STARZ ACQUISITION LLC
FORM
10-K
(Annual Report)
Filed 02/27/13 for the Period Ending 12/31/12
Address
Telephone
CIK
SIC Code
Industry
Sector
Fiscal Year
8900 LIBERTY CIRCLE
ENGLEWOOD, CO 80112
(720) 852-7700
0001507934
4841 - Cable and Other Pay Television Services
Broadcasting
Consumer Cyclicals
12/31
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-35294
Starz
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
20-8988475
(I.R.S. Employer
Identification No.)
8900 Liberty Circle
Englewood, Colorado
(Address of principal executive offices)
(Zip Code)
80112
Registrant’s telephone number, including area code: (720) 852-7700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of exchange on which registered
Series A Liberty Capital Common Stock, par value $.01 per share
The Nasdaq Stock Market LLC
Series B Liberty Capital Common Stock, par value $.01 per share
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes __X_ No___
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes___ No __X_
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 proceeding 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__X__ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files). Yes _X__ No____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___
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.
Large accelerated filer __X__
Accelerated filer ____
Non-accelerated filer ___
Smaller reporting company ____
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ____ No _X__
The aggregate market value of the voting stock held by non-affiliates of Starz computed by reference to the last sales price of such stock, as of the closing of trading on June 30,
2012, was zero.
The number of outstanding shares of Starz’s common stock as of January 31, 2013 was:
Series A
Series B
111,650,628
9,882,238
Documents Incorporated by Reference
The Registrant’s definitive proxy statement for its 2013 Annual Meeting of Shareholders is hereby incorporated by reference into Part III of this Annual Report on Form 10-K.
STARZ
2012 ANNUAL REPORT ON FORM 10-K
Table of Contents
Part I
Page
Item 1.
Business
3
Item 1A.
Item 1B.
Risk Factors
Unresolved Staff Comments
16
25
Item 2.
Properties
25
Item 3.
Item 4.
Legal Proceedings
Mine Safety Disclosures
25
25
Part II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
26
26
28
40
40
41
41
42
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
43
43
43
43
43
Part IV
Item 15.
Exhibits and Financial Statement Schedules
44
i
SPECIAL NOTE REGARDING PRESENTATION OF FINANCIAL INFORMATION
During August 2012, the board of directors of Liberty Media Corporation (“Old LMC”) authorized a plan to spin off wholly-owned
subsidiary Liberty Spinco, Inc. (“Liberty Spinco”) (the “Spin-Off”), which, at the time of the Spin-Off would hold all of the businesses, assets
and liabilities of Old LMC not associated with the businesses of Starz, LLC (with the exception of Starz, LLC’s Englewood, Colorado corporate
office building). On January 11, 2013, the Spin-Off was effected in a tax-free manner through the distribution, by means of a pro-rata dividend,
of shares of Liberty Spinco to the stockholders of Old LMC. As a result, Liberty Spinco became a separate public company on January 11, 2013
and was renamed “Liberty Media Corporation” (“New LMC”). In connection with the Spin-Off, the parent company of Starz, LLC was renamed
“Starz”. Unless the context otherwise requires, Old LMC is used when events or circumstances being described occurred prior to the Spin-Off,
and Starz is used when events or circumstances being described occurred following the Spin-Off and in the context of the historical financial
information as discussed below.
The body of generally accepted accounting principles in the United States (“U.S.”) is commonly referred to as GAAP. In accordance
with GAAP, New LMC was determined to be the accounting successor to Old LMC for financial reporting purposes following the Spin-Off due
to the relative significance of New LMC to Starz (which is the legal spinnor) and the continued involvement of Old LMC’s senior management
with New LMC following the Spin-Off. Accordingly, the historical financial statements of Old LMC prior to the Spin-Off will continue to be the
historical financial statements of New LMC and Starz’s historical financial information will be deemed to be the financial information of Starz,
LLC. The financial statements of Starz reflect Starz, LLC on a historical cost basis.
Starz, LLC is the only directly owned subsidiary of Starz which in turn owns either directly or indirectly various operating subsidiaries.
Starz is a holding company with no assets, liabilities or operations other than those of Starz, LLC. Accordingly, the financial position, results of
operations, comprehensive income and cash flows of Starz and Starz, LLC are identical. As Starz’s common stock did not begin publicly trading
until January 14, 2013 (following the Spin-Off), Starz’s balance sheets as of December 31, 2012 and 2011 will not reflect common stock and
additional paid in capital, but will show member’s interest, identical to that of Starz, LLC. In addition, as the legal spinnor, Starz inherits all of
Old LMC’s filing requirements and is therefore considered a large accelerated filer.
For convenience, the terms “Starz,” “we,” “us” or “our” are used in this Annual Report on Form 10-K to refer to Starz, and collectively
to Starz and its majority-owned and controlled subsidiaries, unless the context otherwise requires. The term Starz, LLC refers to our whollyowned subsidiary Starz, LLC.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes statements reflecting assumptions, expectations, projections, intentions or beliefs about
future events that are intended as forward-looking statements. All statements included in this Annual Report on Form 10-K other than statements
of historical fact or current fact are forward-looking statements that address activities, events or developments that we or our management
expect, believe or anticipate will or may occur in the future. These statements represent our reasonable judgment on the future based on various
factors and using numerous assumptions and are subject to known and unknown risks, uncertainties and other factors, many of which are beyond
our control and could cause our actual results and financial position to differ materially from those contemplated by the statements. You can
identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,”
“project,” “forecast,” “plan,” “may,” “will,” “should,” “could,” “expect,” or the negative thereof, or other words of similar meaning. In
particular, these include, but are not limited to, statements of our current views and estimates of future economic circumstances, industry
conditions in domestic and international markets, and our future performance and financial results. These forward-looking statements are subject
to a number of factors and uncertainties that could cause our actual results to differ materially from the anticipated results and expectations
expressed in such forward-looking statements. We caution readers not to place undue reliance on any forward-looking statements, which speak
only as of the date made. We undertake no obligation to publicly update any forward-looking statements whether as a result of new information,
future events or otherwise.
1
Among the factors that may cause actual results and experiences to differ from the anticipated results and expectations expressed in
such forward-looking statements are the following:
•
changes in the nature of key strategic relationships with multichannel video programming distributors (“MVPDs”) and content
providers and our ability to maintain and renew affiliation agreements with MVPDs and programming output agreements with
content providers on terms acceptable to us;
•
distributor demand for our products and services, including the impact of higher rates paid by our distributors to other
programmers, and our ability to adapt to changes in demand;
•
consumer demand for our products and services, including changes resulting from the unwillingness of certain distributors to allow
us to participate in cooperative marketing campaigns, and our ability to adapt to changes in demand;
•
competitor responses to our products and services;
•
the cost of and our ability to acquire or produce desirable original programming;
•
the cost of and our ability to acquire desirable theatrical movie content;
•
disruption in the production of theatrical films or television programs due to strikes by unions representing writers, directors or
actors;
•
changes in distribution and viewing of television programming, including the expanded deployment of personal video recorders,
video on-demand, and IP television and their impact on media content consumption;
•
continued consolidation of the broadband distribution and movie studio industries;
•
uncertainties inherent in the development and deployment of new business lines and business strategies;
•
uncertainties associated with product and service development and market acceptance, including the development and provision of
programming for new television and telecommunications technologies;
•
our future financial performance, including availability, terms and deployment of capital;
•
the ability of our suppliers and vendors to deliver products, equipment, software and services;
•
the outcome of any pending or threatened litigation, including matters described in the notes to our consolidated financial
statements;
•
availability of qualified personnel;
•
the regulatory and competitive environment of the industries in which we, and the entities in which we have interests, operate;
•
changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal
Communications Commission (“FCC”), and/or adverse outcomes from regulatory proceedings;
•
changes in tax requirements, including tax rate changes, new tax laws and revised tax law interpretations;
•
general economic and business conditions and industry trends, including the current economic downturn;
•
consumer spending levels, including the availability and amount of individual consumer debt;
•
rapid technological changes;
2
•
fluctuation in foreign currency exchange rates; and
•
threatened terrorist attacks or political unrest in international markets.
Any or all of our forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or
unknown risks, uncertainties and other factors, many of which are beyond our control, including those set forth under “Risk Factors.”
In addition, there may be other factors that could cause our actual results to be materially different from the results referenced in the
forward-looking statements. Many of these factors will be important in determining our actual future results. Consequently, no forward-looking
statement can be guaranteed. Our actual future results may vary materially from those expressed or implied in any forward-looking statements.
All forward-looking statements contained in this Annual Report on Form 10-K are qualified in their entirety by this cautionary
statement.
PART I.
Item 1. Business
(a) General Development of Business
In connection with the Spin-Off, Starz, LLC distributed $1.8 billion in cash to Old LMC (paid as follows: $100.0 million on July 9,
2012, $250.0 million on August 17, 2012, $50.0 million on September 4, 2012, $200.0 million on November 16, 2012 and $1.2 billion on
January 10, 2013) funded by a combination of cash on hand and borrowings under Starz, LLC’s senior secured revolving credit facility. Such
distributed cash was contributed to New LMC prior to the Spin-Off. Additionally, in connection with the Spin-Off, Starz, LLC distributed its
Englewood, Colorado corporate office building and related building improvements to Old LMC (and Old LMC transferred such building and
related improvements to a subsidiary of New LMC) and then leased back the use of such facilities from this New LMC subsidiary. Following the
Spin-Off, New LMC and Starz operate independently, and neither have any stock ownership, beneficial or otherwise, in the other.
On September 13, 2012, Starz, LLC and Starz Finance Corp. co-issued $500.0 million of 5% senior notes due September 15, 2019 (the
“Senior Notes”). Starz Finance Corp. is a wholly-owned subsidiary of Starz, LLC and was formed for the sole purpose of co-issuing the Senior
Notes. Starz Finance Corp. does not and will not have any operations, assets or subsidiaries of its own. The Senior Notes pay interest semiannually on September 15 and March 15 of each year. The Senior Notes are guaranteed by Starz Entertainment, LLC (“Starz Entertainment”).
Starz, LLC used the net proceeds as well as cash on hand to repay and terminate the $500.0 million term loan under its senior secured credit
facilities. Starz, LLC registered the Senior Notes under the Securities Act of 1933, as amended, and completed an exchange offer for the Senior
Notes on February 13, 2013.
On February 8, 2013, Starz, LLC and Starz Finance Corp. completed the issuance of an additional $175.0 million 5.0% senior notes (the
“New Notes”), which were issued as additional notes under the indenture governing the Senior Notes. The net proceeds from the issuance of the
New Notes were used to repay indebtedness under Starz, LLC’s senior secured revolving credit facility. Starz, LLC and Starz Finance Corp.
have agreed to file a registration statement with the Securities and Exchange Commission (the “SEC”) related to a registered offering to
exchange the New Notes for new registered notes having substantially identical terms as the New Notes.
(b) Financial Information About Operating Segments
Our reportable segments are strategic business units that offer different services. They are managed separately because each segment
requires different technologies, content delivery methods and marketing strategies. We identify our reportable segments as those operating
segments that represent 10% or more of our consolidated annual revenue, annual Adjusted OIBDA or total assets. Starz Networks (previously
referred to as Starz Channels) and Starz Distribution have been identified as reportable segments; however, as we have only three operating
segments, Starz Animation is also reported
3
separately. Financial information related to our operating segments can be found in Note 13 to our consolidated financial statements found
beginning on page F-2 of this report.
(c) Narrative Description of Business
Our business operations are conducted by our wholly-owned subsidiaries Starz, LLC, Starz Entertainment, Film Roman, LLC (“Film
Roman”) and certain other immaterial subsidiaries, and our majority-owned subsidiary Starz Media Group, LLC (“Starz Media”), which is
owned 25% by The Weinstein Company LLC (“TWC”).
We provide premium subscription video programming to U.S. MVPDs, including cable operators, satellite television providers and
telecommunications companies. We also develop, produce and acquire entertainment content and distribute this content to consumers in the U.S.
and throughout the world. Our operations are managed by and organized around our Starz Networks, Starz Distribution and Starz Animation
operating segments. Our integrated operating segments enable us to maintain control, and maximize the profitability of our original
programming content and its marketing and distribution in the home video, digital (Internet) and television ancillary markets both domestically
and internationally, and we are not reliant on other parties to distribute content on our behalf. Our expanding original programming line-up also
provides downstream revenue opportunities for our Starz Distribution operating segment to the extent we retain rights to exploit such
programming in these ancillary markets both in the U.S. and around the world. A discussion regarding our operating segments follows.
4
STARZ NETWORKS
Programming Networks
Starz Networks is a leading provider of premium subscription video programming to U.S. MVPDs, including cable operators (such as
Comcast and Time Warner Cable), satellite television providers (such as DIRECTV and Dish Network), and telecommunications companies
(such as AT&T and Verizon). Starz Networks’ flagship premium networks are Starz and Encore. As of December 31, 2012, these networks were
available for subscription in approximately 100 million U.S. multichannel households, defined as households subscribing to services offered by
MVPDs, as well as over the Internet, and together Starz and Encore served approximately 56.0 million subscribers. Our third network,
MoviePlex, offers a variety of art house, independent films and classic movie library content. Starz and Encore, along with MoviePlex, air over
1,000 movies monthly across 17 linear networks complemented by on-demand and Internet services.
The table below depicts Starz Networks’ 17 existing linear networks and highlights some of their key attributes:
Premium networks, like Starz and Encore , air recently released and library film content, along with original series and specials without
advertisements. Premium networks are offered by MVPDs to their subscribers either on a fixed monthly price as part of a programming tier or
package or on an a-la-carte basis. Subscribers to premium networks have the exclusive opportunity to watch “first run” or new movies when
they are first aired on linear television following their initial release in movie theaters.
Demographics
Our Starz networks target a balanced composition of men and women in the 25-54 age group who are parents, have higher levels of
education and income of $50,000+ annually. Our Encore networks are sold in both lower level digital programming packages and together with
our Starz networks in premium programming packages depending on the distributor. Encore targets male adults in the 35-50 age group (more
targeted for the theme channels) with income of $50,000+ annually. MoviePlex is sold primarily in lower level digital programming packages
and together with our Encore
5
networks depending on the distributor. Together with its theme channels, IndiePlex and RetroPlex , MoviePlex targets a broad age range of men
and women 35 and older with income of $50,000+ annually.
Affiliation Agreements
Our networks are distributed pursuant to affiliation agreements with MVPDs. These agreements require us to deliver programming that
meets certain standards and volume of first-run films. We earn revenue under these agreements based on either:
•
•
the number of subscribers who receive our programming multiplied by rates specified in the agreements, or
a fixed monthly payment.
We work with our distributors to increase the number of subscribers to our networks. To accomplish this, we may help fund the
distributors’ efforts to market our programming networks or we may permit distributors to offer limited promotional periods without payment of
subscriber fees. We believe these efforts will increase our subscribers, improve the awareness of our programming networks and ultimately
increase our revenue and margins over the term of our affiliation agreements.
Distributors report the number of subscribers to our networks and pay us for our services, generally on a monthly basis. The agreements
are generally structured to be multi-year agreements with staggered expiration dates and generally provide for contractual rate increases or rate
increases tied to annual increases in the Consumer Price Index.
Our existing affiliation agreements expire at various dates through 2019. Failure to renew important affiliation agreements, or the
termination of those agreements, could have a material adverse effect on our business, and, even if affiliation agreements are renewed, there can
be no assurance that renewal rates will equal or exceed the rates that are currently being charged. We have not historically failed to renew an
agreement, although agreements have sometimes expired before the renewal was fully negotiated and finalized or continued on a month-tomonth basis (in such cases, paid carriage of our programming networks continued unaffected during the periods in which the agreements were
being negotiated).
As of December 31, 2012, we had 21.2 million Starz linear channel subscribers and 34.8 million Encore linear channel subscribers. Our
subscriber numbers do not include subscribers who receive our programming over the Internet or who receive our programming free as part of a
promotional offer.
For the year ended December 31, 2012, revenue received under affiliation agreements with Comcast and DIRECTV each accounted for
at least 10% of Starz’s revenue.
Programming
The programming on our networks includes programming that we license from studios and other rights holders and original
programming that we control, either through outright ownership or through licensing arrangements. Programming costs represent our single
largest expense.
Output and Other Content License Agreements
The majority of the content on our programming networks consists of films that have been released theatrically. We have exclusive
long-term output licensing agreements with The Walt Disney Company (“Disney”) and Sony Pictures Entertainment, Inc. (“Sony”) for all
qualifying films released theatrically by these companies’ movie studios. Our licensing agreements cover all qualifying films that are released
theatrically in the U.S. by studios owned by Disney through 2015 and all qualifying films that are released theatrically in the U.S. by studios
owned by Sony through 2021. On February 11, 2013, we announced a new, multi-year output licensing agreement for theatrically released
motion pictures from Sony that extends our relationship with Sony through 2021. The previous agreement had covered motion pictures released
theatrically through 2016. The rights we license from Disney and Sony on an exclusive basis during our license periods include linear television,
on-demand and Internet, among others.
Under these agreements, our networks have valuable exclusive rights to air new movies on our linear television channels, on-demand or
over the Internet during two or three separate windows over a period of approximately eight to ten years from their initial theatrical release.
Generally, except on a video on-demand or pay-per-view basis, no other network,
6
Internet streaming or other video service may air or stream these recent releases during our first two windows and no other premium subscription
service may air or stream these releases between our first two windows. Examples of recent Hollywood blockbusters that are exclusively aired or
will be aired by our networks in 2013 include The Amazing Spiderman, Brave, Men In Black 3, Pirates of the Caribbean: On Stranger Tides , 21
Jump Street and Wreck-it Ralph .
We have licensed theatrical titles from Disney since 1994. We currently license films released by Disney under the Disney, Touchstone,
Pixar and Marvel labels. We do not license films produced by DreamWorks that are released by Disney. Our licensing agreement with Sony,
which began in 2001, includes all titles released under the Columbia, Screen Gems, Sony Pictures Classics and TriStar labels.
We also license library content comprised of older, previously released theatrical films from many of Hollywood’s major studios,
including Lionsgate, MGM, Paramount, Sony, Twentieth Century Fox, Universal and Warner Bros. In addition to theatrical films, we license
made for television movies, series and other content from studios, production companies or other rights holders. We license library content
primarily on an exclusive basis, with virtually the same and, in some cases, more expansive exhibition rights than our output agreements. The
rights agreements for our library content are of varying duration and generally permit our programming networks to exhibit these films, series
and other programming during certain window periods.
A summary of our significant output and library programming agreements follows:
Summary of Significant Output Programming Agreements
Studio
Sony
Disney (aka Buena Vista)
Anchor Bay Entertainment, LLC
(1)
Summary of Significant Library Programming Agreements
Term(1)
Studio
12/2021 Lionsgate
12/2015 Sony Pictures
06/2015 Paramount
MGM
Warner Bros.
Universal
Twentieth Century Fox
Term
09/2025
11/2020
10/2020
06/2018
01/2017
02/2016
08/2013
Dates based on initial theatrical release.
Original Programming
We contract with independent production companies, including Pacific Renaissance, Lionsgate Television and BBC Worldwide
Limited, among others, to produce the majority of the original programming that appears on our networks. These contractual arrangements
provide us with either:
•
Outright ownership of the programming, in which case we wholly-own the series and receive all distribution and other rights to the
content. These distribution and other rights can be monetized through Starz Distribution or third-party distribution organizations,
•
An exclusive U.S. pay television license and other distribution or ancillary rights covering specific territories for specified periods
of time, or
•
An exclusive U.S. pay television license which provides for the programming to appear only on our Starz and Encore networks for
specified periods of time.
At times, we retain certain rights to exploit our original programming in the home video, digital (Internet) and television ancillary
markets both in the U.S. and around the world. These ancillary markets create downstream revenue opportunities for our Starz Distribution
operating segment.
7
A summary of our original programming series that have aired or will air on the Starz network is as follows:
Original Series/Key Cast
Air Date
1Q’14
Black Sails
(Key Cast: Toby
Stephens, Hanna New,
Luke Arnold)
White Queen
3Q’13
(Key Cast:
Rebecca
Ferguson,
Janet McTeer,
Max Irons)
3Q’13
Magic City Season 2
(Key Cast: Jeffrey
Dean Morgan, Olga
Kurylenko, Danny
Huston)
2Q’13
Da Vinci’s Demons
(Key Cast: Tom Riley,
Laura Haddock, Lara
Pulver)
Spartacus: War of the 1Q’13
Damned
(Key Cast: Liam
McIntyre, Manu
Bennett, Dustin Clare)
3Q’12
Boss Season 2
(Key Cast: Kelsey
Grammer, Connie
Nielsen, Kathleen
Robertson)
2Q’12
Magic City
(Key Cast: Jeffrey
Dean Morgan, Olga
Kurylenko, Danny
Huston)
Spartacus: Vengeance 1Q’12
(Key Cast: Liam
McIntyre, Lucy
Lawless, Manu
Bennett, Peter
Mensah)
4Q’11
Boss Season 1
(Key Cast: Kelsey
Grammer, Connie
Nielsen, Kathleen
Robertson)
3Q’11
Torchwood
(Key Cast: John
Barrowman, Mekhi
Phifer, Eve Myles)
Ownership
Rights
Description
All Rights
Executive Producer Michael Bay’s story chronicles the adventures of fabled
buccaneer Captain Flint and his men. Threatened with extinction on all sides,
they fight for the survival of New Providence Island, the most notorious
criminal haven of its day—a debauched paradise teaming with pirates,
prostitutes, thieves and fortune seekers, a place defined by both its enlightened
ideals and its stunning brutality.
All Rights excluding Adaptation of Philippa Gregory’s best-selling historical novel about the iconic
U.K. pay television period of English history known as the “War of the Roses” in which two
and SVOD rights
branches of the same royal family fight over the English throne. It is a
and all Benelux
stunningly rich tale of love and loss, seduction and deception, betrayal and
rights
murder, vibrantly weaving the stories of three different yet equally driven
women in their quest for power.
All Rights
In Season 2, Ike Evans risks everything in a life and death battle to rid his
Miramar Playa Hotel of the mob and Ben “The Butcher” Diamond. But will the
price of his victory be too high? For what will it profit a man if he gains the
whole world and loses his soul?
All Rights U.S.;
English Speaking
Canada
In a world where thought and faith are controlled, Leonardo Da Vinci fights to
set knowledge free. The tortured genius defies authority and throws himself into
the future, forever changing the fate of mankind.
All Rights
Having lost a significant part of his army (and friends) in the Season 2 finale,
Spartacus must make the decision to carry on and march toward Rome or forego
his vengeance and return home to Thrace.
U.S. Pay TV Only
Mayor Tom Kane’s grip on Chicago is more intense than ever. After nearly
losing his career, his family and his mind, Kane turns to solidifying his power.
Through all this, Kane struggles to keep his debilitating brain disease in check
in his quest for the last thing that matters to him—his legacy.
All Rights
Miami Beach, New Year’s Eve, 1959. Castro’s rebels seize Havana while the
Kennedys, the mob and the CIA all hold court at the luxurious Miramar Playa
Hotel. This is Ike Evans’ place, and he used mob boss, Ben “The Butcher”
Diamond, to finance it. With diving clowns by day and escorts at night,
nothing’s what it seems in Magic City.
All Rights
On the heels of the bloody escape from the House of Batiatus that concluded
“Spartacus: Blood and Sand,” the gladiator rebellion continues and begins to
strike fear into the heart of the Roman Republic.
U.S. Pay TV Only
Mayor of Chicago, Tom Kane knows what his city needs and isn’t afraid to use
any means necessary to get things done, but when a degenerative brain disorder
starts ripping away his personality he can no longer trust his memory, allies, or
even himself.
U.S. Pay TV Only
Season 4 of the popular British series; one day, all across the world, nobody
dies; the result: a population boom, overnight; but this can’t be a natural event—
someone’s got to be behind it.
8
Original Series/Key Cast
Camelot
(Key Cast: Jamie
Campbell Bower,
Joseph Fiennes, Eva
Green)
Air Date
2Q’11
Spartacus: Gods of the 1Q’11
Arena
(Key Cast: John
Hannah, Lucy
Lawless, Dustin Clare)
The Pillars of the Earth 3Q’10
Ownership
Rights
Description
All Rights U.S.
In the wake of King Uther’s sudden death, chaos threatens to engulf Britain.
When the sorcerer Merlin has visions of a dark future, he installs the young and
impetuous Arthur, Uther’s unknown son and heir.
All Rights
The House of Batiatus is on the rise, basking in the glow of its infamous
champion Gannicus; prequel to Spartacus: Blood & Sand.
U.S. Pay TV Only
Mini-series of the popular Ken Follett novel of the same name.
All Rights
Comedy about Hollywood wannabees working for a catering company.
All Rights
Dark comedy about a group of eccentric individuals in an out-patient program
for suicide survivors.
All Rights
Graphic and visceral series about the Roman Republic’s most infamous rebel.
(Key Cast: Rufus
Sewell, Ian McShane,
Donald Sutherland)
Party Down Season 2 2Q’10
(Key Cast: Adam
Scott, Megan
Mullally, Ken Marino)
2Q’10
Gravity
(Key Cast: Krysten
Ritter, Ivan Sergei,
Eric Shaeffer)
1Q’10
Spartacus: Blood &
Sand
(Key Cast: Andy
Whitfield, Lucy
Lawless, John
Hannah)
The fourth and final season of the Spartacus franchise, Spartacus: War of the Damned , premiered on January 25, 2013 to 3.1 million
viewers for the weekend. The Spartacus franchise, which includes Spartacus: Blood and Sand, Spartacus: Gods of the Arena, Spartacus:
Vengeance, and Spartacus: War of the Damned , has performed exceptionally well for our Starz network. Completed seasons of this franchise
have averaged 6 million viewers per episode and ranked as the number one rated Friday show on cable among adults (18+) for 26 of 29 episode
premieres. The Spartacus franchise has also performed well for our Starz Distribution operating segment. In home video, the Spartacus franchise
has sold approximately 2.9 million units since the first season was released in September 2010. In television, this series is currently licensed in
approximately 200 territories worldwide, representing approximately 60 distinct licenses. Of these licenses, 80% have committed to, or have the
option to license, all seasons of this franchise.
Viewership for the first season of Magic City averaged over 3 million viewers per episode and, according to Nielsen, ranked in the top
10 rated cable programs among adults (18+) on Friday for each of the 8 episode premieres. Viewership for the two seasons of Boss averaged
2.6 million viewers per episode and, according to Nielsen, 11 of the 18 episodes ranked in the top 20 rated cable programs among adults (18+)
on Friday for each of those episode premieres. In November 2012, we made the decision to not renew Boss for a third season.
Transmission
We uplink our programming to five non-preemptible, protected transponders on three satellites positioned in geo-synchronous orbit.
These satellites feed our signals to various swathes of the Americas. We lease these transponders under long-term lease agreements. These
transponder leases have termination dates ranging from 2018 to 2021. We transmit to these satellites from our uplink center in Englewood,
Colorado. We have made arrangements at a third party facility to uplink our linear channels to these satellites in the event we are unable to do so
from our uplink center.
9
Competition
Our programming networks operate in highly competitive markets. We compete with other programming networks, including premium
television network providers HBO/Cinemax, Showtime and EPIX, for viewing and subscribership by each distributor’s customer base. Our
networks compete not only with other programming networks and other content available from our distributors, but also with over-the-air
broadcast television, Internet-based video and other online services, mobile services, radio, print media, motion picture theaters, DVDs, and
other sources of information and entertainment.
We also compete with other content providers to secure desired entertainment programming. The success of our business depends on
our ability to license and produce content for our programming networks that is adequate in quantity and quality and will generate satisfactory
subscriber levels. A portion of our original programming and a majority of our theatrical movie content are obtained through agreements with
other parties that have produced or own the rights to such programming. Other programming networks that are affiliated with programming
sources such as movie or television studios or own film libraries may have a competitive advantage over us in this area. With respect to the
acquisition of programs and movies that are not produced by or specifically for our networks, our competitors include national broadcast
television networks, local broadcast television stations, other premium television networks, other cable programming networks and online video
distributors. Some of these competitors have exclusive contracts with motion picture studios or independent motion picture distributors or own
film libraries.
Regulatory Matters
In the U.S., the FCC regulates broadcasters, the providers of satellite communications services and facilities for the transmission of
programming services, the cable television systems and MVPDs that distribute such services, and, to some extent, the availability of the
programming services themselves through its regulation of program licensing. Cable television systems in the U.S. are also regulated by
municipalities or other state and local government authorities. Cable television systems are currently subject to federal rate regulation on the
provision of basic service, except where subject to effective competition under FCC rules, which has become increasingly widespread.
Continued rate regulation or other franchise conditions could place downward pressure on the fees cable television companies are willing or able
to pay for programming services. Regulatory carriage requirements also could adversely affect the number of channels available to carry our
programming networks.
Regulation of Carriage of Broadcast Stations
The Cable Television Consumer Protection and Competition Act of 1992 (“1992 Cable Act”) granted broadcasters a choice of must
carry rights or retransmission consent rights. The rules adopted by the FCC generally provided for mandatory carriage by cable systems of all
local full-power commercial television broadcast signals selecting must carry rights and, depending on a cable system’s channel capacity, noncommercial television broadcast signals. Such statutorily mandated carriage of broadcast stations coupled with the provisions of the Cable
Communications Policy Act of 1984, which require cable television systems with 36 or more “activated” channels to reserve a percentage of
such channels for commercial use by unaffiliated third parties and permit franchise authorities to require the cable operator to provide channel
capacity, equipment and facilities for public, educational and government access channels, could adversely affect our programming networks by
limiting the carriage of our services in cable systems with limited channel capacity.
Closed Captioning
The Telecommunications Act of 1996 also required the FCC to establish rules and an implementation schedule to ensure that video
programming is fully accessible to the hearing impaired through closed captioning. The rules adopted by the FCC require substantial closed
captioning, with only limited exemptions. In 2012, the FCC adopted regulations pursuant to the Twenty-First Century Communications and
Video Accessibility Act of 2010 that require, among other things, video programming owners to send caption files for Internet protocol (“IP”)
delivered video programming to video programming distributors and providers along with program files. A four year implementation period for
the IP-delivered programming captioning requirements began in March 2012.
Commercial Advertisement Loudness Mitigation (“CALM”) Act
Congress enacted the Commercial Advertisement Loudness Mitigation (“CALM”) Act in 2010. The CALM Act directs the FCC to
incorporate into its rules and make mandatory a technical standard that is designed to prevent digital television commercial advertisements from
being transmitted at louder volumes than the program material they accompany. The FCC’s CALM Act implementing regulations are effective
on December 13, 2012. Although the FCC’s CALM Act
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regulations place the primary compliance responsibility on MVPDs, the FCC’s “safe harbor” compliance approach, which requires programmers
to issue “widely available” CALM Act compliance certifications to MVPDs, effectively shifts that responsibility to programmers.
Copyright Regulation
We are required to obtain any necessary music performance rights from the rights holders. These rights generally are controlled by the
music performance rights organizations of the American Society of Composers, Authors and Publishers (ASCAP), Broadcast Music, Inc. (BMI)
and the Society of European Stage Authors and Composers (SESAC), each with rights to the music of various artists.
Satellites and Uplink
In general, authorization from the FCC must be obtained for the construction and operation of a communications satellite. The FCC
authorizes utilization of satellite orbital slots assigned to the U.S. by the World Radiocommunication Conference. Such slots are finite in
number, thus limiting the number of carriers that can provide satellite transponders and the number of transponders available for transmission of
programming services. At present, however, there are numerous competing satellite service providers that make transponders available for video
services. The FCC also regulates the earth stations uplinking to and/or downlinking from such satellites.
Program Access
Because overlapping attributable interests continue to exist between us and entities owning cable systems, we remain subject to the
FCC’s program access and antidiscrimination rules. The 1992 Cable Act and implementing regulations generally prohibit a cable operator that
has an attributable interest in a satellite programmer from improperly influencing the terms and conditions of sale to unaffiliated MVPDs.
Further, the 1992 Cable Act requires that such affiliated programmers make their programming services available to cable operators and
competing MVPDs on terms and conditions that do not unfairly discriminate among distributors. As part of the FCC’s 2008 order approving Old
LMC’s acquisition of a controlling interest in DIRECTV, the FCC imposed program access conditions on Old LMC and its affiliated entities,
including us. Under this order, as amended by the FCC’s October 5, 2012 order allowing the general restrictions on exclusive contracts to expire,
we are required to make our programming services available to all MVPDs on nondiscriminatory terms and conditions. We are also currently
subject to the program access rules due to interests held by Liberty Global, Inc. in a cable television system in Puerto Rico, which interests are
attributable to us under FCC rules. In 1998, the FCC revised its program licensing rules by implementing a damages remedy in situations where
the defendant knowingly violates the regulations and by establishing a timeline for the resolution of complaints, among other things.
Internet Services
To the extent that our programming services are distributed through Internet-based platforms, we must comply with various federal and
state laws and regulations applicable to online communications and commerce. Congress and individual states may consider additional
legislation addressing online privacy and other issues.
Proposed Changes in Regulation
The regulation of programming services, cable television systems, DBS providers, broadcast television licensees and Internetdistributed services is subject to the political process and has been in constant flux over the past decade. Further material changes in the law and
regulatory requirements must be anticipated and there can be no assurance that our business will not be materially adversely affected by future
legislation, new regulation or deregulation.
STARZ DISTRIBUTION
Our Starz Distribution operating segment includes the operations of our Home Video, Digital Media and Worldwide Distribution
businesses.
Sales and Distribution
Through our majority-owned subsidiary Anchor Bay Entertainment, LLC (“Anchor Bay Entertainment”), our Home Video business
unit sells or rents DVDs (standard definition and Blu-ray™) under the Anchor Bay and Manga brands, in the U.S., Canada, United Kingdom and
Australia and other international territories to the extent we have rights to such content in international territories. Anchor Bay Entertainment
develops and produces certain of its content and also acquires and
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licenses various titles from third parties. Certain of the titles produced or acquired by Anchor Bay Entertainment air on Starz Networks’ Starz
and Encore networks. Anchor Bay Entertainment also distributes other titles acquired or produced by us including the Starz Networks’ original
programming content, Overture Films, LLC’s (“Overture Films”) titles (as discussed below), and TWC’s titles. These titles are sold to and
distributed by regional and national retailers and other distributors, including Wal-Mart, Target, Best Buy, Ingram Entertainment, Amazon and
Netflix. Generally, retailers have the right to return unsold products. Anchor Bay Entertainment records its revenue net of an allowance for
future returns of unsold product.
Our Digital Media business unit is a distributor of digital and on-demand content for our owned content and content for which we have
licensed the non-pay television ancillary rights (including Overture Films’ titles) in the U.S. and throughout the world to the extent we have
rights to such content in international territories. Digital Media receives fees for such services from a wide array of partners and distributors.
These range from traditional MVPDs, Internet/mobile distributors, game developers/publishers and consumer electronics companies. Digital
Media also distributes Starz Networks’ original programming content and TWC’s titles.
Our Worldwide Distribution business unit is a global distributor of movies, television series, documentaries, children’s programming
and other video content. Worldwide Distribution exploits our owned content and content for which we have licensed ancillary rights (including
Overture Films’ titles) on free or pay television in the U.S. and throughout the world on free or pay television and other media to the extent that
we have rights to such content in international territories. Worldwide Distribution also distributes Starz Networks’ original programming
content.
In July 2010, we elected to shut down our theatrical production and distribution operations conducted by our subsidiary Overture Films.
Overture Films’ library of 19 released films was retained by us and will continue to be exploited.
Overture Films produced and acquired live action theatrical motion pictures for release domestically and throughout the world.
Overture Films distributed its movies theatrically in the U.S. Our Starz Distribution operating segment provides home video, digital and
television distribution in the U.S., while Overture Films has entered into distribution agreements with Paramount Pictures and Alliance Atlantis
to distribute its product internationally, to the extent it controls such rights. All of Overture Films’ titles appear on the Starz and Encore networks
during their pay television windows.
Content
Starz Distribution develops and produces certain of its content and also acquires and licenses various titles from third parties. Starz
Distribution also distributes other titles acquired or produced by us, including Starz Networks’ original programming content, Overture Films’
titles and TWC’s titles. Amortization of content acquisition costs and royalty and participation payments to its content licensors represents Starz
Distribution’s largest expense.
Marketing
The majority of Starz Distribution’s marketing is performed by our Home Video business unit. Anchor Bay Entertainment markets and
advertises each title prior to and during release generally through the use of a combination of television and other media related advertising and
discounts, rebates and cooperative advertising with retailers depending on the specific genre, demographic appeal and the overall sales
expectations for the title.
Fox Agreement
In July 2010, Anchor Bay Entertainment outsourced substantially all of its home video fulfillment services, including DVD
manufacturing and distribution, to Twentieth Century Fox Home Entertainment LLC (“Fox”). Previously, Anchor Bay Entertainment had
outsourced substantially all of its home video distribution services, including DVD manufacturing and distribution, to Sony Pictures Home
Entertainment, Inc. Anchor Bay Entertainment does not outsource its sales or marketing functions and maintains its own marketing team and
sales force. Anchor Bay Entertainment believes the agreement with Fox provides supply chain efficiencies due to the combined volume of titles
provided by Anchor Bay Entertainment and Fox (Fox also has fulfillment agreements with Lionsgate and MGM), while not compromising
Anchor Bay Entertainment’s control over its products and retail relationships.
Weinstein Agreement
Effective in January 2011, Anchor Bay Entertainment entered into a five-year license agreement with TWC for the distribution, by our
Home Video and Digital Media business units, of certain of TWC’s theatrical releases. Anchor Bay Entertainment pays advances to TWC based
on a percentage of the U.S. box office and the genre of each film and earns a fee
12
for the distribution of such theatrical releases. Starz Entertainment guarantees Anchor Bay Entertainment’s advance payments to TWC under this
agreement up to $50.0 million.
Competition
Starz Distribution’s markets are highly competitive, especially for DVD sales. Anchor Bay Entertainment competes to sell DVDs
against all of the major Hollywood studios, including Disney, Paramount, Sony, Twentieth Century Fox, Universal and Warner Bros. as well as
smaller studios such as Lionsgate. All of these studios distribute their theatrical, television and other titles acquired from third parties on DVD.
Anchor Bay Entertainment also competes with independent home video distributors, like itself, which are not affiliated with a Hollywood studio
such as Entertainment One, Gaiam Media, RLJ Entertainment and Magnolia Pictures. Like the Hollywood studios, Anchor Bay Entertainment
has a direct vendor relationship with the major North American retailers (such as Wal-Mart, Target, Best Buy, etc.).
Not only does Anchor Bay Entertainment compete with Hollywood studios for ultimate consumer sales of DVDs, but it also competes
with them for “placement” at retailers and other distributors. Placement refers to the location in a store or on a website where Anchor Bay
Entertainment’s content is placed for sale as well as the actual amount of physical shelf space allotted to a release.
Anchor Bay Entertainment competes with Hollywood studios and other DVD distributors to acquire the rights to sell or rent DVDs.
Anchor Bay Entertainment’s ability to license and produce quality content in sufficient quantities has a direct impact on its ability to acquire
shelf space at retail locations and on websites. In addition, Anchor Bay Entertainment’s DVD sales are impacted by the myriad of choices
consumers have to view entertainment content, including over-the-air broadcast television, cable television networks, Internet-based video and
other online services, mobile services, radio, print media, motion picture theaters and other sources of information and entertainment.
STARZ ANIMATION
Our Starz Animation operating segment, through our wholly-owned subsidiary Film Roman, develops and produces two-dimensional
animated content on a for-hire basis for distribution theatrically and on television for various third party entertainment companies.
13
STRATEGY AND CHALLENGES
Our mission is to be a leading global entertainment brand providing powerful and immersive experiences. To that end, our goal is to
provide our distributors and their subscribers with high-quality, differentiated premium video services available on multiple viewing platforms.
Strategy
Our strategy is based on the following four strategic objectives:
Deepen relationships with core network distributors. We have long-term relationships with the largest MVPDs in the U.S. We have
maintained uninterrupted carriage and have been successful in renewing our affiliation agreements with our distributors in the past. Our
increasingly broad content offerings and services help drive the profitability of these distributors. Many of these distributors have included our
Starz and Encore networks in some of their best performing programming packages.
We plan to create valuable new products and services, like our authenticated online offerings Starz Play, Encore Play and MoviePlex
Play , that will assist our distributors in strengthening their product offerings. We expect these efforts to solidify our relationships with our
distributors by assisting us in renewing and extending our affiliation agreements and increasing our subscribers.
Expand our slate of compelling, immersive, and differentiated original programming. We believe that a differentiated network brand
and long-term shareholder value rests on having greater scale and output of exclusive original programming. We continue to look at how we can
best increase the rate of deployment of original programming. Various mechanisms exist to prudently and economically increase original
programming, including enhancing our in-house production capabilities, co-productions, and licensing arrangements. For example, our recent
multi-year agreement with BBC Worldwide Limited enables us to share financial exposure for high quality new productions. Da Vinci’s
Demons , the first original series greenlit under this agreement, will premiere in April 2013.
In 2012, we aired three original series ( Spartacus: Vengeance , Magic City Season 1 and Boss ) and plan to air four original series in
2013 ( Spartacus: War of the Damned , Da Vinci’s Demons , Magic City Season 2 and White Queen) representing a relatively small portion of
our total programming lineup. Over time, we plan to increase our original programming so that our viewers will have an opportunity to see a
new Starz original program or a new season of an existing Starz original throughout the year.
We intend to create unique and fully immersive content ecosystems around our original programming and theatrical movie content such
as authenticated online offerings, second screen and social media integration.
Optimize existing and emerging distribution opportunities. We seek to monetize the digital rights we control for our exclusive original
programming content and those under our programming licensing agreements with the major studios. We look to do this to the fullest extent
possible while maintaining wholesale pricing consistent with the premium nature of our services. We seek opportunities to license services to our
traditional distribution partners, targeting authenticated subscribers, as well as online video providers to the extent such online video providers
include our services in a premium programming tier.
