying amounts of investments, by category, at December 31, 2016 and March 31, 2016 were as follows:
 
 
December 31,
2016
 
March 31,
2016
 
 
(Amounts in millions)
Equity method investments
 
$
314

 
$
297

Available-for-sale securities
 

 
124

Cost method investments
 
43

 
43

 
 
$
357

 
$
464


Equity Method Investments:
The carrying amounts of equity method investments at December 31, 2016 and March 31, 2016 were as follows:
 
 
December 31,
2016
 
 
 
 
Equity Method Investee
Ownership
Percentage
 
December 31,
2016
 
March 31,
2016
 
 
 
(Amounts in millions)
EPIX
31.2%
 
$
179

 
$
172

Pop
50.0%
 
94

 
99

Other
Various
 
41

 
26

 
 
 
$
314

 
$
297

Equity interests in equity method investments for the three and nine months ended December 31, 2016 and 2015 were as follows (income (loss)):
 
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
Equity Method Investee
2016
 
2015
 
2016
 
2015
 
(Amounts in millions)
EPIX
$
5

 
$
13

 
$
21

 
$
34

Pop
(3
)
 

 
(5
)
 
1

Other
(4
)
 
(2
)
 
(5
)
 
(6
)
 
$
(2
)
 
$
11

 
$
11

 
$
29

EPIX. In April 2008, the Company formed a joint venture with Viacom, its Paramount Pictures unit and Metro-Goldwyn-Mayer Studios to create a premium television channel and subscription video-on-demand service named “EPIX”. The Company invested $80 million through September 30, 2010, and no additional amounts have been funded since. Since the Company's original investment in April 2008, the Company has received distributions from EPIX of $42 million. During the three and nine months ended December 31, 2016, the Company received distributions from EPIX of $14 million (three and nine months ended December 31, 2015 - none).
EPIX Financial Information:
The following table presents summarized balance sheet data as of December 31, 2016 and March 31, 2016 for EPIX:

18

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



 
 
December 31,
2016
 
March 31,
2016
 
(Amounts in millions)
Current assets
$
386

 
$
356

Non-current assets
$
393

 
$
360

Current liabilities
$
113

 
$
91

Non-current liabilities
$
23

 
$
24

The following table presents the summarized statements of income for the three and nine months ended December 31, 2016 and 2015 for EPIX and a reconciliation of the net income reported by EPIX to equity interest income recorded by the Company:
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2016
 
2015
 
2016
 
2015
 
(Amounts in millions)
Revenues
$
101

 
$
98

 
$
298

 
$
315

Expenses:
 
 
 
 
 
 
 
Operating expenses
73

 
56

 
194

 
190

Selling, general and administrative expenses
5

 
6

 
18

 
18

Operating income
23

 
36

 
86

 
107

Interest and other expense

 

 

 
(2
)
Net income
$
23

 
$
36

 
$
86

 
$
105

Reconciliation of net income reported by EPIX to equity interest income:
 
 
 
 
 
 
 
Net income reported by EPIX
$
23

 
$
36

 
$
86

 
$
105

Ownership interest in EPIX
31.15
%
 
31.15
%
 
31.15
%
 
31.15
%
The Company's share of net income
7

 
11

 
27

 
33

Eliminations of the Company’s share of profits on licensing sales to EPIX(1)
(4
)
 

 
(10
)
 
(6
)
Realization of the Company’s share of profits on licensing sales to EPIX(2)
2

 
2

 
4

 
7

Total equity interest income recorded
$
5

 
$
13

 
$
21

 
$
34

_________________________
(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 and nine months ended December 31, 2016, the Company made no contributions to Pop (2015 - none and $1 million, respectively).
The mandatorily redeemable preferred stock units carry a dividend rate of 10% compounded annually and are mandatorily redeemable in May 2019 at the stated value plus the dividend return and any additional capital contributions less previous distributions. The mandatorily redeemable preferred stock units were initially recorded based on their estimated fair value, as determined using an option pricing model. The mandatorily redeemable preferred stock units and the 10% dividend are being accreted up to their redemption amount over the ten-year period to the redemption date, which is recorded as income within equity interest.