Establish Starz as a leading premium content brand. We intend to increase our Starz brand awareness, perception and loyalty among
our distributors to attract new and retain existing subscribers. To this end, we will continue to focus our marketing efforts on improving the
recognition of our brand as a premier provider of premium entertainment, including compelling original series, as well as first run and classic
Hollywood movies. To enhance our brand recognition, we intend to continue to focus our marketing investment on original series, and utilize
cross-channel advertising with our MVPDs, advertising in select print outlets, online advertising (including social media) and outdoor billboards
in major cities.
14
Challenges
We face certain key challenges in our attempt to achieve our strategic goals, including:
Our ability to renew and extend affiliation agreements with key distributors on favorable terms. During the fourth quarter, we agreed
to multi-year extensions with several of our distributors. The financial terms of the extensions with two distributors are generally less favorable
than the financial terms in the prior affiliation agreements. These less favorable financial terms would have resulted in an approximate reduction
of 3% of Starz Networks’ revenue for the year ended December 31, 2012, on a pro forma basis, had the extended agreements been in effect on
January 1, 2012. The agreements with these two distributors provide for contractually agreed upon increases in the amounts we receive on an
annual basis beginning on the first anniversary of the extensions.
Our ability to continue to acquire or produce affordable programming content, including original programming content that
appeals to our distributors and our viewers. In December 2012, Disney informed us that it would not extend its licensing agreement with us
beyond its expiration on December 31, 2015. We will continue to receive films from Disney’s Walt Disney Pictures, Walt Disney Animation
Studios, Disney-Pixar, Touchstone Pictures, Marvel Entertainment and Hollywood Pictures labels through December 31, 2015 with initial
license periods for such films extending into 2017. We are evaluating our options with respect to replacement of the Disney content following
expiration of the licensing agreement, including the production of additional original content.
We also face certain other challenges in our attempt to meet our strategic goals, including:
•
Potential loss of subscribers due to economic conditions and competition from other networks and video programming services.
•
Potential consolidation of our distributors.
•
Increased rates paid by our distributors to carry broadcast networks and sports networks may make it more difficult for consumers
to afford premium video services.
•
Our distributor’s willingness to market our networks and other services.
•
Our ability to react to changes in viewer habits related to technologies such as DVRs, video-on-demand, Internet-based content
delivery, Blu-ray™ players and mobile devices.
EMPLOYEES
As of December 31, 2012, we had 926 full-time and part-time employees, of which 121 employees are represented by unions. We have
not experienced any work stoppages with respect to our union employees and we consider our employee relations to be good.
CORPORATE INFORMATION
Starz is a Delaware corporation, incorporated on May 7, 2007, with principal executive offices located at 8900 Liberty Circle,
Englewood, Colorado 80112. Our main telephone number at that location is (720) 852-7700.
(d) Financial Information About Geographic Areas
Information about our geographic areas can be found in note 12 to our consolidated financial statements found beginning on page F-2 of
this report.
(e) Available Information
All of Old LMC’s filings with the SEC, including Form 10-Ks, Form 10-Qs and Form 8-Ks, as well as amendments to such filings, are
available on our Internet website free of charge. All of our current and future filings with the SEC are or will be available on our Internet website
free of charge as soon as reasonably practicable after we file such material with the SEC. Our website address is www.starz.com .
15
Our corporate governance guidelines, code of business conduct and ethics, audit committee charter, compensation committee charter
and nominating and corporate governance committee charter are also available on our website. In addition, we will provide a copy of any of
these documents, free of charge, to any shareholder who calls or submits a request in writing to Investor Relations, Starz, 8900 Liberty Circle,
Englewood, Colorado 80112, telephone number (1-855-807-2929).
The information contained on our website is not incorporated by reference herein.
Item 1A. Risk Factors
The risks described below and elsewhere in this Annual Report on Form 10-K are not the only ones facing our company. In the event
any of the following risks actually occurs, our business, financial condition and results of operations could be materially adversely affected. The
risks described below are those that we currently believe may materially affect us. Additional risks not presently known to us, or that we
currently consider immaterial, may also materially adversely affect us.
This Annual Report on Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks described
below and elsewhere in this Annual Report on Form 10-K.
RISKS RELATED TO OUR BUSINESS
If economic instability persists in the U.S. or in other parts of the world, our results of operations could be adversely affected.
Our business is affected by prevailing economic conditions. Financial instability or a general decline in economic conditions in the U.S.
could affect our business in an adverse manner. Decreases in U.S. consumer discretionary spending, which is sensitive to general economic
conditions, may affect cable television and other video service subscriptions, in particular with respect to digital programming packages on
which our Encore and Movieplex networks are sometimes carried and premium video programming packages and premium a-la-carte where our
Starz networks are typically carried. This reduction in spending could lead to a decrease in the number of subscribers to our networks from
MVPDs, which would have a materially adverse impact on our business, financial condition and results of operations.
We depend on MVPDs that carry our programming, and no assurance can be given that we will be able to maintain and renew our
affiliation agreements on favorable terms or at all.
We currently distribute our programming through affiliation agreements with many MVPDs, including Comcast, DIRECTV, Dish
Network, Time Warner Cable, Charter, Cox, Cablevision, AT&T and Verizon. Our affiliation agreements with distributors are scheduled to
expire at various dates through 2019. We agreed to multi-year extensions with several of our distributors during the fourth quarter of 2012. The
financial terms of the extensions with two distributors are generally less favorable than the financial terms in the prior affiliation agreements.
These less favorable financial terms would have resulted in an approximate reduction of 3% of Starz Networks’ revenue for the year ended
December 31, 2012, on a pro forma basis, had the extended agreements been in effect on January 1, 2012. The agreements with each of these
two distributors provide for contractually agreed upon increases in the amounts we receive on an annual basis beginning on the first anniversary
of the extensions. The largest MVPDs have significant leverage in their relationship with certain programming networks. As of September 30,
2012, the two largest cable distributors provided service to approximately 34% of U.S. multichannel households, while the two largest direct
broadcast satellite distributors provided service to an additional 34% of such households. Further consolidation among MVPDs could increase
this leverage.
In some cases, if a distributor is acquired, the affiliation agreement of the acquiring distributor will govern following the acquisition. In
those circumstances, the acquisition of a distributor that is party to affiliation agreements with us that are more favorable to us would adversely
impact our business, financial condition and results of operations.
The renewal negotiation process for affiliation agreements is typically lengthy. In certain cases, renewals are not agreed upon prior to
the expiration of a given agreement, while the programming continues to be carried by the relevant distributor pursuant to the other terms and
conditions in the affiliation agreement. We may be unable to obtain renewals with our current distributors on acceptable terms, if at all. We may
also be unable to successfully negotiate affiliation agreements
16
with new or existing distributors to carry our programming. Although we consider our current levels of distribution pursuant to affiliation
agreements with terms expiring during 2013 to be ordinary course, the failure to successfully renew or negotiate new affiliation agreements
covering a material portion of multichannel television households could result in a discontinuation of carriage that would materially adversely
affect our subscriber growth, revenue and earnings which would materially adversely affect our business, financial condition and results of
operations.
Because a limited number of MVPDs account for a large portion of our business, the loss of any significant distributor would
materially adversely affect our business, financial condition and results of operations.
Our programming networks depend upon agreements with a limited number of MVPDs. For the year ended December 31, 2012,
Comcast and DIRECTV each accounted for at least 10% of Starz’s revenue. The loss of any significant distributor would have a materially
adverse effect on our business, financial condition and results of operations.
Occasionally we have disputes with our distributors over the terms of our carriage, such as how the distributor markets our services
(such as free offers), or other contract terms. If not resolved through business negotiation, such disputes could result in litigation or termination
of an existing agreement. Termination of a significant existing agreement resulting in the loss of distribution of our programming to a material
portion of our multichannel television households would materially adversely affect our subscriber growth, revenue and earnings and have a
materially adverse effect on our business, financial condition and results of operations. See “Item 3. Legal Proceedings.”
Increasing rates paid by MVPDs to other programmers may result in increased rates charged to their subscribers for their services,
making it more costly for subscribers to purchase our Starz and Encore services, which may result in fewer subscribers to our services and
may materially adversely affect our business, financial condition and results of operations.
The amounts paid by MVPDs to certain programming networks for the rights to carry broadcast networks and sports networks have
increased substantially in recent years. As a result, MVPDs have passed on some of these increases to their subscribers. The rates that
subscribers pay for programming from MVPDs continue to increase each year and these increases may impact our ability, as a premium
subscription video provider, to increase or even maintain our subscriber levels and may adversely impact our revenue and earnings which would
have a materially adverse effect on our business, financial condition and results of operations.
We depend on our distributors to market our networks and other services, the lack of which may result in reduced customer demand.
At times, certain of our distributors do not allow us to participate in cooperative marketing campaigns to market our networks and
services. Our inability to participate in the marketing of our networks and other services may put us at a competitive disadvantage. Also, our
distributors are often focused more on marketing their bundled service offerings (video, Internet and telephone) than premium video services. If
our distributors do not sign up new subscribers to our networks, we may lose subscribers which would have a materially adverse effect on our
business, financial condition and results of operations.
We may not be able to adapt to new content distribution platforms and to changes in consumer behavior resulting from these new
technologies, which may materially adversely affect our business, financial condition and results of operations.
We must successfully adapt to technological advances in our industry, including the emergence of alternative distribution platforms.
Our ability to exploit new distribution platforms and viewing technologies will affect our ability to maintain or grow our business and may
increase our capital expenditures. Additionally, we must adapt to changing consumer behavior driven by advances such as digital video recorders
(or “DVRs”), video-on-demand, Internet-based content delivery, Blu-ray™ players and mobile devices. Such changes may impact the revenue
we are able to generate from our traditional distribution methods by decreasing the viewership of our programming networks on cable and other
MVPD systems. If we fail to adapt our distribution methods and content to emerging technologies, our appeal to our targeted audiences might
decline and there would be a materially adverse effect on our business, financial condition and results of operations.
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Our business depends on the appeal of our programming to our distributors and our viewers, which is difficult to predict.
Our business depends in part upon viewer preferences and audience acceptance of the programming on our networks. These factors are
difficult to predict, and subject to influences that are beyond our control, such as the quality and appeal of competing programming, general
economic conditions and the availability of other entertainment activities. We may not be able to anticipate and react effectively to shifts in
tastes and interests in our markets. A change in viewer preferences could cause our programming to decline in popularity, which could
jeopardize renewal of our contracts with MVPDs. In addition, our competitors may have more flexible programming arrangements, as well as
greater amounts of available content, distribution and capital resources, and may be able to react more quickly than we can to shifts in tastes and
interests.
To an increasing extent, the success of our business depends on exclusive original programming and our ability to accurately predict
how audiences will respond to our original programming. Because original programming often involves a greater degree of financial
commitment, as compared to acquired programming that we license from third parties, and because our network branding strategies depend
significantly on a relatively small number of original programs, a failure to anticipate viewer preferences for such programs could be especially
detrimental to our business.
In addition, theatrical feature films constitute a significant portion of the programming on our Starz and Encore programming networks.
In general, the popularity of feature-film content on linear television is declining, due in part to the broad availability of such content through an
increasing number of distribution platforms prior to our linear window. Should the popularity of feature-film programming suffer significant
further declines, we may lose subscribership or be forced to rely more heavily on original programming, which could increase our costs.
If our programming does not gain the level of audience acceptance we expect, or if we are unable to maintain the popularity of our
programming, we may have a diminished negotiating position when dealing with distributors, which could reduce our revenue and earnings. We
cannot assure you that we will be able to maintain the success of any of our current programming, or generate sufficient demand and market
acceptance for our original programming. This would materially adversely impact our business, financial condition and results of operations.
Our programming networks’ success depends upon the availability of programming that is adequate in quantity and quality, and we
may be unable to secure or maintain such programming.
Our programming networks’ success depends upon the availability of quality programming, particularly original programming and
films, that is suitable for our target markets. While we produce some of our original programming, we obtain most of our programming
(including some of our original programming, films and other acquired programming) through agreements with third parties that have produced
or control the rights to such programming. These agreements expire at varying times and may be terminated by the other party if we are not in
compliance with their terms.
We compete with other programming networks to secure desired programming. Competition for programming has increased as the
number of programming networks has increased. Other programming networks that are affiliated with programming sources such as movie or
television studios or film libraries may have a competitive advantage over us in this area. In addition to other cable programming networks, we
also compete for programming with national broadcast television networks, local broadcast television stations video-on-demand services and
Internet-based content delivery services such as Netflix, iTunes, Amazon and Hulu. Some of these competitors have exclusive contracts with
motion picture studios or independent motion picture distributors or own film libraries. In December 2012, Disney informed us that it would not
extend its licensing agreement with us beyond its expiration on December 31, 2015. We will continue to receive films from Disney’s Walt
Disney Pictures, Walt Disney Animation Studios, Disney-Pixar, Touchstone Pictures, Marvel Entertainment and Hollywood Pictures labels
through December 31, 2015 with initial license periods for such films extending into 2017. We are evaluating our options with respect to
replacement of the Disney content following expiration of the licensing agreement, including the production of additional original content.
We cannot assure you that we will ultimately be successful in negotiating renewals of our programming rights agreements or in
negotiating adequate substitute agreements. In the event that these agreements expire or are terminated and are not replaced by programming
content, including additional original programming, acceptable to our distributors and subscribers, it would have a materially adverse impact on
our business, financial condition and results of operations.
18
We have entered into long-term output licensing agreements that require substantial payments over long periods of time.
We have entered into long-term agreements to acquire theatrical releases from Disney and Sony. Such agreements expire at
December 31, 2015 and 2021, respectively. Each agreement requires us to pay for films released by each studio at rates calculated on a pricing
grid that is based on the film’s domestic box office performance (subject to maximum amounts payable per film and a cap on the maximum
number of films that can be put to us each year), and the amounts payable over the term of the respective agreements will be substantial. We
believe that the theatrical performance of the films we will receive under the agreements will perform at levels consistent with the performance
of films we have received from Disney and Sony in the past. We also assume a certain number of annual releases of first run films by Disney and
Sony’s studios consistent with the number we received in 2012. Should the films perform at higher levels across the slate of films we receive or
the quantity of films increase, then our payment obligations under these agreements would increase and would have a materially adverse effect
on our business, financial condition and results of operations.
Changes in foreign, state and local tax incentives may increase the cost of original programming content to such an extent that they
are no longer feasible.
Original programming requires substantial financial commitment. In some cases the financial commitment can be offset by foreign,
state or local tax incentives. However, there is a risk as the result of current economic conditions that the tax incentives will not remain available
for the duration of a series. If tax incentives are no longer available or reduced substantially, it may result in increased costs for us to complete
the production or make the production of additional seasons more expensive. If we are unable to produce original programming content on a cost
effective basis our business, financial condition and results of operations may be materially adversely affected.
We are subject to intense competition, which may have a negative effect on our profitability or on our ability to expand our business.
The cable programming industry is highly competitive. Our Starz and Encore networks compete with other programming networks and
other types of video programming services for marketing and distribution by MVPDs. We face competition from other providers of
programming networks for the right to be carried by a particular MVPD and for the right to be carried by such distributor on a particular “tier” or
in a particular “package” of service.
Certain programming networks affiliated with broadcast networks like ABC, CBS, Fox or NBC or other programming networks
affiliated with sports and certain general entertainment networks with strong viewer ratings have a competitive advantage over our programming
networks in obtaining distribution through the “bundling” of carriage agreements for such programming networks with a distributor’s right to
carry the affiliated broadcasting network. In addition, our ability to compete with certain programming networks for distribution may be
hampered because the MVPDs through which we seek distribution may be affiliated with these programming networks. Because such
distributors may have a substantial number of subscribers, the ability of such programming networks to obtain distribution on the systems of
affiliated distributors may lead to increased revenue for these programming networks because of their increased penetration compared to our
programming networks. Even if the affiliated distributors carry our programming networks, they may place their affiliated programming network
on a more desirable tier or programming package, thereby giving their affiliated programming network a competitive advantage over our own
which would have a materially adverse effect on our business, financial condition and results of operations.
Any continued or permanent inability to transmit our programming via satellite would result in lost revenue and could result in lost
subscribers.
Our success is dependent upon our continued ability to transmit our programming to MVPDs from our satellite uplink facility, which
transmissions are subject to FCC compliance in the U.S. We have entered into long-term satellite transponder leases that expire between 2018
and 2021 in the U.S. for carriage of our network’s programming. These leases provide for the continued carriage of our programming on
available replacement transponders and/or replacement satellites, as applicable, throughout the term of the leases, in the event of a failure of
either the transponders and/or satellites currently carrying our programming. Although we believe we take reasonable and customary measures to
ensure continued satellite transmission capability, termination or interruption of satellite transmissions may occur and would have a materially
adverse effect on our business, financial condition and results of operations.
19
Despite our efforts to secure transponder capacity with long-term satellite transponder leases, there is a risk that when these leases
expire, we may not be able to secure capacity on a transponder or may not be able to secure capacity on a transponder on the same or similar
terms. This may result in an inability to transmit the content and could result in significant lost revenue and lost subscribers and would have a
materially adverse effect on our business, financial condition and results of operations.
If our technology facility fails or its operations are disrupted, our performance could be hindered.
Our programming is transmitted from our uplink center in Englewood, Colorado. We use this center for a variety of purposes, including
signal processing, satellite uplinking, program editing, promotions, creation of programming segments (i.e., interstitials) to fill short gaps
between featured programs, quality control, and live and recorded playback. Like other facilities, this facility is subject to interruption from fire,
lightning, adverse weather conditions and other natural causes. Equipment failure, employee misconduct or outside interference could also
disrupt the facility’s services. We have made arrangements at a third party facility to uplink our linear channels to our satellites in the event we
are unable to do so from this facility. However, any significant interruption at our facility, and any failure by our third party facility to perform as
intended, could have a materially adverse effect on our business, financial condition and results of operations.
Piracy of films and television programs is an increasingly prevalent problem and could adversely affect our business over time.
Piracy is prevalent in many parts of the world and has been made easier in recent years by the availability of digital copies of content
and technological advances allowing conversion of films into digital formats, which facilitates the creation, transmission and sharing of high
quality unauthorized copies of films. Piracy has long-term implications for our business, as it may eventually force film studios to invest less in
films, resulting in the release of fewer films and/or an increase in the use of other channels for releasing films. If film piracy were to increase, it
would have a materially adverse effect on our business, financial condition and results of operations.
We may fail to adequately protect our intellectual property rights or may be accused of infringing intellectual property rights of third
parties.
We regard our intellectual property rights, including service marks, trademarks, domain names, copyrights (including our programming
and our websites), trade secrets and similar intellectual property, as critical to our success. Our business also relies heavily upon software codes,
informational databases and other components that aide in the provision of our networks to our MVPDs.
From time to time, we are subject to legal proceedings and claims in the ordinary course of business, including claims of alleged
infringement of the trademarks, patents, copyrights and other intellectual property rights of third parties. In addition, litigation may be necessary
to enforce our intellectual property rights, protect trade secrets or to determine the validity and scope of proprietary rights claimed by others.
Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical
resources, any of which could adversely affect our business, financial condition and results of operations. Our failure to protect our intellectual
property rights, particularly our brand, in a meaningful manner or challenges to related contractual rights could result in erosion of our brand and
limit our ability to control marketing of our networks, which could have a materially adverse effect on our business, financial condition and
results of operations.
The loss of any of our key personnel and artistic talent could adversely affect our business.
We believe that our future success will depend to a significant extent upon the performance of our senior executives. We do not
maintain “key man” insurance. In addition, we depend on the availability of a number of writers, directors, producers and others, who are
employees of third-party production companies that create our original programming. The loss of any significant personnel or talent could have a
materially adverse effect on our business, financial condition and results of operations.
20
Labor disputes may disrupt our operations and adversely affect the profitability of our business.
Certain of our production employees at our Film Roman subsidiary are covered by collective bargaining agreements. In addition, our
content providers’ talent, including writers, directors, actors and production personnel and those working on our original productions, may be
covered by labor agreements. In general, a labor dispute involving our employees, the employees of our subsidiaries, or talent involved in
content production at our content providers or working on our original productions may disrupt our operations or result in work stoppages. Labor
disputes may impair our ability to complete our original productions or restrict our access to available content, resulting in increased costs and
decreased revenue which would have an adverse effect on our business, financial condition and results of operations. The resolution of labor
disputes can be costly. Additionally, we cannot assure that we will renew our collective bargaining agreements as they expire or that we can
renew them on favorable terms without any work stoppages. Such labor disputes may have a materially adverse effect on our business, financial
condition and results of operations.
Our business is limited by regulatory constraints which may adversely impact our operations.
Although our business generally is not directly regulated by the FCC, under the Communications Act of 1934 and the 1992 Cable Act,
there are certain FCC regulations that govern our business either directly or indirectly. See “(c) Narrative Description of Business - Regulatory
Matters.” Furthermore, to the extent that regulations and laws, either presently in force or proposed, hinder or stimulate the growth of the cable
television and satellite industries, our business will be affected.
The regulation of cable television services and satellite carriers is subject to the political process and has been in constant flux over the
past two decades. Further material changes in the law and regulatory requirements must be anticipated. We cannot assure you that we will be
able to anticipate material changes in laws or regulatory requirements or that future legislation, new regulation or deregulation will not have a
materially adverse effect on our business, financial condition and results of operations.
Our Starz Distribution operating segment is subject to intense competition, which may have a materially adverse effect on our
profitability or on our ability to expand our business.
The home entertainment industry is highly competitive. Our Home Video, Digital Media and Worldwide Distribution businesses
compete to sell DVDs and other media (e.g., digital and television programs) with all of the major Hollywood studios, including Disney,
Paramount, Sony, Twentieth Century Fox, Universal and Warner Bros. as well as smaller studios such as Lionsgate. All of these studios
distribute their theatrical, television and titles acquired from third parties on DVD and other media and have marketing budgets that are well in
excess of the amounts we are able to spend to market our content. We also compete with independent home entertainment distributors that are
not affiliated with a Hollywood studio such as Entertainment One, Gaiam Media, RLJ Entertainment and Magnolia Pictures.
In addition to competing with these parties for ultimate consumer sales of DVDs and other media, we also compete with them for
“placement” at retailers and other distributors. Placement refers to the location in a store or on a website where our content is placed for sale as
well as the actual amount of physical shelf space allotted to a release. The better the location and the more space we are allotted the greater the
chance our content will be seen by the consumer and ultimately purchased. The quality and quantity of titles as well as the quality of our
marketing programs determines how much shelf space we are able to garner at any given time as retailers and other distributors look to
maximize DVD and other media sales.
We compete with Hollywood studios and other distributors that may have certain competitive advantages over us to acquire the rights
to sell or rent DVDs and other media. Our ability to license and produce quality content in sufficient quantities has a direct impact on our ability
to acquire shelf space at retail locations and on websites. Some of our competitors, including the Hollywood studios, are large publicly held
companies that have greater financial resources than we do. In addition, most of our content is obtained through agreements with other parties
that have produced or own the rights to such content, while Hollywood studios produce most of the content they distribute.
Our DVD sales and other media sales are also impacted by the myriad of choices consumers have to view entertainment content,
including over-the-air broadcast television, cable television networks, Internet-based video and other online services, mobile services, radio,
print media, motion picture theaters and other sources of information and entertainment. The increasing availability of content from these
varying media outlets may reduce our ability to sell DVDs and other media in the future, particularly during difficult economic conditions such
as we have seen in the past couple of years.
21
RISKS RELATED TO THE SPIN-OFF
We may be subject to significant obligations related to the Spin-Off.
In connection with the Spin-Off, Old LMC received an IRS private letter ruling (the “Ruling”) and an opinion of tax counsel, in each
case to the effect that the Spin-Off would qualify as a tax-free transaction under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code
(the “Code”). Although the Ruling is generally binding on the IRS, the Ruling does not address certain requirements necessary to obtain tax-free
treatment to Starz and its shareholders as a result of the IRS’s ruling policy with respect to transactions under Section 355 of the Code (and
instead is based upon representations made by Old LMC that these requirements have been satisfied), and the continuing validity of the Ruling is
subject to the accuracy of representations and factual statements made by Old LMC to the IRS. Further, an opinion of tax counsel is not binding
on the IRS or the courts, and the conclusions expressed in such opinion could be challenged by the IRS, and a court could sustain such challenge.
If it is subsequently determined, for whatever reason, that the Spin-Off does not qualify for tax-free treatment, Starz and the holders of its
common stock could incur significant tax liabilities.
Prior to the Spin-Off, Old LMC entered into a tax sharing agreement with Liberty Spinco, now New LMC. Under this agreement, New
LMC is generally required to indemnify Starz for any or all of the tax liabilities resulting from the Spin-Off if the Spin-Off fails to be a tax-free
transaction. Starz, however, as the taxpaying entity, is subject to the risk of non-payment by New LMC of its indemnification obligations.
Additionally, the tax sharing agreement contains a number of covenants by Starz not to take any action, or fail to take any action, following the
Spin-Off, which action or failure to act is inconsistent with the Spin-Off qualifying as a tax-free transaction. Any breach of these covenants or
the application of Section 355(e) of the Code to the Spin-Off as a result of the Spin-Off being part of a plan (or series of related transactions)
pursuant to which one or more persons acquire a 50-percent or greater interest (measured by vote or value) in the stock of Starz could cause the
entirety of the tax liabilities associated with the Spin-Off to be the obligation of Starz for which no indemnification would be available from New
LMC. As a result, Starz might determine to forego certain transactions that might have otherwise been advantageous in order to preserve the taxfree treatment of the Spin-Off, including share repurchases, stock issuances, certain asset dispositions or other strategic transactions for some
period of time following the Spin-Off. In particular, Starz might determine to continue to operate certain of its business operations for the
foreseeable future even if a sale or discontinuance of such business might have otherwise been advantageous. In addition, Starz’s obligations
under the tax sharing agreement might discourage, delay or prevent a change of control transaction for some period of time following the SpinOff.
Starz will have no assets other than those of Starz, LLC and its subsidiaries with which to honor any of its obligations to New LMC or
the IRS, as described above.
Conflicts of interest may arise between our company and our former parent company, Liberty Interactive Corporation (“LIC”), or
New LMC.
We own and operate programming services that may compete with programming services offered by LIC. Old LMC and its subsidiaries
(including Starz, LLC) were subsidiaries of LIC until the September 2011 split-off of Old LMC. QVC, a wholly-owned subsidiary of LIC, and
Starz both produce programming that is distributed via cable and satellite networks. We have no rights in respect of programming or distribution
opportunities developed by or presented to QVC and the pursuit of these opportunities by QVC may adversely affect our interests or those of our
stockholders. Because Gregory B. Maffei is the Chairman of the Board of our company and the President and Chief Executive Officer, and a
director, of LIC, a business opportunity that is presented to him may result in a conflict of interest or the appearance of a conflict of interest.
Each of our directors and officers has a fiduciary duty to offer to our company any business opportunity that he or she may be presented in which
we have an interest or expectancy. The directors and officers of other issuers, including those who are also our directors and officers, owe the
same fiduciary duty to such other issuers and their respective stockholders. In addition, Mr. Maffei is also the President and Chief Executive, and
a director, of New LMC. Another member of our board, Charles Y. Tanabe, is a former executive officer of LIC and New LMC. These two
directors continue to own LIC and New LMC stock and options to purchase LIC and New LMC stock, as well as Starz stock and options to
purchase Starz stock. Management cross ownership interests could create, or appear to create, potential conflicts of interest when these
individuals consider decisions that could have different implications for our company, on the one hand, and LIC or New LMC, on the other
hand. Any potential conflict that qualifies as a “related party transaction” (as defined in Item 404 of Regulation S-K) is subject to review by an
independent committee of the applicable issuer's board of directors in accordance with its corporate governance guidelines. Any other potential
conflicts that arise will be addressed on a case-by-case basis, keeping in mind the applicable fiduciary duties owed by the executive officers and
directors of each issuer. From time to time, our company or our subsidiaries may enter into transactions with LIC or New LMC or any of their
respective subsidiaries or affiliates. Although
22
the terms of any such transactions or agreements will be established based upon arms'-length negotiations between the companies involved, there
can be no assurance that the terms of any such transactions will be as favorable to Starz or its subsidiaries as would be the case if there were no
overlap in management.
RISKS RELATED TO OUR INDEBTEDNESS
We have a substantial amount of indebtedness, which could adversely affect our financial position and prevent us from fulfilling
our debt obligations.
We have a substantial amount of indebtedness. As of December 31, 2012, we had total debt of $539.8 million, consisting of
$500.0 million of Senior Notes, $5.0 million of borrowings under Starz, LLC’s senior secured revolving credit facility and $34.8 million of
capital lease obligations. We also have an additional $995.0 million available for borrowing under Starz, LLC’s senior secured revolving credit
facility as of that date. On January 10, 2013, Starz, LLC distributed $1.2 billion to Old LMC in connection with the Spin-Off, utilizing cash on
hand and $550.0 million of borrowings under its senior secured revolving credit facility, and such distributed cash was contributed to New LMC.
Effective January 11, 2013, in connection with the Spin-Off, we distributed our Englewood, Colorado corporate office building and
related building improvements to Old LMC (and Old LMC subsequently transferred such building and related improvements to Liberty Property
Holdings, Inc. (“LPH”), now a subsidiary of New LMC) and leased back the use of such facilities from LPH. In connection with such leaseback,
we incurred a capital lease obligation of $44.8 million.
On February 8, 2013, Starz, LLC and Starz Finance Corp. completed the issuance of the New Notes, which were issued as additional
notes under the indenture governing the Senior Notes. The net proceeds from the issuance of the New Notes were used to repay indebtedness
under Starz, LLC’s senior secured revolving credit facility.
We may incur significant additional indebtedness in the future.
Our level of indebtedness could limit our flexibility in responding to current market conditions, and could have a materially adverse
effect on our financial position, preventing us from meeting our obligations under our debt instruments or otherwise restricting our business
activities.
The existence of and limitations on the availability of our debt could have important consequences. The existence of debt could, among
other things:
•
require a substantial portion of our net cash provided by operating activities to be dedicated to the payment of principal and interest
on our indebtedness;
•
limit our ability to use net cash provided by operating activities or obtain additional financing for future working capital, capital
expenditures or other general corporate purposes, which reduces the funds available to us for operations and any future business
opportunities;
•
increase our vulnerability to general economic and industry conditions;
•
expose us to the risk of increased interest rates because certain of our borrowings, including borrowings under our senior secured
credit facilities, are at variable interest rates; and
•
cause our content providers and distributors to attempt to use our significant debt levels in order to put pricing pressure on us
during negotiations of affiliation and output licensing agreements.
Limitations imposed as a part of our debt, such as the availability of credit and the existence of restrictive covenants may, among other
things:
•
make it difficult for us to satisfy our financial obligations, including making scheduled principal and interest payments on the
Senior Notes, the New Notes and our other indebtedness;
•
restrict us from making strategic acquisitions or cause us to make non-strategic divestitures;
23
•
limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions or other general business
purposes on satisfactory terms or at all;
•
limit our flexibility to plan for, or react to, changes in our business and industry;
•
place us at a competitive disadvantage compared to our less leveraged competitors; and
•
limit our ability to respond to business opportunities.
We may not be able to generate sufficient net cash provided by operating activities to service our debt obligations and may be forced
to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make payments on our indebtedness will depend on our financial and operating performance, which is subject to
prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may be unable to
maintain a level of net cash provided by operating activities sufficient to permit us to pay the principal and interest on our indebtedness,
including Starz, LLC’s senior secured revolving credit facility, Senior Notes and New Notes.
If our net cash provided by operating activities and capital resources are insufficient to fund our debt service obligations, we may be
forced to reduce or delay investments in original programming and capital expenditures, or to dispose of material assets or operations, seek
additional capital or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the
capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to
comply with more onerous covenants, which could further restrict our business operations. Additionally, we may not be able to consummate
asset dispositions or obtain the proceeds that we expect to realize from them, and any proceeds received may not be adequate to meet any debt
service obligations then due. The terms of the indenture governing Starz, LLC’s Senior Notes, the agreements governing Starz, LLC’s senior
secured revolving credit facility and future debt instruments may restrict us from adopting some of these alternatives. In addition, any failure to
make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating,
which could harm our ability to incur additional indebtedness.
Covenants in our debt agreements will restrict our business in many ways.
Our senior secured revolving credit facility, Senior Notes and New Notes contain various covenants that limit our ability and/or our
restricted subsidiaries’ ability to, among other things:
•
incur additional indebtedness;
•
create liens on property or assets;
•
make certain loans or investments;
•
sell or dispose of assets;
•
pay certain dividends and other restricted payments;
•
dissolve, consolidate or merge;
•
enter into certain transactions with affiliates;
•
enter into sale/leaseback transactions; and
•
restrict subsidiary distributions.
Our senior secured revolving credit facility, Senior Notes and New Notes contain restrictive covenants and our senior secured revolving
credit facility requires us to maintain specified financial ratios. Our ability to meet those financial ratios can be affected by events beyond our
control, and we may be unable to meet those tests. A breach of any of these covenants could result in a default under our senior secured
revolving credit facility, which in turn could result in a default
24
under the indenture governing our Senior Notes and New Notes. Upon the occurrence of an event of default under our senior secured revolving
credit facility, the lenders could elect to declare all amounts outstanding under our senior secured revolving credit facility to be immediately due
and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against
the collateral granted to them to secure that indebtedness. We have pledged our membership interest and the equity interests of our material
restricted subsidiaries as collateral under our senior secured revolving credit facility. If the lenders and counterparties under our senior secured
revolving credit facility accelerate the repayment of obligations, we may not have sufficient assets to repay our senior secured revolving credit
facility, and our other indebtedness. Our borrowings under our senior secured revolving credit facility are, and are expected to continue to be, at
variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness
would increase even though the amount borrowed remained the same, and our net income and cash on hand would decrease.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
In connection with the Spin-Off, Starz, LLC distributed its corporate office building and related building improvements located in
Englewood, Colorado to Old LMC (and Old LMC transferred such building and related improvements to a subsidiary of New LMC) and entered
into a capital lease to lease back the facilities from this New LMC subsidiary. In addition, we lease office space for executive offices and
distribution and sales operations in Atlanta, Georgia, Beverly Hills, California, Burbank, California, Media, Pennsylvania, New York, New
York, Troy, Michigan, Toronto, Ontario, London, England and Melbourne and Sydney, Australia.
Item 3. Legal Proceedings
On March 9, 2011, Starz Entertainment notified DISH Network L.L.C. (“DISH”) that DISH breached its affiliation agreement with
Starz Entertainment by providing a free preview for one year of eight of the Starz and Encore channels to a substantial number of DISH
customers without Starz Entertainment’s written approval. On May 3, 2011, Starz Entertainment filed a lawsuit against DISH in Douglas
County, Colorado District Court, 18th Judicial District, alleging that DISH breached its affiliation agreement with Starz Entertainment in
connection with such free preview and seeking damages for breach of contract. On May 2, 2011, Disney Enterprises, Inc. filed a lawsuit against
DISH in connection with the same free preview in U.S. District Court for the Southern District of New York, seeking damages for copyright
infringement. In addition, on July 19, 2011, FX Networks filed a separate lawsuit against DISH and Starz Entertainment in connection with the
same free preview in Los Angeles County, California Superior Court, seeking damages for tortious interference with its contracts for studio
movie content. DISH filed a counterclaim against Starz Entertainment in the first lawsuit, seeking indemnification from Starz Entertainment
against Disney Enterprises, Inc. in the second lawsuit and against FX Networks in the third lawsuit. The first lawsuit by Starz Entertainment
against DISH is expected to go to trial in April 2013. The third lawsuit by FX Networks is presently stayed and is tentatively set for trial in
October 2013. The resolution of these matters and its potential impact on Starz is uncertain at this time.
In the normal course of business, we are subject to lawsuits and other claims, including claims of alleged infringement of the
trademarks, patents, copyrights and other intellectual property rights of third parties. While it is not possible to predict the outcome of these
matters, it is the opinion of management, based upon consultation with legal counsel, that the ultimate disposition of known proceedings will not
have a material adverse impact on our consolidated financial position, results of operations or liquidity.
Item 4. Mine Safety Disclosures
Not applicable.
25
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Not applicable. Starz’s common stock (ticker symbols STRZA and STRZB) did not begin trading until January 14, 2013 (after the
Spin-Off).
Item 6. Selected Financial Data
In accordance with GAAP, New LMC was determined to be the accounting successor to Old LMC for financial reporting purposes
following the Spin-Off due to the relative significance of New LMC to Starz (which is the legal spinnor) and the continued involvement of Old
LMC’s senior management with New LMC following the Spin-Off. Accordingly, the historical financial statements of Old LMC prior to the
Spin-Off will continue to be the historical financial statements of New LMC and Starz’s historical financial information will be deemed to be the
financial information of Starz, LLC. The financial statements of Starz reflect Starz, LLC on a historical cost basis. Starz, LLC is the only directly
owned subsidiary of Starz which in turn owns either directly or indirectly various operating subsidiaries. Starz is a holding company with no
assets, liabilities or operations other than those of Starz, LLC. Accordingly, the financial position, results of operations, comprehensive income
and cash flows of Starz and Starz, LLC are identical.
The statement of operations, balance sheet and other financial data included in the following selected historical consolidated financial
data as of December 31, 2012 and 2011 and for each year in the three-year period ended December 31, 2012 have been derived from the audited
annual consolidated financial statements of Starz included elsewhere in this annual report. The balance sheet data as of December 31, 2010 and
2009 and the statement of operations and other financial data for the years ended December 31, 2009 and 2008 have been derived from the
audited annual consolidated financial statements of Starz which are not included in this annual report. The balance sheet data included in the
following selected historical consolidated financial data as of December 31, 2008 has been derived from the unaudited annual consolidated
financial statements of Starz which are not included in this annual report. The selected historical consolidated financial data presented below
should be read in conjunction with the consolidated financial statements included elsewhere in this annual report and with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
26
Statement of Operations Data (in thousands)
Fiscal Year Ended December 31,
2012
2011
2010
2009
2008
1,419,074 $
211,622
1,630,696
1,372,141 $
241,892
1,614,033
1,380,349 $
224,988
1,605,337
1,354,978 $
167,619
1,522,597
661,157
192,340
63,880
53,410
105,674
109,403
651,249
158,789
62,440
53,703
132,183
106,081
647,817
177,954
69,815
73,260
175,417
125,421
641,477
107,122
63,296
79,963
229,335
121,792
20,022
19,406
—
1,225,292
405,404
7,078
17,907
—
1,189,430
424,603
39,468
20,468
—
1,329,620
275,717
35,142
23,470
—
1,301,597
221,000
Revenue:
Programming networks and other services
Home video net sales
Total revenue
Costs and expenses:
$
Programming costs (including amortization)
Production and acquisition costs (including amortization)
Home video cost of sales
Operating expenses
Advertising and marketing
General and administrative
Stock compensation, long-term incentive plan and phantom stock
appreciation rights
Depreciation and amortization
Impairment of goodwill and other assets
Total costs and expenses
Operating income (loss)
Other income (expense):
Interest expense, including amounts due to affiliates, net of amounts
capitalized
Other income (expense), net
Income (loss) from continuing operations before income taxes
Income tax benefit (expense)
Income (loss) from continuing operations
$
(25,688)
3,023
382,739
(130,465)
252,274 $
(5,012)
(3,505)
416,086
(172,189)
243,897 $
(20,932)
(542)
254,243
(98,764)
155,479 $
1,253,081
160,140
1,413,221
660,322
95,888
83,420
75,122
259,174
129,290
23,127
27,448
1,432,101
2,785,892
(1,372,671)
(27,188)
(4,719)
189,093
(71,006)
118,087 $
(38,836)
(6,899)
(1,418,406)
62,077
(1,356,329)
Balance Sheet Data (in thousands)
As of December 31,
2012
2011
2010
2009
2008
(unaudited)
Cash and cash equivalents
Program rights(1)
Investment in films and television programs
Total assets
Total debt(2)
Member’s interest
$
$
$
$
$
$
749,774
678,689
181,673
2,176,050
539,805
1,311,951
27
$
$
$
$
$
$
1,099,887
761,850
183,942
2,603,175
545,044
1,651,484
$
$
$
$
$
$
315,652
734,077
120,701
1,893,002
99,214
1,508,681
$
$
$
$
$
$
258,895
786,757
167,640
2,022,595
582,458
1,469,898
$
$
$
$
$
$
117,997
841,794
141,048
1,977,829
561,649
1,414,943
Other Financial Data (in thousands)
Fiscal Year Ended December 31,
2012
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Ratio of total debt to Adjusted OIBDA(3)
Adjusted OIBDA(4)
$
$
$
$
2011
292,077
(16,214)
(626,101)
1.2x
444,832
$
$
$
2010
347,973
(7,723)
444,002
1.2x
449,588
$
$
$
$
$
2009
191,139
(7,099)
(128,414)
0.3x
335,653
$
$
$
$
2008
212,076
(10,018)
(75,070)
2.1x
279,612
$
$
$
$
95,823
(7,565)
(81,318)
5.1x
110,005
Selected Operating Data (in millions)
As of December 31,
2012
Starz subscribers
Encore subscribers
___________________
(1)
Total of current and long-term program rights.
2011
21.2
34.8
2010
19.6
33.2
2009
18.2
32.8
2008
16.9
30.6
17.7
31.7
(2)
Total of current and long-term portions of debt and capital lease obligations.
(3)
Ratio is calculated based on total debt divided by Adjusted OIBDA.
(4)
The following table provides a reconciliation of total Adjusted OIBDA to income (loss) from continuing operations before income taxes
(in thousands):
Fiscal Year Ended December 31,
Adjusted OIBDA
$
Stock compensation, long-term incentive plan and phantom stock
appreciation rights
Depreciation and amortization
Impairment of goodwill and other assets
Interest expense, including amounts due to affiliate, net of
amounts capitalized
Other income (expense), net
Income (loss) from continuing operations before income taxes
$
2012
2011
2010
2009
2008
(unaudited)
(unaudited)
(unaudited)
(unaudited)
(unaudited)
444,832 $
449,588 $
335,653 $
279,612 $
110,005
(20,022)
(19,406)
—
(7,078)
(17,907)
—
(39,468)
(20,468)
—
(35,142)
(23,470)
—
(23,127)
(27,448)
(1,432,101)
(25,688)
3,023
382,739 $
(5,012)
(3,505)
416,086 $
(20,932)
(542)
254,243 $
(27,188)
(4,719)
189,093 $
(38,836)
(6,899)
(1,418,406)
For an explanation of Adjusted OIBDA, a non-GAAP financial measure, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Adjusted Operating Income before Depreciation and Amortization (Adjusted OIBDA).”
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In accordance with GAAP, New LMC was determined to be the accounting successor to Old LMC for financial reporting purposes
following the Spin-Off due to the relative significance of New LMC to Starz (which is the legal spinnor) and the continued involvement of Old
LMC’s senior management with New LMC following the Spin-Off. Accordingly, the historical financial statements of Old LMC prior to the
Spin-Off will continue to be the historical financial statements of New LMC and Starz’s historical financial information will be deemed to be the
financial information of Starz, LLC. The financial statements of Starz reflect Starz, LLC on a historical cost basis. Starz, LLC is the only directly
owned subsidiary of Starz which in turn owns either directly or indirectly various operating subsidiaries. Starz is a holding company with no
assets, liabilities or operations other than those of Starz, LLC. Accordingly, the financial position, results of operations, comprehensive income
and cash flows of Starz and Starz, LLC are identical.
28
Management’s discussion and analysis, or MD&A, of the results of operations and financial condition is provided as a supplement to
the audited annual consolidated financial statements and notes thereto included elsewhere herein to help provide an understanding of our
financial condition, changes in financial condition and results of operations. The information included in this MD&A should be read in
conjunction with the consolidated financial statements included in this Annual Report on Form 10-K as well as the financial data set forth under
“Selected Historical Consolidated Financial and Other Data.” For an overview of Starz and discussion of our business, including our strategy and
challenges, see “Item 1. Business.”
ADJUSTED OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION (ADJUSTED OIBDA)
We evaluate performance and make decisions about allocating resources to our operating segments based on financial measures such as
Adjusted OIBDA. We define Adjusted OIBDA as: revenue less programming costs, production and acquisition costs, home video cost of sales,
operating expenses, advertising and marketing costs and general and administrative expenses. Our chief operating decision maker uses this
measure of performance in conjunction with other measures to evaluate our operating segments and make decisions about allocating resources
among our operating segments. We believe that Adjusted OIBDA is an important indicator of the operational strength and performance of our
operating segments, including each operating segment’s ability to assist in servicing our debt and fund investments in films and television
programs. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking
between operating segments and identify strategies to improve performance. This measure of performance excludes stock compensation, longterm incentive plan and phantom stock appreciation rights, depreciation and amortization and impairment of goodwill and other assets that are
included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not
as a substitute for, operating income, income from continuing operations before income taxes, net income, net cash provided by operating
activities and other measures of financial performance prepared in accordance with GAAP. The primary material limitations associated with the
use of Adjusted OIBDA as compared to GAAP results are (i) it may not be comparable to similarly titled measures used by other companies in
our industry, and (ii) it excludes financial information that some may consider important in evaluating our performance. We compensate for
these limitations by providing a reconciliation of Adjusted OIBDA to GAAP results to enable investors to perform their own analysis of our
operating results.
The tables below set forth, for the periods presented, certain historical financial information for our reportable segments (in thousands).
We generally account for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices.
Year Ended December 31,
2012
Revenue
Starz Networks
Starz Distribution
Starz Animation
Inter-segment eliminations
$
$
2011
2010
1,276,815 $
320,671
42,436
(9,226)
1,630,696 $
1,269,924 $
310,927
45,273
(12,091)
1,614,033 $
1,224,136
367,477
50,007
(36,283)
1,605,337
447,368 $
(4,926)
(932)
3,322
444,832 $
427,689 $
4,567
(850)
18,182
449,588 $
416,390
(66,182)
(2,419)
(12,136)
335,653
Adjusted OIBDA
$
Starz Networks
Starz Distribution
Starz Animation
Inter-segment eliminations
$
29
The following table provides a reconciliation of Adjusted OIBDA to income from continuing operations before income taxes (in
thousands):
Year Ended December 31,
2012
Adjusted OIBDA
Stock compensation, long-term incentive plan and phantom stock appreciation
rights
Depreciation and amortization
Interest expense, including amounts due to affiliates, net of amounts capitalized
Other income (expense), net
Income from continuing operations before income taxes
30
2011
2010
$
444,832 $
449,588 $
335,653
$
(20,022)
(19,406)
(25,688)
3,023
382,739 $
(7,078)
(17,907)
(5,012)
(3,505)
416,086 $
(39,468)
(20,468)
(20,932)
(542)
254,243
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
Operating results are as follows (in thousands, except as otherwise indicated):
Year Ended December 31,
2012
Revenue:
Programming networks and other services
$
Home video net sales
Total revenue
Costs and expenses:
Programming costs (including amortization)
Production and acquisition costs (including
amortization)
Home video cost of sales
Operating expenses
Advertising and marketing
General and administrative
Stock compensation, long-term incentive plan and
phantom stock appreciation rights
Depreciation and amortization
Total costs and expenses
Operating income
Other income (expense)
Interest expense, including amounts due to affiliate,
net of amounts capitalized
Other income (expense), net
Income from continuing operations
before income taxes
Income tax expense
Income from continuing operations
Income (loss) from discontinued operations, net of
income taxes
Net income
$
Operating Data (in millions):
2011
% Increase (Decrease)
2010
1,419,074 $
211,622
1,630,696
1,372,141 $
241,892
1,614,033
661,157
‘12 vs ‘11
‘11 vs ‘10
1,380,349
224,988
1,605,337
3.4 %
(12.5)%
1.0 %
(0.6)%
7.5 %
0.5 %
651,249
647,817
1.5 %
0.5 %
192,340
63,880
53,410
105,674
109,403
158,789
62,440
53,703
132,183
106,081
177,954
69,815
73,260
175,417
125,421
21.1 %
2.3 %
(0.5)%
(20.1)%
3.1 %
(10.8)%
(10.6)%
(26.7)%
(24.6)%
(15.4)%
20,022
19,406
1,225,292
405,404
7,078
17,907
1,189,430
424,603
39,468
20,468
1,329,620
275,717
182.9 %
8.4 %
3.0 %
(4.5)%
(82.1)%
(12.5)%
(10.5)%
54.0 %
(25,688)
3,023
(5,012)
(3,505)
(20,932)
(542)
412.5 %
186.2 %
(76.1)%
(546.7)%
382,739
(130,465)
252,274
416,086
(172,189)
243,897
254,243
(98,764)
155,479
(8.0)%
(24.2)%
3.4 %
63.7 %
74.3 %
56.9 %
3,315
158,794
100.0 %
(325.8)%
6.7 %
48.9 %
—
252,274 $
(7,486)
236,411 $
As of December 31,
2011
2012
2010
Starz subscriptions:
Fixed-rate subscriptions
Consignment subscriptions
Total Starz subscriptions
13.0
8.2
21.2
9.4
10.2
19.6
8.6
9.6
18.2
Encore subscriptions:
Fixed-rate subscriptions
Consignment subscriptions
Total Encore subscriptions
23.2
11.6
34.8
19.6
13.6
33.2
19.5
13.3
32.8
31
COMPARISON OF YEAR ENDED DECEMBER 31, 2012 TO YEAR ENDED DECEMBER 31, 2011
Revenue
Our revenue increased $16.7 million or 1.0% for the year ended December 31, 2012 as compared to the corresponding prior year.
Revenue for the year ended December 31, 2012 increased primarily as a result of increases in revenue for Starz Distribution and Starz Networks
which were partially offset by a decrease in revenue for Starz Animation. Starz Networks’ revenue represented 78.3% and 78.7% of our total
revenue for the years ended December 31, 2012 and 2011, respectively.
Revenue from Starz Networks increased $6.9 million or 0.5% for the year ended December 31, 2012 as compared to the corresponding
prior year. The Starz Networks’ growth in revenue for the year ended December 31, 2012 resulted from a $33.6 million increase due to higher
effective rates for Starz Networks’ services and a $26.7 million decrease in volume. The decrease in volume was due primarily to the nonrenewal of the Netflix agreement and a decrease in consignment subscriptions.
The Starz and Encore networks are the primary drivers of Starz Networks’ revenue. Starz average subscriptions increased 8.2% in 2012
and Encore average subscriptions increased 4.8% in 2012. The impact on revenue due to subscription increases is affected by the relative
percentage change under consignment agreements and fixed-rate agreements. In this regard, as of December 31, 2012, subscriptions under fixedrate agreements were 36.2 million while subscriptions under consignment agreements were 19.8 million. As of December 31, 2011,
subscriptions under fixed-rate agreements were 29.0 million while subscriptions under consignment agreements were 23.8 million. The increase
in fixed-rate subscriptions includes 3.9 million of subscriptions for certain affiliates which moved from consignment to fixed-rate agreements.
Revenue from Starz Distribution increased $9.7 million or 3.1% for the year ended December 31, 2012 as compared to the
corresponding prior year. Such increase is primarily due to increased revenue from the Digital Media and Worldwide Distribution businesses
which were offset by a decrease in revenue from the Home Video business. The Digital Media business experienced an increase in revenue from
films released under the distribution agreement with TWC while Worldwide Distribution experienced an increase in revenue from distribution of
our original programming. The Home Video business experienced a decrease in revenue from the TWC films released during the year ended
December 31, 2012 as compared to the corresponding prior year. This decrease was partially offset by an increase in revenue from the
distribution of our original series Spartacus and AMC Network’s original series The Walking Dead. Home video revenue was positively
impacted in 2011 by the release of TWC’s The King’s Speech , which won four Academy Awards ® , including Best Picture, Best Actor, Best
Director and Best Original Screenplay.
Programming
Programming costs are our largest expense. Programming costs increased $9.9 million or 1.5% for the year ended December 31, 2012
as compared to the corresponding prior year. Programming costs vary due to costs associated with original productions, the number of films
licensed under our output and library programming agreements and the cost per film paid under our output and library agreements. Programming
costs for the year ended December 31, 2012 as compared to the prior year have increased due to increased exhibitions of our original
programming content and higher production costs related to our 2012 original series as compared to the 2011 series. Partially offsetting this
increase in original programming during 2012 is higher utilization of lower cost second window films licensed under our output agreements. We
expect programming costs related to original programming will continue to increase in the future as we continue to invest in original content.
Production and Acquisition
Production and acquisition costs primarily include the amortization of our investments in films and television programs and
participation costs. The license fee associated with original productions is included in programming costs and all remaining production and
acquisition costs for original productions are amortized to production and acquisition costs based on the proportion that current revenue bears to
an estimate of our ultimate revenue for each original production. The amount of production and acquisition costs that we will incur for original
productions is impacted by both the number of original productions and the various distribution rights that we acquire or retain for these
productions. Participation costs represent amounts paid or due to participants under agreements we have whereby Starz Distribution distributes
content in
32
which a participant has an ownership interest (e.g., TWC, AMC Networks, producers or writers of our original programming, etc.).
Production and acquisition costs increased $33.6 million or 21.1% for the year ended December 31, 2012 as compared to the
corresponding prior year. The increase in production and acquisition costs is primarily due to higher Starz Distribution revenue associated with
our original series (which resulted in higher production cost amortization) and higher participation costs as a result of a higher gross margin in
2012 on films distributed which was primarily the result of higher advertising and marketing costs in 2011 as described below. In addition,
revisions we made in our ultimate revenue estimates resulted in impairments of $17.2 million in 2012 as compared to impairments of
$12.9 million in 2011.
Advertising and Marketing
Advertising and marketing costs decreased $26.5 million or 20.1% for the year ended December 31, 2012 as compared to the
corresponding prior year due primarily to a decrease in advertising and marketing for Starz Distribution and Starz Networks. Advertising and
marketing for Starz Distribution was higher in 2011 primarily as a result of the home video release of The King’s Speech . Advertising and
marketing for Starz Networks decreased for the year ended December 31, 2012 as compared to the corresponding prior year due to a lower
number of original series premieres in 2012 than 2011. We expect that advertising and marketing costs related to original programming will
increase in future periods as we continue to increase our investment in original content.
General and Administrative
General and administrative expenses increased $3.3 million or 3.1% for the year ended December 31, 2012 as compared to the
corresponding prior year due primarily to an increase in severance payments in 2012. General and administrative expenses were 6.7% and 6.6%
of revenue for the year ended December 31, 2012 and 2011, respectively.
Stock Compensation, Long Term Incentive Plan and Phantom Stock Appreciation Rights
Stock compensation, long term incentive plan and phantom stock appreciation rights expense increased $12.9 million or 182.9% in
2012. On December 4, 2012, Old LMC effected an acceleration of each unvested in-the-money option to acquire shares of Old LMC’s Series A
Liberty Capital Common Stock (“LMCA”) by certain of its, and its subsidiaries’ officers, which included one of our executive officers.
Following this acceleration, our executive officer exercised, on a net settled basis, all of this individual’s outstanding in-the-money vested and
unvested options to acquire LMCA shares which resulted in a charge of $5.8 million. An increase in the number of options granted, and at a
higher grant-date fair value than options previously granted, accounted for the remainder of the increase for the year ended December 31, 2012
as compared to the year ended December 31, 2011.
Interest Expense
Interest expense increased $20.7 million for the year ended December 31, 2012 as compared to the corresponding prior year due to
$505.0 million of borrowings that we made under our senior secured credit facilities in November of 2011. On September 13, 2012, Starz, LLC
and Starz Finance Corp. co-issued $500.0 million of 5% Senior Notes due September 15, 2019. We used the net proceeds and cash on hand to
repay and terminate the $500.0 million term loan under the senior secured credit facilities.
Income Taxes
We had income from continuing operations before income taxes of $382.7 million and $416.1 million and income tax expense of
$130.5 million and $172.2 million for the years ended December 31, 2012 and 2011, respectively. Our effective tax rate was 34.1% and 41.4%
for the years ended December 31, 2012 and 2011, respectively.
Our effective tax rate differs from the U.S. federal income tax rate of 35% as a result of changes in our valuation allowance for deferred
taxes, state and local taxes and Starz Media’s election, effective April 1, 2012, to convert itself from a limited liability company (“LLC”) treated
as a corporation to a LLC treated as a partnership for U.S. federal and state income tax purposes. As a result of the conversion, we recognized a
capital loss on the deemed liquidation of Starz Media. Based on the relevant accounting literature, we had not previously recorded a benefit for
the tax basis in the stock of Starz Media. The capital loss of $101.3 million (as tax effected) is being carried forward and is recorded as a long
term deferred tax asset. We
33
do not believe that it is more likely than not that we would be able to generate any capital gains to utilize any of this capital loss carryforward as
a stand-alone taxpayer and as such, we have recorded a full valuation allowance against this capital loss.
In addition, under current U.S. federal and state tax law, LLCs treated as partnerships are not subject to income tax at the entity level.
As such, the election to convert Starz Media to be treated as a partnership for income tax purposes resulted in the reversal of deferred tax assets
related to Starz Media’s deductible temporary differences of $16.1 million and the reversal of a valuation allowance offsetting these deferred tax
assets of $16.1 million. Also, a deferred tax asset of $7.1 million was recorded for the difference between the book basis and the tax basis of our
investment in Starz Media as of April 1, 2012.
Our effective tax rate for 2011 differs from the U.S. federal income tax rate of 35% as a result of changes in our valuation allowance for
deferred taxes and state and local taxes.
COMPARISON OF YEAR ENDED DECEMBER 31, 2011 TO YEAR ENDED DECEMBER 31, 2010
Revenue
Our revenue increased $8.7 million or 0.5% in 2011 as compared to 2010 due primarily to a $45.8 million increase from Starz Networks
and a decrease in our intersegment eliminations of $24.2 million. Such increases were partially offset by decreases in revenue from Starz
Distribution of $56.6 million and Starz Animation of $4.7 million. Starz Networks’ revenue represented 78.7% and 76.3% of our total revenue in
2011 and 2010, respectively.
Revenue from Starz Networks increased $45.8 million or 3.7% in 2011 as compared to 2010 as a result of increases in the average
number of subscriptions for the Starz Networks’ services as well as rate increases. The 2011 increase in revenue from Starz Networks is
comprised of $25.0 million due to growth in the average number of subscriptions for Starz Networks’ services and $20.8 million due to higher
effective rates for Starz Networks’ services.
The Starz and Encore networks are the primary drivers of Starz Networks’ revenue. Starz average subscriptions increased 8.8% in 2011
while Encore average subscriptions increased 4.0% in 2011. The impact on revenue due to the subscription increases is affected by the relative
percentage change under consignment (per subscriber) agreements and fixed-rate affiliation agreements. In this regard, as of December 31, 2011,
subscriptions under fixed-rate agreements were 29.0 million while subscriptions under consignment agreements were 23.8 million. As of
December 31, 2010, subscriptions under fixed-rate affiliation agreements were 28.1 million while subscriptions under consignment agreements
were 22.9 million.
The decrease in revenue from Starz Distribution was primarily due to the decision to shut down our theatrical business in 2010 which
was partially offset by an increase in revenue from titles distributed for TWC and our original programming (primarily our Spartacus franchise).
The intersegment eliminations revenue was lower in 2011 primarily as a result of the number and box office results of films released by
Overture Films which were exhibited on Starz Networks’ networks.
Programming
Programming costs are our largest expense. Programming costs increased $3.4 million or 0.5% in 2011. Programming costs vary due to
costs associated with original productions, the number of films licensed under our output and library programming agreements and the cost per
film paid under our output and library agreements. Programming costs for the year ended December 31, 2011 as compared to the prior year have
increased due to increased exhibitions of our original programming content and higher production costs related to our 2011 original series as
compared to the 2010 series. A decrease in the number of films and corresponding number of exhibitions of such films available under our
output agreements partially offset the increase in original programming during 2011.
34
Production and Acquisition
Production and acquisition costs primarily include the amortization of our investments in films and television programs and
participation costs. The license fee associated with original productions is included in programming costs and all remaining production and
acquisition costs for original productions are amortized to production and acquisition costs based on the proportion that current revenue bears to
an estimate of our ultimate revenue for each original production. The amount of production and acquisition costs that we will incur for original
productions is impacted by both the number of original productions and the various distribution rights that we acquire or retain for these
productions. Participation costs represent amounts paid or due to participants under agreements we have whereby Starz Distribution distributes
content in which a participant has an ownership interest (e.g., TWC, AMC Networks, producers or writers of our original programming, etc.).
Production and acquisition costs decreased $19.2 million or 10.8% in 2011 primarily as a result of a $33.7 million decrease in
impairment charges. Revisions we made in our ultimate revenue estimates resulted in impairments of $12.9 million in 2011 as compared to
impairments of $46.6 million in 2010. The decrease in impairment charges was partially offset by an increase in participation costs for films that
we distribute under our agreement with TWC.
Advertising and Marketing
Advertising and marketing costs decreased $43.2 million or 24.6% in 2011 due primarily to the shut down of our theatrical business.
We expect that advertising and marketing costs related to our original programming will increase in the future as we continue to invest in
original content.
General and Administrative
General and administrative expenses decreased $19.3 million or 15.4% in 2011 primarily as a result of the shut down of our theatrical
business in 2010. General and administrative expenses were 6.6% and 7.8% of revenue in 2011 and 2010, respectively.
Stock Compensation, Long Term Incentive Plan and Phantom Stock Appreciation Rights
Stock compensation, long term incentive plan and phantom stock appreciation rights expense decreased $32.4 million or 82.1% in 2011
due primarily to amounts paid in 2010 in excess of amounts accrued to settle all outstanding phantom stock appreciation rights held by our
founder and former chief executive officer.
Interest Expense
Interest expense decreased $15.9 million or 76.1% in 2011 as compared to 2010. Such decrease was primarily attributable to a decrease
in interest on debt due to affiliate as a result of the contribution of the corresponding affiliate receivables from our former parent company, Old
LMC, to us on September 30, 2010 in connection with a corporate restructuring. As a result of the contribution, the affiliate debt and related
interest expense are eliminated in consolidation effective September 30, 2010.
Income Taxes
We had income from continuing operations before income taxes of $416.1 million and $254.2 million and income tax expense of
$172.2 million and $98.8 million in 2011 and 2010, respectively. Our effective tax rate was 41.4% and 38.8% in 2011 and 2010, respectively.
Our effective tax rate differs from the U.S. federal income tax rate of 35% primarily as a result of state and local and foreign taxes. The 2011 tax
rate was also impacted by a change in our valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2012, our cash and cash equivalents totaled $749.8 million. Substantially all of our cash and cash equivalents are
invested in U.S. Treasury securities, other government securities or government guaranteed funds, AAA rated money market funds and other
highly rated commercial paper.
We generated positive net cash provided by operating activities of $292.1 million, $348.0 million and $191.1 million for the years
ended December 31, 2012, 2011 and 2010, respectively. Our primary uses of cash are payments under our programming output and library
agreements and production costs for our original programming, home video and other
35
content (i.e., investment in films and television programs), which are included as a reduction of net cash provided by operating activities. Cash
paid under our programming output and library agreements totaled $456.6 million, $554.3 million and $532.6 million for years ended
December 31, 2012, 2011 and 2010, respectively. Cash paid for original programming, home video and other content totaled $284.1 million,
$213.7 million and $117.0 million for the years ended December 31, 2012, 2011 and 2010, respectively. We plan to make additional investments
in original programming in the future. Additionally, we may use cash for the potential buyback of common stock under our share buyback
program.
Payments made under our long-term incentive plan and the timing of tax payments made to Old LMC negatively impacted net cash
provided by operating activities in 2012. During 2012, we made cash payments of $161.4 million for income taxes and $33.4 million under our
long-term incentive plan as compared to cash payments of $44.8 million for income taxes and $7.7 million under our long-term incentive plan in
2011. During 2010, we also made a non-recurring payment of $149.6 million to settle all remaining phantom stock appreciation rights held by
our founder and former chief executive officer which negatively impacted our net cash provided by operating activities.
We are continually projecting our anticipated cash requirements for our operating, investing and financing needs as well as net cash
provided by operating activities available to meet these needs. Our potential sources of liquidity are available cash balances, net cash provided
by operating activities and borrowings under our senior secured revolving credit facility and we expect that we will be able to utilize these
sources to fund our cash commitments for investing and financing activities, which include the remaining $1.2 billion of the $1.8 billion
distribution paid to Old LMC in connection with the Spin-Off as described below, debt repayments and capital expenditures during 2013. Based
upon our current operating plans, we believe that our net cash provided by operating activities will be sufficient to fund our cash commitments
for investing and financing activities such as our long term debt obligations and capital expenditures from 2014 through 2017. As of December
31, 2012, on a pro forma basis after the $1.8 billion distribution to Old LMC, we would have had $445.0 million available for borrowing under
our senior secured revolving credit facility, which is available to fund our operating activities and cash commitments for investing and financing
activities.
On November 16, 2011, we closed our $1.5 billion senior secured credit facilities with a group of banks. Such facilities are comprised
of a $1,000.0 million senior secured revolving credit facility and a $500.0 million senior secured term loan A. On November 18, 2011, we
borrowed $500.0 million under the senior secured term loan A and $5.0 million under the senior secured revolving credit facility. On
September 13, 2012, we closed the offering of $500.0 million of 5% Senior Notes due September 15, 2019, the net proceeds of which were used
together with cash on hand to repay and terminate the senior secured term loan A. On February 8, 2013, Starz, LLC and Starz Finance Corp.
completed the issuance of the New Notes, which were issued as additional notes under the indenture governing the Senior Notes. The net
proceeds from the issuance of the New Notes were used to repay indebtedness under Starz, LLC’s senior secured revolving credit facility. The
senior secured revolving credit facility contains certain covenants, including a covenant that limits our maximum leverage ratio, as defined in the
credit agreement, to not more than 4.75 to 1.00 through December 31, 2013 and 4.25 to 1.00 thereafter. In addition, investments in unrestricted
subsidiaries, as defined in the credit agreement, shall not exceed $150.0 million during the term of the credit agreement (starting on the closing
date of November 16, 2011). Starz Entertainment and Starz Finance Corp. are the only guarantors and restricted subsidiaries under the senior
secured revolving credit facility. The senior secured revolving credit facility matures on November 16, 2016. In connection with the Spin Off,
Starz, LLC distributed $1.8 billion in cash to Old LMC (paid as follows: $100.0 million on July 10, 2012, $250.0 million on August 17, 2012,
$50.0 million on September 4, 2012, $200.0 million on November 16, 2012 and $1.2 billion on January 10, 2013), funded by a combination of
cash on hand and $550.0 million of borrowings under our senior secured revolving credit facility (under which $995.0 million was available to
be drawn as of December 31, 2012). See “Item 1. Business, (a) General Development of the Business” for additional information.
As of December 31, 2012, Starz Entertainment had an outstanding loan receivable from Starz Media, which is an unrestricted
subsidiary, totaling $26.1 million.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
We are required to make future payments under various contracts, including long-term output licensing agreements, affiliation
agreements, debt agreements, lease agreements, long-term incentive plans and various other agreements, Information concerning the amount and
timing of required payments related to our contractual obligations at December 31, 2012 is summarized below (these contractual obligations are
grouped in the same manner as they are classified in the consolidated statements of cash flows in order to provide a better understanding of the
nature of the obligations and to provide a basis for comparison to historical information):
36
Total
Operating activities:
Programming rights
Affiliation agreements
Investment in films and television programs
Long-term incentive and deferred compensation plans
Operating lease obligations
Purchase orders and other obligations
Interest related to total debt
Financing activities:
Repayments of total debt
Investing activities:
Purchases of property and equipment
Total
$
$
950,181 $
46,668
81,225
6,871
22,932
227,667
184,061
Payments due by period (in thousands)
Less than
1 year
2 - 3 years
4 - 5 years
382,110 $
34,842
81,225
4,757
6,123
198,867
27,192
174,558 $
9,025
—
2,114
10,620
24,000
53,574
539,805
4,134
9,078
2,400
2,061,810 $
2,400
741,650 $
—
282,969 $
127,768 $
2,801
—
—
4,489
4,800
52,265
15,277
—
207,400 $
After
5 years
265,745
—
—
—
1,700
—
51,030
511,316
—
829,791
Obligations for Operating Activities
We have entered into an exclusive long-term licensing agreement for theatrically released films from Disney through 2015. The
agreement provides us with exclusive pay TV rights to exhibit qualifying theatrically released live-action and animated feature films under the
Disney, Touchstone, Pixar and Marvel labels. Theatrically released films produced by DreamWorks are not licensed to us under the agreement.
In addition, we are obligated to pay programming fees for all qualifying films that are released theatrically in the U.S. by Sony’s Columbia
Pictures, Screen Gems, Sony Pictures Classics and TriStar labels through 2021, subject to certain limitations. The programming fees to be paid
by us to Disney and Sony are based on the quantity and domestic theatrical exhibition receipts of qualifying films. We have also entered into
agreements with a number of other motion picture producers and are obligated to pay fees for the rights to exhibit certain films that are released
by these producers.
The unpaid balance for film rights related to films that were available at December 31, 2012 is reflected in accrued liabilities and in
other liabilities in our consolidated balance sheet. As of December 31, 2012, such liabilities aggregated $58.6 million and are payable as follows:
$57.1 million in 2013 and $1.5 million in 2014.
Under the agreements with Disney and Sony, we are obligated to pay fees for the rights to exhibit films that have been released
theatrically, but are not available for exhibition by us until some future date. The estimated amounts payable under our programming license
agreements, including the Disney and Sony agreements, which have not been accrued as of December 31, 2012, are as follows: $325.0 million in
2013; $101.4 million in 2014; $71.7 million in 2015; $63.8 million in 2016; $64.0 million in 2017 and $265.7 million thereafter.
Starz, LLC is also obligated to pay fees for films that have not yet been released in theaters. Starz, LLC is unable to estimate the
amounts to be paid under these agreements for films that have not yet been released in theaters; however, such amounts are expected to be
significant.
Obligations for Financing Activities
Effective January 11, 2013, in connection with the Spin-Off, we distributed our Englewood, Colorado corporate office building and
related building improvements to Old LMC (and Old LMC subsequently transferred such building and related improvements to LPH, a
subsidiary of Old LMC) and leased back the use of such facilities from LPH. Under the terms of the agreement, we will lease the facilities for a
term of 10 years, with an additional four successive five-year renewal terms at our option. We are obligated to pay LPH approximately $3.4
million in the initial year of the lease, with annual increases related to the change in the Consumer Price Index.
37
Guarantee Commitments
Our subsidiary, Starz Media Canada Co. (“Canada Co.”), entered into an agreement with the Ontario government whereby Canada Co.
is eligible to receive funds under the Canadian Next Generation of Jobs Fund Grant through the termination date of March 31, 2014. Starz
Entertainment entered into a guarantee for any amounts owed to the Ontario government under the grant if Canada Co. does not meet its
obligation. The maximum amount of the grant available and the guarantee is $23.1 million. The Ontario government can demand payment from
Starz Entertainment if Canada Co. does not perform any of its obligations. The maximum potential amount payable under the guarantee is
$10.7 million at December 31, 2012 and Starz Entertainment has accrued $8.5 million related to this guarantee as of December 31, 2012. We
sold a controlling interest in Canada Co. on March 3, 2011. The terms of the guarantee have not changed.
In January 2011, Anchor Bay Entertainment entered into a five-year license agreement with TWC for the distribution, by our Home
Video and Digital Media businesses, of certain of TWC’s theatrical releases. Anchor Bay Entertainment recovers its advances through the
distribution of DVDs and earns a fee. Starz Entertainment guarantees Anchor Bay Entertainment’s advance payments to TWC under this
agreement up to $50.0 million.
Starz Entertainment is the guarantor on two noncancelable operating leases in which a subsidiary of Starz Media and Film Roman,
respectively, are the tenant. The maximum potential amount payable under these guarantees is $13.0 million at December 31, 2012. Starz
Entertainment does not currently expect to have to perform under these obligations. The leases expire in 2014 and 2016, respectively.
CRITICAL ACCOUNTING ESTIMATES
The following represents a discussion of our critical accounting estimates. For information regarding our significant accounting
policies, see note 2 to our consolidated financial statements for the year ended December 31, 2012.
Program Rights
Programming costs are our most significant individual operating cost. Program rights for films and television programs exhibited by
Starz Networks are generally amortized on a film-by-film basis over the anticipated number of exhibitions. We estimate the number of
exhibitions based on the number of exhibitions allowed in the agreement and the expected usage of the content. We generally have rights to two
or three separate windows under our pay-television output agreements. For films with multiple windows, the license fee is allocated between the
windows based upon the proportionate estimated value of each window. We have allocated a substantial portion of the programming costs to the
first window as first-run content is believed to have greater appeal to subscribers when it is newer and therefore deemed to have greater value to
us in acquiring and retaining subscribers. Certain other program rights are amortized to expense using the straight-line method over the
respective lives of the agreements.
Additionally, we allocate programming costs associated with our original productions between the pay television window and the
ancillary revenue markets (e.g., home video, digital platforms, international television, etc.) based on the estimated relative fair values of these
markets. Costs allocated to the pay television window are amortized to expense over the anticipated number of exhibitions for each original
production while costs associated with the ancillary revenue markets are amortized to expense based on the proportion that current revenue from
the original productions bears to an estimate of the remaining unrecognized revenue (ultimate revenue). Estimates of fair value for the pay
television and ancillary markets involve uncertainty as well as estimates of ultimate revenue.
Changes in management’s estimate of the anticipated exhibitions of films and original programming on our networks and the estimate
of ultimate revenue could result in the earlier recognition of our programming costs than anticipated. Conversely, scheduled exhibitions may not
capture the appropriate usage of the program rights in current periods which would lead to the write-off of additional program rights in future
periods and have a significant impact on our future results of operations and our financial position.
38
Impairment of Goodwill
We test goodwill annually for impairment at December 31 or more frequently if indicators of potential impairment exist. Our goodwill
balance resides entirely at our Starz Networks’ operating segment which is also a reporting unit. At December 31, 2012, we first utilized a
qualitative assessment for determining whether the first step of the goodwill impairment analysis was necessary. In evaluating goodwill on a
qualitative basis, we considered whether there were any negative macroeconomic conditions, negative changes in our industry specific
conditions, market changes, increased competition, increased costs in doing business, management challenges, events affecting a reporting unit
such as a change in the composition or carrying amount of its net assets, the legal environment and how these factors might impact our
performance in future periods. This qualitative assessment involves a significant amount of judgment on the part of management.
If step one is necessary, the fair value of Starz Networks’ goodwill is compared to its carrying value. Fair value is estimated by
considering sale prices for similar assets or by discounting estimated future cash flows from such assets using an appropriate discount rate. If the
carrying amount of Starz Networks exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of
goodwill impairment loss, if any. The second step of the goodwill impairment test would compare the implied fair value of Starz Networks’
goodwill with the carrying amount of that goodwill. If the carrying amount of Starz Networks’ goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same
manner as the amount of goodwill that would be recognized in a business combination.
At December 31, 2012, our qualitative assessment indicated that step one of the goodwill impairment analysis was necessary due to the
Spin-Off and the known future change in our net assets due to the remaining $1.2 billion of the $1.8 billion cash distribution we made to Old
LMC on January 10, 2013. We utilized a valuation analysis which included a guideline public companies analysis and a discounted cash flow
analysis, prepared by a third party, to perform step one, which indicated Starz Networks did not have an impairment at December 31, 2012. At
December 31, 2011, our qualitative assessment indicated that step one of the goodwill impairment analysis was not necessary. For 2010, we
performed step one of the goodwill impairment analysis utilizing a discounted cash flow analysis prepared by management which indicated Starz
Networks did not have an impairment at December 31, 2010. The cash flow projections used in our analysis represent management’s best
estimate of the future cash flows for Starz Networks as of December 31, 2010.
The fair value of Starz Networks substantially exceeds its carrying value. Goodwill impairment tests require a high degree of judgment
with respect to estimates of future cash flows and discount rates as well as other assumptions. Accordingly, any value ultimately derived for
Starz Networks may differ from our estimate of fair value.
Carrying Value of Investments in Films and Television Programs
Investment in films and television programs includes the cost of completed films, television programs and original productions which
we have produced or for which we have acquired distribution rights, as well as the cost of films, television programs or original productions in
production, pre-production and development. Investment in films and television programs is stated at unamortized cost unless reduced to
estimated fair value, as discussed below, on an individual film basis. Investment in films and television programs is amortized to production and
acquisition costs using the individual-film-forecast method, whereby the costs are charged to expense and royalty, participation and residual
costs are accrued based on the proportion that current revenue from the films, television programs and original productions bears to an estimate
of the remaining unrecognized ultimate revenue. Estimates of ultimate revenue involve uncertainty and it is therefore possible that reductions in
the carrying value of investment in films and television programs may be required as a consequence of changes in management’s future revenue
estimates. We periodically review revenue estimates and revise our assumptions as necessary, which impacts the timing of amortization expense.
Significant revisions to our revenue estimates could also be an indicator that a film is impaired.
Investment in films and television programs is reviewed for impairment on a title-by-title basis when an event or change in
circumstances indicates that a film, television program or original production may be impaired. The estimated fair value for each title is
determined using the discounted estimated future cash flow of each title. If the estimated fair value of a film, television program or original
production is less than its unamortized cost, the excess of unamortized cost over the estimated fair value is charged to expense. Considerable
management judgment is necessary to estimate the fair value of investment in films and television programs. Changes in these estimates could
significantly impact the impairment analysis in the future.
39
Valuation of Deferred Tax Assets
We are required to estimate the amount of tax payable for the current year and the deferred income tax assets and liabilities for the
future tax consequences of events that have been reflected in our financial statements or tax returns. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some portion or all of our deferred tax assets will not be realized. Our ability
to realize deferred tax assets depends upon the generation of sufficient future taxable income and tax planning strategies. We may be required to
record additional valuation allowances against our deferred tax assets in the future if our assumptions and estimates change which would result
in additional income tax expense. Management evaluates the realizability of our deferred tax assets quarterly.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk in the normal course of business due to our ongoing financial and operating activities. Market risk refers
to the risk of loss arising from adverse changes in stock prices and interest rates. The risk of loss can be assessed from the perspective of adverse
changes in fair values, cash flows and future earnings.
We are exposed to changes in interest rates as a result of borrowings used to maintain our liquidity and fund our operations. The nature
and amount of our long-term and short-term debt are expected to vary as a result of future requirements, market conditions and other factors. We
manage our exposure to interest rates by maintaining what we believe is an appropriate mix of fixed and variable rate debt and by entering into
interest rate swap and collar arrangements when we deem appropriate.
As of December 31, 2012, our debt is comprised of the following amounts (in thousands):
Variable rate debt
Fixed rate debt
Principal
amount
Weighted avg.
interest rate
Principal
amount
Weighted avg.
interest rate
$5,000
1.96%
$534,805
5.09%
As noted above, our outstanding debt at December 31, 2012 was primarily fixed rate debt. We have borrowing capacity at December
31, 2012 of $995.0 million under our senior secured revolving credit facility at variable rates. On January 10, 2013, we utilized $550.0 million of
borrowings under our senior secured revolving credit facility and cash on hand to pay the remaining $1.2 billion of the $1.8 billion cash
distribution to Old LMC (such distributed cash was subsequently contributed to New LMC) which resulted in a more balanced mix of fixed and
variable rate debt.
At December 31, 2012 , the fair value of the Senior Notes was $517.8 million . We believe the fair value of our remaining debt
approximates its carrying value as of December 31, 2012 due to its variable rate nature and our stable credit spread.
We are exposed to foreign exchange rate risk on certain of our original productions that are produced in foreign countries. We mitigate
this foreign exchange rate risk by entering into forward contracts and other types of derivative instruments as deemed appropriate. As of
December 31, 2012, the fair market value of our outstanding derivative instruments related to foreign currencies was insignificant. We are also
exposed to foreign exchange rate risk on our foreign operations; however, this risk is not deemed significant to our overall business.
Item 8. Financial Statements and Supplementary Data
In accordance with GAAP, New LMC was determined to be the accounting successor to Old LMC for financial reporting purposes
following the Spin-Off due to the relative significance of New LMC to Starz (which is the legal spinnor) and the continued involvement of Old
LMC’s senior management with New LMC following the Spin-Off. Accordingly, the historical financial statements of Old LMC prior to the
Spin-Off will continue to be the historical financial statements of New LMC and Starz’s historical financial information will be deemed to be the
financial information of Starz, LLC. Starz, LLC is the only directly owned subsidiary of Starz which in turn owns either directly or indirectly
various operating subsidiaries. Starz is a holding company with no assets, liabilities or operations other than those of Starz, LLC. Accordingly,
the financial position, results of operations, comprehensive income and cash flows of Starz and Starz, LLC are identical.
40
The Report of Independent Registered Public Accounting Firm and Starz’s consolidated financial statements and notes thereto appear in
a separate section of this report (beginning on page F-2 following Part IV).
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the
participation of management, including our chief executive officer and our principal financial and accounting officer (the “Executives”), of the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the
Executives concluded that our disclosure controls and procedures were effective as of December 31, 2012 to provide reasonable assurance that
information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Internal Control over Financial Reporting
Management’s Report on Internal Control over Financial Reporting
Starz’s management is responsible for establishing and maintaining adequate internal control over Starz’s financial reporting. Starz’s
internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of the consolidated financial statements and related disclosures in accordance with generally accepted accounting principles.
Starz’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions of Starz; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of the consolidated financial statements and related disclosures in accordance with generally accepted accounting
principles; (3) provide reasonable assurance that receipts and expenditures of Starz are being made only in accordance with authorizations of
management and directors of Starz; and (4) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of Starz’s assets that could have a material effect on the consolidated financial statements and related disclosures.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies and procedures may deteriorate.
Starz assessed the design and effectiveness of internal control over financial reporting as of December 31, 2012. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control-Integrated Framework.
Based upon our assessment using the criteria contained in COSO, management has concluded that, as of December 31, 2012, Starz’s
internal control over financial reporting is effectively designed and operating effectively.
Starz’s independent registered public accounting firm audited the consolidated financial statements and related disclosures in the
Annual Report on Form 10-K and have issued an audit report on the effectiveness of Starz’s internal control over financial reporting. This report
appears on page F-2 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the year ended December 31, 2012 that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
41
Item 9B. Other Information
None.
42
Part III.
The following required information is incorporated by reference to our definitive proxy statement for our 2013 Annual Meeting of
Stockholders presently scheduled to be held in the second quarter of 2013:
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Audit Fees and All Other Fees
The following table presents fees for professional audit services rendered by KPMG LLP and its international affiliates for the audit of
our consolidated financial statements for 2012 and 2011 and the separate financial statements of one of our subsidiaries, and fees billed for other
services rendered by KPMG LLP. The following do not reflect fees paid by Old LMC to KPMG LLP.
December 31,
Audit fees (1)
Audit related fees (2)
Audit and related fees
Tax fees (3)
$
Total fees
__________________
$
2012
926,250
327,491
1,253,741
22,097
1,275,838
$
$
2011
906,000
67,853
973,853
17,446
991,299
(1) Audit fees include fees for the audit and quarterly reviews of our 2012 and 2011 consolidated financial statements and the audit of the
2012 and 2011 consolidated financial statements of one of our subsidiaries.
(2) Audit related fees include fees billed in the respective periods for reviews of debt offerings and registration statements and for
professional consultations with respect to accounting issues affecting our financial statements.
(3) Consist of tax compliance fees only as we have not been billed any tax fees by KPMG LLP because we are included in Old LMC’s
consolidated federal and state income tax returns.
Policy on Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor
Through the date of the Spin-Off, Old LMC managed the pre-approval of our audit fees and non-audit services.
43
Part IV.
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this report:
(1) Financial Statements
The financial statements listed in the accompanying Index to Financial Statements are filed as part of this report beginning on page F-1.