19

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



Other Equity Method Investments
Defy Media. In June 2007, the Company acquired an interest in Break Media, a multi-platform digital media company and a leader in male-targeted content creation and distribution. In October 2013, Break Media merged with Alloy Digital to create Defy Media. The Company's effective economic interest in Defy Media through its investment in Break Media and its direct investment in Defy Media is approximately 10%. 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 made initial investments totaling $4 million in Atom Tickets during the year ended March 31, 2015. During the year ended March 31, 2016, the Company agreed to participate in an equity offering of Atom Tickets and subscribed for an additional $8 million in equity interests. The Company owns an interest of approximately 19% 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.
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 losses and fair market value of available-for-sale securities were as set forth below:

 
 
March 31,
2016
 
 
(Amounts in millions)
Cost basis
 
$
159

Gross unrealized loss
 
(35
)
Fair value
 
$
124


Starz. At March 31, 2016, available-for-sale securities consisted of the Company's minority interest in Starz. On March 27, 2015, pursuant to the terms of a stock exchange agreement entered into on February 10, 2015 (the "Exchange Agreement"), the Company exchanged 4,967,695 of the then newly issued common shares for 2,118,038 shares of Series A common stock of Starz and 2,590,597 shares of Series B common stock of Starz held by certain affiliates of John C. Malone ("Dr. Malone") (the exchange transaction, the "Exchange").

On December 8, 2016, the Company merged with Starz (see Note 2), and accordingly, the difference between the fair value of the Starz available-for-sale securities on December 8, 2016 of $179 million and the original cost of the Starz available-for-sale securities of $159 million represented a gain of $20 million, which has been reflected in in the gain on Starz investment line item in the Company's unaudited condensed consolidated statements of operations for the three and nine months ended December 31, 2016. Such amounts have been reclassified out of accumulated other comprehensive loss to net loss for the three and nine months ended December 31, 2016.
 

20

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



Cost Method Investments:
Telltale. Telltale Games ("Telltale") is a creator, developer and publisher of interactive software episodic games based upon popular stories and characters across all major gaming and entertainment platforms. In February 2015, the Company invested $40 million in Telltale, which consisted of cash of $28 million and 361,229 shares of then newly issued common shares of the Company with a fair value of approximately $12 million representing in the aggregate an approximately 14% economic interest in Telltale.
Next Games. Next Games is a mobile games development company headquartered in Helsinki, Finland, with a focus on crafting visually impressive, highly engaging games. In July 2014, the Company invested $2 million in Next Games for a small minority ownership interest.


5. Goodwill and Intangible Assets

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, 2016
$
294

 
$
241

 
$

 
$
535

Starz Merger
68

 

 
2,131

 
2,199

Balance as of December 31, 2016
$
362

 
$
241

 
$
2,131

 
$
2,734


As a result of the reorganization of the Company's reporting segments (see Note 15) in connection with the Starz Merger (see Note 2), the goodwill resulting from the acquisition was allocated to the Media Networks and Motion Pictures segments based on the estimate of the relative fair value of the businesses included in each segment.

Intangible Assets
Finite-lived intangible assets consisted of the following as of December 31, 2016 and March 31, 2016:
 
December 31, 2016
 
March 31, 2016
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
(Amounts in millions)
Finite-lived intangible assets subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
1,771

 
$
7

 
$
1,764

 
$

 
$

 
$

Trademarks and trade names
9

 
7

 
2

 
9

 
7

 
2

Other
10

 
2

 
8

 
9

 

 
9

 
$
1,790

 
$
16

 
$
1,774

 
$
18

 
$
7

 
$
11


Indefinite-lived intangible assets not subject to amortization consisted of the following:
 
December 31, 2016
 
March 31, 2016
 
(Amounts in millions)
Indefinite-lived intangible assets not subject to amortization:
 
 
 
Tradenames
$
250

 
$


The increase in the carrying value of intangible assets from March 31, 2016 was primarily due to intangible assets acquired in the Starz Merger. The intangible assets acquired were (i) customer relationships primarily representing affiliation agreements with distributors, and (ii) tradenames primarily related to the Starz brand name, which have an indefinite useful life and are not

21

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



amortized, but rather are assessed for impairment at least annually or more frequently whenever events or circumstances indicate that the rights might be impaired. The allocation of the intangible assets acquired is preliminary and subject to revision as a more detailed analysis 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. See Note 2 for further information.