(2) Financial Statement Schedules
All schedules have been omitted because they are not applicable, not material or the required information is set forth in the financial
statements or notes thereto.
(3) Exhibits
Listed below are the exhibits which are filed as part of this report (according to the number assigned to them in Item 601 of Regulation
S-K).
Exhibit No.
Description of Exhibit
2-Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:
2.1 Reorganization Agreement, dated as of January 10, 2013, between the Registrant and Liberty Media Corporation (incorporated
by reference to Exhibit 2.1 of the Current Report on Form 8-K of Starz filed on January 17, 2013 (File No. 001-35294) (the
“Starz 8-K”))
3-Articles of Incorporation and Bylaws:
3.1 Restated Certificate of Incorporation of the Registrant dated September 23, 2011 (incorporated by reference to Exhibit 3.1 to
Post-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-4 filed on September 23, 2011 (File No.
333-171201) (the “S-4”))
3.2 Certificate of Ownership and Merger, dated January 11, 2013 (incorporated by reference to Exhibit 3.1 to the Starz 8-K)
3.3 Bylaws of the Registrant dated September 23, 2011 (incorporated by reference to Exhibit 3.3 to the S-4)
4-Instruments Defining the Rights of Securities Holders, including Indentures:
4.1 Specimen certificate for shares of the Registrant's Series A Liberty Capital common stock, par value $0.01 per share
(incorporated by reference to Exhibit 4.1 to the S-4)
4.2 Specimen certificate for shares of the Registrant's Series B Liberty Capital common stock, par value $0.01 per share
(incorporated by reference to Exhibit 4.2 to the S-4)
4.3 Indenture dated as of September 13, 2012 among Starz, LLC and Starz Finance Corp. as issuers, the guarantors named therein
and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to Starz, LLC’s Registration Statement
on Form S-4 filed on October 23, 2012 (File No. 333-184551) (the “Starz, LLC S-4”))
10-Material Contracts:
10.1 The Registrant’s 2011 Incentive Plan (incorporated by reference to Exhibit 10.1 to the S-4)
10.2 Form of Non-Qualified Stock Option Agreement under the Registrant’s 2011 Incentive Plan*
10.3 Form of Restricted Stock Award Agreement under the Registrant’s 2011 Incentive Plan*
10.4 The Registrant’s 2011 Nonemployee Director Incentive Plan (incorporated by reference to Exhibit 10.2 to the S-4)
10.5 The Registrant’s Transitional Stock Adjustment Plan (incorporated by reference to Exhibit 10.3 to the S-4)
10.6 Non-Qualified Stock Option Agreement pursuant to the Starz Transitional Stock Adjustment Plan between the Registrant and
Gregory B. Maffei (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2012 filed on August 8, 2012 (File No. 001-35294))
10.7 Form of Election Form with respect to December 2012 Option Exchange Proposal for participants*
10.8 Tax Sharing Agreement, dated as of September 23, 2011, by and among Liberty Interactive Corporation, Liberty Interactive
LLC and the Registrant (incorporated by reference to Exhibit 10.4 to the S-4)
44
10.9 Tax Sharing Agreement, dated as of January 11, 2013, by and between the Registrant and Liberty Media Corporation
(incorporated by reference to Exhibit 10.1 to the Starz 8-K)
10.10 Services Agreement, dated as of January 11, 2013, by and between the Registrant and Liberty Media Corporation (incorporated
by reference to Exhibit 10.2 to the Starz 8-K)
10.11 Facilities Sharing Agreement, dated as of January 11, 2013, by and between the Registrant and Liberty Property Holdings, Inc.
(incorporated by reference to Exhibit 10.3 to the Starz 8-K)
10.12 Form of Indemnification Agreement by and between the Registrant and its executive officers/directors (incorporated by
reference to Exhibit 10.7 to Amendment No. 2 to the Registrant's Registration Statement on Form S-4 filed on February 14,
2011 (File No. 333-171201))
10.13 Aircraft Time Sharing Agreements, dated as of January 11, 2013, by and between Liberty Media Corporation and the Registrant
(incorporated by reference to Exhibit 10.4 to the Starz 8-K)
10.14 Lease Agreement, dated as of January 11, 2013, by and among Starz, LLC, Liberty Property Holdings, Inc. and, for the limited
purposes specified therein, Starz Entertainment, LLC (incorporated by reference to Exhibit 10.5 to the Starz 8-K)
10.15 Credit Agreement, dated as of November 16, 2011 among Starz, LLC, as the borrower, the lenders from time to time party
thereto, the Bank of Nova Scotia, as administrative agent, Suntrust Bank, as syndication agent, and the other parties thereto
(incorporated by reference to Exhibit 10.1 to the Starz, LLC S-4)
10.16 Employment Agreement, dated January 1, 2010, between Starz, LLC and Christopher Albrecht*
10.17 Amendment dated December 7, 2012 to Employment Agreement, dated January 1, 2010, between Starz, LLC and Christopher
Albrecht*
10.18 Term Sheet relating to new employment agreement with Christopher Albrecht*
21.1 Subsidiaries of the Registrant*
23.1 Consent of KPMG LLP*
31.1 Rule 13a-14(a)/15(d)-14(a) Certification*
31.2 Rule 13a-14(a)/15(d)-14(a) Certification*
32.1 Section 1350 Certifications*
______________________
*Filed herewith.
45
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Starz
By:
/s/ Christopher P. Albrecht
Name: Christopher P. Albrecht
Title:
Chief Executive Officer
By:
/s/ Scott D. Macdonald
Name: Scott D. Macdonald
Title:
Chief Financial Officer, Executive Vice
President and Treasurer (Principal
Financial Officer and Principal Accounting
Officer)
Date: February 27, 2013
Date: February 27, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the date indicated.
Signature
Title
Date
/s/ Gregory B Maffei
Gregory B. Maffei
Chairman of the Board and Director
February 27, 2013
/s/ Christopher P. Albrecht
Christopher P. Albrecht
Director and Chief Executive Officer
February 27, 2013
Irving L. Azoff
Director
February 27, 2013
/s/ Derek Chang
Derek Chang
Director
February 27, 2013
/s/ Susan M. Lyne
Susan M. Lyne
Director
February 27, 2013
/s/ Jeffrey F. Sagansky
Jeffrey F. Sagansky
Director
February 27, 2013
/s/ Daniel E. Sanchez
Daniel E. Sanchez
Director
February 27, 2013
/s/ Charles Y. Tanabe
Charles Y. Tanabe
Director
February 27, 2013
/s/ Robert S. Wiesenthal
Robert S. Wiesenthal
Director
February 27, 2013
/s/ Irving L. Azoff
46
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
AUDITED FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm
F-2
Report of Independent Registered Public Accounting Firm
F-3
Consolidated Balance Sheets as of December 31, 2012 and 2011
F-4
Consolidated Statements of Operations for the Years Ended December 31, 2012, 2011 and 2010
F-5
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2011 and 2010
F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010
F-7
Consolidated Statements of Member’s Interest and Noncontrolling Interests for the Years Ended December 31, 2012, 2011 and
2010
Notes to Consolidated Financial Statements
F-8
F-1
F-9
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Starz:
We have audited Starz’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Starz’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on Starz’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Starz maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on
criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of Starz and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations,
comprehensive income, cash flows, and member’s interest and noncontrolling interests for each of the years in the three-year period ended
December 31, 2012, and our report dated February 27, 2013 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Denver, Colorado
February 27, 2013
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Starz:
We have audited the accompanying consolidated balance sheets of Starz and subsidiaries (the Company) as of December 31, 2012 and 2011, and
the related consolidated statements of operations, comprehensive income, cash flows, and member’s interest and noncontrolling interests for
each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements An
audit includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Starz and
subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's
internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework ,
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 2013 expressed
an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
/s/ KPMG LLP
Denver, Colorado
February 27, 2013
F-3
Starz and Subsidiaries
Consolidated Balance Sheets
December 31, 2012 and 2011
(in thousands)
2012
2011
Assets
Current assets:
Cash and cash equivalents (Note 12)
Restricted cash
Trade accounts receivable, net of allowances of $35,045 and $38,355 (Note 12)
Program rights
Deferred income taxes (Note 10)
Other current assets
Total current assets
Program rights
Investment in films and television programs, net (Note 4)
Property and equipment, net (Note 5)
Deferred income taxes (Note 10)
Goodwill (Note 12)
Other assets, net
$
$
Total assets
749,774
—
241,415
340,005
990
44,727
1,376,911
338,684
181,673
96,280
12,222
131,760
38,520
2,176,050
$
$
1,099,887
4,896
241,026
388,298
10,114
31,336
1,775,557
373,552
183,942
98,531
—
131,760
39,833
2,603,175
Liabilities and Member’s Interest
and Noncontrolling Interests
Current liabilities:
Current portion of debt (Note 6)
Trade accounts payable
Accrued liabilities (Notes 7, 8, 9 and 11)
Due to affiliates (Note 8)
Deferred revenue
Total current liabilities
Debt (Note 6)
Deferred income taxes (Note 10)
Other liabilities (Note 11)
Total liabilities
$
Member’s interest
Noncontrolling interests in subsidiaries
Total member’s interest and noncontrolling interests
Commitments and contingencies (Note 11)
4,134
6,162
256,062
39,519
24,574
330,451
535,671
—
7,784
873,906
$
1,311,951
(9,807)
1,302,144
Total liabilities and member’s interest and noncontrolling interests
$
See accompanying notes to consolidated financial statements.
F-4
2,176,050
4,129
8,690
304,150
53,836
26,734
397,539
540,915
10,308
11,312
960,074
1,651,484
(8,383)
1,643,101
$
2,603,175
Starz and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2012 , 2011 and 2010
(in thousands)
2012
Revenue:
Programming networks and other services
Home video net sales
Total revenue
$
Costs and expenses:
Programming costs (including amortization) (Note 11)
Production and acquisition costs (including amortization)
Home video cost of sales
Operating expenses
Advertising and marketing (Note 12)
General and administrative (Notes 8 and 11)
Stock compensation, long term incentive
plan and phantom stock appreciation rights (Note 9)
Depreciation and amortization
Total costs and expenses
Operating income
Other income (expense):
Interest expense, including amounts due to affiliate of none, none, and
$16,054, net of amounts capitalized (Notes 6 and 8)
Other income (expense), net
Income from continuing operations before income taxes
Income tax expense (Note 10)
Income from continuing operations
Income (loss) from discontinued operations (including loss on sale of $12,114
in 2011), net of income taxes (Note 3)
1,419,074
211,622
1,630,696
$
Net loss attributable to noncontrolling interests
$
1,372,141
241,892
1,614,033
$
1,380,349
224,988
1,605,337
651,249
158,789
62,440
53,703
132,183
106,081
647,817
177,954
69,815
73,260
175,417
125,421
20,022
19,406
1,225,292
7,078
17,907
1,189,430
39,468
20,468
1,329,620
405,404
424,603
275,717
(25,688)
3,023
382,739
(5,012)
(3,505)
416,086
(20,932)
(542)
254,243
(130,465)
(172,189)
(98,764)
252,274
243,897
155,479
(7,486)
3,315
252,274
236,411
158,794
2,210
3,273
—
254,484
$
See accompanying notes to consolidated financial statements.
F-5
2010
661,157
192,340
63,880
53,410
105,674
109,403
—
Net income
Net income attributable to member
2011
239,684
$
158,794
Starz and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2012 , 2011 and 2010
(in thousands)
2012
Net income
$
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments from continuing operations
Foreign currency translation adjustments from discontinued operations
2011
252,274
$
(73)
—
(73)
Other comprehensive loss
Comprehensive income
Comprehensive loss attributable to noncontrolling interests
$
Comprehensive income attributable to member
236,411
$
158,794
(529)
(5,946)
1,167
(1,172)
(6,475)
(5)
252,201
229,936
158,789
2,167
3,447
—
254,368
See accompanying notes to consolidated financial statements.
F-6
2010
$
233,383
$
158,789
Starz and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2012 , 2011 and 2010
(in thousands)
2012
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Loss (income) from discontinued operations
Depreciation and amortization
Amortization of program rights
Program rights payments
Amortization of investment in films and television programs
Investment in films and television programs
Stock compensation, long term incentive plan and phantom stock
appreciation rights
Payments of long term incentive plan and phantom stock appreciation
rights
Noncash interest on debt due to affiliate
Deferred income taxes
Other non-cash items
Changes in assets and liabilities:
Current and other assets
Due to affiliates
Payables and other liabilities
Net cash provided by operating activities
Investing activities – purchases of property and equipment
Financing activities:
Borrowings of debt
Payments of debt
Debt issuance costs
Distributions to parent
Distributions to parent related to stock compensation
Minimum withholding of taxes related to stock compensation
Excess tax benefit from stock compensation
Contribution from parent
Contribution from noncontrolling owner of subsidiary
Settlement of derivative instruments
Restricted cash
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net cash provided by discontinued operations
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents:
Beginning of year
$
2010
236,411
$
7,486
17,907
611,041
(554,341)
126,102
(213,655)
158,794
(3,315)
20,468
611,615
(532,566)
116,928
(117,035)
20,022
7,078
39,468
(33,410)
—
(17,410)
4,533
(7,696)
—
37,023
11,014
(196,232)
16,313
52,954
2,808
1,759
(5,637)
31,819
292,077
(16,214)
(29,101)
89,271
9,433
347,973
(7,723)
9,510
(1,554)
12,983
191,139
(7,099)
500,000
(504,029)
(8,514)
(600,000)
(4,689)
(13,273)
4,401
—
—
3
—
(626,101)
125
—
(350,113)
505,000
(59,170)
(10,191)
—
—
—
—
—
3,000
(2,863)
8,226
444,002
(17)
—
784,235
129,343
(202,035)
—
(75,221)
—
—
—
15,000
500
(6,301)
10,300
(128,414)
59
1,072
56,757
1,099,887
749,774
See accompanying notes to consolidated financial statements.
F-7
$
—
19,406
617,789
(456,558)
141,553
(284,063)
$
End of year
252,274
2011
$
315,652
1,099,887
$
258,895
315,652
Starz and Subsidiaries
Consolidated Statements of Member’s Interest and Noncontrolling Interests
Years Ended December 31, 2012 , 2011 and 2010
(in thousands)
Balance at January 1, 2010
Net income
Other comprehensive loss
Distributions to parent (Note 8)
Contribution of notes receivable from affiliate (Note 8)
Distribution of notes receivable to affiliate (Note 8)
Contribution from parent
Stock compensation
Contribution from noncontrolling owner of subsidiary
Balance at December 31, 2010
Net income (loss)
Other comprehensive loss
Contribution from parent (Note 8)
Change in deferred tax assets due to sale of noncontrolling interest
(Note 10)
Stock compensation
Contribution from noncontrolling owner of subsidiary
Allocate member’s interest in deficit to noncontrolling interest
Balance at December 31, 2011
Net income (loss)
Other comprehensive income (loss)
Distributions to parent (Note 1)
Distributions to parent related to stock compensation
Change in deferred tax assets due to sale of noncontrolling interest
Stock compensation
Minimum withholding of taxes related to stock compensation
Balance at December 31, 2012
Notes
Member’s
Receivable
Noncontrolling
Interest
from Affiliate
Interests
$
1,469,898 $
(489,134) $
— $
158,794
—
—
(5)
—
—
(75,221)
—
—
426,254
—
—
(489,134)
489,134
—
15,000
—
—
3,095
—
—
—
—
500
1,508,681
—
500
239,684
—
(3,273)
(6,301)
—
(174)
36,617
—
—
(141,135)
5,352
—
8,586
1,651,484
254,484
(116)
(600,000)
(4,689)
(1,855)
25,916
(13,273)
$
1,311,951
—
—
—
—
—
—
—
—
—
—
—
—
$
See accompanying notes to consolidated financial statements.
F-8
—
$
Total
980,764
158,794
(5)
(75,221)
426,254
—
15,000
3,095
500
1,509,181
236,411
(6,475)
36,617
—
150
3,000
(8,586)
(8,383)
(2,210)
43
—
—
(354)
1,097
—
(141,135)
5,502
3,000
—
1,643,101
252,274
(73)
(600,000)
(4,689)
(2,209)
27,013
(13,273)
(9,807) $
1,302,144
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Note 1 - Basis of Presentation and Description of Business
Starz, through its wholly-owned subsidiary Starz, LLC, provides premium subscription video programming to United States (“U.S.”)
multichannel video programming distributors (“MVPDs”), including cable operators, satellite television providers and telecommunications
companies. Starz also develops, produces and acquires entertainment content and distributes this content to consumers in the U.S. and
throughout the world.
D uring August 2012, the board of directors of Liberty Media Corporation (“Old LMC”) authorized a plan to spin off wholly-owned
subsidiary Liberty Spinco, Inc. (“Liberty Spinco”) (the “Spin-Off”), which, at the time of the Spin-Off, would hold all of the businesses, assets
and liabilities of Old LMC not associated with the businesses of Starz, LLC (with the exception of Starz, LLC’s Englewood, Colorado corporate
office building). On January 11, 2013, the Spin-Off was effected in a tax-free manner through the distribution, by means of a pro-rata dividend,
of shares of Liberty Spinco to the stockholders of Old LMC. As a result, Liberty Spinco became a separate public company on January 11, 2013
and was renamed “Liberty Media Corporation” (“New LMC”). In connection with the Spin-Off, the parent company of Starz, LLC was renamed
“Starz.” Unless the context otherwise requires, Old LMC is used to refer to Starz, LLC’s parent company when events or circumstances being
described occurred prior to the Spin-Off and Starz is used to refer to Starz, LLC’s parent company when events or circumstances being described
occurred following the Spin-Off.
In accordance with U.S. generally accepted accounting principles (“GAAP”), New LMC was determined to be the accounting successor to
Old LMC for financial reporting purposes following the Spin-Off due to the relative significance of New LMC to Starz (which is the legal
spinnor) and the continued involvement of Old LMC’s senior management with New LMC following the Spin-Off. Accordingly, the historical
financial statements of Old LMC prior to the Spin-Off will continue to be the historical financial statements of New LMC and Starz’s historical
financial information will be deemed to be the financial information of Starz, LLC. The financial statements of Starz reflect Starz, LLC on a
historical cost basis. Starz, LLC is the only directly owned subsidiary of Starz which in turn owns either directly or indirectly various operating
subsidiaries. Starz is a holding company with no assets, liabilities or operations other than those of Starz, LLC. Accordingly, the financial
position, results of operations, comprehensive income and cash flows of Starz and Starz, LLC are identical.
In connection with the Spin-Off, Starz, LLC distributed $1.8 billion in cash to Old LMC (paid as follows: $100.0 million on July 9,
2012, $250.0 million on August 17, 2012, $50.0 million on September 4, 2012, $200.0 million on November 16, 2012 and $1.2 billion on
January 10, 2013) funded by a combination of cash on hand and $550.0 million of borrowings under Starz, LLC’s senior secured revolving
credit facility. Such distributed cash was contributed to New LMC prior to the Spin-Off. Additionally, in connection with the Spin-Off, Starz,
LLC distributed its Englewood, Colorado corporate office building and related building improvements to Old LMC (and Old LMC transferred
such building and related improvements to a subsidiary of New LMC) and then leased back the use of such facilities from this New LMC
subsidiary. Following the Spin-Off, New LMC and Starz operate independently, and neither have any stock ownership, beneficial or otherwise,
in the other. See Note 15 – Subsequent Events for additional information regarding agreements entered into in connection with the Spin-Off.
On September 13, 2012, Starz, LLC and Starz Finance Corp. co-issued $500.0 million of 5% Senior Notes due September 15, 2019 (the
“Senior Notes”). Starz Finance Corp. is a wholly-owned subsidiary of Starz, LLC and was formed for the sole purpose of co-issuing the Senior
Notes. Starz Finance Corp. does not have and will not have any operations, assets or subsidiaries of its own. The Senior Notes pay interest semiannually on September 15 and March 15 of each year. The Senior Notes are guaranteed by Starz Entertainment, LLC (“Starz Entertainment”).
Starz, LLC used the net proceeds as well as cash on hand to repay and terminate the $500.0 million term loan under its senior secured credit
facilities. See Note 15 – Subsequent Events for additional information regarding the Senior Notes.
On January 28, 2011, Starz, LLC sold a 25% interest in Starz Media Group, LLC (“Starz Media”), a previously wholly-owned
subsidiary, to The Weinstein Company LLC (“TWC”) for cash consideration of $3.0 million .
In July 2010, Starz elected to shut down its majority-owned subsidiary Overture Films, LLC (“Overture Films”). Prior to its shut down,
Overture Films produced, acquired and distributed motion pictures in theaters in the U.S. Overture Films used third party distributors to
distribute its films outside the U.S. to the extent it held rights to such films in
F-9
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
international territories. Overture Films’ final three films were released theatrically during the fourth quarter of 2010. The Overture Films’
library of films was retained by Starz and will continue to be exploited.
Following the Spin-Off, Starz, LLC is a wholly-owned subsidiary of Starz. Starz’s business operations are conducted by its whollyowned subsidiaries Starz Entertainment, Film Roman, LLC (“Film Roman”) and certain other immaterial subsidiaries, and our majority-owned
subsidiary Starz Media. Starz is managed by and organized around the following operating segments:
Starz Networks
Starz Networks’ (previously referred to as Starz Channels) flagship premium networks are Starz and Encore . Starz , a first-run movie
service, exhibits contemporary hit movies, original series, and documentaries. Encore airs first-run movies and classic contemporary movies.
Starz Network’s third network, MoviePlex , offers a variety of art house, independent films and classic movie library content. Starz and Encore ,
along with MoviePlex , air across 17 linear networks complemented by on-demand and Internet services. Starz Networks’ premium networks are
offered by MVPDs to their subscribers either on a fixed monthly price as part of a programming tier or package or on an a-la-carte basis.
Starz Distribution
Starz Distribution includes Starz’s Home Video, Digital Media and Worldwide Distribution businesses.
Home Video
Starz, through its majority-owned subsidiary Anchor Bay Entertainment, LLC (“Anchor Bay Entertainment”), sells or rents DVDs
(standard definition and Blu-ray™) under the Anchor Bay and Manga brands, in the U.S., Canada, the United Kingdom, Australia and other
international territories to the extent it has rights to such content in international territories. Anchor Bay Entertainment develops and produces
certain of its content and also acquires and licenses various titles from third parties. Certain of the titles produced or acquired by Anchor Bay
Entertainment air on Starz Networks’ Starz and Encore networks. Anchor Bay Entertainment also distributes other titles acquired or produced by
Starz (including Overture Films’ titles and Starz Networks’ original programming content) and TWC’s titles. These titles are sold to and
distributed by regional and national retailers and other distributors, including Wal-Mart, Target, Best Buy, Ingram Entertainment, Amazon and
Netflix.
Digital Media
Digital Media distributes digital and on-demand content for Starz’s owned content and content for which it has licensed digital ancillary
rights (including Overture Films’ titles) in the U.S. and throughout the world to the extent it has rights to such content in international territories.
Digital Media receives fees for such services from a wide array of partners and distributors. These range from traditional MVPDs,
Internet/mobile distributors, game developers/publishers and consumer electronics companies. Digital Media also distributes Starz Networks’
original programming content and TWC’s titles.
Worldwide Distribution
Worldwide Distribution (previously referred to as Television) distributes movies, television series, documentaries, children’s
programming and other video content. Worldwide Distribution exploits Starz’s owned content and content for which it has licensed ancillary
rights (including Overture Films’ titles) on free or pay television in the U.S. and throughout the world on free or pay television and other media
to the extent it has rights to such content in international territories. It also distributes Starz Networks’ original programming content.
Starz Animation
Starz, through its wholly-owned subsidiary Film Roman, develops and produces two-dimensional animated content on a for-hire basis
for distribution theatrically and on television for various third party entertainment companies. See also Note 3 – Discontinued Operations.
F-10
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Note 2 - Significant Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of Starz and its majority-owned and controlled subsidiaries.
All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and accompanying notes. Starz considers amortization of program rights, the fair
value of goodwill and any related impairment, the development of ultimate revenue estimates (as defined below under “Investment in Films and
Television Programs”) associated with released films, the assessment of investment in films and television programs for impairment, valuation
allowances associated with deferred income taxes and allowances for sales returns to be its most significant estimates. Actual results may differ
from those estimates.
Prior Period Reclassifications
Certain prior period amounts have been reclassified for comparability with the 2012 presentation. In addition, Starz reclassified $53.6
million of program rights from current to long-term in the accompanying consolidated balance sheet as of December 31, 2011 to correctly reflect
the estimated usage of program rights that extended beyond a year from that date. The revisions were not material to Starz’s financial statements
taken as a whole.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less when purchased. Cash
and cash equivalents are invested at high credit quality financial institutions. Deposits generally exceed the Federal Deposit Insurance
Corporation insurance limit.
Restricted Cash
Restricted cash includes amounts owed under the distribution agreement entered into with TWC (see Note 8).
Allowance for Trade Receivables
The allowance for trade receivables represents estimated losses which may result from the inability of customers to make required
payments on trade accounts receivable and for sales returns. Allowances for sales returns are based on past experience and current trends that are
expected to continue.
Program Rights
The cost of program rights for films and television programs exhibited by Starz Networks are generally amortized on a film-by-film
basis over the anticipated number of exhibitions. Starz Networks estimates the number of exhibitions based on the number of exhibitions
allowed in the agreement and the expected usage of the content. Certain other program rights are amortized to expense using the straight-line
method over the respective lives of the agreements. Starz Networks generally has rights to two or three separate windows under its output
agreements. For films with multiple windows, the license fee is allocated between the windows based upon the proportionate estimated fair value
of each window with the majority of the cost allocated to the first window. Considerable management judgment is necessary to estimate the fair
value of each window.
Investment in Films and Television Programs
Investment in films and television programs generally includes the cost of completed films, television programs and original
productions which have been produced by Starz or for which Starz has acquired distribution rights, as well as the cost of films, television
programs or original productions in production, pre-production and development. Capitalized costs include production costs, including labor,
goods and services, interest and allocable overhead, acquisition of distribution
F-11
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
rights (including cash advances paid to TWC for theatrical releases under the distribution agreement entered into with TWC – see Note 8),
acquisition of story rights and the development of stories less the license fee for original productions, which have aired on the Starz linear
channels, on-demand or on the Internet.
Starz allocates the cost of its original productions between the pay television window 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
original productions is reclassified to program rights when the program is aired. Investment in films and television programs is amortized using
the individual-film-forecast method, whereby the costs are charged to expense and royalty, participation and residual costs are accrued based on
the proportion that current revenue from the films, television programs and original productions bears to an estimate of the remaining
unrecognized ultimate revenue. Ultimate revenue estimates do not exceed ten years following the date of initial release or from the date of
delivery of the first episode for episodic television series. Estimates of ultimate revenue involve uncertainty and it is therefore possible that
reductions in the carrying value of investment in films and television programs may be required as a consequence of changes in management’s
future revenue estimates.
Investment in films and television programs in development or pre-production is periodically reviewed to determine whether they will
ultimately be used in the production of a film or television program. Costs of films, television programs and original productions in development
or pre-production are charged to expense when a project is abandoned, or generally if the film, television program or original production has not
been set for production within three years from the time of the first capitalized transaction.
Investment in films and television programs is reviewed for impairment on a title-by-title basis when an event or change in
circumstances indicates that a film, television program or original production may be impaired. The estimated fair value for each title is
determined using the discounted estimated future cash flow of each title. If the estimated fair value of a film, television program or original
production is less than its unamortized cost, the excess of unamortized cost over the estimated fair value is charged to expense. Considerable
management judgment is necessary to estimate the fair value of investment in films and television programs.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the
assets, which range from 3 to 15 years for support and distribution equipment, 3 to 7 years for furniture, fixtures and other assets and 40 years
for the corporate office building. See Note 15 – Subsequent Events for additional information regarding the distribution, and related lease-back,
of the corporate office building to a subsidiary of New LMC.
Property and equipment is reviewed for impairment when an event or change in circumstances indicates that the asset may be impaired.
If the carrying value of the asset is determined to not be recoverable and is greater than its fair value, then an impairment charge is recognized.
The charge consists of the amount by which the carrying value of the asset exceeds its fair value. Fair value is estimated by considering sale
prices for similar assets or by discounting estimated future cash flows from such asset using an appropriate discount rate. Considerable
management judgment is necessary to determine recoverability and to estimate the fair value of property and equipment.
Goodwill
Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified assets
acquired. Goodwill is reviewed for impairment annually, at December 31, or more frequently if indicators of potential impairment exist. Starz
utilizes a qualitative assessment for determining whether step one of the goodwill impairment analysis is necessary. In evaluating goodwill on a
qualitative basis, Starz considers whether there were any negative macroeconomic conditions, industry specific conditions, market changes,
increased competition, increased costs in doing business, management challenges, the legal environment and how these factors might impact the
company specific performance in future periods.
If step one is necessary, the fair value of each reporting unit in which goodwill resides is compared to its carrying value. Fair value is
estimated by considering sale prices for similar assets or by discounting estimated future cash flows from such asset using an appropriate
discount rate. For reporting units whose carrying value exceeds the fair value, a second test is required to measure the impairment loss. In the
second test, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit with any residual value being
allocated to goodwill. The difference between such
F-12
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
allocated amount and the carrying value of the goodwill is recorded as an impairment charge. Considerable management judgment is necessary
to estimate the fair value of each reporting unit.
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. Payments to distributors for marketing support costs for which Starz, LLC does not receive a direct benefit are recorded as a
reduction of the corresponding revenue. Certain sales incentives, including discounts and rebates, provided to distributors are accounted for as a
reduction of revenue and are not significant.
Revenue generated from the sale of DVDs is recognized, net of an allowance for estimated sales returns, on the later of the estimated
receipt of the product by the customer or after any restrictions on sale lapse. At the time of the initial sale, Starz also records a provision, based
on historical trends and practices, to reduce revenue for discounts and rebates provided to customers related to the sale of DVDs.
Revenue from digital and television licensing is recognized when the film or program is complete in accordance with the terms of the
arrangement, is available for exploitation and when certain other conditions are met. In the event that a licensee pays Starz a nonrefundable
minimum guarantee at or prior to the beginning of a license term, Starz records this amount as deferred revenue until all of the criteria for
recognition are met.
Starz recognizes revenue and related production costs related to animation services provided to customers under contract generally
based on the percentage that costs incurred-to-date bear to estimated total costs to complete based upon the most recent information. Revenue
recognized is proportional to the work performed-to-date under the contracts.
Revenue from the theatrical release of feature films is recognized at the time of exhibition based on Starz’s participation in box office
receipts.
Advertising and Marketing
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, which are dependent on future events. Marketing support is mutually beneficial and
generally cooperative advertising and marketing between Starz and its distributors. 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.
Stock-Based and Other Long-term Compensation
Starz measures the cost of employee services received in exchange for an award of equity instruments (such as stock options and
restricted stock) based on the grant-date fair value of the award, and recognizes that cost over the period during which the employee is required
to provide service (usually the vesting period of the award). Starz measures the cost of employee services received in exchange for an award of
liability instruments based on the current fair value of the award and re-measures the fair value of the award at each reporting date.
Certain current and former employees of Starz held awards granted under the Overture Films, LLC 2006 Long-term Incentive Plan (the
“Overture LTIP”). Because Overture is a privately held enterprise, Starz utilized a probability-weighted expected return method to determine the
fair value of the awards and corresponding compensation expense under the Overture LTIP. The estimated value per unit was estimated based
upon an analysis of probability-weighted net present values of future returns, considering each of the various future outcomes.
F-13
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Income Taxes
Starz is a holding company with no assets, liabilities or operations other than those of Starz, LLC. Starz, LLC is a single-member
limited liability company (“LLC”), which is treated as a disregarded entity for U.S. federal income tax purposes and is included in Old LMC’s
consolidated federal and state income tax returns prior to the Spin-Off. Subsequent to the Spin-Off, Starz will file its own U.S. federal and state
income tax returns.
As a result of the sale of 25% of Starz Media to TWC, Starz Media is no longer consolidated for federal income tax purposes and is no
longer consolidated in certain states for state income tax purposes with Old LMC/Starz and is now a separate taxpayer for federal purposes and
in certain states. Effective April 1, 2012, Starz Media filed an election to convert itself from a LLC treated as a corporation to a partnership for
federal and state income tax purposes.
The income tax provision included in these consolidated financial statements has been prepared as if Starz was a stand-alone federal
and state taxpayer. Accordingly, Starz has applied the asset and liability method to account for income taxes. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying value amounts and income tax
bases of assets and liabilities and the expected benefits of utilizing net operating loss and tax credit carryforwards. The deferred tax assets and
liabilities are calculated using enacted tax rates in effect for each taxing jurisdiction in which Starz operates for the year in which those
temporary differences are expected to be recovered or settled. Net deferred tax assets are then reduced by a valuation allowance if Starz believes
it more likely than not that such net deferred tax assets will not be realized.
Collaborative Arrangements
As part of its production and acquisition activities, Starz has entered into collaborative arrangements. A collaborative arrangement is a
contractual arrangement that involves a joint operating activity. These arrangements involve two (or more) parties who are both (a) active
participants in the activity and (b) exposed to significant risks and rewards dependent on the commercial success of the activity. A collaborative
arrangement may provide that one participant has sole or primary responsibility for certain activities or that two or more participants have shared
responsibility for certain activities. Starz records revenue and costs on a gross basis for activities for which it has been determined to be the
principal and records revenue and costs on a net basis for activities for which it has been determined to be the agent. Payments made to other
participants are recorded as participation expense within production and acquisition costs in the accompanying consolidated statements of
operations.
Derivative Instruments and Hedging Activities
All derivatives, whether designated in hedging relationships or not, are recorded on the balance sheet at fair value. If the derivative is
designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative
are recorded in other comprehensive income (loss) and are recognized in the statement of operations when the hedged item affects earnings.
Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. If the derivative is not designated as a hedge,
changes in the fair value of the derivative are recognized in earnings.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, restricted cash, trade accounts receivable, trade accounts payable, accrued liabilities
and due to affiliates approximates fair value, due to their short maturity. See Note 6 for information concerning the fair value of Starz’s debt
instruments.
F-14
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Foreign Currency Translation
The functional currency of Starz is the U.S. dollar. The functional currency of Starz’s foreign operations is the applicable local currency
for each foreign subsidiary. Assets and liabilities of foreign subsidiaries are translated at the spot rate in effect at the applicable reporting date
and the related statements of operations are translated at the average exchange rates in effect during the applicable period. The resulting
unrealized cumulative translation adjustment, net of applicable income taxes, is included as a component of accumulated other comprehensive
income (loss) in member’s interest and noncontrolling interests and the consolidated statements of comprehensive income.
Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such
transactions arise. Subsequent changes in exchange rates result in gains and losses which are reflected in the accompanying consolidated
statements of operations as unrealized (based on the applicable period-end exchange rate) or realized upon settlement of the transactions.
Recent Accounting Pronouncements
In October 2012, the Financial Accounting Standards Board amended the Accounting Standards Codification as summarized in
Accounting Standards Update (“ASU”) 2012-07- Entertainment-Films (Topic 926). ASU 2012-07 eliminates the presumption that conditions
leading to the write-off of unamortized film costs after the balance sheet date existed as of the balance sheet date. The amendment also
eliminates the requirement that an entity incorporate into fair value measurements used in the impairment tests, the effects of any changes in
estimates resulting from the consideration of subsequent evidence if the information would not have been considered by market participants at
the measurement date. ASU 2012-07 is effective for impairment assessments performed on or after December 15, 2012 and should be applied
prospectively. Starz does not believe that the amendment had any impact on its consolidated financial statements.
Note 3 - Discontinued Operations
On March 3, 2011, Starz completed the sale of 92.5% of Starz Media Canada Co. (“Canada Co.”), located in Toronto, Ontario, to a
Canadian investor group and recognized a loss on the sale of $12.1 million , before a tax benefit of $3.9 million . Subsequent to the sale, Starz
maintains a 7.5% ownership interest, but does not have significant involvement with the ongoing operations of Canada Co. Canada Co. develops
and produces three-dimensional animated content on a for-hire basis.
The summarized statements of operations of Canada Co. for the years ended December 31, 2012 , 2011 and 2010 included in
discontinued operations in the consolidated statements of operations are as follows:
2012
Revenue
Operating expenses
Advertising and marketing
General and administrative
Depreciation
Operating income (loss)
Other expense
Income (loss) before income taxes
Income tax benefit (expense)
$
$
Net income
F-15
For the Years Ended December 31,
2011
2010
— $
1,354 $
20,623
—
(1,513)
(12,182)
—
(2)
(103)
—
(114)
(1,102)
—
(447)
(1,773)
—
(722)
5,463
—
(61)
(274)
—
(783)
5,189
—
1,500
(1,874)
— $
717 $
3,315
Note 4 – Investment in Films and Television Programs, Net
Investment in films and television programs, net consists of the following (in thousands):
December 31,
2012
Released film costs-theatrical, less amortization
Film costs – television and DVD:
Released, less amortization
Completed, but not released
In production
Development and pre-production
2011
$
3,650
$
44,101
343
128,535
5,044
181,673
$
11,876
$
67,912
7,283
91,570
5,301
183,942
Approximately 88% of the unamortized film costs (theatrical, television and DVD) for released films of $47.8 million at December 31,
2012 are expected to be amortized within three years. Approximately $32.4 million of the costs of Released and Completed, but not released
films of $48.1 million at December 31, 2012 are expected to be amortized during the next twelve months.
As a result of changes in ultimate revenue estimates, Starz Distribution recognized impairments of investment in films and television
programs totaling $17.2 million , $12.9 million and $46.6 million for the years ended December 31, 2012 , 2011 and 2010 , respectively. Such
impairments are included in production and acquisition costs in the consolidated statements of operations.
Note 5 - Property and Equipment, Net
Property and equipment, net consists of the following (in thousands) :
December 31,
Building and support equipment
Distribution equipment
Furniture, fixtures and other
$
Less accumulated depreciation
$
2012
100,061 $
91,824
15,277
207,162
(110,882)
96,280 $
2011
139,368
95,423
15,115
249,906
(151,375)
98,531
The cost of satellite transponders under capital leases included in distribution equipment was $57.5 million and $60.5 million as of
December 31, 2012 , and 2011 , respectively. Accumulated depreciation for these transponders was $30.2 million and $27.7 million at
December 31, 2012 and 2011 , respectively. During 2012, Starz conducted a review of its fixed asset records and wrote-off $56.0 million of fully
depreciated assets that are no longer in service.
F-16
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Note 6 - Debt
Debt consists of the following (in thousands) :
December 31,
2012
Senior Secured Credit Facilities (a)
Senior Notes (b)
Transponder capital leases (c)
Total debt
Less current portion of debt
Debt
$
$
5,000 $
500,000
34,805
539,805
(4,134)
535,671 $
2011
505,000
—
40,044
545,044
(4,129)
540,915
(a) On November 16, 2011, Starz, LLC entered into a credit agreement that provides a $1,000 million revolving credit facility, with a $50
million sub-limit for standby letters of credit, and $500.0 million of term loans (the “Senior Secured Credit Facilities”). At closing,
Starz, LLC borrowed $500 million under the term loan facility and $5 million under the revolving credit facility. Net proceed from the
Senior Notes and cash on hand were used to repay and terminate the term loans in September 2012. Borrowings under the revolving
credit facility may be prepaid at any time and from time to time without penalty other than customary breakage costs. Any amounts
prepaid on the revolving credit facility may be reborrowed. The revolving credit facility is scheduled to mature on November 16, 2016.
Interest on each loan under the Senior Secured Credit Facilities is payable at either an alternate base rate or LIBOR at Starz, LLC’s
election. Borrowings that are alternate base rate loans bear interest at a per annum rate equal to the alternate base rate plus a margin
that varies between 0.50% and 1.50% depending on the consolidated leverage ratio, as defined in the Senior Secured Credit Facilities.
The alternate base rate is the highest of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus ½ of 1% or (c) LIBOR for a one month interest period plus 1% . Borrowings that are LIBOR loans bear interest at a per annum rate equal to the applicable LIBOR plus
a margin that varies between 1.50% and 2.50% depending on the consolidated leverage ratio. The Senior Secured Credit Facilities
require Starz, LLC to pay a commitment fee on any unused portion under the revolving credit facility. The commitment fee varies
between 0.25% and 0.50% , depending on the consolidated leverage ratio.
As of December 31, 2012 , the following borrowings and related LIBOR interest rates were outstanding under the Senior Secured
Credit Facilities (dollars in thousands) :
LIBOR period:
December 2012 – January 2013
Interest Rate
1.9617%
Loan Amount
$5,000
The Senior Secured Credit Facilities contain certain covenants that include restrictions on, among others, incurring additional debt,
paying dividends or making certain distributions, investments and other restricted payments, liens, guarantees and investments. In
addition, Starz, LLC must comply with certain financial covenants including a consolidated leverage ratio, as defined in the
agreement. As of December 31, 2012 , Starz, LLC is in compliance with all covenants under the Senior Secured Credit Facilities.
F-17
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
(b) On September 13, 2012, Starz, LLC and Starz Finance Corp. co-issued $500.0 million aggregate principal amount of Senior Notes,
due September 15, 2019. The Senior Notes bear interest at a rate of 5.0% payable semi-annually on September 15 and March 15 of
each year. The Senior Notes are guaranteed by Starz Entertainment. Starz, LLC used the net proceeds and cash on hand to repay and
terminate the $500.0 million term loan under our Senior Secured Credit Facilities. During the first quarter of 2013, Starz, LLC
completed an exchange offer for the Senior Notes and co-issued an additional $175.0 million 5.0% senior notes (see Note 15 –
Subsequent Events).
The Senior Notes rank equally in right of payment to all existing and future senior obligations and existing and future subordinated
obligations. The Senior Notes are effectively subordinated to any existing and future secured obligations and to all the liabilities of the
subsidiaries that do not guarantee the Senior Notes.
The Senior Notes contain certain covenants that include restrictions on, among others, incurring additional debt, paying dividends or
making certain distributions, investments and other restricted payments, liens, guarantees and investments. As of December 31, 2012,
Starz, LLC is in compliance with all covenants under the Senior Notes.
(c) Starz Entertainment has entered into capital lease agreements for its transponder capacity. The agreements expire during 2018 to 2021
and have an imputed annual interest rates ranging from 5.5% to 7.0% .
Debt maturities for the next five years and thereafter are as follows (in thousands) :
2013
2014
2015
2016
2017
Thereafter
Total minimum payments
Less: amounts representing interest
Present value of debt payments
Less: current portion of debt obligations
$
$
Long-term portion of debt obligations
6,228
6,228
6,228
11,228
6,228
512,346
548,486
(8,681)
539,805
(4,134)
535,671
At December 31, 2012 , the fair value of the Senior Notes was $517.8 million and was based upon quoted prices in active markets.
Starz believes the fair value of the remaining debt approximates its carrying value as of December 31, 2012 due to its variable rate nature and
Starz’s stable credit spread.
Amounts totaling $2.2 million , $2.0 million and $2.0 million in interest costs have been capitalized as investment in films and
television programs during the years ended December 31, 2012 , 2011 and 2010 , respectively.
F-18
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Note 7 – Accrued Liabilities
Accrued liabilities consist of the following (in thousands) :
Royalties, residuals and participations
Participations payable to TWC
Program rights payable
Advertising and marketing
Payroll and related costs
Accrued compensation related to long term incentive plan
Other
$
$
December 31,
2012
2011
72,139 $
46,692
23,861
56,201
57,125
65,600
38,779
39,381
23,657
22,380
3,195
33,854
37,306
40,042
256,062 $
304,150
Approximately 85% of accrued royalties, participations and residuals of $72.1 million at December 31, 2012 are expected to be paid
during the next twelve months.
Note 8 – Related Party Transactions
Due to Affiliates
Prior to the Spin-Off, Starz, LLC participated in Old LMC’s employee benefit plans (medical, dental, life insurance, etc.) and will
participate in Starz’s plans following the Spin-off. Charges from Old LMC related to these benefits and other miscellaneous charges are included
in general and administrative expenses in the accompanying consolidated statements of operations and aggregated $12.5 million , $12.4 million
and $12.8 million for the years ended December 31, 2012 , 2011 and 2010 , respectively. Such amounts were invoiced by Old LMC on a
monthly basis and were due upon receipt of the invoice by Starz, LLC. Amounts due to affiliate for such charges totaled $1.0 million and $3.6
million as of December 31, 2012 and 2011 , respectively.
Due to affiliates at December 31, 2012 and 2011 also includes $38.5 million and $50.2 million respectively for amounts owed to Old
LMC for income tax obligations.
Contributions from (Distributions to) Affiliate
Starz, LLC is a single member LLC, which is treated as an entity that is disregarded as being separate from Old LMC/Starz for U.S.
federal income tax purposes. As such, Starz, LLC is included in the consolidated federal and state income tax returns of Old LMC prior to the
Spin-Off. Prior to 2011, Starz, LLC’s subsidiary Starz Media was subject to a separate tax sharing agreement with Old LMC. As a result, the tax
benefits of losses generated by Starz Media were not included in the calculation of Starz, LLC’s tax obligation to Old LMC. Accordingly, Starz,
LLC’s tax payments to Old LMC prior to 2011 were in excess of what Starz, LLC’s consolidated tax obligation would have been if Starz Media
was included in the tax calculation. Such excess payments of $75.2 million are reflected as distributions to parent in the accompanying
consolidated statements of cash flows and consolidated statements of member’s interest and noncontrolling interests.
As a result of the sale of the 25% interest to TWC in January 2011, Starz Media is now a separate taxpayer for federal purposes and in
certain states. During the year ended December 31, 2011 , Starz, LLC’s tax liability to Old LMC was reduced by $36.6 million due to the
overpayment of 2010 tax sharing obligations which were treated as a distribution to affiliate in 2010. Such reduction is reflected as a contribution
from affiliate in the accompanying consolidated statement of member’s interest and noncontrolling interests.
During 2006, Starz, LLC entered into two notes receivable totaling $489.1 million with Liberty Media LLC, a wholly-owned subsidiary
of Old LMC. Such notes were classified in member’s interest. Starz, LLC distributed the notes receivable to Liberty Media LLC on September
30, 2010 in connection with a corporate reorganization. Starz, LLC did not recognize interest on the notes receivable.
F-19
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Note Payable due to Affiliate
On December 28, 2006, a wholly-owned subsidiary of Starz Media, entered into a note agreement with Liberty Media LLC to fund the
operating needs of this subsidiary. Such note bore interest at a rate of LIBOR plus 4.0% . On September 30, 2010, Liberty Media LLC
contributed its receivable under the note agreement aggregating $363.6 million to Starz, LLC in connection with a corporate reorganization.
Such note agreement was canceled on October 1, 2011. See Note 6 for interest capitalized as investment in films and television programs.
Mezzanine Debt due to Affiliate
On January 2, 2008, Overture Films entered into a $50.0 million , six year secured term credit facility (the “Overture Mezzanine Debt”)
with Liberty Media LLC. The Overture Mezzanine Debt was used to fund certain costs and working capital associated with the production or
acquisition of theatrical films. On September 30, 2010, Liberty Media LLC contributed its receivable under the Overture Mezzanine Debt
aggregating $62.7 million to Starz, LLC in connection with a corporate restructuring. Interest on each loan under the Overture Mezzanine Debt
was payable at LIBOR plus 10.00% per annum. Such note agreement was canceled in August 2012. See Note 6 for interest capitalized as
investment in films and television programs.
Related Party
As discussed previously, on January 28, 2011, Starz, LLC sold a 25% interest in Starz Media to TWC. In December 2010, Anchor Bay
Entertainment entered into a five -year license agreement with TWC for the distribution, by the Home Video and Digital Media businesses, of
certain of TWC’s theatrical releases. Starz recognized participation expense of $60.8 million , $72.1 million and none , which is included in
production and acquisition costs in the accompanying statement of operations, for TWC’s share of the net proceeds under the license agreement,
for the years ended December 31, 2012 , 2011 and 2010, respectively. Starz’s accrued advances payable to TWC totaled $23.9 million and $56.2
million , which is included in accrued liabilities in the accompanying consolidated balance sheets, at December 31, 2012 and 2011 , respectively.
Starz Entertainment guarantees Anchor Bay Entertainment’s advance payments to TWC under this agreement up to $50.0 million .
Note 9 – Stock Options, Long Term Incentive Plan and Phantom Stock Appreciation Rights
Stock Options – Pursuant to an Old LMC incentive plan, Old LMC granted to certain of Starz’s employees stock options to purchase
former Liberty Starz common stock and restricted shares of Liberty Starz common stock. In November 2011, Old LMC exchanged each share of
outstanding Series A Liberty Starz common stock for 0.88129 of a share of Old LMC’s Series A Liberty Capital common stock (“LMCA”). The
outstanding Liberty Starz restricted stock was also exchanged for LMCA restricted stock using the same ratio. An adjustment was made to the
strike price of and number of shares (using the same ratio) subject to each outstanding stock option to purchase shares of Liberty Starz common
stock. The exchange of stock options and restricted stock was considered a modification of the previous award, however, the impact to
compensation expense was not significant.
On December 4, 2012 (the “Grant Date”), pursuant to the approval of the Compensation Committee of its Board of Directors, Old LMC
effected the acceleration of each unvested in-the-money option to acquire shares of LMCA held by certain of its and its subsidiaries’ officers
(collectively, the “Eligible Optionholders”), including one executive officer of Starz, LLC. Following this acceleration, also on the Grant Date,
each Eligible Optionholder exercised, on a net settled basis, substantially all of his or her outstanding in-the-money vested and unvested options
to acquire LMCA shares (the “Eligible Options”) (collectively, the “Exchange”), and:
•
with respect to each vested Eligible Option, Old LMC granted the Eligible Optionholder a vested new option with substantially the
same terms and conditions as the exercised vested Eligible Option, except that the exercise price for the new option is the closing
price per LMCA share, as applicable, on The Nasdaq Global Select Market on the Grant Date; and
•
with respect to each unvested Eligible Option:
◦
the Eligible Optionholder sold to Old LMC the shares of LMCA received upon exercise of such unvested Eligible Option on
the Grant Date for cash equal to the closing price of LMCA on The Nasdaq Global Select Market on the Grant Date;
F-20
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
◦
Each Eligible Optionholder used the proceeds of that sale to purchase from Old LMC at that price an equal number of
restricted LMCA shares, as applicable, which have a vesting schedule identical to that of the exercised unvested Eligible
Option; and
◦
Old LMC granted the Eligible Optionholder an unvested new option, with substantially the same terms and conditions as the
exercised unvested Eligible Option, except that (a) the number of shares underlying the new option is equal to the number of
shares underlying such exercised unvested Eligible Option less the number of restricted shares purchased from Old LMC as
described above and (b) the exercise price of the new option is the closing price of LMCA on The Nasdaq Global Select
Market on the Grant Date.
Starz recognized $20.0 million (including $5.8 million of expense related to the Exchange), $6.9 million and $4.3 million during the
years ended December 31, 2012 , 2011 and 2010 , respectively of compensation expense related to vested stock options and restricted stock. As
of December 31, 2012 , the total unrecognized compensation cost related to the unvested stock options and restricted stock was approximately
$44.7 million . Such amount will be recognized in Starz’s consolidated statements of operations over a weighted average period of
approximately 2.4 years.
The historical awards granted in 2012 , 2011 and 2010 are summarized as follows:
Options
Granted
Weighted
Average GrantDate Fair Value
2012 Awards:
Stock options - LMCA
688,000
$40.12
Stock options - LMCA issued in the Exchange
482,535
$42.36
58,110
$105.56
Stock options - LMCA
100,000
$32.60
Stock options - Series A Liberty Starz Common Stock
496,000
$21.36
11,655
$77.52
208,500
$16.17
Restricted stock - LMCA
2011 Awards:
Restricted stock - Series A Liberty Starz Common Stock
2010 Awards:
Stock options - Series A Liberty Starz Common Stock
—
Restricted stock - Series A Liberty Starz Common Stock
—
The 2012 , 2011 and 2010 stock option awards vest quarterly over a 4 year period and have a term of 7 years, except with respect to
certain of the Exchange options which have a term of 10 years . Starz calculates the grant-date fair value for the stock options using the BlackScholes Model. The expected term used in the Black-Scholes calculation was a range of 4.5 to 7.08 years for the 2012 awards, 4.4 years for the
2011 awards and 4.6 years for the 2010 awards. The expected volatility was a range of 37.5% to 54.2% for the 2012 awards, 31.9% for the
Liberty Starz grants and 54.2% for the LMCA grants for the 2011 awards and 33.6% for the 2010 awards. The expected volatility used in the
calculation for the awards is based on the historical volatility of Old LMC’s LMCA, Starz and Capital tracking stocks and the implied volatility
of LMC’s publicly traded options. Starz uses a zero dividend rate as Starz has not historically declared dividends and a range of risk-free rates of
0.5% to 1.0% for the 2012 awards, 0.7% to 1.9% for the 2011 awards and 2.2% to 2.4% for the 2010 awards which are derived from U.S.
Treasury Bonds with a term similar to that of the subject options. The grant-date fair value of the 2012 outstanding restricted shares of 58,110
was based on the market value of the Series A Liberty Starz common stock related to the unvested LMCA options which they were exchanged
for as follows: 3,100 restricted shares at $105.56 , 43,546
F-21
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
restricted shares at $105.56 and 11,464 restricted shares at $105.56 per share. The grant-date fair value of the 2011 outstanding restricted shares
of 11,655 was based on the market value of the Series A Liberty Starz common stock at the grant date of $77.52 per share. Of the 58,110
restricted shares granted in 2012, 46,646 will vest on December 31, 2013 and 11,464 will vest quarterly through December 15, 2015. The 2011
grant of restricted shares vest annually over three years.
The following table presents the number and weighted average exercise price (“WAEP”) of the historical Liberty Starz stock options
prior to the conversion in November 2011 to LMCA stock options:
Options
600,000
208,500
(3,310)
(10,439)
—
794,751
496,000
(8,683)
(31,626)
—
(1,250,442)
—
Outstanding at January 1, 2010
Granted
Exercised
Forfeited
Expired/cancelled
Outstanding at December 31, 2010
Granted
Exercised
Forfeited
Expired/cancelled
Liberty Starz conversion to LMCA
Outstanding at December 31, 2011
$
$
$
$
$
$
$
$
$
$
$
WAEP
61.53
51.04
51.03
51.03
—
59.41
72.92
52.63
64.78
—
57.56
$
—
The following table presents the number and WAEP of LMCA stock options after the conversion from Liberty Starz stock options in
November 2011:
Options
Outstanding at December 31, 2010
Liberty Starz conversion to LMCA
Granted
Exercised
Forfeited
Expired/cancelled
Outstanding at December 31, 2011
Granted
Exercised
The Exchange, Granted
The Exchange, Exercised
Forfeited
Expired/cancelled
WAEP
$
$
$
$
$
$
$
$
$
$
$
$
$
—
65.31
73.45
57.90
—
—
65.99
90.49
73.13
105.56
63.37
83.27
—
Outstanding at December 31, 2012
—
1,101,922
100,000
(275)
—
—
1,201,647
688,000
(166,316)
482,535
(540,645)
(49,510)
—
1,615,711
$
93.14
Exercisable at December 31, 2012
520,540
$
95.84
At December 31, 2012 the weighted-average remaining contractual term of the outstanding options is 6.1 years and the exercisable
options is 6.2 years.
Long Term Incentive Plan - Starz granted incentive units to certain officers and key employees (“Plan Participants”) under the 2006
long term incentive plan (“2006 LTIP”). Such grants vest over a period of four years. Compensation under the 2006 LTIP is computed based on
the vested percentage of units granted and a formula based on a multiple of earnings
F-22
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
before interest, taxes, depreciation and amortization, adjusted for certain net assets or liabilities of Starz Entertainment, as defined. During 2010,
Starz amended the LTIP to freeze the value of the 2006 LTIP units at the value calculated as of December 31, 2009. All amounts accrued under
the 2006 LTIP are payable in cash, Old LMC common stock or a combination thereof at specified dates through 2013.
Starz recognized none , $0.2 million and $3.1 million during the years ended December 31, 2012 , 2011 and 2010 , respectively, of
compensation expense related to the 2006 LTIP. During the years ended December 31, 2012 , 2011 and 2010, Starz made payments of $33.4
million , $7.7 million and $46.6 million , respectively, to certain Plan Participants under the 2006 LTIP. Starz has accrued $3.2 million as of
December 31, 2012 related to the 2006 LTIP, which is included in accrued liabilities in the accompanying consolidated balance sheet.
PSARs – Starz had fully vested outstanding Phantom Stock Appreciations Rights (“PSAR”) held by its founder and former chief
executive officer. Effective September 30, 2009, the founder and former chief executive officer elected to exercise all of his remaining PSARs.
In December 2010, Starz paid $149.6 million in cash to settle the PSARs which was determined by a valuation process as described in the PSAR
agreement. Prior to this valuation process, the value of the PSARs was based on the estimated fair value of Starz Entertainment, as adjusted for
certain assets and liabilities as defined, utilizing a discounted cash flow model. Starz recognized none , none and $33.7 million of compensation
expense during the years ended December 31, 2012 , 2011 and 2010 , respectively, related to these PSARs.
Overture Long Term Incentive Plan - In November 2006, Starz established the Overture LTIP to provide long term compensation to
secure loyal and continued services and promote profitability and efficiency within Overture Films. As previously noted, Starz ceased operations
at Overture Films in July 2010. Starz determined that the units have no value due to the valuation of Overture Films at the time it ceased
operations and as of the 2012 valuation date provided in the Overture LTIP. Accordingly, during the year ended December 31, 2010 , Starz
eliminated the previously recorded liability of $1.6 million related to 14.24 outstanding units Starz recognized credits to compensation expense
related to the Overture LTIP of none , none and $1.6 million during the years ended December 31, 2012 , 2011 and 2010 , respectively. Starz has
no further obligations to grantees under the Overture LTIP.
Note 10 - Income Taxes
Starz is a holding company with no assets, liabilities or operations other than those of Starz, LLC. Starz, LLC is a single member LLC,
which is treated as a disregarded entity for U.S. federal income tax purposes and is included in the consolidated federal and state income tax
returns of Old LMC prior to the Spin-Off. The income tax accounts and provisions included in these consolidated financial statements have been
prepared as if Starz was a stand-alone federal and state taxpayer.
Income tax expense consists of the following (in thousands) :
2012
Current:
Federal
State and local
Foreign
$
Deferred:
Federal
State and local
$
Income tax expense
F-23
Years ended December 31,
2011
141,537
4,580
1,758
147,875
$
122,505
10,018
2,643
135,166
(21,782)
4,372
(17,410)
130,465 $
34,423
2,600
37,023
172,189
$
$
2010
38,117
2,715
4,978
45,810
48,590
4,364
52,954
98,764
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Income tax expense differs from the amounts computed by applying the U.S. federal income tax rate of 35% as a result of the following
(in thousands) :
Computed expected tax expense
State and local income taxes, net of federal income taxes
Foreign taxes, net of foreign tax credit
Noncontrolling interest - partnership investment
Change in valuation allowance affecting tax expense
Taxable liquidation of subsidiary
$
Years ended December 31,
2012
2011
133,959 $
145,630 $
10,162
8,000
832
1,024
1,297
—
76,933
(223,992)
(101,299)
—
2010
88,985
4,168
(563)
—
5,974
—
Change in subsidiary tax status
Expiration of capital loss
Other, net
$
Income tax expense
9,018
—
(437)
130,465 $
—
241,934
(407)
172,189 $
—
—
200
98,764
Effective April 1, 2012, Starz Media filed an election to convert itself from a LLC treated as a corporation to a partnership for U.S.
federal and state income tax purposes. As a result of the conversion, Starz recognized a capital loss on the deemed liquidation of Starz Media.
Based on the relevant accounting literature, Starz had not previously recorded a benefit for the tax basis in the stock of Starz Media. The capital
loss of $101.3 million (as tax effected) is being carried forward and is recorded as a long term deferred tax asset. Starz does not believe that it is
more likely than not that it would be able to generate capital gains to utilize any of this capital loss carryforward as a stand-alone taxpayer and as
such, has recorded a full valuation allowance against this capital loss.
In addition, under current U.S. federal and state tax law, LLC’s treated as partnerships are not subject to income tax at the entity level.
As such, the election to convert Starz Media to partnership treatment for income tax purposes resulted in the reversal of deferred tax assets
related to Starz Media’s deductible temporary differences of $16.1 million and the reversal of a valuation allowance offsetting these deferred tax
assets of $16.1 million . Also, a deferred tax asset of $7.1 million was recorded for the initial difference between the book basis and the tax basis
of Starz, LLC’s investment in the Starz Media partnership as of April 1, 2012
F-24
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 2012 and 2011 are presented below (in thousands) :
December 31,
2012
Deferred tax assets:
Tax loss and credit carryforwards
Accrued stock compensation
Investments
Deferred revenue
Intangible assets
Other future deductible amounts
Deferred tax assets
Valuation allowance
Deferred tax assets, net
$
Deferred tax liabilities:
Property and equipment
Intangible assets
Other future taxable amounts
Deferred tax liabilities
2011
155,861 $
5,575
25,516
—
1,163
219
188,334
(155,861)
32,473
(18,807)
—
(454)
(19,261)
$
Net deferred tax assets (liabilities)
13,212
56,682
19,301
6,747
1,588
—
24,752
109,070
(78,141)
30,929
(23,070)
(8,053)
—
(31,123)
$
(194)
The net increase in the valuation allowance was $77.8 million in 2012 . The gross change in the valuation allowance that affected tax
expense was $76.9 million .
Starz’s ability to utilize its foreign income tax credit carryforwards is dependent on Starz generating foreign-source taxable income.
Based on management’s assessment of projected foreign source taxable income and available tax planning strategies, Starz does not believe that
it is more likely than not that it will utilize the foreign income tax credit carryforward deferred tax asset before it expires. As such, Starz has
recorded a valuation allowance of $17.2 million and $15.1 million related to those credit carryforwards as of December 31, 2012 and 2011 ,
respectively.
Starz has generated net operating losses in certain foreign and state jurisdictions in which Starz operates. Because Starz’s ability to
utilize these losses is dependent on it generating future taxable income in these jurisdictions, Starz does not believe that it is more likely than not
that it will utilize these losses. As such, Starz has recorded a valuation allowance of $1.7 million and $5.9 million related to those foreign and
state net operating losses as of December 31, 2012 and 2011 , respectively.
Starz has a capital loss carryforward deferred tax asset of $137.0 million and $35.7 million as of December 31, 2012 and 2011 ,
respectively, that Starz does not believe that it is more likely than not that it will utilize. As such, Starz has recorded a valuation allowance of
$137.0 million and $35.7 million related to these capital loss carryforwards as of December 31, 2012 and 2011 , respectively.
The election to convert Starz Media to partnership treatment for income tax purposes resulted in the reversal of deductible temporary
differences of $21.4 million as of December 31, 2011, including the $16.1 million as discussed above, and the reversal of the valuation
allowance offsetting these deductible temporary differences.
F-25
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Note 11 - Commitments and Contingencies
Programming Rights
Starz has entered into an exclusive long-term licensing agreement for theatrically released films from the Walt Disney Company
(“Disney”) through 2015. The agreement provides Starz with exclusive pay TV rights to exhibit qualifying theatrically released live-action and
animated feature films under the Disney, Touchstone, Pixar and Marvel labels. Theatrically released films produced by DreamWorks are not
licensed to Starz under the agreement. In addition, we are obligated to pay programming fees for all qualifying films that are released theatrically
in the U.S. by Sony Pictures Entertainment Inc.’s (“Sony”) Columbia Pictures, Screen Gems, Sony Pictures Classics and TriStar labels through
2021, subject to certain limitations. On February 11, 2013, Starz announced a new, multi-year output licensing agreement for theatrically
released motion pictures from Sony that extends its relationship with Sony through 2021. The previous agreement had covered motion pictures
released theatrically through 2016. The programming fees to be paid to Disney and Sony are based on the quantity and domestic theatrical
exhibition receipts of qualifying films. Starz has also entered into agreements with a number of other motion picture producers and is obligated
to pay fees for the rights to exhibit certain films that are released by these producers.
The unpaid balance for film rights related to films that were available at December 31, 2012 is reflected in accrued liabilities and in
other liabilities in the accompanying consolidated balance sheets. As of December 31, 2012 , such liabilities aggregated approximately $58.6
million and are payable as follows: $57.1 million in 2013 and $1.5 million in 2014.
Under the agreements with Disney and Sony, Starz is obligated to pay fees for the rights to exhibit films that have been released
theatrically, but are not available for exhibition by Starz until some future date. The estimated amounts payable under Starz’s programming
license agreements, including the Disney and Sony agreements, which have not been accrued as of December 31, 2012 , are as follows: $325.0
million in 2013; $101.4 million in 2014; $71.7 million in 2015; $63.8 million in 2016, $64.0 million in 2017 and $265.7 million thereafter.
Starz is also obligated to pay fees for films that have not yet been released in theaters. Starz is unable to estimate the amounts to be paid
under these agreements for films that have not yet been released in theaters; however, such amounts are expected to be significant.
Total amortization of program rights was $617.8 million , $611.0 million and $611.6 million for the years ended December 31, 2012 ,
2011 and 2010 , respectively. These amounts are included in programming costs in the accompanying consolidated statements of operations.
Operating Leases
Starz leases office facilities, back-up transponder capacity, and certain other equipment under operating lease arrangements. Rental
expense under such arrangements amounted to $7.1 million , $6.6 million and $7.9 million for the years ended December 31, 2012 , 2011 and
2010 , respectively. Such amounts are included in operating expenses and general and administrative expenses in the accompanying consolidated
statements of operations.
The future minimum payments under noncancelable operating leases, net of subleases, at December 31, 2012 are as follows (in
thousands) :
2013
2014
2015
2016
2017
Thereafter
$
$
F-26
6,123
5,595
5,025
3,709
780
1,700
22,932
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Foreign Currency Hedge Contracts
Starz has entered into foreign currency hedge contracts to manage its foreign currency risk in connection with certain original
programming series produced in South Africa. Starz has committed to pay US $14.3 million for ZAR 119.6 million during 2013.
Guarantees
Canada Co. entered into an agreement with the Ontario government whereby Canada Co. is eligible to receive funds under the Canadian
Next Generation of Jobs Fund Grant (“NGOJF”) through the termination date of March 31, 2014. The maximum amount of the grant available
and the guarantee is $23.1 million . Starz Entertainment entered into a guarantee for any amounts owed to the Ontario government under the
grant if Canada Co. does not meet its obligations. The Ontario government can demand payment from Starz Entertainment if Canada Co. does
not perform any of its obligations. The maximum potential amount payable under the guarantee is $10.7 million at December 31, 2012 and Starz
has accrued $8.5 million related to this guarantee in accrued liabilities in the accompanying consolidated balance sheet as of December 31,
2012 . As discussed in Note 3, Starz sold its controlling interest in Canada Co. on March 3, 2011. The terms of the guarantee have not changed.
Starz Entertainment is the guarantor on two noncancelable operating leases in which an affiliate within each of the Starz Distribution
and Starz Animation businesses is the tenant. The maximum potential amount payable under these guarantees is $13.0 million at December 31,
2012 . Starz Entertainment does not currently expect to have to perform under these obligations. The leases expire in 2014 and 2016.
Legal Proceedings
On March 9, 2011, Starz Entertainment notified DISH Network L.L.C. (“DISH”) that DISH breached its affiliation agreement with
Starz Entertainment by providing a free preview for one year of eight of the Starz and Encore channels to a substantial number of DISH
customers without Starz Entertainment’s written approval. On May 3, 2011, Starz Entertainment filed a lawsuit against DISH in Douglas
County, Colorado District Court, 18th Judicial District, alleging that DISH breached its affiliation agreement with Starz Entertainment in
connection with such free preview and seeking damages for breach of contract. On May 2, 2011, Disney Enterprises, Inc. filed a lawsuit against
DISH in connection with the same free preview in U.S. District Court for the Southern District of New York, seeking damages for copyright
infringement. In addition, on July 19, 2011, FX Networks filed a separate lawsuit against DISH and Starz Entertainment in connection with the
same free preview in Los Angeles County, California Superior Court, seeking damages for tortious interference with its contracts for studio
movie content. DISH filed a counterclaim against Starz Entertainment in the first lawsuit, seeking indemnification from Starz Entertainment
against Disney Enterprises, Inc. in the second lawsuit and against FX Networks in the third lawsuit. The first lawsuit by Starz Entertainment
against DISH is expected to go to trial in April 2013. The third lawsuit by FX Networks is presently stayed and is tentatively set for trial in
October 2013. The resolution of these matters and its potential impact on Starz is uncertain at this time.
In the normal course of business, Starz is subject to lawsuits and other claims. While it is not possible to predict the outcome of these
matters, it is the opinion of management, based upon consultation with legal counsel, that the ultimate disposition of known proceedings, other
than as discussed above, will not have a material adverse impact on our consolidated financial position, results of operations or liquidity.
F-27
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Note 12 – Other Information
Supplemental Disclosure of Cash Flow Information
The following table presents the supplemental disclosure of cash flow information (in thousands) :
2012
Years ended December 31,
2011
2010
Cash paid for interest, net of amounts capitalized
$
11,624
$
2,679
$
3,776
Cash paid for income taxes
Change in deferred tax assets due to sale of noncontrolling
interest (Note 10)
$
161,404
$
44,793
$
120,706
2,209 $
141,135
$
—
Retirement of fully depreciated assets
$
55,970
$
1,699
$
4,296
Contribution of notes receivable from affiliate (Note 8)
$
—
$
—
$
426,254
Distribution of notes receivable to affiliate (Note 8)
$
—
$
—
$
489,134
$
Assets Measured at Fair Value
For assets required to be reported at fair value, GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to
measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the
reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs, other than quoted market prices included within
Level 1, that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability.
Starz’s assets measured at fair value are as follows (in thousands) :
Description
Cash
equivalents
Fair Value Measurements at December 31, 2012
Quoted
prices in
active
Significant
markets
for
other
Significant
observable
identical
unobservable
inputs
inputs
assets
Total
(Level 1)
(Level 2)
(Level 3)
$662,681
662,681
—
—
Fair Value Measurements at December 31, 2011
Quoted
prices in
active
Significant
markets
for
other
Significant
observable
identical
unobservable
inputs
inputs
assets
Total
(Level 1)
(Level 2)
(Level 3)
$ 931,433
931,433
—
—
Substantially all of our cash equivalents are invested in U.S. Treasury securities, other government securities or government guaranteed
funds, AAA rated money market funds and other highly rated commercial paper. Such amounts are included in cash and cash equivalents in the
consolidated balance sheet.
F-28
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Allowance for Trade Receivables
The following table presents the changes in the allowance for trade receivables.
Description
Year ended December 31, 2012:
Reserves:
Allowance for doubtful accounts
Allowance for sales returns
Total
Year ended December 31, 2011:
Reserves:
Allowance for doubtful accounts
Allowance for sales returns
Total
Year ended December 31, 2010:
Reserves:
Allowance for doubtful accounts
Allowance for sales returns
Balance at
beginning of
period
$
$
$
$
$
$
Total
Charged to
costs and
expenses(1)
2,173
36,162
38,335
$
3,723
26,967
30,690
$
5,094
29,134
34,228
$
(623) $
83,214
82,591 $
$
$
Charged to
other accounts
426
101,628
102,054
$
1,954
75,126
77,080
$
$
$
$
Deductions(2)
—
—
—
$
—
—
—
$
—
—
—
$
$
$
$
Balance at
end of
period
(1,284) $
(84,597)
(85,881) $
266
34,779
35,045
(1,976) $
(92,433)
(94,409) $
2,173
36,162
38,335
(3,325) $
(77,293)
(80,618) $
3,723
26,967
30,690
(1) Charges for doubtful accounts are included in general and administrative expense and charges for sales returns are recorded against
revenue.
(2) Uncollectible accounts written off, foreign currency exchange rate and actual video returns.
Goodwill
There were no changes in the carrying amount of goodwill, all of which relates to Starz Networks, during the years ended December 31,
2012 and 2011 . As of December 31, 2012 , the accumulated impairment loss was $1,722.1 million , of which $1,396.7 million relates to Starz
Networks, $322.2 million to Starz Distribution and $3.2 million to Starz Animation.
Advertising and Marketing
Starz’s total advertising costs were $80.6 million , $109.2 million and $147.4 million for the years ended December 31, 2012 , 2011 and
2010 , respectively. Total marketing costs were $25.1 million , $23.0 million and $28.0 million for the years ended December 31, 2012 , 2011
and 2010 , respectively.
Foreign Currency Translation
The balances of accumulated foreign currency translation adjustments, net of income taxes, included in the consolidated statements of
member’s interest and noncontrolling interests were $(4.5) million and ($4.4) million as of December 31, 2012 and 2011 , respectively, and
represented the total amount of accumulated other comprehensive income as of each date.
Major Customers and Suppliers
Two Starz Networks’ distributors accounted for 22% and 15% of Starz’s total revenue for the year ended December 31, 2012 . Two
Starz Networks’ distributors accounted for 21% and 15% of Starz’s total revenue for the year ended December 31, 2011 . Two Starz Networks’
distributors accounted for 20% and 15% of Starz’s total revenue for the year ended December 31, 2010 . There were no other distributors or
other customers that accounted for more than 10% of revenue
F-29
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
in any year. These two distributors accounted for 42% and 41% of trade accounts receivable as of December 31, 2012 and 2011 , respectively.
Services are provided to these distributors pursuant to affiliation agreements with varying terms.
As discussed in Note 11, Starz has entered into agreements to license theatrically released films for our premium movie networks from
studios owned by Disney (through 2015) and Sony (through 2021). Films are available to Starz for exhibition generally 8 - 13 months after their
theatrical release.
In July 2010, Anchor Bay Entertainment outsourced substantially all of its home video distribution services, including DVD
manufacturing and distribution to Twentieth Century Fox Home Entertainment LLC. The term of the distribution agreement is from July 1, 2010
through June 30, 2015. Previously, Anchor Bay Entertainment had outsourced substantially all of its home video distribution services, including
DVD manufacturing and distribution, to Sony Pictures Home Entertainment, Inc.
Foreign Operations
Revenue generated outside of the U.S. represented 5% , 4% and 4% of consolidated revenue for each of the years ended December 31,
2012 , 2011 and 2010 , respectively. Net long-lived assets outside the U.S. were less than 1% as of December 31, 2012 and 2011 , respectively.
Note 13 – Information about Operating Segments
Starz is primarily engaged in video programming and development, production, acquisition and distribution of entertainment content.
Starz evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as
Adjusted OIBDA. Adjusted OIBDA is defined as: revenue less programming costs, production and acquisition costs, home video cost of sales,
operating expenses, advertising and marketing costs and general and administrative expenses. Our chief operating decision maker uses this
measure of performance in conjunction with other measures to evaluate the operating segments and make decisions about allocating resources
among the operating segments. Starz believes Adjusted OIBDA is an important indicator of the operational strength and performance of its
operating segments, including each operating segment’s ability to assist Starz in servicing its debt and fund investments in films and television
programs. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking
between operating segments and identify strategies to improve performance. This measure of performance excludes stock compensation, long
term incentive plan and phantom stock appreciation rights and depreciation and amortization that are included in the measurement of operating
income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income,
income from continuing operations before income taxes, net income, net cash provided by operating activities and other measures of financial
performance prepared in accordance with GAAP. Starz generally accounts for intersegment sales and transfers as if the sales or transfers were to
third parties, that is, at current prices.
F-30
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Starz’s reportable segments are strategic business units that offer different services. They are managed separately because each segment
requires different technologies, content delivery methods and marketing strategies. Starz identifies its reportable segments as those operating
segments that represent 10% or more of its consolidated annual revenue, annual Adjusted OIBDA or total assets. Starz Networks and Starz
Distribution have been identified as reportable segments; however as Starz has only three operating segments, Starz Animation is also reported.
Performance Measures (in thousands) :
2012
Revenue:
Starz Networks
Starz Distribution
Starz Animation
Inter-segment eliminations
$
$
Total Revenue
Adjusted OIBDA:
Starz Networks
Starz Distribution
Starz Animation
Inter-segment eliminations
$
$
Total Adjusted OIBDA
F-31
For the Years Ended December 31,
2011
2010
1,276,815 $
320,671
42,436
(9,226)
1,630,696 $
447,368
(4,926)
(932)
3,322
444,832
$
$
1,269,924 $
310,927
45,273
(12,091)
1,614,033 $
427,689
4,567
(850)
18,182
449,588
$
$
1,224,136
367,477
50,007
(36,283)
1,605,337
416,390
(66,182)
(2,419)
(12,136)
335,653
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Other Information (in thousands) :
2012
Capitalized production and development spend:
Starz Networks
Starz Distribution
Starz Animation
Inter-segment eliminations
$
$
Total capitalized production and development spend
For the Years Ended December 31,
2011
2010
175,085
108,978
—
—
284,063
$
$
144,494
69,161
—
—
213,655
$
$
64,573
52,462
—
—
117,035
December 31,
2012
Total assets:
Starz Networks
Starz Distribution
Starz Animation
Other unallocated assets (primarily cash, deferred taxes and other assets)
Inter-segment eliminations
$
$
Total assets
2,066,961 $
118,134
3,225
33,850
(46,120)
2,176,050 $
2011
2,357,580
162,659
5,320
136,753
(59,137)
2,603,175
The following table provides a reconciliation of Adjusted OIBDA to income from continuing operations before income taxes (in
thousands) :
Consolidated Adjusted OIBDA
Stock compensation, long term incentive plan and phantom stock appreciation
rights
Depreciation and amortization
Interest expense, including amounts due to affiliate, net of amounts capitalized
Other expense, net
$
$
Income from continuing operations before income taxes
For the Years Ended December 31,
2012
2011
2010
444,832 $
449,588 $
335,653
(20,022)
(19,406)
(25,688)
3,023
382,739 $
(7,078)
(17,907)
(5,012)
(3,505)
416,086 $
Note 14 – Supplemental Guarantor Condensed Consolidating Financial Information
As discussed previously, Starz, LLC and Starz Finance Corp. co-issued the Senior Notes which are fully and unconditionally
guaranteed by Starz Entertainment. Starz Media, Film Roman and other immaterial subsidiaries of Starz, LLC (“Starz Media and Other
Businesses”) are not guarantors of the Senior Notes.