Amortization expense associated with the Company's intangible assets for the three and nine months ended December 31, 2016 was approximately $7 million and $8 million, respectively (2015 - $1 million and $2 million, respectively). Amortization expense remaining relating to intangible assets for each of the years ending March 31, 2017 through 2021 is estimated to be approximately $27 million$106 million$106 million$106 million, and $106 million, respectively.


6. Debt

Total debt of the Company, excluding film obligations and production loans, was as follows as of December 31, 2016 and March 31, 2016:

 
December 31,
2016
 
March 31,
2016
 
(Amounts in millions)
Corporate debt:
 
 
 
Revolving credit facilities
$

 
$
161

Term Loan A
1,000

 

Term Loan B
2,000

 

5.875% Senior Notes
520

 

5.25% Senior Notes

 
225

Term Loan Due 2022

 
400

Total corporate debt
3,520

 
786

Convertible senior subordinated notes
102

 
102

Capital lease obligations
59

 

Total debt
3,681

 
888

Unamortized discount and debt issuance costs, net of fair value adjustment on capital lease obligations
(106
)
 
(23
)
Total debt, net
3,575

 
865

Less current portion
(118
)
 
(40
)
Non-current portion of debt
$
3,457

 
$
825



22

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



The following table sets forth future annual contractual principal payment commitments of debt as of December 31, 2016:
 
 
 
Maturity Date
 
Year Ended March 31,
Debt Type
 
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
 
 
 
 
(Amounts in millions)
Revolving credit facility
 
December 2021
 
$

 
$

 
$

 
$

 
$

 
$

 
$

Term Loan A
 
December 2021
 
13

 
50

 
55

 
77

 
100

 
705

 
1,000

Term Loan B
 
December 2023
 
5

 
20

 
20

 
20

 
20

 
1,915

 
2,000

5.875% Senior Notes
 
November 2024
 

 

 

 

 

 
520

 
520

Capital lease obligations
 
Various
 
1

 
6

 
6

 
4

 
3

 
39

 
59

Principal amounts of convertible senior subordinated notes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 2012 4.00% Notes
 
January 2017
 
42

 

 

 

 

 

 
42

April 2013 1.25% Notes
 
April 2018
 

 

 
60

 

 

 

 
60

 
 
 
 
$
61

 
$
76

 
$
141

 
$
101

 
$
123

 
$
3,179

 
3,681

Less aggregate unamortized discount & debt issuance costs, net of fair value adjustment on capital lease obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
(106
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
3,575



Senior Credit Facilities

Issuance. 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, the "Senior Credit Facilities"). The Term Loan B facility was issued at 99.5%.
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 December 31, 2016 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 December 31, 2016. 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:
Revolving Credit Facility & Term Loan A: Initially bears interest at a rate per annum equal to LIBOR plus 2.5% (or an alternative base rate plus 1.5%) margin, subject to possible reductions in the margin 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 (effective interest rate of 3.19% as of December 31, 2016).
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 3.75% as of December 31, 2016).
Required Principal Payments:
Term Loan A: Quarterly principal payments beginning 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 beginning 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.

23

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



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 December 31, 2016, the Company was in compliance with all applicable covenants.
Change in Control. The Company may also be subject to an event of default upon a change in control (as defined in the Credit Agreement) which, among other things, includes a person or group acquiring ownership or control in excess of 50% of the Company’s common shares.

5.875% Senior Notes

Issuance. On October 27, 2016, Lions Gate Entertainment Corp. issued $520 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.
(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 December 31, 2016, 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

24

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



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.