F-32
(39,468)
(20,468)
(20,932)
(542)
254,243
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
As discussed previously, Starz’s historical financial information is deemed to be the financial information of Starz, LLC. The financial
statements of Starz reflect Starz, LLC on a historical cost basis. The following tables set forth the consolidating financial information of Starz,
which includes the financial information of Starz Entertainment, the guarantor:
Consolidating Balance Sheet Information – As of December 31, 2012
(in thousands)
Starz
Entertainment,
LLC
(Guarantor)
Starz Media
and Other
Businesses
(Non-Guarantors)
Starz, LLC
Parent Only
(Co-Issuer)
Consolidated
Starz
Eliminations
Assets
Current assets:
Cash and cash equivalents
$
735,507
Trade accounts receivable, net
205,261
Program rights
$
879
$
13,388
$
—
$
749,774
—
36,204
(50)
241,415
341,255
—
—
(1,250)
340,005
164
826
—
Notes receivable from affiliates
26,067
—
—
Other current assets
27,874
—
16,853
Deferred income taxes
Total current assets
—
990
(26,067)
—
—
44,727
1,336,128
1,705
66,445
(27,367)
1,376,911
Program rights
344,042
—
—
(5,358)
338,684
Investment in films and television programs, net
143,583
—
38,090
—
181,673
95,832
—
448
—
96,280
—
12,222
—
—
12,222
131,760
—
—
—
131,760
15,616
13,395
22,904
(13,395)
38,520
—
1,787,826
—
(1,787,826)
—
Property and equipment, net
Deferred income taxes
Goodwill
Other assets, net
Investment in consolidated subsidiaries
Total assets
$
2,066,961
$
1,815,148
$
$
4,134
$
—
$
127,887
$
—
$
(1,833,946) $
2,176,050
Liabilities and Member’s Interest (Deficit) and
Noncontrolling Interests
Current liabilities:
Current portion of debt
Trade accounts payable
—
$
—
1,345
136,434
8,235
128,059
(16,666)
256,062
—
—
26,067
(26,067)
—
Due to (from) affiliates
20,902
20,111
3,694
(5,188)
39,519
Deferred revenue
18,859
—
5,989
(274)
24,574
185,146
28,346
165,154
(48,195)
330,451
535,671
505,000
—
(505,000)
535,671
13,060
(20,342)
Accrued liabilities
Notes payable due to affiliate
Total current liabilities
Debt
Deferred income taxes
Other liabilities
Total liabilities
Member’s interest (deficit)
Noncontrolling interests in subsidiaries
Total member’s interest (deficit) and
noncontrolling interests
Total liabilities and member’s interest (deficit)
$
and noncontrolling interests
—
4,134
4,817
—
7,282
6,162
—
4,259
—
8,643
(5,118)
7,784
738,136
513,004
173,797
(551,031)
873,906
1,328,825
1,311,951
(45,789)
—
(9,807)
1,328,825
2,066,961
(121)
1,302,144
$
1,815,148
F-33
(1,283,036)
121
(45,910)
$
127,887
$
1,311,951
(9,807)
(1,282,915)
1,302,144
(1,833,946) $
2,176,050
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Consolidating Balance Sheet Information – As of December 31, 2011
(in thousands)
Starz
Entertainment,
LLC
(Guarantor)
Starz Media
and Other
Businesses
(Non-Guarantors)
Starz, LLC
Parent Only
(Co-Issuer)
Consolidated
Starz
Eliminations
Assets
Current assets:
Cash and cash equivalents
$
Restricted cash
965,400
$
125,261
$
9,226
$
—
$
—
4,896
Trade accounts receivable, net
204,457
—
36,865
(296)
241,026
Program rights
393,439
—
—
(5,141)
388,298
8,616
1,498
—
38,352
—
—
Deferred income taxes
Notes receivable from affiliates
—
1,099,887
—
4,896
—
10,114
(38,352)
—
18,961
—
12,375
1,629,225
126,759
63,362
(43,789)
1,775,557
Program rights
379,029
—
—
(5,477)
373,552
Investment in films and television programs, net
106,720
—
77,222
—
95,968
—
2,563
—
98,531
131,760
—
—
—
131,760
14,878
9,938
24,888
(9,871)
39,833
—
1,619,020
—
(1,619,020)
—
Other current assets
Total current assets
Property and equipment, net
Goodwill
Other assets, net
Investment in consolidated subsidiaries
Total assets
—
$
2,357,580
$
1,755,717
$
168,035
$
$
4,129
$
—
$
—
$
31,336
183,942
(1,678,157) $
2,603,175
Liabilities and Member’s Interest (Deficit) and
Noncontrolling Interests
Current liabilities:
Current portion of debt
Trade accounts payable
Accrued liabilities
Notes payable due to affiliate
Due to (from) affiliates
Deferred revenue
Total current liabilities
Debt
Deferred income taxes
—
6,509
—
2,181
170,939
938
140,433
(8,160)
—
38,352
(38,352)
—
427,650
(377,255)
(376,317)
540,915
28,473
—
—
—
16,888
626,115
$
3,441
—
9,846
4,129
8,690
304,150
—
53,836
26,734
190,812
(43,071)
397,539
505,000
—
(505,000)
540,915
(16,067)
—
(2,098)
10,308
7,261
—
9,443
(5,392)
11,312
Total liabilities
1,202,764
112,616
200,255
(555,561)
960,074
Member’s interest (deficit)
1,154,816
1,651,484
(1,122,621)
1,651,484
Other liabilities
Noncontrolling interests in subsidiaries
Total member’s interest (deficit) and
noncontrolling interests
Total liabilities and member’s interest (deficit)
$
and noncontrolling interests
—
1,154,816
2,357,580
(32,195)
(8,383)
(25)
1,643,101
$
1,755,717
F-34
25
(32,220)
$
168,035
$
(8,383)
(1,122,596)
1,643,101
(1,678,157) $
2,603,175
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Consolidating Statement of Operations Information – For the Year Ended December 31, 2012
(in thousands)
Starz
Entertainment,
LLC
(Guarantor)
Revenue:
Programming networks and other
services
$
1,305,052
Starz Media
and Other
Businesses
(Non-Guarantors)
Starz, LLC
Parent Only
(Co-Issuer)
$
—
$
127,337
Consolidated
Starz
Eliminations
$
(13,315)
$
1,419,074
33,401
—
184,901
(6,680)
211,622
1,338,453
—
312,238
(19,995)
1,630,696
666,632
—
—
(5,475)
661,157
34,958
—
157,279
Home video cost of sales
17,780
—
52,780
(6,680)
63,880
Operating expenses
18,887
—
45,788
(11,265)
53,410
Advertising and marketing
81,117
—
24,557
—
105,674
General and administrative
Stock compensation and long term
incentive plan
73,744
91
35,568
—
109,403
18,804
—
1,218
—
20,022
Depreciation and amortization
13,068
—
6,338
—
19,406
Total costs and expenses
924,990
91
323,528
(23,317)
Operating income (loss)
413,463
(91)
(11,290)
3,322
405,404
(23,524)
(136)
23,524
(25,688)
(4,952)
—
Home video net sales
Total revenue
Costs and expenses:
Programming costs (including
amortization)
Production and acquisition costs
(including amortization)
Other income (expense):
Interest expense, including amounts due
to affiliate, net of amounts capitalized
(25,552)
103
192,340
1,225,292
Interest income (expense), related party
Share of earnings of consolidated
subsidiaries
4,952
—
—
248,799
Other income (expense), net
Income (loss) from continuing
operations before income taxes
1,440
976
(1,509)
394,303
226,160
(17,887)
(219,837)
382,739
(147,424)
26,114
1,187
(10,342)
(130,465)
246,879
252,274
(16,700)
(230,179)
252,274
—
2,210
(96)
2,210
Income tax benefit (expense)
Net income (loss)
Net loss attributable to noncontrolling
interests
Net income (loss) attributable to
member
$
246,879
$
254,484
F-35
—
(248,799)
(16,604)
—
2,116
96
$
—
$
(230,275)
3,023
$
254,484
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Consolidating Statement of Comprehensive Income (Loss) Information – For the Year Ended December 31, 2012
(in thousands)
Starz
Entertainment,
LLC
(Guarantor)
Net income (loss)
$
Other comprehensive loss, net of taxes:
Foreign currency translation adjustments
from continuing operations
Other comprehensive loss
Comprehensive income (loss)
Comprehensive loss attributable to
noncontrolling interests
Comprehensive income (loss) attributable to
$
member
246,879
Starz Media
and Other
Businesses
(Non-Guarantors)
Starz, LLC
Parent Only
(Co-Issuer)
$
252,274
$
(16,700)
Consolidated
Starz
Eliminations
$
(230,179)
$
252,274
—
(73)
(73)
73
(73)
—
(73)
(73)
73
(73)
246,879
252,201
—
2,167
246,879
$
254,368
F-36
(16,773)
96
$
(16,677)
$
(230,106)
252,201
(96)
2,167
(230,202)
$
254,368
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Consolidating Statement of Operations Information – For the Year Ended December 31, 2011
(in thousands)
Starz
Entertainment,
LLC
(Guarantor)
Revenue:
Programming networks and other
services
$
1,287,826
Starz Media
and Other
Businesses
(Non-Guarantors)
Starz, LLC
Parent Only
(Co-Issuer)
$
—
$
98,416
Consolidated
Starz
Eliminations
$
(14,101)
$
1,372,141
27,389
—
219,981
(5,478)
241,892
1,315,215
—
318,397
(19,579)
1,614,033
672,525
—
—
(21,276)
651,249
23,938
—
136,161
(1,310)
158,789
Home video cost of sales
14,296
—
53,622
(5,478)
62,440
Operating expenses
16,193
—
47,287
(9,777)
53,703
Advertising and marketing
91,314
—
40,869
—
132,183
General and administrative
Stock compensation and long term
incentive plan
71,399
338
34,344
—
106,081
6,603
—
475
—
7,078
Depreciation and amortization
12,757
—
5,150
—
17,907
Total costs and expenses
909,025
338
317,908
Operating income (loss)
406,190
(338)
Home video net sales
Total revenue
Costs and expenses:
Programming costs (including
amortization)
Production and acquisition costs
(including amortization)
Other income (expense):
Interest expense, including amounts due
to affiliate, net of amounts capitalized
(2,849)
Interest income (expense), related party
Share of earnings of consolidated
subsidiaries
Loss from discontinued operations
(including loss on sale of $12,114), net
of income taxes
Net income (loss)
Net loss attributable to noncontrolling
interests
Net income (loss) attributable to
member
$
(4,395)
—
—
241,759
—
93
546
239,232
(147,877)
Income (loss) from continuing
operations
2,282
—
(8,232)
(6,099)
(9,981)
(224,765)
(11,622)
—
5,411
(12,897)
249,284
236,411
(24,519)
—
3,273
249,284
$
239,684
(23,994)
—
—
(3,505)
416,086
(172,189)
243,897
—
525
$
(5,012)
6,431
(214,784)
231,000
424,603
(241,759)
(5,523)
249,284
1,189,430
18,262
(2,163)
4,395
397,161
Income tax expense
489
(2,282)
(10,575)
Other income (expense), net
Income (loss) from continuing
operations before income taxes
(37,841)
$
(7,486)
(224,765)
236,411
(525)
3,273
(225,290)
$
239,684
F-37
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Consolidating Statement of Comprehensive Income (Loss) Information – For the Year Ended December 31, 2011
(in thousands)
Starz
Entertainment,
LLC
(Guarantor)
Net income (loss)
$
Other comprehensive loss, net of taxes:
Foreign currency translation adjustments
from continuing operations
Foreign currency translation adjustments
from discontinued operations
Other comprehensive loss
Comprehensive income (loss)
Comprehensive loss attributable to
noncontrolling interests
Comprehensive income (loss) attributable to
$
member
249,284
Starz Media
and Other
Businesses
(Non-Guarantors)
Starz, LLC
Parent Only
(Co-Issuer)
$
236,411
$
(24,519)
Consolidated
Starz
Eliminations
$
(224,765)
$
236,411
—
(529)
(529)
529
(529)
—
(5,946)
(5,946)
5,946
(5,946)
—
(6,475)
(6,475)
6,475
(6,475)
249,284
229,936
—
3,447
249,284
$
233,383
F-38
(30,994)
681
$
(30,313)
$
(218,290)
229,936
(681)
3,447
(218,971)
$
233,383
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Consolidating Statement of Operations and Comprehensive Income (Loss) Information – For the Year Ended December 31, 2010
(in thousands)
Starz
Entertainment,
LLC
(Guarantor)
Revenue:
Programming networks and other
services
Home video net sales
Total revenue
Costs and expenses:
Programming costs (including
amortization)
Production and acquisition costs
(including amortization)
Home video cost of sales
$
1,234,712
Starz Media
and Other
Businesses
(Non-Guarantors)
Starz, LLC
Parent Only
(Co-Issuer)
$
—
$
176,667
Consolidated
Starz
Eliminations
$
(31,030)
$
1,380,349
12,766
—
214,775
(2,553)
224,988
1,247,478
—
391,442
(33,583)
1,605,337
665,271
—
—
(17,454)
647,817
18,760
—
159,194
—
177,954
7,279
—
65,089
(2,553)
69,815
Operating expenses
16,077
—
59,293
(2,110)
73,260
Advertising and marketing
66,682
—
108,735
—
175,417
General and administrative
Stock compensation, long term incentive
plan and phantom stock appreciation
rights
66,308
—
59,113
—
125,421
40,900
—
(1,432)
—
39,468
Depreciation and amortization
14,007
—
6,461
Total costs and expenses
895,284
—
456,453
(22,117)
1,329,620
Operating income (loss)
352,194
—
(65,011)
(11,466)
275,717
—
(19,730)
Other income (expense):
Interest expense, including amounts due
to affiliate, net of amounts capitalized
Share of earnings of consolidated
subsidiaries
Other income (expense), net
Income (loss) from continuing
operations before income taxes
Income tax benefit (expense)
Income (loss) from continuing
operations
Income (loss) from discontinued operations,
net of income taxes
Net income (loss)
Other comprehensive income (loss), net of
taxes:
Foreign currency translation adjustments
from continuing operations
Foreign currency translation adjustments
from discontinued operations
(1,202)
—
129,269
1,310
—
(1,852)
352,302
129,269
(86,593)
(131,416)
31,399
(3,039)
220,886
160,668
(89,632)
—
(1,874)
—
5,322
(84,310)
—
—
(129,269)
—
(140,735)
4,292
20,468
(20,932)
—
(542)
254,243
(98,764)
(136,443)
155,479
(133)
3,315
(136,576)
158,794
220,886
158,794
—
1,167
1,167
(1,167)
1,167
—
(1,172)
(1,172)
1,172
(1,172)
Comprehensive income (loss)
$
220,886
$
158,789
F-39
$
(84,315)
$
(136,571)
$
158,789
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Consolidating Statement of Cash Flows’ Information – For the Year Ended December 31, 2012
(in thousands)
Starz
Entertainment,
LLC
(Guarantor)
Starz, LLC
Parent Only
(Co-Issuer)
Starz Media
and Other
Businesses
(Non-Guarantors)
Consolidated
Starz
Eliminations
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
$
Depreciation and amortization
Amortization of program rights
246,879
$
252,274
$
(16,700)
13,068
—
6,338
$
(230,179)
$
—
252,274
19,406
623,264
—
—
(5,475)
617,789
Program rights payments
Amortization of investment in films and television
programs
(458,243)
—
—
1,685
(456,558)
29,998
—
111,555
—
141,553
Investment in films and television programs
(175,085)
—
(108,978)
—
(284,063)
18,804
—
1,218
—
20,022
—
—
—
(33,410)
—
248,799
Stock compensation and long term incentive plan
Payments of long term incentive plan
(33,410)
Share of earnings of consolidated subsidiaries
—
(248,799)
—
—
Deferred income taxes
(9,535)
(17,255)
Other non-cash items
12,423
5,057
Current and other assets
6,480
—
Due to / from affiliates
16,311
(29,000)
5,493
1,559
(5,637)
Payables and other liabilities
14,676
7,297
18,572
(8,726)
31,819
305,630
(30,426)
16,873
3,850
9,380
(17,410)
(16,797)
4,533
(246)
1,759
Changes in assets and liabilities:
Net cash provided by operating activities
(15,972)
Investing activities – purchases of property and equipment
(4,475)
—
292,077
(242)
—
(16,214)
500,000
—
—
500,000
(500,000)
—
—
(504,029)
(8,514)
—
—
(8,514)
(500,000)
—
—
(600,000)
(4,689)
—
Financing activities:
Borrowings of debt
—
Payments of debt
(4,029)
Debt issuance costs
—
Distributions to parent
(100,000)
Distributions to parent related to stock compensation
Borrowings under notes payable to affiliate
Repayments under notes payable to affiliate
(4,689)
—
—
—
(39,892)
—
39,892
—
—
51,987
Net advances to / from affiliate
Minimum withholding of taxes related to stock
compensation
Excess tax benefit from stock compensation
Settlement of derivative instruments
Net cash provided by (used in) financing
activities
Effect of exchange rate changes on cash and cash
equivalents
Net increase (decrease) in cash and cash
equivalents
—
(51,987)
—
—
(414,379)
414,558
(179)
—
—
(12,953)
—
(320)
—
(13,273)
4,401
—
—
—
4,401
3
—
—
—
3
(519,551)
(93,956)
—
(12,594)
—
(229,893)
(124,382)
—
125
—
4,162
—
(626,101)
125
(350,113)
Cash and cash equivalents:
965,400
Beginning of year
125,261
9,226
—
1,099,887
$
735,507
$
879
$
13,388
$
—
$
749,774
Cash paid for interest, net of amounts capitalized
$
198
$
11,290
$
136
$
—
$
11,624
Cash paid for income taxes
$
156,836
$
—
$
4,568
$
—
$
161,404
End of year
Supplemental disclosure of cash flow information:
Change in deferred tax assets due to sale of
noncontrolling interest
$
—
$
2,209
$
—
$
—
$
2,209
Retirement of fully depreciated assets
$
53,608
$
—
$
2,362
$
—
$
55,970
F-40
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Consolidating Statement of Cash Flows’ Information – For the Year Ended December 31, 2011
(in thousands)
Starz
Entertainment,
LLC
(Guarantor)
Starz, LLC
Parent Only
(Co-Issuer)
Starz Media
and Other
Businesses
(Non-Guarantors)
Consolidated
Starz
Eliminations
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
$
Loss (income) from discontinued operations
249,284
$
—
236,411
$
(5,411)
(24,519)
$
12,897
(224,765)
$
—
236,411
7,486
Depreciation and amortization
12,757
—
5,150
Amortization of program rights
632,317
—
—
(21,276)
611,041
Program rights payments
Amortization of investment in films and television
programs
(564,375)
—
—
10,034
(554,341)
20,145
—
105,957
—
126,102
Investment in films and television programs
(144,494)
—
(69,028)
(133)
(213,655)
Stock compensation and long term incentive plan
Payments of long term incentive plan
Share of earnings of consolidated subsidiaries
—
17,907
6,603
—
475
—
7,078
(7,696)
—
—
—
(7,696)
241,759
(241,759)
—
Deferred income taxes
25,758
—
13,363
—
(2,098)
37,023
—
Other non-cash items
1,382
253
(299)
9,678
11,014
—
(26,549)
(6,034)
(29,101)
9,466
1,952
89,271
(9,117)
Changes in assets and liabilities:
Current and other assets
3,482
Due to / from affiliates
80,081
Payables and other liabilities
Net cash provided by operating activities
(2,228)
14,711
951
2,888
329,955
1,580
16,438
(7,554)
Investing activities – purchases of property and equipment
—
9,433
—
347,973
(169)
—
(7,723)
—
—
505,000
Financing activities:
Borrowings of debt
—
Payments of debt
505,000
(3,907)
Debt issuance costs
Cash advance to / from affiliate
—
—
(10,191)
374,128
(374,128)
(55,263)
—
(59,170)
—
—
(10,191)
—
—
—
Borrowings under notes payable to affiliate
(103,236)
—
103,236
—
—
Repayments under notes payable to affiliate
72,359
—
(72,359)
—
—
Net advances to / from affiliate
(2,502)
—
2,502
—
—
—
Contribution from noncontrolling owner of subsidiary
—
3,000
—
3,000
Settlement of derivative instruments
—
—
(2,863)
—
(2,863)
—
—
8,226
—
8,226
336,842
123,681
(16,521)
—
444,002
—
—
(17)
—
(17)
—
—
—
—
—
659,243
125,261
(269)
—
784,235
306,157
—
—
315,652
Restricted cash
Net cash provided by (used in) financing
activities
Effect of exchange rate changes on cash and cash
equivalents
Net cash provided by discontinued operations
Net increase (decrease) in cash and cash
equivalents
Cash and cash equivalents:
Beginning of year
9,495
$
965,400
$
125,261
$
9,226
$
—
$
1,099,887
Cash paid for interest, net of amounts capitalized
$
683
$
1,238
$
758
$
—
$
2,679
Cash paid for income taxes
$
41,782
$
—
$
3,011
$
—
$
44,793
End of year
Supplemental disclosure of cash flow information:
Change in deferred tax assets due to sale of
noncontrolling interest
$
—
$
141,135
$
—
$
—
$
141,135
Retirement of fully depreciated assets
$
—
$
—
$
1,699
$
—
$
1,699
Push down of debt from parent
$
494,826
$
$
—
$
—
$
—
F-41
(494,826)
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Consolidating Statement of Cash Flows’ Information – For the Year Ended December 31, 2010
(in thousands)
Starz
Entertainment,
LLC
(Guarantor)
Starz, LLC
Parent Only
(Co-Issuer)
Starz Media
and Other
Businesses
(Non-Guarantors)
Consolidated
Starz
Eliminations
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
$
Loss (income) from discontinued operations
220,886
$
158,794
$
(84,310)
$
$
1,874
Depreciation and amortization
14,007
—
6,461
Amortization of program rights
629,069
—
—
(17,454)
611,615
Program rights payments
Amortization of investment in films and television
programs
(561,276)
—
—
28,710
(532,566)
15,688
—
101,240
—
116,928
Investment in films and television programs
Stock compensation, long term incentive plan and
phantom stock appreciation rights
Payments of phantom stock appreciation rights and
long term incentive plan
(64,573)
—
(52,462)
—
(117,035)
40,900
—
(1,432)
—
39,468
(196,232)
—
—
—
(196,232)
—
16,313
—
16,313
—
Share of earnings of consolidated subsidiaries
Deferred income taxes
Other non-cash items
133
158,794
—
Noncash interest on debt due to affiliate
(5,322)
(136,576)
(3,315)
—
20,468
—
(129,269)
—
129,269
—
59,513
(6,559)
—
—
52,954
57
—
7,043
(4,292)
18,840
3,471
2,808
Changes in assets and liabilities:
Current and other assets
(12,801)
—
Due to / from affiliates
(48,258)
50,381
Payables and other liabilities
Net cash provided by operating activities
4,123
—
12,121
101,103
75,221
14,815
(6,720)
Investing activities – purchases of property and equipment
(3,677)
—
9,510
—
(1,554)
(3,261)
12,983
—
(379)
191,139
—
(7,099)
Financing activities:
Borrowings of debt
—
Payments of debt
Net advances to / from affiliate
—
129,343
—
129,343
(3,700)
—
(198,335)
—
(202,035)
(35,812)
—
35,812
—
(75,221)
—
Distributions to parent
—
Contribution from parent
—
—
Contribution from noncontrolling owner of subsidiary
—
—
Settlement of derivative instruments
—
—
(6,301)
—
(6,301)
Restricted cash
—
—
10,300
—
10,300
(13,681)
—
(128,414)
(39,512)
Net cash used in financing activities
Effect of exchange rate changes on cash and cash
equivalents
Net cash provided by discontinued operations
Net increase in cash and cash equivalents
(75,221)
—
—
(75,221)
15,000
—
15,000
500
—
500
—
—
59
—
59
—
—
1,072
—
1,072
54,871
—
1,886
—
56,757
Cash and cash equivalents:
251,286
Beginning of year
End of year
$
—
7,609
—
258,895
306,157
$
—
$
9,495
$
—
$
315,652
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized
$
1,202
$
—
$
2,574
$
—
$
3,776
Cash paid for income taxes
$
118,636
$
—
$
2,070
$
—
$
120,706
Retirement of fully depreciated assets
$
476
$
—
$
3,820
$
—
$
4,296
Contribution of notes receivable from affiliate
$
—
$
—
$
426,254
$
—
$
426,254
Distribution of notes receivable to affiliate
$
—
$
—
$
489,134
$
—
$
489,134
(Distribution)/contribution of due from affiliate
$
$
—
$
39,885
$
—
$
—
(39,885)
F-42
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Note 15 – Subsequent Events
In connection with the Spin-Off, Old LMC, now Starz entered into several agreements with Liberty Spinco, now New LMC, or New
LMC’s affiliated companies:
•
•
•
•
•
•
a Reorganization Agreement, dated as of January 10, 2013, by and between Starz and New LMC, which provides for, among other
things, the principal corporate transactions required to effect the Spin-Off, certain conditions to the Spin-Off and provisions
governing the relationship between Starz and New LMC with respect to and resulting from the Spin-Off;
a Tax Sharing Agreement, dated as of January 11, 2013, between Starz and New LMC, which governs the allocation of taxes, tax
benefits, tax items and tax-related losses between Starz and New LMC;
a Services Agreement, dated as of January 11, 2013, by and between Starz and New LMC, which governs the provision by New
LMC to Starz and by Starz to New LMC of specified services and benefits following the Spin-Off;
a Facilities Sharing Agreement, dated as of January 11, 2013, by and between Starz and Liberty Property Holdings, Inc. (a
subsidiary of New LMC, “LPH”), pursuant to which Starz shares office facilities with New LMC;
two Aircraft Time Sharing Agreements, each dated as of January 11, 2013, by and between Starz and New LMC, which govern the
lease for each of two aircraft from New LMC to Starz and the provision of fully qualified flight crew for all operations on a
periodic, non-exclusive time sharing basis; and
a Commercial Lease, dated as of January 11, 2013, by and between LPH, Starz, LLC, and, for the limited purposes described
therein, Starz Entertainment, pursuant to which Starz, LLC will lease its headquarters building that was distributed to New LMC in
connection with the Spin-Off from LPH for a period of ten years, with successive five -year renewal periods at the option of Starz,
LLC. Starz, LLC has recorded a $44.8 million capital lease in connection with this lease agreement.
During 2013, in accordance with the terms of the Senior Notes, Starz, LLC completed an exchange offer, exchanging the majority of
the Senior Notes for new registered Senior Notes. The new registered Senior Notes are substantially identical to the original Senior Notes, except
the new registered Senior Notes are registered under the Securities Act of 1933, and the transfer restrictions and registration rights, and related
special interest provisions applicable to the original Senior Notes will not apply to the new registered Senior Notes.
On February 8, 2013, Starz, LLC and Starz Finance Corp. completed the issuance of an additional $175.0 million 5.0% senior notes (the
“New Notes”), which were issued as additional notes under the indenture governing the Senior Notes. The net proceeds from the issuance of the
New Notes were used to repay indebtedness under Starz, LLC’s senior secured revolving credit facility. Starz, LLC and Starz Finance Corp.
have agreed to file a registration statement with the Securities and Exchange Commission related to a registered offering to exchange the New
Notes for new registered notes having substantially identical terms as the New Notes.
F-43
Starz and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
Note 16 – Quarterly Financial Information (Unaudited)
The unaudited quarterly financial information for the years ended December 31, 2012 and 2011 is as follows (in thousands) :
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
2012:
Revenue
$
404,964
$
402,562
$
400,970
$
422,200
Operating income
$
120,003
$
100,271
$
99,508
$
85,622
Income from continuing operations
$
79,195
$
69,608
$
55,282
$
48,189
Net income attributable to member
$
77,782
$
68,725
$
56,424
$
51,553
Revenue
$
390,128
$
402,996
$
388,330
$
432,579
Operating income
$
124,800
$
111,863
$
100,700
$
87,240
Income from continuing operations
$
69,518
$
63,483
$
60,087
$
50,809
Net income attributable to member
$
67,037
$
62,352
$
60,110
$
50,185
2011:
As discussed in Note 4 – Investment in Films and Television Programs, Net, due to changes in ultimate revenue estimates, Starz
Distribution recognized impairments of investment in films and television programs totaling $17.2 million and $12.9 million for the years ended
December 31, 2012 and 2011 , respectively, all of which were recognized in the 4th quarter of each year.
F-44
Exhibit List
Exhibits . Listed below are the exhibits which are filed as a part of this Report (according to the number assigned to them in Item 601 of
Regulation S-K):
Exhibit No.
Description of Exhibit
2-Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:
2.1 Reorganization Agreement, dated as of January 10, 2013, between the Registrant and Liberty Media Corporation (incorporated
by reference to Exhibit 2.1 of the Current Report on Form 8-K of Starz filed on January 17, 2013 (File No. 001-35294) (the
“Starz 8-K”))
3-Articles of Incorporation and Bylaws:
3.1 Restated Certificate of Incorporation of the Registrant dated September 23, 2011 (incorporated by reference to Exhibit 3.1 to
Post-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-4 filed on September 23, 2011 (File No.
333-171201) (the “S-4”))
3.2 Certificate of Ownership and Merger, dated January 11, 2013 (incorporated by reference to Exhibit 3.1 to the Starz 8-K)
3.3 Bylaws of the Registrant dated September 23, 2011 (incorporated by reference to Exhibit 3.3 to the S-4)
4-Instruments Defining the Rights of Securities Holders, including Indentures:
4.1 Specimen certificate for shares of the Registrant's Series A Liberty Capital common stock, par value $0.01 per share
(incorporated by reference to Exhibit 4.1 to the S-4)
4.2 Specimen certificate for shares of the Registrant's Series B Liberty Capital common stock, par value $0.01 per share
(incorporated by reference to Exhibit 4.2 to the S-4)
4.3 Indenture dated as of September 13, 2012 among Starz, LLC and Starz Finance Corp. as issuers, the guarantors named therein
and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to Starz, LLC’s Registration Statement
on Form S-4 filed on October 23, 2012 (File No. 333-184551) (the “Starz, LLC S-4”))
10-Material Contracts:
10.1 The Registrant’s 2011 Incentive Plan (incorporated by reference to Exhibit 10.1 to the S-4)
10.2 Form of Non-Qualified Stock Option Agreement under the Registrant’s 2011 Incentive Plan*
10.3 Form of Restricted Stock Award Agreement under the Registrant’s 2011 Incentive Plan*
10.4 The Registrant’s 2011 Nonemployee Director Incentive Plan (incorporated by reference to Exhibit 10.2 to the S-4)
10.5 The Registrant’s Transitional Stock Adjustment Plan (incorporated by reference to Exhibit 10.3 to the S-4)
10.6 Non-Qualified Stock Option Agreement pursuant to the Starz Transitional Stock Adjustment Plan between the Registrant and
Gregory B. Maffei (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2012 filed on August 8, 2012 (File No. 001-35294))
10.7 Form of Election Form with respect to December 2012 Option Exchange Proposal for participants*
10.8 Tax Sharing Agreement, dated as of September 23, 2011, by and among Liberty Interactive Corporation, Liberty Interactive LLC
and the Registrant (incorporated by reference to Exhibit 10.4 to the S-4)
10.9 Tax Sharing Agreement, dated as of January 11, 2013, by and between the Registrant and Liberty Media Corporation
(incorporated by reference to Exhibit 10.1 to the Starz 8-K)
10.10 Services Agreement, dated as of January 11, 2013, by and between the Registrant and Liberty Media Corporation (incorporated
by reference to Exhibit 10.2 to the Starz 8-K)
10.11 Facilities Sharing Agreement, dated as of January 11, 2013, by and between the Registrant and Liberty Property Holdings, Inc.
(incorporated by reference to Exhibit 10.3 to the Starz 8-K)
10.12 Form of Indemnification Agreement by and between the Registrant and its executive officers/directors (incorporated by reference
to Exhibit 10.7 to Amendment No. 2 to the Registrant's Registration Statement on Form S-4 filed on February 14, 2011 (File No.
333-171201))
10.13 Aircraft Time Sharing Agreements, dated as of January 11, 2013, by and between Liberty Media Corporation and the Registrant
(incorporated by reference to Exhibit 10.4 to the Starz 8-K)
10.14 Lease Agreement, dated as of January 11, 2013, by and among Starz, LLC, Liberty Property Holdings, Inc. and, for the limited
purposes specified therein, Starz Entertainment, LLC (incorporated by reference to Exhibit 10.5 to the Starz 8-K)
E-1
10.15 Credit Agreement, dated as of November 16, 2011 among Starz, LLC, as the borrower, the lenders from time to time party
thereto, the Bank of Nova Scotia, as administrative agent, Suntrust Bank, as syndication agent, and the other parties thereto
(incorporated by reference to Exhibit 10.1 to the Starz, LLC S-4)
10.16 Employment Agreement, dated January 1, 2010, between Starz, LLC and Christopher Albrecht*
10.17 Amendment dated December 7, 2012 to Employment Agreement, dated January 1, 2010, between Starz, LLC and Christopher
Albrecht*
10.18 Term Sheet relating to new employment agreement with Christopher Albrecht*
21.1 Subsidiaries of the Registrant*
23.1 Consent of KPMG LLP*
31.1 Rule 13a-14(a)/15(d)-14(a) Certification*
31.2 Rule 13a-14(a)/15(d)-14(a) Certification*
32.1 Section 1350 Certifications*
_____________________
Filed herewith.
*
E-2
Exhibit 10.2
LIBERTY MEDIA CORPORATION
2011 Incentive Plan
NONQUALIFIED STOCK OPTION AGREEMENT
THIS NONQUALIFIED STOCK OPTION AGREEMENT (this “Agreement”) is made as of the date set forth on
Schedule I hereto (the “Grant Date”), by and between LIBERTY MEDIA CORPORATION, a Delaware corporation
(the “Company”), and the recipient (the “Grantee”) of an Award of Options granted by the Compensation Committee of
the Board of Directors of the Company as set forth in this Agreement.
The Company has adopted the incentive plan identified on Schedule I hereto (as may be amended, the “Plan”), a
copy of which is attached via a link at the end of this online Agreement as Exhibit A and by this reference made a part
hereof, for the benefit of eligible employees of the Company and its Subsidiaries. Capitalized terms used and not
otherwise defined in this Agreement will have the meanings ascribed to them in the Plan.
Pursuant to the Plan, the Compensation Committee appointed by the Board of Directors of the Company
pursuant to Section 3.1 of the Plan to administer the Plan (the “Committee”) has determined that it would be in the
interest of the Company and its stockholders to award Options to the Grantee, subject to the conditions and restrictions
set forth herein and in the Plan, in order to provide the Grantee with additional remuneration for services rendered, to
encourage the Grantee to remain in the employ of the Company or its Subsidiaries and to increase the Grantee’s personal
interest in the continued success and progress of the Company.
The Company and the Grantee therefore agree as follows:
1.
Definitions . The following terms, when used in this Agreement, have the following meanings:
“Base Price” means the amount set forth on Schedule I hereto, which is the Fair Market Value of a share of
Common Stock on the Grant Date.
“Business Day” means any day other than Saturday, Sunday or a day on which banking institutions in Denver,
Colorado, are required or authorized to be closed.
“Cause” has the meaning specified as “cause” in Section 10.2(b) of the Plan.
“Close of Business” means, on any day, 5:00 p.m., Denver, Colorado time.
“Committee” has the meaning specified in the recitals to this Agreement.
“Common Stock” has the meaning specified in Section 2.
“Company” has the meaning specified in the preamble to this Agreement.
“Forfeitable Benefits” has the meaning specified in Schedule I of this Agreement.
“Grant Date” has the meaning specified in the preamble to this Agreement.
“Grantee” has the meaning specified in the preamble to this Agreement.
“Misstatement Period” has the meaning specified in Schedule I of this Agreement.
“Options” has the meaning specified in Section 2.
“Option Share” has the meaning specified in Section 4(c)(i).
“Plan” has the meaning specified in the recitals of this Agreement.
“Required Withholding Amount” has the meaning specified in Section 5.
“Section 409(A)” has the meaning specified in Section 21.
“Term” has the meaning specified in Section 2.
“Unvested Fractional Option” has the meaning specified in Section 3(b).
“Vesting Date” has the meaning specified in Section 3(a).
“Vesting Percentage” has the meaning specified in Section 3(a).
2.
Award . Pursuant to the terms of the Plan and in consideration of the covenants and promises of the Grantee
herein contained, the Company hereby awards to the Grantee as of the Grant Date nonqualified stock options to purchase
from the Company at the Base Price the number of shares of the Company’s Series A Liberty Capital Common Stock
(“Common Stock”) authorized by the Committee and set forth in the notice of online grant delivered to the Grantee
pursuant to the Company’s online grant and administration program, subject to the conditions and restrictions set forth in
this Agreement and in the Plan (the “Options”). The Options are exercisable as set forth in Section 3 during the period
commencing on the Grant Date and expiring at the Close of Business on the seventh anniversary of the Grant Date (the
“Term”) subject to earlier termination as provided in Section 7 below. No fractional shares of Common Stock will be
issuable upon exercise of an Option, and the Grantee will receive, in lieu of any fractional share of Common Stock that
the Grantee otherwise would receive upon such exercise, cash equal to the fraction representing such fractional share
multiplied by the Fair Market Value of one share of Common Stock as of the date on which such exercise is considered
to occur pursuant to Section 4.
3.
Conditions of Exercise . Unless otherwise determined by the Committee in its sole discretion, the Options
will be exercisable only in accordance with the conditions stated in this Section 3.
(a)
Except as otherwise provided in Section 10.1(b) of the Plan, the Options may be exercised only to the
extent they have become exercisable in accordance with the provisions of this Section 3(a) or Section 3(b), and
subject to the provisions of Section 3(c). That number of Options that is equal to the fraction or percentage
specified on Schedule I hereto (the “Vesting Percentage”) of the total number of Options that are subject to this
Agreement, in each case rounded down to the nearest whole number of such Options, shall become exercisable
on each of the dates specified on Schedule I hereto (each such date, together with any other date on which
Options vest pursuant to this Agreement, a “Vesting Date”).
(b) If rounding pursuant to Section 3(a) prevents any portion of an Option from becoming exercisable on a
particular Vesting Date (any such portion, an “Unvested Fractional Option”), one additional Option to purchase a
share of Common Stock will become exercisable on the earliest succeeding Vesting Date on which the
cumulative fractional amount of all Unvested Fractional Options to purchase shares of Common Stock (including
any Unvested Fractional Option created on such succeeding Vesting Date) equals or exceeds one whole Option,
with any excess treated as an Unvested Fractional Option thereafter subject to the application of this Section 3(b).
Any Unvested Fractional Option comprising part of a whole Option that vests pursuant to the preceding sentence
will thereafter cease to be an Unvested Fractional Option.
(c) Notwithstanding the foregoing, (i) in the event that any date on which Options would otherwise become
exercisable is not a Business Day, such Options will become exercisable on the first Business Day following
such date and (ii) all Options will become exercisable on the date of the Grantee’s termination of employment if
(A) the Grantee’s employment with the Company or a Subsidiary terminates by reason of Disability or (B) the
Grantee dies while employed by the Company or a Subsidiary.
(d) To the extent the Options become exercisable, such Options may be exercised in whole or in part (at any
time or from time to time, except as otherwise provided herein) until expiration of the Term or earlier termination
thereof.
(e) The Grantee acknowledges and agrees that the Committee, in its discretion and as contemplated by Section
3.3 of the Plan, may adopt rules and regulations from time to time after the date hereof with respect to the
exercise of the Options and that the exercise by the Grantee of Options will be subject to the further condition
that such exercise is made in accordance with all such rules and regulations as the Committee may determine are
applicable thereto.
4. Manner of Exercise . Options will be considered exercised (as to the number of Options specified in the notice
referred to in Section 4(c)(i)) on the latest of (a) the date of exercise designated in the written notice referred to in
Section 4(c)(i), (b) if the date so designated is not a Business Day, the first Business Day following such date or (c) the
earliest Business Day by which the Company has received all of the following:
(i) Written notice, in such form as the Committee may require, containing such representations and warranties
as the Committee may require and designating, among other things, the date of exercise and the number of shares
of Common Stock to be purchased by exercise of Options (each, an “Option Share”);
(ii) Payment of the Base Price for each Option Share in any (or a combination) of the following forms: (A)
cash, (B) check, (C) the delivery, together with a properly executed exercise notice, of irrevocable instructions to
a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the Base Price
(and, if applicable, the Required Withholding Amount as described in Section 5) or (D) the delivery of
irrevocable instructions via the Company’s online grant and administration program for the Company to withhold
the number of shares of Common Stock (valued at the Fair Market Value of such Common Stock on the date of
exercise) required to pay the Base Price (and, if applicable, the Required Withholding Amount as described in
Section 5) that would otherwise be delivered by the Company to the Grantee upon exercise of the Options; and
(iii) Any other documentation that the Committee may reasonably require.
5.
Mandatory Withholding for Taxes . The Grantee acknowledges and agrees that the Company will deduct
from the shares of Common Stock otherwise payable or deliverable upon exercise of any Options that number of shares
of Common Stock (valued at the Fair Market Value of such Common Stock on the date of exercise) that is equal to the
amount of all federal, state and local taxes required to be withheld by the Company upon such exercise, as determined by
the Company (the “Required Withholding Amount”), unless provisions to pay such Required Withholding Amount have
been made to the satisfaction of the Company. If the Grantee elects to make payment of the Base Price by delivery of
irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to
pay the Base Price, such instructions may also include instructions to deliver the Required Withholding Amount to the
Company. In
such case, the Company will notify the broker promptly of its determination of the Required Withholding Amount.
6. Payment or Delivery by the Company . As soon as practicable after receipt of all items referred to in Section
4, and subject to the withholding referred to in Section 5, the Company will (a) deliver or cause to be delivered to the
Grantee certificates issued in the Grantee’s name for, or cause to be transferred to a brokerage account through
Depository Trust Company for the benefit of the Grantee, the number of shares of Common Stock purchased by exercise
of Options and (b) deliver any cash payment to which the Grantee is entitled in lieu of a fractional share of Common
Stock as provided in Section 2. Any delivery of shares of Common Stock will be deemed effected for all purposes when
certificates representing such shares have been delivered personally to the Grantee or, if delivery is by mail, when the
stock transfer agent of the Company has deposited the certificates in the United States mail, addressed to the Grantee or
at the time the stock transfer agent initiates transfer of shares to a brokerage account through Depository Trust Company
for the benefit of the Grantee, if applicable, and any cash payment will be deemed effected when a check from the
Company, payable to the Grantee and in the amount equal to the amount of the cash payment, has been delivered
personally to the Grantee or deposited in the United States mail, addressed to the Grantee.
7. Early Termination of Options . The Options will terminate, prior to the expiration of the Term, at the time
specified below:
(a) Subject to Section 7(b), if the Grantee’s employment with the Company or a Subsidiary is terminated other
than (i) by the Company or such Subsidiary for Cause or (ii) by reason of death or Disability, then the Options
will terminate at the Close of Business on the first Business Day following the expiration of the 90-day period
that began on the date of termination of the Grantee’s employment.
(b) If the Grantee dies while employed by the Company or a Subsidiary, or prior to the expiration of a period
of time following termination of the Grantee’s employment during which the Options remain exercisable as
provided in Section 7(a) or Section 7(c), as applicable, the Options will terminate at the Close of Business on the
first Business Day following the expiration of the one-year period that began on the date of the Grantee’s death.
Subject to Section 7(b), if the Grantee’s employment with the Company or a Subsidiary terminates by
(c)
reason of Disability, then the Options will terminate at the Close of Business on the first Business Day following
the expiration of the one-year period that began on the date of termination of the Grantee’s employment.
If the Grantee’s employment with the Company or a Subsidiary is terminated by the Company or such
(d)
Subsidiary for Cause, then the Options will terminate immediately upon such termination of the Grantee’s
employment.
In any event in which Options remain exercisable for a period of time following the date of termination of the
Grantee’s employment as provided above, the Options may be exercised during such period of time only to the extent
the same were exercisable as provided in Section 3 on such
date of termination of the Grantee’s employment. Notwithstanding any period of time referenced in this Section 7 or any
other provision of this Section 7 that may be construed to the contrary, the Options will in any event terminate upon the
expiration of the Term.
8.
Nontransferability . During the Grantee’s lifetime, the Options are not transferable (voluntarily or
involuntarily) other than pursuant to a Domestic Relations Order and, except as otherwise required pursuant to a
Domestic Relations Order, are exercisable only by the Grantee or the Grantee’s court appointed legal representative. The
Grantee may designate a beneficiary or beneficiaries to whom the Options will pass upon the Grantee’s death and may
change such designation from time to time by filing a written designation of beneficiary or beneficiaries with the
Committee on the form attached via a link to this online Agreement as Exhibit B or such other form as may be
prescribed by the Committee, provided that no such designation will be effective unless so filed prior to the death of the
Grantee. If no such designation is made or if the designated beneficiary does not survive the Grantee’s death, the
Options will pass by will or the laws of descent and distribution. Following the Grantee’s death, the Options will pass
accordingly to the designated beneficiary and such beneficiary will be deemed the Grantee for purposes of any
applicable provisions of this Agreement.
9. No Stockholder Rights . Prior to the exercise of Options in accordance with the terms and conditions set forth
in this Agreement, the Grantee will not be deemed for any purpose to be, or to have any of the rights of, a stockholder of
the Company with respect to any shares of Common Stock represented by the Options, nor will the existence of this
Agreement affect in any way the right or power of the Company or its stockholders to accomplish any corporate act,
including, without limitation, the acts referred to in Section 10.16 of the Plan.
10. Adjustments . If the outstanding shares of Common Stock are subdivided into a greater number of shares (by
stock dividend, stock split, reclassification or otherwise) or are combined into a smaller number of shares (by reverse
stock split, reclassification or otherwise), or if the Committee determines that any stock dividend, extraordinary cash
dividend, reclassification, recapitalization, reorganization, split-up, spin-off, combination, exchange of shares, warrants
or rights offering to purchase any shares of Common Stock, or other similar corporate event (including mergers or
consolidations other than those that constitute Approved Transactions, which shall be governed by Section 10.1(b) of the
Plan) affects shares of Common Stock such that an adjustment is required to preserve the benefits or potential benefits
intended to be made available under this Agreement, then the Options (including the number of Options and the Base
Price) will be subject to adjustment in such manner as the Committee, in its sole discretion, deems equitable and
appropriate in connection with the occurrence of any of the events described in this Section 10 following the Grant Date.
11. Restrictions Imposed by Law. Without limiting the generality of Section 10.8 of the Plan, the Grantee will
not exercise the Options, and the Company will not be obligated to make any cash payment or issue or cause to be issued
any shares of Common Stock, if counsel to the Company determines that such exercise, payment or issuance would
violate any applicable law or any rule or regulation of any governmental authority or any rule or regulation of, or
agreement of the Company with, any securities exchange or association upon which shares of Common Stock are listed
or quoted. The Company will in no event be obligated to take any affirmative action in order to cause
the exercise of the Options or the resulting payment of cash or issuance of shares of Common Stock to comply with any
such law, rule, regulation or agreement.
12. Notice. Unless the Company notifies the Grantee in writing of a different procedure or address, any notice or
other communication to the Company with respect to this Agreement will be in writing and will be delivered personally
or sent by first class mail, postage prepaid, to the following address:
Liberty Media Corporation
12300 Liberty Boulevard
Englewood, Colorado 80112
Attn: General Counsel
Unless the Company elects to notify the Grantee electronically pursuant to the online grant and administration program
or via email, any notice or other communication to the Grantee with respect to this Agreement will be in writing and will
be delivered personally, or will be sent by first class mail, postage prepaid, to the Grantee’s address as listed in the
records of the Company on the Grant Date, unless the Company has received written notification from the Grantee of a
change of address.
13. Amendment . Notwithstanding any other provision hereof, this Agreement may be supplemented or amended
from time to time as approved by the Committee as contemplated by Section 10.7(b) of the Plan. Without limiting the
generality of the foregoing, without the consent of the Grantee:
(a) this Agreement may be amended or supplemented from time to time as approved by the Committee (i) to
cure any ambiguity or to correct or supplement any provision herein that may be defective or inconsistent with
any other provision herein, (ii) to add to the covenants and agreements of the Company for the benefit of the
Grantee or surrender any right or power reserved to or conferred upon the Company in this Agreement, subject to
any required approval of the Company’s stockholders and, provided, in each case, that such changes or
corrections will not adversely affect the rights of the Grantee with respect to the Award evidenced hereby or (iii)
to make such other changes as the Company, upon advice of counsel, determines are necessary or advisable
because of the adoption or promulgation of, or change in the interpretation of, any law or governmental rule or
regulation, including any applicable federal or state securities laws; and
(b) subject to any required action by the Board of Directors or the stockholders of the Company, the Options
granted under this Agreement may be canceled by the Committee and a new Award made in substitution
therefor, provided that the Award so substituted will satisfy all of the requirements of the Plan as of the date such
new Award is made and no such action will adversely affect any Options to the extent then exercisable.
14.
Grantee Employment . Nothing contained in this Agreement, and no action of the Company or the
Committee with respect hereto, will confer or be construed to confer on the Grantee any right to continue in the employ
of the Company or any Subsidiary or interfere in any way with the right of the Company or any employing Subsidiary to
terminate the Grantee’s employment at any time,
with or without Cause, subject to the provisions of any employment agreement between the Grantee and the Company or
any Subsidiary.
15. Nonalienation of Benefits. Except as provided in Section 8, (a) no right or benefit under this Agreement will
be subject to anticipation, alienation, sale, assignment, hypothecation, pledge, exchange, transfer, encumbrance or
charge, and any attempt to anticipate, alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or charge
the same will be void, and (b) no right or benefit hereunder will in any manner be subjected to or liable for the debts,
contracts, liabilities or torts of the Grantee or other person entitled to such benefits.
16. Governing Law. This Agreement will be governed by, and construed in accordance with, the internal laws of
the State of Colorado. Each party irrevocably submits to the general jurisdiction of the state and federal courts located in
the State of Colorado in any action to interpret or enforce this Agreement and irrevocably waives any objection to
jurisdiction that such party may have based on inconvenience of forum.
17.
Construction. References in this Agreement to “this Agreement” and the words “herein,” “hereof,”
“hereunder” and similar terms include all Exhibits and Schedules appended hereto, including the Plan. All references to
“Sections” in this Agreement shall be to Sections of this Agreement unless explicitly stated otherwise. The word
“include” and all variations thereof are used in an illustrative sense and not in a limiting sense. All decisions of the
Committee upon questions regarding the Plan or this Agreement will be conclusive. Unless otherwise expressly stated
herein, in the event of any inconsistency between the terms of the Plan and this Agreement, the terms of the Plan will
control. The headings of the sections of this Agreement have been included for convenience of reference only, are not to
be considered a part hereof and will in no way modify or restrict any of the terms or provisions hereof.
18. Rules by Committee. The rights of the Grantee and the obligations of the Company hereunder will be subject
to such reasonable rules and regulations as the Committee may adopt from time to time.
19. Entire Agreement. This Agreement is in satisfaction of and in lieu of all prior discussions and agreements,
oral or written, between the Company and the Grantee regarding the subject matter hereof. The Grantee and the
Company hereby declare and represent that no promise or agreement not herein expressed has been made and that this
Agreement contains the entire agreement between the parties hereto with respect to the Award and replaces and makes
null and void any prior agreements between the Grantee and the Company regarding the Award. Subject to the
restrictions set forth in Sections 8 and 15, this Agreement will be binding upon and inure to the benefit of the parties and
their respective heirs, successors and assigns.
20.
Grantee Acknowledgment. The Grantee will signify acceptance of the terms and conditions of this
Agreement by acknowledging the acceptance of this Agreement via the procedures described in the online grant and
administration program utilized by the Company.
21.
Code Section 409A Compliance. If any provision of this Agreement would result in the imposition of an
excise tax under Section 409A of the Code or the related regulations and Treasury
pronouncements (“Section 409A”), that provision will be reformed to avoid imposition of the excise tax and no action
taken to comply with Section 409A shall be deemed to impair a benefit under this Agreement.
*****
Schedule I
to
Liberty Media Corporation
Nonqualified Stock Option Agreement
Grant Date:
Plan:
Base Price:
Liberty Media Corporation 2011 Incentive Plan
$
Vesting Percentage:
Vesting Dates:
Additional Provisions Applicable
to Grantee who holds the office of
Senior Vice President or above as
of the Grant Date:
Forfeiture for Misconduct and Repayment of Certain Amounts. If the Grantee holds the office of
Senior Vice President or above as of the Grant Date, and if (i) a material restatement of any financial
statement of the Company (including any consolidated financial statement of the Company and its
consolidated Subsidiaries) is required and (ii) in the reasonable judgment of the Committee, (A) such
restatement is due to material noncompliance with any financial reporting requirement under applicable
securities laws and (B) such noncompliance is a result of misconduct on the part of the Grantee, the Grantee
will repay to the Company Forfeitable Benefits received by the Grantee during the Misstatement Period in
such amount as the Committee may reasonably determine, taking into account, in addition to any other
factors deemed relevant by the Committee, the extent to which the market value of Common Stock during
the Misstatement Period was affected by the error(s) giving rise to the need for such restatement.
“Forfeitable Benefits” means (i) any and all cash and/or shares of Common Stock received by the Grantee
(A) upon the exercise during the Misstatement Period of any SARs held by the Grantee or (B) upon the
payment during the Misstatement Period of any Cash Award or Performance Award held by the Grantee,
the value of which is determined in whole or in part with reference to the value of Common Stock, and (ii)
any proceeds received by the Grantee from the sale, exchange, transfer or other disposition during the
Misstatement Period of any shares of Common Stock received by the Grantee upon the exercise, vesting or
payment during the Misstatement Period of any Award held by the Grantee. By way of clarification,
“Forfeitable Benefits” will not include any shares of Common Stock received upon exercise of any Options
during the Misstatement Period that are not sold, exchanged, transferred or otherwise disposed of during the
Misstatement Period. “Misstatement Period” means the 12-month period beginning on the date of the first
public issuance or the filing with the Securities and Exchange Commission, whichever occurs earlier, of the
financial statement requiring restatement.
Exhibit 10.3
LIBERTY MEDIA CORPORATION
2007 INCENTIVE PLAN
RESTRICTED STOCK AWARD AGREEMENT
THIS RESTRICTED STOCK AWARD AGREEMENT (this “Agreement”) is made as of the date set forth on
Schedule I hereto (the “Grant Date”), by and between LIBERTY MEDIA CORPORATION, a Delaware corporation
(the “Company”), and the recipient of an award of Restricted Shares (as defined below) granted by the Compensation
Committee of the Board of Directors of the Company (the “Grantee”).
The Company has adopted the incentive plan identified on Schedule I hereto (the “Plan”), a copy of which is
attached via a link at the end of this online Agreement as Exhibit A and by this reference made a part hereof, for the
benefit of eligible employees of the Company and its Subsidiaries. Capitalized terms used and not otherwise defined in
this Agreement will have the meaning given thereto in the Plan.
Pursuant to the Plan, the Compensation Committee (the “Committee”) appointed by the Board of Directors of the
Company pursuant to Section 3.1 of the Plan to administer the Plan has determined that it would be in the interest of the
Company and its stockholders to award Restricted Shares to the Grantee, subject to the conditions and restrictions set
forth herein and in the Plan, in order to provide the Grantee additional remuneration for services rendered, to encourage
the Grantee to remain in the employ of the Company or its Subsidiaries and to increase the Grantee’s personal interest in
the continued success and progress of the Company.
The Company and the Grantee therefore agree as follows:
1.
Award. Pursuant to the terms of the Plan and in consideration of the covenants and promises of the
Grantee herein contained, the Company hereby awards to the Grantee as of the Grant Date the number of shares of
Liberty Media Corporation Series A Liberty Starz Common Stock (“LSTZA Stock”) authorized by the Committee and
set forth in the notice of online grant delivered to the Grantee pursuant to the Company’s online grant and administration
program, subject to the conditions and restrictions set forth below and in the Plan (the “Restricted Shares”).
2.
Issuance of Restricted Shares at Beginning of the Restriction Period. Upon issuance of the
Restricted Shares, such Restricted Shares will be registered in a book entry account (the “Account”) in the name of the
Grantee. During the Restriction Period, as provided in Section 8.2 of the Plan, any certificates representing the
Restricted Shares that may be issued during the Restriction Period, and any securities constituting Retained Distributions
will bear a restrictive legend to the effect that ownership of the Restricted Shares (and such Retained Distributions), and
the enjoyment of all rights appurtenant thereto, are subject to the restrictions, terms and conditions provided in the Plan
and this Agreement. Any such certificates will remain in the custody of the Company, and upon their issuance the
Grantee will deposit with the Company stock powers or other instruments of assignment, each endorsed in blank, so as
to permit retransfer to the Company of all
or any portion of the Restricted Shares and any securities constituting Retained Distributions that are forfeited or
otherwise do not become vested in accordance with the Plan and this Agreement.
3.
Restrictions . Restricted Shares constitute issued and outstanding shares of LSTZA Stock for all
corporate purposes. The Grantee will have the right to vote such Restricted Shares, to receive and retain dividends and
distributions paid or distributed on such Restricted Shares as the Committee may in its sole discretion designate and to
exercise all other rights, powers and privileges of a holder of Common Stock with respect to such Restricted Shares,
except that (a) the Grantee will not be entitled to delivery of the stock certificate or certificates representing such
Restricted Shares until the Restriction Period shall have expired and unless all other vesting requirements with respect
thereto shall have been fulfilled or waived, (b) the Company will retain custody of any stock certificate or certificates
representing the Restricted Shares during the Restriction Period, (c) other than such dividends and distributions as the
Committee may in its sole discretion designate, the Company or its designee will retain custody of all Retained
Distributions made or declared with respect to the Restricted Shares (and such Retained Distributions will be subject to
the same restrictions, terms and vesting and other conditions as are applicable to the Restricted Shares) until such time, if
ever, as the Restricted Shares with respect to which such Retained Distributions shall have been made, paid or declared
shall have become vested, and such Retained Distributions will not bear interest or be segregated in a separate account,
(d) the Grantee may not sell, assign, transfer, pledge, exchange, encumber or dispose of the Restricted Shares or any
Retained Distributions or the Grantee’s interest in any of them during the Restriction Period and (e) a breach of any
restrictions, terms or conditions provided in the Plan or established by the Committee with respect to any Restricted
Shares or Retained Distributions will cause a forfeiture of such Restricted Shares and any Retained Distributions with
respect thereto.
4.
Vesting and Forfeiture of Restricted Shares . Subject to earlier vesting in accordance with the
provisions of Paragraph 7(b) below, the Grantee will become vested as to each of that number of the Restricted Shares
constituting LSTZA Stock subject to this Agreement that is equal to the fraction or percentage set forth on Schedule I
hereto (the “Vesting Percentage”), rounded down to the nearest whole number of such Restricted Shares) on each of the
dates indicated on Schedule I hereto (each such date, together with any other date on which Restricted Shares vest
pursuant to this Agreement, a “Vesting Date”). If rounding pursuant to the preceding sentence prevents any portion of a
Restricted Share from becoming vested on a particular Vesting Date (any such portion, an “Unvested Fractional
Restricted Share”), one additional Restricted Share will become vested on the earliest succeeding Vesting Date on which
the cumulative fractional amount of all Unvested Fractional Restricted Shares (including any Unvested Fractional
Restricted Share created on such succeeding Vesting Date) equals or exceeds one whole Restricted Share, with any
excess treated as an Unvested Fractional Restricted Share thereafter subject to the application of this sentence and the
following sentence. Any Unvested Fractional Restricted Share comprising part of a whole Restricted Share that vests
pursuant to the preceding sentence will thereafter cease to be an Unvested Fractional Restricted Share. Notwithstanding
the foregoing, (a) the Grantee will not vest, pursuant to this Paragraph 4, in Restricted Shares as to which the Grantee
would otherwise vest as of a given date if the Grantee has not been continuously employed by the Company or its
Subsidiaries from the date of this Agreement through such date (the vesting or forfeiture of such shares to be governed
instead by the provisions of Paragraph 5 hereof), and (b) in the event that
any date on which vesting would otherwise occur is a Saturday, Sunday or a holiday, such vesting will instead occur on
the business day next following such date. Unless otherwise determined by the Committee in its sole discretion,
Retained Distributions will be subject to the same vesting and forfeiture conditions that are applicable to the Restricted
Shares to which such Retained Distributions relate.
5.
Early Termination or Vesting . Unless otherwise determined by the Committee in its sole discretion:
(a) If the Grantee’s employment with the Company and its Subsidiaries terminates for any reason other than
death or Disability, then the Award, to the extent not theretofore vested, will be forfeited immediately;
(b) If the Grantee dies while employed by the Company or a Subsidiary, then the Award, to the extent not
theretofore vested, will immediately become fully vested; and
(c) If the Grantee’s employment with the Company or a Subsidiary terminates by reason of Disability, then the
Award, to the extent not theretofore vested, will immediately become fully vested.
6. Completion of the Restriction Period . On each Vesting Date, subject to the satisfaction of all applicable
restrictions, terms and conditions (a) all or the applicable portion of such Restricted Shares will become vested pursuant
to Paragraph 4 hereof, and (b) any Retained Distributions with respect to such Restricted Shares will become vested to
the extent that the Restricted Shares related thereto shall have become vested, all in accordance with the terms of this
Agreement. Any such Restricted Shares and Retained Distributions that shall not become vested will be forfeited to the
Company, and the Grantee will not thereafter have any rights (including dividend and voting rights) with respect to such
Restricted Shares or any Retained Distributions that are so forfeited.
7.
Adjustments; Early Vesting in Certain Events .
(a) The Restricted Shares will be subject to adjustment (including, without limitation, as to the number of
Restricted Shares) in such manner as the Committee, in its sole discretion, may deem equitable and appropriate
in connection with the occurrence of any of the events described in Section 4.2 of the Plan following the Grant
Date.
(b) In the event of any Approved Transaction, Board Change or Control Purchase, the restrictions in Paragraph
3 hereof will lapse. Notwithstanding the foregoing, the Committee may, in its sole discretion, determine that the
restrictions in Paragraph 3 hereof will not lapse on an accelerated basis in connection with an Approved
Transaction if the Committee makes or causes to be made effective provision for the taking of such action as in
the opinion of the Committee is equitable and appropriate to substitute a new Award for the Award evidenced by
this Agreement or to assume this Agreement and the Award evidenced hereby and in order to make such new or
assumed Award, as nearly as may be practicable equivalent to the Award evidenced by this Agreement as then in
effect (but before giving effect to any
acceleration of the exercisability hereof unless otherwise determined by the Committee), taking into account, to
the extent applicable, the kind and amount of securities, cash or other assets into or for which shares of LSTZA
Stock may be changed, converted or exchanged in connection with the Approved Transaction.
8.
Mandatory Withholding for Taxes . The Grantee acknowledges that, upon the expiration of the
Restriction Period, the Company will deduct from the shares of LSTZA Stock otherwise deliverable to the Grantee (or
Beneficiary, as defined in Paragraph 10 below) that number of shares of LSTZA Stock (valued at the Fair Market Value
of such LSTZA Stock on the applicable Vesting Date) that is equal to the amount, as determined by the Company, of all
federal, state or other governmental withholding tax requirements imposed upon the Company or any Subsidiary of the
Company with respect to the vesting of Restricted Shares, unless other provisions to pay such withholding requirements
have been made to the satisfaction of the Company. Upon the payment of any cash dividends with respect to Restricted
Shares during the Restriction Period, the amount of such dividends will be reduced to the extent necessary to satisfy any
withholding tax requirements applicable thereto prior to payment to the Grantee.
9. Delivery by the Company . As soon as practicable after the vesting in Restricted Shares pursuant to
Paragraphs 4, 5 or 7 hereof, but no later than 30 days after such vesting occurs, and subject to the withholding referred to
in Paragraph 8 hereof, the Company will (a) cause to be removed from the Account the restriction described in
Paragraph 2 hereof or cause to be issued and delivered to the Grantee (in certificate or electronic form) shares of LSTZA
Stock equal to the number of Restricted Shares that have vested, and (b) shall cause to be delivered to the Grantee any
Retained Distributions with respect to such vested shares. If delivery of certificates is by mail, delivery of shares of
LSTZA Stock will be deemed effected for all purposes when a stock transfer agent of the Company shall have deposited
the certificates in the United States mail, addressed to the Grantee.
10.
Nontransferability of Restricted Shares Before Vesting . Before vesting and during the Grantee’s
lifetime, the Restricted Shares are not transferable (voluntarily or involuntarily) other than pursuant to a Domestic
Relations Order and, except as otherwise required pursuant to a Domestic Relations Order, are exercisable only by the
Grantee or the Grantee’s court appointed legal representative. The Grantee may designate a beneficiary or beneficiaries
(each, a “Beneficiary”), to whom the Restricted Shares will pass upon the Grantee’s death and may change such
designation from time to time by filing a written designation of Beneficiary or Beneficiaries with the Committee on the
form attached via a link to this online Agreement as Exhibit B or such other form as may be prescribed by the
Committee, provided that no such designation will be effective unless so filed prior to the death of the Grantee. If no
such designation is made or if the designated Beneficiary does not survive the Grantee’s death, the Restricted Shares will
pass by will or the laws of descent and distribution. Following the Grantee’s death, the Restricted Shares will pass
accordingly to the designated Beneficiary, and such Beneficiary will be deemed the Grantee for purposes of any
applicable provisions of this Agreement.
11. Company’s Rights . The existence of this Agreement will not affect in any way the right or power of the
Company or its stockholders to accomplish any corporate act, including, without limitation, the acts referred to in
Section 11.16 of the Plan.
12.
Limitation of Rights . Nothing in this Agreement or the Plan will be construed to:
give the Grantee any right to be awarded any further Restricted Shares other than in the sole discretion
(a)
of the Committee; or
(b)
give the Grantee or any other person any interest in any fund or in any specified asset or assets of the
Company or any Subsidiary of the Company.
13.
Prerequisites to Benefits . Neither the Grantee nor any person claiming through the Grantee will
have any right or interest in the Restricted Shares awarded hereunder, unless and until there shall have been full
compliance with all the terms, conditions and provisions of this Agreement and the Plan that affect the Grantee or such
other person.
14.
Restrictions Imposed by Law . Without limiting the generality of Section 11.8 of the Plan, the
Grantee will not require the Company to deliver any Restricted Shares and the Company will not be obligated to deliver
any Restricted Shares if counsel to the Company determines that such exercise, delivery or payment would violate any
applicable law or any rule or regulation of any governmental authority or any rule or regulation of, or agreement of the
Company with, any securities exchange or association upon which the LSTZA Stock is listed or quoted. The Company
will in no event be obligated to take any affirmative action in order to cause the delivery of any Restricted Shares to
comply with any such law, rule, regulation or agreement.
15. Notice . Unless the Company notifies the Grantee in writing of a different procedure or address, any notice
or other communication to the Company with respect to this Agreement will be in writing and will be delivered
personally or sent by first class mail, postage prepaid, to the following address:
Liberty Media Corporation
12300 Liberty Boulevard
Englewood, Colorado 80112
Attn: General Counsel
Unless the Company elects to notify the Grantee electronically pursuant to the online grant and administration
program or via email, any notice or other communication to the Grantee with respect to this Agreement will be in
writing and will be delivered personally, or will be sent by United States first class mail, postage prepaid, to the
Grantee’s address as listed in the records of the Company or any Subsidiary of the Company, unless the Company has
received written notification from the Grantee of a change of address.
16. Amendment . Notwithstanding any other provision hereof, this Agreement may be supplemented or
amended from time to time as approved by the Committee as contemplated by
Section 11.7(b) of the Plan. Without limiting the generality of the foregoing, without the consent of the Grantee,
this Agreement may be amended or supplemented from time to time as approved by the Committee (i)
(a)
to cure any ambiguity or to correct or supplement any provision herein that may be defective or inconsistent with
any other provision herein, (ii) to add to the covenants and agreements of the Company for the benefit of the
Grantee or surrender any right or power reserved to or conferred upon the Company in this Agreement, subject to
any required approval of the Company’s stockholders and provided, in each case, that such changes or corrections
will not adversely affect the rights of the Grantee with respect to the Award evidenced hereby or (iii) to make
such other changes as the Company, upon advice of counsel, determines are necessary or advisable because of the
adoption or promulgation of, or change in or of the interpretation of, any law or governmental rule or regulation,
including any applicable federal or state securities laws; and
(b)
subject to any required action by the Board of Directors or the stockholders of the Company, the Award
evidenced by this Agreement may be canceled by the Committee and a new Award made in substitution therefor,
provided that the Award so substituted will satisfy all of the requirements of the Plan as of the date such new
Award is made and no such action will adversely affect the Restricted Shares to the extent then vested.
17. Grantee Employment . Nothing contained in this Agreement, and no action of the Company or the
Committee with respect hereto, will confer or be construed to confer on the Grantee any right to continue in the employ
of the Company or any of its Subsidiaries or interfere in any way with the right of the Company or any employing
Subsidiary to terminate the Grantee’s employment at any time, with or without cause (as that term is defined in Section
11.2(b) of the Plan); subject, however, to the provisions of any employment agreement between the Grantee and the
Company or any Subsidiary.
18. Governing Law . This Agreement will be governed by, and construed in accordance with, the internal
laws of the State of Colorado. Each party irrevocably submits to the general jurisdiction of the state and federal courts
located in the State of Colorado in any action to interpret or enforce this Agreement and irrevocably waives any
objection to jurisdiction that such party may have based on inconvenience of forum.
19. Construction . References in this Agreement to “this Agreement” and the words “herein,” “hereof,”
“hereunder” and similar terms include all Exhibits and Schedules appended hereto, including the Plan. This Agreement
is entered into, and the Award evidenced hereby is granted, pursuant to the Plan and will be governed by and construed
in accordance with the Plan and the administrative interpretations adopted by the Committee thereunder. All decisions of
the Committee upon questions regarding the Plan or this Agreement will be conclusive. Unless otherwise expressly
stated herein, in the event of any inconsistency between the terms of the Plan and this Agreement, the terms of the Plan
will control. The headings of the paragraphs of this Agreement have been included for convenience of reference only,
are not to be considered a part hereof and will in no way modify or restrict any of the terms or provisions hereof.
20. Rules by Committee . The rights of the Grantee and the obligations of the Company hereunder will be
subject to such reasonable rules and regulations as the Committee may adopt from time to time.
21.
Entire Agreement . This Agreement is in satisfaction of and in lieu of all prior discussions and
agreements, oral or written, between the Company and the Grantee regarding the subject matter hereof. The Grantee and
the Company hereby declare and represent that no promise or agreement not herein expressed has been made and that
this Agreement contains the entire agreement between the parties hereto with respect to the Restricted Shares and
replaces and makes null and void any prior agreements between the Grantee and the Company regarding the Restricted
Shares. Subject to Paragraph 10 of this Agreement, this Agreement will be binding upon and inure to the benefit of the
parties and their respective heirs, successors and assigns.
22. Grantee Acknowledgment . The Grantee will signify acknowledgment of the terms and conditions of this
Agreement by acknowledging this Agreement via the procedures described in the online grant and administration
program utilized by the Company.
23. Code Section 409A Compliance . If any provision of this Agreement would result in the imposition of an
excise tax under Section 409A of the Code and related regulations and Treasury pronouncements (“Section 409A”), that
provision will be reformed to avoid imposition of the excise tax and no action taken to comply with Section 409A shall
be deemed to impair a benefit under this Agreement.
Schedule I
to
Liberty Media Corporation
Restricted Stock Award Agreement
Grant Date:
Plan:
Liberty Media Corporation 2007 Incentive Plan
Restricted Stock Grant:
Vesting Terms:
Vesting Percentage:
Vesting Dates:
Additional Provisions
Applicable to Grantee:
Series A Liberty Starz Common Stock (LSTZA)
Forfeiture for Misconduct and Repayment of Certain Amounts . If (i) a material
restatement of any financial statement of the Company (including any consolidated
financial statement of the Company and its consolidated Subsidiaries) is required and (ii)
in the reasonable judgment of the Committee, (A) such restatement is due to material
noncompliance with any financial reporting requirement under applicable securities laws
and (B) such noncompliance is a result of misconduct on the part of the Grantee, the
Grantee will repay to the Company Forfeitable Benefits received by the Grantee during
the Misstatement Period in such amount as the Committee may reasonably determine,
taking into account, in addition to any other factors deemed relevant by the Committee,
the extent to which the market value of LSTZA Stock during the Misstatement Period
was affected by the error(s) giving rise to the need for such restatement. “Forfeitable
Benefits” means (i) any and all cash and/or shares of LSTZA Stock received by the
Grantee (A) upon the exercise during the Misstatement Period of any SARs held by the
Grantee or (B) upon the payment during the Misstatement Period of any Cash Award or
Performance Award held by the Grantee, the value of which is determined in whole or in
part with reference to the value of LSTZA Stock and (ii) any proceeds received by the
Grantee from the sale, exchange, transfer or other disposition during the Misstatement
Period of any shares of LSTZA Stock received by the Grantee upon the exercise, vesting
or payment during the Misstatement Period of any Award held by the Grantee. By way of
clarification, “Forfeitable Benefits” will not include any shares of LSTZA Stock received
upon vesting of any Restricted Shares during the Misstatement Period that are not sold,
exchanged, transferred or otherwise disposed of during the Misstatement Period.
“Misstatement Period” means the 12-month period beginning on the date of the first
public issuance or the filing with the Securities and Exchange Commission, whichever
occurs earlier, of the financial statement requiring restatement.
Exhibit 10.7
LIBERTY MEDIA CORPORATION
Election Form
with respect to
Option Exchange Proposal
Dated: November 27, 2012
The following is a summary of the proposal (the “Proposal”) separately presented to you by Liberty Media Corporation (the
“Company”) with respect to the outstanding options, whether vested or unvested, to purchase shares of Series A Liberty Capital
common stock (“LMCA”) held by you and granted under either the Liberty Media Corporation 2011 Incentive Plan (the “2011
Plan”) or the Liberty Media Corporation Transitional Stock Plan (each such option, an “Eligible Option”). For purposes of the
Proposal, Eligible Options do not include any options to acquire LMCA shares that expire on February 28, 2013 or March 2, 2013,
or any such options with an exercise price that is greater than the closing price per LMCA share on The Nasdaq Global Select
Market on the New Option Grant Date (as defined below). For your convenience, attached is a schedule showing, as of November
27, 2012, all of your outstanding Eligible Options, including the exercise price, vesting schedule and expiration date thereof.
If you accept the Proposal, you must do so with respect to all of your Eligible Options. Notwithstanding any
acceptance by you of the Proposal as contemplated hereby, you or the Company may elect not to complete the transactions
contemplated by the Proposal for any reason at anytime prior to the New Option Grant Date (as defined below) by
delivering written notice (including by electronic mail) to the other.
If you accept the Proposal, and the Proposal is completed as currently contemplated, then:
•
you will exercise, effective as of December 4, 2012 (or such other date as determined by the Company, the “ New
Option Grant Date ”), each outstanding vested Eligible Option (which, for purposes of the Proposal, includes any
Eligible Options that will vest between the New Option Grant Date and December 31, 2012) and receive a number of
LMCA shares equal to (x) an amount (less any applicable withholding taxes) determined by the product of (1) the
number of LMCA shares subject to such vested Eligible Option multiplied by (2) the difference between the closing
price per LMCA share on The Nasdaq Global Select Market on the New Option Grant Date and the exercise price of
the vested Eligible Option, divided by (y) the closing price per LMCA share on The Nasdaq Global Select Market on
the New Option Grant Date;
•
for each vested Eligible Option so exercised the Company will grant you a new option (the “ Vested New Option ”) on
the New Option Grant Date that will be fully vested when granted with substantially the same terms and conditions
(including, without limitation, the number of LMCA shares subject thereto and the expiration date thereof) as the
vested Eligible Option exchanged therefor, except that the exercise price for the new option will be the closing price
per LMCA share on The Nasdaq Global Select Market on the New Option Grant Date;
•
for each unvested Eligible Option (other than any Eligible Option that will vest between the New Option Grant Date
and December 31, 2012), the Company will accelerate the vesting of such Eligible Option and:
This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933.
In addition, this document and any offer by the Company to exchange outstanding options constitute a private transaction between you and the Company and
are not part of, or subject to, any other offer the Company may make to any officer, director or employee with respect to outstanding incentive awards. You
should consult your personal outside advisor(s) if you have questions about your financial or tax situation as it relates to the Proposal.
you will exercise, effective as of the New Option Grant Date, each outstanding unvested Eligible Option and
receive from the Company a number of LMCA shares (the “ Net Settled Shares ”) equal to (x) an amount (less
any applicable withholding taxes) determined by the product of (1) the number of LMCA shares subject to such
unvested Eligible Option multiplied by (2) the difference between the closing price per LMCA share on The
Nasdaq Global Select Market on the New Option Grant Date and the exercise price of the unvested Eligible
Option, divided by (y) the closing price per LMCA share on The Nasdaq Global Select Market on the New Option
Grant Date;
you will sell the Net Settled Shares to the Company on the New Option Grant Date for cash equal to, on a per share
basis, the closing price per LMCA share on the Nasdaq Global Select Market on the New Option Grant Date;
you will use the proceeds from the sale of the Net Settled Shares to acquire from the Company, under the 2011
Plan a number of restricted shares (the “ Restricted Shares ”) equal to the aggregate proceeds from the sale of the
Net Settled Shares divided by the closing price per LMCA share on the Nasdaq Global Select Market on the New
Option Grant Date, which Restricted Shares will have a vesting schedule identical to that of the unvested Eligible
Option exercised as contemplated above; and
the Company will grant to you on the New Option Grant Date a new option (the “ Unvested New Option ” and,
together with the Vested New Option, the “ New Options ”) with substantially the same terms and conditions,
including, without limitation, with respect to vesting and expiration, as the unvested Eligible Option exercised as
contemplated above, except that the number of LMCA shares subject to such Unvested New Option will be equal
to the number of shares subject to the unvested Eligible Option exercised as contemplated above minus the number
of Restricted Shares purchased in respect of such unvested Eligible Option, and the exercise price of such new
option will be the closing price per LMCA share on The Nasdaq Global Select Market on the New Option Grant
Date.
Attached hereto is an example of the Proposal with respect to one of your Eligible Options.
If the transactions contemplated by the Proposal are completed, the Eligible Options will be accelerated and exercised, and
the New Options and Restricted Shares will be granted, in each case, at 5:00 p.m., New York City time, on the New Option Grant
Date. Each of the New Options and the Restricted Shares to be granted as described above will be granted under the 2011 Plan, and
will be subject to the terms and conditions of that plan and a new stock option agreement and restricted stock award agreement, as
applicable. The new stock option agreement will contain terms and conditions substantially similar to the stock option agreement
governing the Eligible Options, except as otherwise described herein. With respect to the Restricted Shares, you must make an
election pursuant to Section 83(b) of the Internal Revenue Code (the “83(b) Election”), a sample form of which is attached hereto.
Such election when made will be irrevocable after the Proposal is completed. With respect to the Net Settled Shares that you sell to
the Company, there is no tax gain or loss on this sale. However, you should report this sale on Schedule D of your 2012 individual
federal income tax return Form 1040. You should consult with your tax advisor as to how to report this sale. A copy of the 2011
Plan has been filed by the Company with the Securities and Exchange Commission as Exhibit 10.1 to the Post-Effective
Amendment No. 1 to its Registration Statement on Form S-4 (File No. 333-171201) filed on September 23, 2011. In addition, a
summary of the material terms of the 2011 Plan can be obtained by contacting the Company or from the Liberty Media Corporation
Legal Department.
To accept the Proposal, you must check the box and sign below, and return this Election Form to , Director of Financial
Reporting,( ), (by emailing a scanned or PDF copy
This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933.
In addition, this document and any offer by the Company to exchange outstanding options constitute a private transaction between you and the Company and
are not part of, or subject to, any other offer the Company may make to any officer, director or employee with respect to outstanding incentive awards. You
should consult your personal outside advisor(s) if you have questions about your financial or tax situation as it relates to the Proposal.
-2-
or hand delivery) prior to the close of business on Monday, December 3, 2012 . In addition, completed and executed copies of
the required 83(b) Elections must be sent to the Internal Revenue Service as indicated on the form within 30 days of the New
Option Grant Date. The Company will send you completed 83(b) Elections for signature by you and your spouse. Please return the
signed 83(b) Elections to within five (5) days of receipt. The Company will send a copy to the Internal Revenue Service. A copy of
the 83(b) Elections must also be included with your 2012 tax returns.
Accepting the offer from the Company with respect to your Eligible Options involves a number of potential risks and
uncertainties, including, the potential risks and uncertainties set forth under the heading entitled “Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2011 and our Quarterly Reports on Form 10-Q for 2012, each of which has
been filed with the SEC and highlights the material risks of investing in the Company and the LMCA shares. You should carefully
consider these risks and we encourage you to speak with your financial, legal and/or tax advisors as necessary before deciding
whether to accept the Proposal. You acknowledge that you (x) have received all the information you consider necessary or
appropriate for deciding whether to accept the Proposal, (y) have had an opportunity to ask questions and receive answers from the
Company regarding the terms and conditions of the Proposal and (z) can bear the economic risk of your investment and have such
knowledge and experience in financial or business matters that you are capable of evaluating the merits and risks of such
investment.
By accepting the Proposal with respect to your Eligible Options, effective as of the exercise of the Eligible Options, you
are:
•
acknowledging that your outstanding option agreement(s) relating to the Eligible Options will become null and void;
•
releasing all of your rights under such Eligible Options and related option agreements; and
•
authorizing the Company to deduct the applicable withholding taxes related to the transactions contemplated hereby.
*
* *
This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933.
In addition, this document and any offer by the Company to exchange outstanding options constitute a private transaction between you and the Company and
are not part of, or subject to, any other offer the Company may make to any officer, director or employee with respect to outstanding incentive awards. You
should consult your personal outside advisor(s) if you have questions about your financial or tax situation as it relates to the Proposal.
-3-
Yes, I wish to accept the Proposal as to ALL, but not less than all, of my Eligible Options as more fullydescribed above and in discussions with the Company, and I agree to file the 83(b) Elections as described above.
Employee Signature
Date
Employee Name (please print)
E-mail Address
Legal Name, if different (please print)
This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933.
In addition, this document and any offer by the Company to exchange outstanding options constitute a private transaction between you and the Company and
are not part of, or subject to, any other offer the Company may make to any officer, director or employee with respect to outstanding incentive awards. You
should consult your personal outside advisor(s) if you have questions about your financial or tax situation as it relates to the Proposal.
-4-
Schedule of Eligible Options
Example of Proposal
SECTION 83(B) ELECTION FORM
_______________, 2012
Via Certified Mail, Return Receipt Requested
Internal Revenue Service
____________________
____________________
Re:
Election to Include in Taxable Income in Year of Transfer Pursuant to Section 83(b) of the Internal Revenue Code
The name, address and taxpayer identification number of the undersigned (the “ Taxpayer ”) are:
Name:
Address:
SSN:
________________________
________________________
________________________
________________________
Description of the property with respect to which the election is being made (the “ Property ”): _____ shares of Series A Liberty Capital
common stock of Liberty Media Corporation (the “ Company ”).
The date on which the Property was transferred is ____________, 2012 (the “ Effective Date ”). The taxable year to which this election relates is
calendar year 2012.
Nature of the restrictions to which the Property is subject: The Property is subject to transfer restrictions and forfeiture restrictions and vests
based on continued service over a period beginning on the Effective Date.
The fair market value at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never
lapse) of the Property with respect to which this election is being made is $__________.
The amount paid by the Taxpayer for the Property is $_____________.
A copy of this statement has been furnished to other persons as provided in Treasury Regulation section 1.83- 2(d).
This statement is executed on __________________, 2012.
TAXPAYER:
[Name]
SSN: _____________________
[Name] (Spouse)
SSN: _____________________
This statement must be filed with the Internal Revenue Service Center with which you filed your last U.S. federal income tax return within 30
days after the Effective Date. This filing should be made by registered or certified mail, return receipt requested. You are also required to (i)
deliver a copy of this statement to the Company and (ii) attach a copy of this statement to your federal income tax return for the taxable year
that includes the grant date. You should also retain a copy of this statement for your records.
EXECUTION VERSION
Exhibit 10.16
EMPLOYMENT AGREEMENT
This Employment Agreement (the “Agreement”), made effective as of January 1, 2010, is entered into by and
between Starz, LLC, a Delaware limited liability company with its corporate headquarters and principal place of
business located at 8900 Liberty Circle, Englewood, Colorado (the “Company”), and Christopher Albrecht
(“Executive”).
INTRODUCTION
The Company, through its subsidiaries (“Subsidiaries”), is engaged in the business of providing premium movie
channels for distribution in the United States, creating and distributing animated and live-action programming,
distributing home video/DVD products and producing feature-length films. The Company desires to employ Executive,
and Executive desires to accept such employment, under the terms and conditions set forth herein.
Capitalized terms used in this Agreement shall have the meanings indicated in the preamble, introduction and
sections hereof. For ease of reference, an index to such terms is contained in Section 6.15 of this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and for other good
and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
EMPLOYMENT; TERM; DUTIES
Employment . Upon the terms and conditions hereinafter set forth, the Company hereby employs
1.1
Executive, and Executive hereby accepts employment, as President and Chief Executive Officer of the Company.
1.2 Term . Subject to Article IV below, Executive’s employment hereunder shall be for a term of four years
commencing effective as of January 1, 2010 (the “Effective Date”), and expiring at the close of business on December
31, 2013 (the “Initial Term”). Thereafter, Executive’s employment hereunder shall continue from year to year (any such
year-to-year term being referred to herein as an “Extended Term”) until and unless either party gives to the other written
notice of non-renewal at least 180 days prior to the expiration of the Initial Term or any Extended Term of this
Agreement or unless Executive’s employment is sooner terminated in accordance with the provisions of this Agreement.
The period of time from the Effective Date until the expiration or termination of the term of Executive’s employment
under this Agreement, whether such expiration or termination occurs during or at the end of the Initial Term or any
Extended Term, is referred to herein as the “Term.”
1.3
Duties . During the Term, Executive shall perform such executive duties for the Company and its
Subsidiaries as are consistent with his positions hereunder. Executive shall devote 100% of his business time, attention
and energies to the performance of his duties hereunder. Executive shall use his best efforts to advance the interests and
business of the Company and its Subsidiaries.
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BUS_RE\2831340.12
Executive shall abide by all rules, regulations and policies of the Company of which Executive has received written
notice as may be in effect from time to time. Notwithstanding the foregoing, during the Term Executive may (i) act for
his own account in passive-type investments as provided in Section 5.3 or, with the Company’s consent (not to be
unreasonably withheld), as a member of boards of directors of other companies, and (ii) provide consulting services
relating to the projects listed on Exhibit A hereto (each, a “Project”) if and at such time as such Project goes into
production, provided that, in each of the foregoing cases, the time allocated for such activities does not interfere with or
create a conflict of interest with the discharge of Executive’s duties for the Company.
1.4 Reporting . Executive shall report directly to the Chief Executive Officer of Liberty Media Corporation,
the ultimate parent entity of the Company, or any successor to all or substantially all of the business or assets of Liberty
Media Corporation (“LMC”), provided that, if the Company ceases to be Controlled by LMC, Executive shall report to
the board of directors (or other similar governing body) of the Company. For purposes of this Agreement, “Control”
shall mean the power to direct the management and policies of a Person, whether by ownership of voting securities, by
contract or otherwise, and “Person” shall mean any individual or any corporation, partnership, trust, unincorporated
organization, association, limited liability company or other entity.
1.5 Location . Except for services rendered during business trips as may be reasonably necessary, Executive
shall render his services under this Agreement primarily from the offices of the Company in Los Angeles, California and
periodically from the offices of the Company in Englewood, Colorado. Executive shall not be required to relocate his
principal residence from the Los Angeles, California metropolitan area to the Englewood, Colorado metropolitan area
during the Term. The Company and Executive shall agree on a reasonable budget for Executive’s travel between Los
Angeles and Englewood as necessary for the conduct of the Company’s business and the performance of Executive’s
duties hereunder.
No Conflicting Agreement . Executive represents and warrants to the Company that there are no
1.6
agreements or arrangements, whether written or oral, in effect that would prevent Executive from rendering his services
exclusively to the Company during the Term (except to the extent otherwise permitted under Section 1.3 hereof) in
accordance with the provisions of this Agreement.
ARTICLE II
COMPENSATION
2.1
Compensation . For all services rendered by Executive hereunder and all covenants and conditions
undertaken by him pursuant to this Agreement, the Company shall pay, and Executive shall accept, as full compensation,
the amounts set forth in this Article II.
2.2 Base Salary . The base salary shall be an annual salary of $1,000,000 (the “Base Salary”), payable by the
Company in accordance with the Company’s normal payroll practices.