Debt Redemptions and Repayments

The Company used the proceeds of the 5.875% Senior Notes, the Term Loan A, the Term Loan B, and a portion of the revolving credit facility (amounting to $50 million) to finance a portion of the consideration and transaction costs for the Starz Merger (see Note 2) and the associated transactions, including the repayment of all amounts outstanding under Lionsgate's previous senior revolving credit facility, term loan and senior notes and the discharge of Starz's senior notes and repayment of all amounts outstanding under Starz's credit agreement. The details of the debt redemptions and repayments are as follows:

Repayment of Lionsgate's Senior Revolving Credit Facility, Term Loan Due 2022 and 5.25% Senior Notes. On December 8, 2016, all outstanding obligations (i.e., $241 million) under Lionsgate's previous $800 million senior revolving credit facility were repaid and the credit agreement was terminated. The previous credit facility bore interest at an alternative base rate, as defined, plus 1.5%, or LIBOR plus 2.5%, as designated by the Company (effective interest rate of 2.94% on borrowings outstanding as of March 31, 2016).

On December 8, 2016, the Company redeemed its previous $400 million seven-year term loan due March 2022 (the "Term Loan Due 2022"), which carried interest at a rate of 5.00% per year. In conjunction with the early redemption of the Term Loan Due 2022, the Company paid a prepayment premium of $8 million, or 2.0% on the principal amount prepaid, pursuant to the terms of the agreement governing the Term Loan Due 2022.

On December 8, 2016, the Company redeemed in full the $225 million outstanding principal amount of the 5.25% Senior Secured Second-Priority Notes due August 2018 (the "5.25% Senior Notes"), which bore interest at a rate of 5.25% per year. In conjunction with the early redemption of the 5.25% Senior Notes, the Company paid a prepayment premium of $15 million pursuant to the terms of the indenture governing the 5.25% Senior Notes.

Accounting for the Repayment of Lionsgate's Senior Revolving Credit Facility:

Any fees paid to creditors or third parties related to the issuance of the new revolving credit facility are capitalized and amortized over the term of the new revolving credit facility. To the extent the borrowing capacity, measured as the amount available under the revolving credit facility multiplied by the remaining term, on a creditor by creditor basis, was more than under the previous revolving credit facility, any prior unamortized debt issuance costs are capitalized and amortized over the term of the new revolving credit facility. To the extent the borrowing capacity on a creditor by creditor basis was less than under the previous credit facility the prior unamortized debt issuance costs were written off as a loss on extinguishment of debt in proportion to the decrease in borrowing capacity under the former revolving credit facility.

The table below sets forth the applicable costs associated with the issuance and repayment of the senior revolving credit facility:

 
Total
 
Amortize Over Life of New Revolving Credit Facility
 
Loss on Extinguishment of Debt
 
(Amounts in millions)
Previously incurred unamortized debt issuance costs of senior revolving credit facility
$
3

 
$
2

 
$
1

New costs incurred to issue the new revolving credit facility
20

 
20

 

Total
$
23

 
$
22

 
$
1



Redemption of Lionsgate's Term Loan Due 2022 and 5.25% Senior Notes:

In accounting for each contemporaneous issuance of the Term Loan A, the Term Loan B and the 5.875% Senior Notes and redemption of the Term Loan Due 2022 and 5.25% Senior Notes, a portion of the issuance and redemption was considered a modification of terms with creditors who participated in both the new issuances and the redeemed debt, and a portion was

25

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



considered a debt extinguishment. To the extent a portion of the issuance and redemption was considered a modification, the call premium and any fees or other amounts paid to creditors plus the remaining unamortized debt issuance costs and debt discount on the redeemed debt will be amortized over the life of the new issuance, and to the extent a portion of the issuance and redemption was considered an extinguishment, these costs were expensed as a loss on extinguishment of debt. The new issuance costs paid to third parties related to each issuance were capitalized and will be amortized over the life of the new issuance to the extent the issuance and redemption was considered an extinguishment, and expensed as a loss on extinguishment of debt to the extent considered to be a modification of terms. All costs and expenses associated with new creditors are capitalized and amortized over the life of the new issuance. Deferred financing costs and any debt discount are amortized using the effective interest method.