2.3 Bonus . For each fiscal year during the Term, in addition to the Base Salary, provided that Executive is
employed by the Company on the date of payment thereof, Executive shall be eligible for a discretionary annual bonus
(the “Bonus”) of 75% of Executive’s annual Base Salary (the “Target
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BUS_RE\2831340.12
Bonus”) based upon achievement of corporate and individual performance criteria to be determined by the compensation
committee (the “Committee”) of the Board of Directors of LMC in conjunction with the Chief Executive Officer of
LMC (or, if the Company ceases to be Controlled by LMC, by the board of directors or other similar governing body of
the Company). Executive’s entitlement to any Bonus will be determined by the Committee in its sole discretion,
provided that Executive will receive a Bonus equal to at least 75% of the Target Bonus for 2010. Except as provided in
the preceding sentence, nothing in this Agreement shall be construed to guarantee the payment of any Bonus to
Executive.
2.4
Deductions . The Company shall deduct from the compensation described in Sections 2.2 and 2.3, and
from any other compensation payable pursuant to this Agreement, any federal, state or local withholding taxes and any
other amounts which may be required to be deducted or withheld by the Company pursuant to any federal, state or local
laws, rules or regulations.
2.5 Disability Adjustment . Any compensation otherwise payable to Executive pursuant to Sections 2.2 and
2.3 in respect of any period during which Executive is Disabled (as contemplated in Section 4.4) shall be reduced by any
amounts payable to Executive for loss of earnings or the like under any insurance plan or policy sponsored by the
Company or any affiliate of the Company or under any program of the United States or the State of California, such as
Social Security Disability Insurance or California State Disability Insurance.
ARTICLE III
BENEFITS; EXPENSES
3.1
Benefits . Executive will be entitled to participate in such group life, health, accident, disability or
hospitalization insurance plans and retirement plans (the “Company Plans”), and to receive such other benefits and
perquisites, as the Company may make available to its other senior executive employees as a group. Executive’s
participation in any Company Plans and receipt of such other benefits and perquisites shall be at a level, and on terms
and conditions, that are commensurate with his positions and responsibilities at the Company but are no less favorable
than those made available to other senior executives of the Company as a group.
3.2 Expenses . The Company agrees that Executive is authorized to incur reasonable and appropriate expenses
in the performance of his duties hereunder and in promoting the business of the Company and to be reimbursed therefor
in accordance with the terms of the Company’s Travel & Entertainment Policy (as the same may be modified or
amended by the Company from time to time in its sole discretion).
3.3 Vacation . Executive shall accrue, pro rata on a pay period by pay period basis, a total of one hundred
sixty (160) hours of vacation per year following the date of this Agreement. If, at any time during the Term, Executive
accumulates two hundred eighty (280) hours of earned but unused vacation time (the “Accrual Cap”), Executive will not
accrue additional vacation time until he has taken a portion of the previously earned vacation. Executive will again
accrue paid vacation time when his accumulated amount of earned but unused vacation time falls below the Accrual
Cap. Upon
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BUS_RE\2831340.12
termination of Executive’s employment, any accrued but unused vacation time will be paid to Executive.
3.4 Key Man Insurance . The Company may secure in its own name or otherwise, and at its own expense, life,
health, accident and other insurance covering Executive alone or with others, and Executive shall not have any right, title
or interest in or to such insurance other than as expressly provided herein. Executive agrees to assist the Company in
procuring such insurance by submitting to usual and customary medical and other examinations to be conducted by such
physicians as the Company or such insurance company may designate and by signing such applications and other written
instruments as may be required by the insurance companies to which application is made for such insurance. Executive’s
failure to submit to such usual and customary medical and other examinations shall be deemed a material breach of this
Agreement.
3.5 Equity Awards . As part of the consideration for Executive’s services to the Company during the Term,
LMC has granted to Executive pursuant to the Liberty Media Corporation 2000 Incentive Plan (As Amended and
Restated Effective February 22, 2007) the equity awards evidenced by and described in the nonqualified stock option
agreement and the restricted stock award agreement (the “Award Agreements”) attached hereto as Exhibit B and Exhibit
C , respectively.
ARTICLE IV
TERMINATION; DEATH; DISABILITY
4.1 Termination of Employment For Cause . In addition to any other remedies available to the Company at
law, in equity or as set forth in this Agreement, the Company shall have the right, upon written notice to Executive, to
terminate Executive’s employment hereunder at any time for “Cause” (a “Termination For Cause”). In the event of a
Termination For Cause, Executive’s employment will terminate and the Company shall have no further liability or
obligation to Executive hereunder or otherwise (other than the Company’s obligation to pay Base Salary and vacation
time accrued but unpaid as of the date of termination, reimbursement of expenses incurred on or prior to the date of
termination in accordance with Section 3.2 above and any other amounts legally required to be paid).
For purposes of this Agreement, prior to the occurrence of a Corporate Event (as defined below), “Cause” shall
mean: (a) any act or omission that constitutes a breach by Executive of any of his material obligations under this
Agreement; (b) the continued failure or refusal of Executive, other than on account of death or Disability of Executive,
(i) to substantially perform the material duties required of him as President and Chief Executive Officer of the Company
and/or (ii) to comply with reasonable directions of the Chief Executive Officer of LMC; (c) any material violation by
Executive of any (i) policy, rule or regulation of the Company or (ii) any law or regulation applicable to the business of
the Company or any of its affiliates; (d) Executive’s conviction of, or plea of guilty or nolo contendere to, any crime
(whether or not involving the Company) that constitutes a felony or crime of moral turpitude or is punishable by
imprisonment of 30 days or more, provided, however, that nothing in this Agreement shall obligate the Company to pay
Base Salary or any Bonus or benefits during any period that Executive is unable to perform his duties hereunder due to
any incarceration; or (e) any other intentional misconduct by Executive that has a material detrimental effect on the
financial condition or business reputation of the Company or any of its affiliates. Following the occurrence of a
Corporate Event, “Cause” shall have the meaning given such term under California law.
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BUS_RE\2831340.12
Notwithstanding the foregoing, no purported Termination For Cause pursuant to (a), (b) or (c)(1) of the
preceding paragraph of this Section 4.1 shall be effective unless all of the following provisions shall have been complied
with: (i) Executive shall be given written notice by the Company of its intention to effect a Termination For Cause, such
notice to state in detail the particular circumstances that constitute the grounds on which the proposed Termination For
Cause is based; and (ii) Executive shall have 30 days after receiving such notice in which to cure such grounds. If
Executive cures such grounds to the reasonable satisfaction of the Company within such 30-day period, the Company
shall not be entitled to effect a Termination For Cause based on such grounds.
For purposes of this Agreement, a “Corporate Event” means the occurrence of an event during the Term that
results in (a) the Company no longer having publicly traded equity securities (which, for this purpose, shall include
publicly traded equity securities of LMC that primarily track the value of the assets and the performance of the
Company, which the parties specifically acknowledge shall include Series A Liberty Starz Common Stock and Series B
Liberty Starz Common Stock of LMC), or (b) the acquisition by a third party, directly or indirectly, of more than 50% of
the voting power of the Company’s equity securities, unless, in either event, the directors prior to the acquisition and the
individuals nominated for election as directors by the board of directors continue to constitute more than 50% of the
directors of (i) the Company (if the Company is not a subsidiary of LMC), (ii) LMC (if the Company is a subsidiary of
LMC), or (iii) the entity resulting from such event. Notwithstanding the foregoing, “Corporate Event” will not include a
direct or indirect spin-off or split-off of the Company from LMC, however effected (including, for example, by a pro
rata distribution or an exchange offer), nor a transfer of equity of the Company to LMC or any affiliate of LMC.
4.2 Termination of Employment Without Cause . During the Term, the Company may at any time, in its sole
discretion, terminate the employment of Executive hereunder for any reason (other than those set forth in Section 4.1
above) or for no reason upon written notice (the “Termination Notice”) to Executive (a “Termination Without Cause”).
In such event, Executive shall be entitled to the following:
(a)
any Base Salary and vacation time accrued but unpaid as of the date of termination;
(b)
any reimbursement for expenses incurred on or prior to the date of termination in accordance with
Section 3.2; and
(c)
subject to Sections 4.6, 4.7 and 4.8 below, provided that such Termination Without Cause
constitutes a Separation from Service of Executive (as defined in Section 4.8 below), and further
provided that Executive does not engage in Competitive Activities during the Severance Period:
(i) payment of amounts (“Severance Installments”) representing continuation of
Executive’s Base Salary as in effect at the date of such Termination Without Cause until the
earlier of (A) the date that is 18 months following the date of termination, or (B) the date on which
the Initial Term or the then-current Extended Term, as applicable, would have expired had such
termination not occurred (such period, the “Severance Period”), which Severance Installments
shall be payable in such amounts and on such dates as
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such amounts otherwise would be payable based on the Company’s payroll schedule in effect at
the date of termination and shall be treated as a series of separate payments for purposes of Code
Section 409A (as defined in Section 4.8 below); and
(ii) an amount equal to Executive’s Target Bonus for the year in which such Termination
Without Cause occurs (the “Severance Bonus”), which Severance Bonus shall be payable in a
lump sum within 60 days following the date of termination of Executive’s employment.
In addition, subject to Sections 4.6, 4.7 and 4.8 below, and provided that such Termination Without Cause
constitutes a Separation from Service of Executive (as defined in Section 4.8 below), if Executive elects continuation
coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), the Company shall
contribute to the health plan maintained by LMC or by the Company, as applicable, that provides coverage for
employees of the Company (including Executive and his dependents) as of the date of termination, or any such successor
plan maintained by LMC or the Company (the “Health Plan”), that amount that reflects the proportionate part of the
premium for such coverage that is paid by the Company as of the date of termination (the “Benefits Payments”)
throughout the period beginning on the date of termination and ending on the earliest of (i) the date that is 18 months
following the date of termination, (ii) the expiration of the coverage period specified under COBRA, such period to be
determined as of the date of termination, or (iii) the date on which the Initial Term or the then-current Extended Term, as
applicable, would have expired had such termination not occurred (the “Reimbursement Period”). Subject to Section 4.8
below, such Benefits Payments shall be made monthly in accordance with the Company’s normal procedures for the
payment of Health Plan premiums. Executive shall bear responsibility for that portion of the Health Plan premiums in
excess of the Benefits Payments. Notwithstanding the foregoing, if Executive becomes employed with another employer
during the Reimbursement Period and is eligible to receive health and/or medical benefits under any plan(s) provided by
such other employer, the Company’s contribution obligation under this paragraph shall be reduced to the extent that
coverage is provided under such other employer’s plan(s). Executive shall not be entitled to receive reimbursement of
any medial expenses under the Health Plan to the extent such medical expenses are reimbursed by any other Person,
including, without limitation, such other employer. Executive shall be responsible for paying any United States federal
or state income taxes associated with the Benefits Payments.
Notwithstanding the foregoing, if Executive elects, during the Severance Period, to engage in any Competitive
Activity, Executive shall deliver to the Company at least ten business days prior to commencing any such Competitive
Activities a written notice advising the Company of (i) Executive’s intent to commence Competitive Activities, and (ii)
the commencement date for such Competitive Activities (the “Competition Notice”). Executive’s election to participate
in any Competitive Activities during the Severance Period shall not be deemed a breach of this Agreement; rather, if
Executive engages in Competitive Activities prior to the expiration of the Severance Period, the Company shall have no
obligation to make any further payment to or for the benefit of Executive of any Severance Installments (except to the
extent Severance Installments at least equal to the Release Consideration have not theretofore been paid), Severance
Bonus or Benefits Payments.
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Executive acknowledges that the payments and benefits described in this Section 4.2, together with any rights or
benefits under any written plan or agreement (including the Award Agreements) that have vested on or prior to the
termination date of Executive’s employment under this Section 4.2, constitute the only payments that Executive shall be
entitled to receive from the Company hereunder or otherwise in the event of any termination of his employment pursuant
to this Section 4.2, and the Company shall have no further liability or obligation to him hereunder or otherwise in respect
of his employment or the termination thereof.
The Company and Executive acknowledge and agree that the delivery by the Company of a notice of nonrenewal pursuant to Section 1.2 above shall not be a Termination Notice giving rise to a Termination Without Cause
pursuant to this Section 4.2. Following delivery by the Company or the Executive of a notice of non-renewal pursuant to
Section 1.2 above, unless earlier terminated pursuant to Section 4.1, 4.2, 4.3 or 4.4 hereof, Executive’s employment
hereunder shall continue until the last day of the Initial Term or the then-current Extended Term, as applicable,
whereupon Executive’s employment hereunder shall cease (the “Cessation Date”). In such event, the Company shall pay
Executive an amount equal to the sum of (i) any Base Salary and unused vacation time accrued but unpaid as of the
Cessation Date, plus (ii) any reimbursement for expenses incurred on or prior to the Cessation Date in accordance with
Section 3.2. Executive acknowledges that the payments referred to in this paragraph, together with any rights or benefits
under any written plan or agreement that have vested on or prior to the Cessation Date, constitute the only payments and
benefits that Executive (or his legal representative, as the case may be) shall be entitled to receive from the Company
hereunder or otherwise in the event of the expiration of the Term following delivery of a notice of non-renewal, and the
Company shall have no further liability or obligation to him (or his legal representative, as the case may be) hereunder or
otherwise in respect of his employment or the termination thereof.
4.3 Termination of Employment With Good Reason . In addition to any other remedies available to Executive
at law, in equity or as set forth in this Agreement, Executive shall have the right during the Term, upon written notice to
the Company, to terminate his employment hereunder upon the occurrence of any of the following events without the
prior consent of Executive: (a) a reduction in Executive’s then current Base Salary or level of Target Bonus; (b) a
significant reduction in Executive’s title, duties or reporting relationship with the Company or the assignment to
Executive of duties that are inconsistent with Executive’s position with the Company; (c) relocation of the Company’s
Los Angeles office more than 50 miles away from Beverly Hills, California; (e) a Corporate Event; or (f) a material
breach by the Company of any provision of this Agreement (a “Termination With Good Reason”), provided, however,
that the disposition during the Term of any or all of the equity or business of Starz Media, LLC or Overture Films, LLC,
however effected, will not constitute an event giving Executive the right to terminate his employment hereunder
pursuant to a Termination With Good Reason.
Notwithstanding the foregoing, except with respect to clause (e) above, no purported Termination With Good
Reason pursuant to this Section 4.3 shall be effective unless all of the following provisions shall have been complied
with: (i) Executive shall give the Company a written notice of Executive’s intention to effect a Termination With Good
Reason, such notice to state in detail the particular circumstances that constitute the grounds on which the proposed
Termination With Good Reason is based and to be given no later than 90 days after the initial occurrence of such
circumstances; (ii) the Company shall have 30 days after receiving such notice in which to cure such grounds; and
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(iii) if the Company fails, within such 30-day period, to cure such grounds to Executive’s reasonable satisfaction,
Executive terminates his employment hereunder within 30 days following the last day of such 30-day period. If the
Company timely cures such grounds in accordance with the preceding sentence, Executive shall not be entitled to
terminate his employment pursuant to a Termination With Good Reason based on such grounds. Within 60 days
following the occurrence of a Corporate Event, Executive may elect to terminate his employment with the Company by
providing notice to the Company not less than 30 days in advance of his proposed date of such termination. If Executive
timely provides such notice pursuant to the preceding sentence, his termination of employment shall be effective as of
such proposed date and shall be considered a Termination With Good Reason. If Executive does not timely provide such
notice of termination, he shall not be entitled to terminate his employment pursuant to a Termination With Good Reason
based on such Corporate Event.
If a Termination With Good Reason occurs, Executive shall have the same entitlement to the payments and
benefits as provided under Section 4.2 for a Termination Without Cause, subject to the conditions set forth in Section 4.2
relating to such payments and benefits.
Executive acknowledges that the payments and benefits referred to in this Section 4.3, together with any rights or
benefits under any written plan or agreement (including the Award Agreements) that have vested on or prior to the
termination date of Executive’s employment under this Section 4.3, constitute the only payments that Executive shall be
entitled to receive from the Company hereunder or otherwise in the event of any termination of his employment pursuant
to this Section 4.3, and the Company shall have no further liability or obligation to him hereunder or otherwise in respect
of his employment or the termination thereof. Executive further acknowledges that if Executive voluntarily terminates
his employment hereunder other than pursuant to a Termination With Good Reason (a “Voluntary Termination”), the
Company shall have no further liability or obligation to Executive hereunder or otherwise, other than with respect to any
rights or benefits under any written plan or agreement (including the Award Agreements) that have vested on or prior to
the date of such Voluntary Termination, the Company’s obligation to pay Base Salary and vacation time accrued but
unpaid as of the date of such Voluntary Termination, reimbursement of expenses incurred on or prior to the date of such
Voluntary Termination in accordance with Section 3.2 above and any other amounts legally required to be paid.
4.4
Death; Disability . If Executive dies or becomes Disabled during the Term, Executive’s employment
hereunder shall terminate automatically, and the Company shall pay Executive (or his legal representative, as the case
may be) the following:
(a)
any Base Salary and vacation time accrued but unpaid as of the date of such termination;
(b)
any reimbursement for expenses incurred on or prior to the date of such termination in accordance
with Section 3.2;
(c)
subject to Sections 4.6, 4.7 and 4.8 below, provided that such termination of employment
constitutes a Separation from Service of Executive (as defined in Section 4.8 below), an amount
(the “Severance Amount”), payable in a single sum within 60 days following the date of such
termination of employment, equal to the sum of (i) Executive’s annual Base Salary as in effect at
the date of
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Executive’s death or Disability, multiplied by a fraction, the numerator of which is the number of
days that would have remained in the Initial Term or the then-current Extended Term, as
applicable, had such termination of employment not occurred and the denominator of which is the
number of days in the Initial Term or the then-current Extended Term, as applicable, plus (ii)
Executive’s Target Bonus for the fiscal year in which Executive’s death or Disability occurs,
multiplied by a fraction, the numerator of which is the number of days during such fiscal year
preceding the date of Executive’s death or Disability and the denominator of which is the total
number of days in such fiscal year.
For purposes of this Agreement, Executive shall be deemed to be “Disabled” or have a “Disability” if, because of
Executive’s physical or mental disability, he has been substantially unable to perform his duties hereunder for 16 work
weeks in any 12-month period. Executive shall be considered to have been substantially unable to perform his duties
hereunder only if he is either (a) unable to reasonably and effectively carry out his duties with reasonable
accommodations by the Company or (b) unable to reasonably and effectively carry out his duties because any reasonable
accommodation which may be required would cause the Company undue hardship. In the event of a disagreement
concerning Executive’s perceived Disability, Executive shall submit to such examinations as are deemed appropriate by
three practicing physicians specializing in the area of Executive’s Disability, one selected by Executive, one selected by
the Company, and one selected by both such physicians. The majority decision of such three physicians shall be final
and binding on the parties.
Executive acknowledges that the payments referred to in this Section 4.4, together with any rights or benefits
under any written plan or agreement (including the Award Agreements) which have vested on or prior to the termination
date of Executive’s employment under this Section 4.4, constitute the only payments which Executive (or his legal
representative, as the case may be) shall be entitled to receive from the Company hereunder in the event of Executive’s
death or Disability during the Term and the consequent termination of Executive’s employment hereunder, and the
Company shall have no further liability or obligation to him (or his legal representative, as the case may be) hereunder or
otherwise in respect of his employment or the termination thereof.
4.5
No Mitigation by Executive . Executive shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment
provided for herein be reduced by any compensation earned by Executive or benefits provided to Executive as the result
of his employment by another employer except as otherwise provided in Section 4.2 with respect to Benefit Payments.
Severance Agreement and Release . If Executive’s employment hereunder is terminated pursuant to a
4.6
Termination Without Cause (as defined in Section 4.2 above) or a Termination With Good Reason (as defined in Section
4.3 above), or on account of Executive’s Disability (as defined in Section 4.4 above), payment by the Company of the
amounts described in said sections shall be subject to the execution and delivery to the Company by Executive (or by
Executive’s legal representative, if applicable), within the applicable time period described below, of a severance
agreement and release (the “Release”) in a form that is reasonably satisfactory to the Company and consistent with the
form of severance agreement and release then used by the Company for senior executives.
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The Release shall be delivered to Executive, in the case of a Termination Without Cause, at the time of delivery
of the Termination Notice, in the case of a Termination With Good Reason, upon delivery of written notice by Executive
to the Company, and in the case of Executive’s Disability, as soon as reasonably practicable following the date on which
Executive’s Disability occurs. Executive shall have a period of 21 days (or, if required by applicable law, a period of 45
days) after the effective date of termination of Executive’s employment hereunder (the “Consideration Period”) in which
to execute and return the original, signed Release to the Company. If Executive delivers the original, signed Release to
the Company prior to the expiration of the Consideration Period and does not thereafter revoke such Release within any
period of time provided therefor under applicable law, Executive shall, subject to Section 4.7 below, be entitled to the
Severance Installments, Severance Bonus and Benefits Payments as described in Section 4.2 (including by reason of
Section 4.3, if applicable) or the Severance Amount described in Section 4.4(c), as applicable. In such event, aggregate
Severance Installments or that portion of the Severance Amount, as applicable, equal to one-twelfth of Executive’s Base
Salary in effect at the date of termination of Executive’s employment hereunder shall constitute consideration for
Executive’s delivery of the Release pursuant to this Section 4.6 (the “Release Consideration”).
If Executive does not deliver the original, signed Release to the Company prior to the expiration of the
Consideration Period, or if Executive delivers the original, signed Release to the Company prior to the expiration of the
Consideration Period and thereafter revokes such Release within any period of time provided therefor under applicable
law, then:
(a)
the Company shall pay Executive an amount equal to the sum of (i) any Base Salary and vacation
time accrued but unpaid as of the date of termination, plus (ii) any reimbursement for expenses
incurred on or prior to the date of termination in accordance with Section 3.2; and
(b)
the Company shall have no obligation to pay to Executive the Severance Installments, Severance
Bonus and Benefits Payments or the Severance Amount.
4.7 Continued Compliance . Executive and the Company hereby acknowledge that any Severance Installment,
Severance Bonus or Benefits Payment payable by the Company under Section 4.2 (including by reason of Section 4.3)
or Severance Amount payable by the Company under Section 4.4(c) are part of the consideration for Executive’s
undertakings under Article V below. Such amounts are subject to Executive’s continued compliance with the provisions
of Article V. If Executive violates the provisions of Article V, then the Company will have no obligation to pay or make
any of the Severance Installments, Severance Bonus or Benefits Payments or the Severance Amount to the extent any or
all of the same remain payable by the Company under Section 4.2 (including by reason of Section 4.3) or 4.4 on or after
the date of such violation, except to the extent of any unpaid Release Consideration.
4.8 Timing of Payments Under Certain Circumstances . With respect to any amount that becomes payable to
or for the benefit of Executive under this Agreement upon Executive’s Separation from Service (as defined below) for
any reason, the provisions of this Section 4.8 will apply, notwithstanding any other provision of this Agreement to the
contrary. If the Company determines in good faith that Executive is a “specified employee” within the meaning of within
the meaning of
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Section 409A of the Internal Revenue Code of 1986, as amended, including any Treasury regulations promulgated
thereunder and any guidance issued by the Internal Revenue Service with respect thereto (collectively, “Code Section
409A”), then to the extent required under Code Section 409A, payment of any amount of deferred compensation that
becomes payable to or for the benefit of Executive upon Separation from Service (other than by reason of the death of
Executive) and that otherwise would be payable during the six-month period following Executive’s Separation from
Service shall be suspended until the lapse of such six-month period (or, if earlier, the date of Executive’s death). A
“Separation from Service” of Executive means Executive’s separation from service, as defined in Code Section 409A,
with the Company and all other Persons with which the Company would be considered a single employer under Internal
Revenue Code Section 414(b) or (c), applying the 80% threshold used in such Internal Revenue Code Sections or any
Treasury regulations promulgated thereunder. Any payment suspended as provided in this Section 4.8, unadjusted for
interest on such suspended payment, shall be paid to Executive in a single payment on the first business day following
the end of such six-month period or within 30 days following the death of Executive, as applicable, provided that the
death of Executive during such six-month period shall not cause the acceleration of any amount that otherwise would be
payable on any date during such six-month period following the date of Executive’s death.
ARTICLE V
OWNERSHIP OF PROCEEDS
OF EMPLOYMENT; NON-DISCLOSURE;
NON-COMPETITION
5.1 Ownership of Proceeds of Employment . The Company shall be the sole and exclusive owner throughout
the universe in perpetuity of all of the results and proceeds of Executive’s services, work and labor in connection with
Executive’s employment by the Company, free and clear of any and all claims, liens or encumbrances. Executive shall
promptly and fully disclose to the Company, with all necessary detail for a complete understanding of the same, any and
all developments, client and potential client lists, know how, discoveries, inventions, improvements, conceptions, ideas,
writings, processes, formulae, contracts, methods, works, whether or not patentable or copyrightable, which are
conceived, made, acquired, or written by Executive, solely or jointly with another, while employed by the Company
(whether or not at the request or upon the suggestion of the Company) and which are substantially related to the business
or activities of the Company or any of its Subsidiaries, or which Executive conceives as a result of his employment by
the Company or its Subsidiaries, or as a result of rendering advisory or consulting services to the Company or its
Subsidiaries (collectively, “Proprietary Rights”).
Executive hereby assigns and transfers, and agrees to assign and transfer, all his rights, title, and interests in the
Proprietary Rights to the Company or its nominee. In addition, Executive shall deliver to the Company any and all
drawings, notes, specifications, and data relating to the Proprietary Rights. All copyrightable Proprietary Rights shall be
considered to be “works made for hire.” Whenever requested to do so by the Company, Executive shall execute and
deliver to the Company any and all applications, assignments and other instruments and do such other acts that the
Company shall reasonably request to apply for and obtain patents and/or copyrights in any and all countries or to
otherwise protect the Company’s interest in the Proprietary Rights and/or to vest title thereto to the
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Company; provided, however, the provisions of this Section 5.1 shall not apply to any Proprietary Rights that Executive
developed entirely on his own time without using the Company’s equipment, supplies, facilities or proprietary
information, except for Proprietary Rights that (a) at the time of conception or reduction to practice of the Proprietary
Rights, relate to the Company’s business, or actual or demonstrably anticipated research or development of the
Company, or (b) result from any work performed by Executive for the Company.
Executive shall assist the Company in obtaining such copyrights and patents during the term of this Agreement,
and any time thereafter without cost to the Executive, on reasonable notice and at mutually convenient times; provided,
however, Executive shall be reasonably compensated for his time and reimbursed for any out-of-pocket expenses
incurred in rendering such assistance or giving or preparing to give such testimony. Executive agrees to testify in any
prosecution or litigation involving any of the Proprietary Rights.
Contemporaneously with the execution and delivery of this Agreement, Executive is executing and delivering an
acknowledgment under Section 2870 of the California Labor Code in the form of Exhibit D hereto, the provisions of
which are incorporated herein by reference.
5.2 Non-Disclosure of Confidential Information . As used herein, “Confidential Information” means any and
all non-public information as to which the Company takes reasonable steps to protect the confidentiality of and that
affects or relates to the business of the Company and its Subsidiaries, including, without limitation: (a) financial data,
customer lists and data, licensing arrangements, business strategies, pricing information, product development,
intellectual, artistic, literary, dramatic or musical rights, works, or other materials of any kind or nature (whether or not
entitled to protection under applicable copyright laws, or reduced to or embodied in any medium or tangible form),
including, without limitation, all copyrights, patents, trademarks, service marks, trade secrets, contract rights, titles,
themes, stories, treatments, ideas, concepts, technologies, art work, logos, hardware, and software; (b) such information
as may be embodied in any and all computer programs, tapes, diskettes, disks, mailing lists, lists of actual or prospective
customers and/or suppliers, notebooks, documents, memoranda, reports, files, correspondence, charts and lists; and (c)
all other written, printed or otherwise recorded material of any kind whatsoever and any other information, whether or
not reduced to writing, including “know-how,” ideas, concepts, research, processes, and plans. “Confidential
Information” does not include information relating to Executive’s working conditions or wages, information that is in
the public domain, information that is generally known in the trade, or information that Executive can prove he acquired
wholly independently of his employment with the Company. Executive shall not, at any time during the Term or
thereafter, directly or indirectly, disclose or furnish to, or use for the benefit of, any other person, firm or corporation any
Confidential Information, except in the course of the proper performance of his duties hereunder or as required by law
(in which event Executive shall give prior written notice to the Company and shall cooperate with the Company and the
Company’s counsel in complying with such legal requirements). Promptly upon the expiration or termination of
Executive’s employment hereunder for any reason or whenever the Company so requests, Executive shall surrender to
the Company all documents, drawings, work papers, lists, memoranda, records and other data (including all copies,
compilations or summaries thereof) constituting or pertaining in any way to any of the Confidential Information, other
than Executive’s personal “rolodex” or equivalent and any personal information contained on Executive’s computer(s);
provided, however, that Executive acknowledges if he chooses to import or maintain any personal
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information on the Company’s computers or network, he does not have any reasonable expectation of privacy vis-à-vis
the Company with respect to such information, and the Company may access and review such information at any time,
for any reason.
5.3 Non-Competition . During the Term, Executive shall not, directly or indirectly, compete with the Company
(i.e., by being employed as an executive by, or otherwise providing services as an executive to, any Person (a
“Competing Entity”) having an interest in, engaging in or participating in the ownership, management, operation or
control of, or acting in any advisory capacity or other capacity to, any premium pay television service operating in the
United States (collectively, “Competitive Activities”)), or solicit or divert any business or any customer from the
Company or assist any Person in doing so or attempting to do so, or cause or seek to cause any Person to refrain from
dealing or doing business with the Company or assist any Person in doing so or attempting to do so. Notwithstanding the
foregoing, Executive may make solely passive investments in any Competing Entity, the common stock of which is
“publicly held,” and of which Executive shall not own or control, directly or indirectly, in the aggregate, securities that
constitute more than one percent of the voting rights or equity ownership of such Competing Entity.
5.4 Non-Solicitation . Executive shall not, for a period of two years from the date of any termination of his
employment hereunder except a Termination Without Cause or a Termination With Good Reason: (a) solicit or induce,
directly or indirectly, or cause or permit others to solicit or induce, directly or indirectly, any person employed by the
Company or any Subsidiary (a “Company Employee”) to leave employment with the Company; or (b) solicit or cause to
be solicited the disclosure of or disclose any Confidential Information for any purpose whatsoever or for any other party.
5.5
Breach of Provisions . If Executive shall breach any of the provisions of this Article V, or if any such
breach is threatened by Executive, in addition to and without limiting or waiving any other rights or remedies available
to the Company at law or in equity, unless otherwise prohibited by applicable law, the Company shall be entitled to
immediate injunctive relief in any court, domestic or foreign, having the capacity to grant such relief, without the
necessity of posting a bond, to restrain any such breach or threatened breach and to enforce the provisions of this Article
V. Executive acknowledges and agrees that there is no adequate remedy at law for any such breach or threatened breach
and, if any action or proceeding is brought seeking injunctive relief, Executive shall not use as a defense thereto that
there is an adequate remedy at law.
5.6
Reasonable Restrictions . The parties acknowledge that the foregoing restrictions, the duration and the
territorial scope thereof as set forth in this Article V, are under all of the circumstances reasonable and necessary for the
protection of the Company and its business.
5.7
Definition . For purposes of this Article V, the term “Company” shall be deemed to include (i) any
predecessor to, or successor of, the Company, (ii) any Subsidiary of the Company (including, without limitation, any
Person in which the Company owns, directly or indirectly, 50% or more of the issued and outstanding equity), and (iii)
any Person that is under the Control or common Control of the Company (including, by way of illustration and not as a
limitation, any joint venture to which the Company or one of its Subsidiaries is a party).
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ARTICLE VI
MISCELLANEOUS
6.1 Binding Effect . This Agreement shall be binding upon and inure to the benefit of the parties hereto and
their respective legal representatives, heirs, distributees, successors and assigns.
6.2 Assignment . The Company may assign this Agreement to any successor in interest to its business, and
Executive hereby agrees to be employed by such assignee as though such assignee were originally the employer named
herein. Executive hereby acknowledges that the services to be rendered by Executive are unique and personal, and,
accordingly, Executive may not assign any of his rights or delegate any of his duties or obligations under this
Agreement.
6.3
Notices . All notices, requests, demands and other communications under this Agreement shall be in
writing and shall be deemed to have been duly given: (a) on the date of service if served personally on the party to whom
notice is to be given; (b) on the day of transmission if sent via facsimile transmission to the facsimile number given
below, and telephonic confirmation of receipt is obtained promptly after completion of transmission; (c) on the day of
transmission if sent via electronic mail to the electronic mail address given below; (d) on the day after delivery by
Federal Express or similar overnight courier or the Express Mail service maintained by the United States Postal Service;
or (e) on the fifth day after mailing, if mailed to the party to whom notice is to be given, by first class mail, registered or
certified, postage prepaid and properly addressed, to the party as follows:
(a)
If to the Company:
Starz, LLC
8900 Liberty Circle
Englewood, CO 80112
Attention: General Counsel
With a copy to:
Liberty Media Corporation
12300 Liberty Boulevard
Englewood, CO 80112
Attention: General Counsel
and
Sherman & Howard L.L.C.
633 Seventeenth Street, Suite 3000
Denver, CO 80202
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(b)
If to Executive:
Christopher Albrecht
With a copy to:
Ziffren Brittenham LLP
1801 Century Park West
Los Angeles, CA 90067-6406
And:
Geibelson Young & Company
21700 Oxford Street Suite 2030
Woodland Hills, CA 91367
Notwithstanding the foregoing, any notice of change of address of a party shall be effective only upon actual receipt by
the other party hereto.
6.4 Severability . If any provision of this Agreement, or portion thereof, shall be held invalid or unenforceable
by a court of competent jurisdiction, such invalidity or unenforceability shall attach only to such provision or portion
thereof, and shall not in any manner affect or render invalid or unenforceable any other provision of this Agreement or
portion thereof, and this Agreement shall be carried out as if any such invalid or unenforceable provision or portion
thereof were not contained herein. In addition, any such invalid or unenforceable provision or portion thereof shall be
deemed, without further action on the part of the parties hereto, modified, amended or limited to the extent necessary to
render the same valid and enforceable.
6.5 Confidentiality . Executive agrees that, unless such disclosure is expressly permitted by applicable law, he
will not, during the Term or thereafter, disclose to any other Person the terms or conditions of this Agreement (excluding
the financial terms hereof) without the prior written consent of the Company. Approval of the Company and of
Executive shall be required with respect to any press releases regarding this Agreement and the activities of Executive
contemplated hereunder.
6.6 Arbitration . Other than any action to obtain injunctive relief relating to the matters set forth in Article 5 of
this Agreement, if any controversy, claim or dispute arises out of or in any way relates to this Agreement, the alleged
breach thereof, Executive’s employment with the Company or termination therefrom, including, without limitation, any
and all claims for employment discrimination or harassment, civil tort and any other employment laws, excepting only
claims that may not, by statute, be arbitrated, both Executive and the Company (and its members, managers, officers,
employees or
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agents) agree to submit any such dispute exclusively to binding arbitration. Both Executive and the Company
acknowledge that they are relinquishing their right to a jury trial in civil court. Executive and the Company agree that
arbitration is the exclusive remedy for all disputes arising out of or related to Executive’s employment with the
Company.
The arbitration shall be subject to the Federal Arbitration Act and shall be administered by JAMS in accordance
with the Employment Arbitration Rules & Procedures of JAMS then in effect and subject to JAMS Policy on
Employment Arbitration Minimum Standards, except as otherwise provided in this Agreement. Arbitration shall be
commenced and heard in the Los Angeles, California metropolitan area. Only one arbitrator shall preside over the
proceedings, who shall be selected by agreement of the parties from a list of five or more qualified arbitrators provided
by the arbitration tribunal, or if the parties are unable to agree on an arbitrator within ten business days following receipt
of such list, the arbitration tribunal shall select the arbitrator. The arbitrator shall apply the substantive law (and the law
of remedies, if applicable) of California or federal law, or both, as applicable to the claim(s) asserted. In any arbitration,
the burden of proof shall be allocated as provided by applicable law. The arbitrator shall have the authority to award any
and all legal and equitable relief authorized by the law applicable to the claim(s) being asserted in the arbitration, as if
the claim(s) were brought in a federal or state court of law. Either party may bring an action in court to compel
arbitration under this Agreement and to enforce an arbitration award. Discovery, such as depositions or document
requests, shall be available to the Company and Executive as though the dispute were pending in federal court. The
arbitrator shall have the ability to rule on pre-hearing motions as though the matter were in a federal court, including the
ability to rule on a motion for summary judgment.
If permitted by applicable law, the fees of the arbitrator and any other fees for the administration of the
arbitration that would not normally be incurred if the action were brought in a court of law (e.g., filing fees, room rental
fees, etc.) shall be shared equally by the parties. If the foregoing is not permitted by applicable law, the fees of the
arbitrator and any other fees for the administration of the arbitration that would not normally be incurred if the action
were brought in a court of law (e.g., filing fees, room rental fees, etc.) shall be paid by the Company, provided that
Executive shall be required to pay the amount of filing fees equal to that which Executive would be required to pay to
file an action in California state court. Each party shall pay its own attorneys’ fees and other costs incurred in connection
with the arbitration, unless the relief authorized by law allows otherwise and the arbitrator determines that attorneys’
fees shall be paid in a different manner. The arbitrator must provide a written decision that is subject to limited judicial
review consistent with applicable law. If any part of this arbitration provision is deemed to be unenforceable by an
arbitrator or a court of law, that part may be severed or reformed so as to make the balance of this arbitration provision
enforceable.
6.7
Waiver . No waiver by a party hereto of a breach or default hereunder by the other party shall be
considered valid unless in writing signed by such first party, and no such waiver shall be deemed a waiver of any
subsequent breach or default of the same or any other nature.
6.8
Controlling Nature of Agreement . To the extent any terms of this Agreement are inconsistent with the
terms or provisions of the Company’s Employee Handbook or any other personnel policy statements or documents, the
terms of this Agreement shall control. To the extent that any terms and conditions of Executive’s employment are not
covered in this Agreement, the terms and conditions set forth in the Employee Handbook or any similar document shall
control such terms.
16
BUS_RE\2831340.12
6.9 Entire Agreement . This Agreement, including the exhibits hereto, sets forth the entire agreement between
the parties with respect to the subject matter hereof, and supersedes any and all prior agreements or understanding
between the Company and Executive, whether written or oral, fully or partially performed relating to any or all matters
covered by and contained or otherwise dealt with in this Agreement.
6.10 Amendment . No modification, change or amendment of this Agreement or any of its provisions shall be
valid unless in writing and signed by the party against whom such claimed modification, change or amendment is sought
to be enforced.
6.11 Authority . The parties each represent and warrant that they have the power, authority and right to enter
into this Agreement and to carry out and perform the terms, covenants and conditions hereof.
6.12 Applicable Law . This Agreement, and all of the rights and obligations of the parties in connection with
the employment relationship established hereby, shall be governed by and construed in accordance with the substantive
laws of the State of California without giving effect to principles relating to conflicts of law.
6.13
Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an
original, and all of which together shall constitute one and the same instrument.
6.14 Compliance with Section 409A The provisions of this Agreement are intended to satisfy the requirements
of Code Section 409A and will be interpreted in a manner that is consistent with such intent so that all payments and
reimbursements made and all in-kind benefits provided hereunder are either made or provided in compliance with Code
Section 409A or are exempt from the provisions thereof. The parties intend that, to the maximum extent possible, any
Severance Installments and any Severance Bonus paid pursuant to Section 4.2(c) (including by reason of Section 4.3)
and any Severance Amount paid pursuant to Section 4.4(c) shall qualify as a short-term deferral pursuant to Treasury
Regulation § 1.409A-1(b)(4) or a separation payment pursuant to Treasury Regulation § 1.409A-1(b)(9) and that any
Benefits Payments made pursuant to Section 4.2 (including by reason of Section 4.3) shall qualify as reimbursements of
medical expenses under a separation pay plan pursuant to Treasury Regulation § 1.409A-1(b)(9)(v)(B). With respect to
any reimbursement or in-kind benefit provided to Executive hereunder that constitutes deferred compensation subject to
Code Section 409A, the following provisions shall apply: (i) the amount of any reimbursements or in-kind benefits
provided during any taxable year of Executive shall not affect the expenses eligible for reimbursement or the in-kind
benefits provided to Executive in any other taxable year; (ii) reimbursements shall be made only for expenses incurred,
and in-kind benefits shall be provided only, during the period expressly set forth in this Agreement; (iii) any
reimbursement of eligible expenses must be made on or before the last day of Executive’s taxable year following the
taxable year in which the expense was incurred; and (iv) no such reimbursements or in-kind benefits shall be subject to
liquidation or exchange for another benefit.
6.15
Agreement.
Defined Terms . Each capitalized term set forth below is defined in the referenced section of this
17
BUS_RE\2831340.12
Term
Section
Accrual Cap
Agreement
Award Agreements
Base Salary
Benefits Payments
Bonus
Cause
Cessation Date
COBRA
Code Section 409A
Committee
Company
Company Employee
Company Plans
Competing Entity
Competition Notice
Competitive Activities
Confidential Information
Consideration Period
Control
Corporate Event
Disabled and Disability
Effective Date
Executive
Extended Term
Health Plan
Initial Term
LMC
Person
Project
Proprietary Rights
Reimbursement Period
Release
Release Consideration
Separation from Service
Severance Amount
Severance Bonus
Severance Installments
Severance Period
Subsidiaries
Target Bonus
Term
3.3
Preamble
3.5
2.2
4.2, ¶ Second
2.3
4.1, ¶ Second
4.2, ¶ Fifth
4.2, ¶ Second
4.8
2.3
Preamble
5.4
3.1
5.3
4.2, ¶ Third
5.3
5.2
4.6, ¶ Second
1.4
4.1, ¶ Fourth
4.4, ¶ Second
1.2
Preamble
1.2
4.2, ¶ Second
1.2
1.4
1.4
1.3
5.1, ¶ First
4.2, ¶ Second
4.6, ¶ First
4.6, ¶ Second
4.8
4.4, ¶ First, (c)
4.2, ¶ First, (c)(