The table below sets forth the applicable costs associated with the issuance of the Term Loan A, the Term Loan B, and the 5.875% Senior Notes and the redemption of the Term Loan Due 2022 and the 5.25% Senior Notes, respectively (as discussed above), and the applicable accounting for such:


 
Total
 
Amortize Over Life of 5.875% Senior Notes, Term Loan A and Term Loan B
 
Loss on Extinguishment of Debt
 
(Amounts in millions)
Early redemption/ call premium on 5.25% Senior Notes and Term Loan Due 2022 and other fees paid to creditors
$
23

 
$
11

 
$
12

Previously incurred unamortized net discount/premium and debt issuance costs of 5.25% Senior Notes and Term Loan Due 2022
13

 
9

 
4

 
36

 
20

 
16

New costs incurred to issue the 5.875% Senior Notes, Term Loan A and Term Loan B
92

 
84

 
8

Total
$
128

 
$
104

 
$
24


Repayment of Starz Credit Facility and Redemption of Starz Senior Notes. On December 8, 2016, all outstanding obligations (i.e., $255 million) under Starz's existing $1.0 billion revolving credit facility that were assumed as part of the Starz Merger were repaid and the credit agreement was terminated.

On December 8, 2016, the Company discharged the $675 million outstanding principal amount of the previous Starz senior notes due September 15, 2019 (the "Starz Senior Notes") that were assumed as part of the Starz Merger. In conjunction with the discharge of the Starz Senior Notes, the Company paid a call premium of $8 million.

The repayment of the Starz credit facility and discharge of the Starz Senior Notes were accounted for as debt extinguishments, and a loss on extinguishment of debt of $3 million was recorded in the unaudited condensed consolidated statements of operations in the three and nine months ended December 31, 2016 related to these transactions.

The following table summarizes the loss on extinguishment of debt recorded in the three and nine months ended December 31, 2016:

 
(in millions)
Loss on Extinguishment of Debt
 
Senior revolving credit facility
$
1

Term Loan Due 2022 & 5.25% Senior Notes
24

Starz credit facility & Starz Senior Notes
3

 
$
28





26

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




Convertible Senior Subordinated Notes
Outstanding Amount and Terms. The following table sets forth the convertible senior subordinated notes outstanding and certain key terms of these notes at December 31, 2016 and March 31, 2016:
 
 
 
Maturity Date
 
Conversion Price Per Share at December 31, 2016
 
December 31, 2016
 
March 31, 2016
Convertible Senior Subordinated Notes
 
 
 
Principal
 
Unamortized Discount & Debt Issuance Costs
 
Net Carrying Amount
 
Principal
 
Unamortized Discount & Debt Issuance Costs
 
Net Carrying Amount
 
 
 
 
 
 
(Amounts in millions)
January 2012 4.00% Notes
 
January 11, 2017
 
$10.21
 
$
42

 
$

 
$
42

 
$
42

 
$
(2
)
 
$
40

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

 

 
60

 
60

 

 
60

 
 
 
 
 
 
$
102

 
$

 
$
102

 
$
102

 
$
(2
)
 
$
100


January 2012 4.00% Notes: In January 2012, Lions Gate Entertainment Inc., a subsidiary of the Company, ("LGEI") issued approximately $45 million of 4.00% convertible senior subordinated notes due 2017 (the "January 2012 4.00% Notes"), of which $10 million was allocated to the equity component.

April 2013 1.25% Notes: In April 2013, LGEI issued approximately $60 million in aggregate principal amount of 1.25% convertible senior subordinated notes due 2018 (the "April 2013 1.25% Notes").

Conversion Features: The convertible senior subordinated notes are convertible, at any time, into the number of common shares of the Company determined by the principal amount being converted divided by the conversion price, subject to adjustment in certain circumstances, including upon the issuance of dividends.
 
The January 2012 4.00% Notes provide that upon conversion, the Company has the option to deliver, in lieu of common shares, cash or a combination of cash and common shares of the Company. Convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are recorded by separately accounting for the liability and equity component (i.e., conversion feature), thereby reducing the principal amount with a debt discount that is amortized as interest expense over the expected life of the note using the effective interest method. The effective interest rate on the liability component of the January 2012 4.00% Notes is 9.56%.

The April 2013 1.25% Notes are convertible only into the Company's common shares and do not carry an option to be settled in cash upon conversion, and accordingly, have been recorded at their principal amount (not reduced by a debt discount for the equity component).

Conversions. The following conversions were completed with respect to the Company's convertible senior subordinated notes in the nine months ended December 31, 2015 (none in the nine months ended December 31, 2016). In January 2017, the outstanding principal amount of the January 2012 4.00% Notes was converted; see Subsequent Events Note 20 for further details.

 
Nine Months Ended
 
December 31,
 
2015
 
(Amounts in millions)
April 2009 3.625% Notes
 
Principal amount converted
$
16

Common shares issued upon conversion
2

Weighted average conversion price per share
$
8.15


27

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




Capital Lease Obligations

Capital lease obligations represent lease agreements acquired in the Starz Merger (see Note 2), and include a ten-year commercial lease for a building with an imputed annual interest rate of 6.4%, and capital lease arrangements for Starz's transponder capacity that expire from 2018 to 2021 and have imputed annual interest rates ranging from 5.5% to 7.0%.


7. Participations and Residuals

Theatrical Slate Participation

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

Amounts provided from TIK Films are reflected as a participation liability in the Company's unaudited condensed consolidated balance sheets and amounted to $131 million at December 31, 2016 (March 31, 2016 - $61 million). The difference between the ultimate participation expected to be paid to TIK Films and the amount provided by TIK Films is amortized as a charge to or a reduction of participation expense under the individual-film-forecast method.



8. Film Obligations and Production Loans
 
 
December 31,
2016
 
March 31,
2016
 
(Amounts in millions)
Film obligations
$
122

 
$
25

Production loans
298

 
690

Total film obligations and production loans
420

 
715

Unamortized debt issuance costs
(1
)
 

Total film obligations and production loans, net
419

 
715

Less current portion
(257
)
 
(663
)
Total non-current film obligations and production loans
$
162

 
$
52



28

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



The following table sets forth future annual repayment of film obligations and production loans as of December 31, 2016:
 
 
Three Months Ending
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31,
 
Year Ended March 31,
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
 
(Amounts in millions)
Film obligations
$
61

 
$
26

 
$
11

 
$
14

 
$
4

 
$
7

 
$
123

Production loans
37

 
232

 
29

 

 

 

 
298

 
$
98

 
$
258

 
$
40

 
$
14

 
$
4

 
$
7

 
$
421

Less imputed interest on film obligations and debt issuance costs on production loans
 
 
 
 
 
 
 
 
 
 
 
 
(2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
$
419

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 3.69% to 3.98%.


9. Fair Value Measurements
Fair Value
Accounting guidance and standards about fair value define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Fair Value Hierarchy
Fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The accounting guidance and standards establish three levels of inputs that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 liabilities that are not required to be measured at fair value on a recurring basis include the Company’s convertible senior subordinated notes, production loans, 5.875% 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.

29

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



The following table sets forth the assets and liabilities required to be carried at fair value on a recurring basis as of December 31, 2016 and March 31, 2016:
 
December 31, 2016
 
March 31, 2016
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
Assets:
(Amounts in millions)
Available-for-sale securities (see Note 4) (1):
 
 
 
 
 
 
 
 
 
 
 
Starz Series A common stock
$

 
$

 
$

 
$
56

 
$

 
$
56

Starz Series B common stock

 

 

 

 
68

 
68

 
 
 
 
 
 
 
 
 
 
 
 
Forward exchange contracts (see Note 18)

 

 

 

 
9

 
9

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Forward exchange contracts (see Note 18)

 
(2
)
 
(2
)
 

 
(1
)
 
(1
)
 
$

 
$
(2
)
 
$
(2
)
 
$
56

 
$
76

 
$
132

(1)
At March 31, 2016, the Company classified the Series A common stock of Starz within Level 1 of the fair value hierarchy as the valuation inputs were based on quoted prices in active markets. The Series B common stock of Starz was considered a Level 2 security because the quoted market prices were based on infrequent transactions. Therefore, the fair value of the Series B common stock, which was convertible, at the holder’s option, into Series A common stock of Starz was based on the quoted market price of the Series A common stock, which was an equivalent security other than for the voting rights.
The following table sets forth the carrying values and fair values of the Company’s investment in Pop's mandatorily redeemable preferred stock units and outstanding debt at December 31, 2016 and March 31, 2016: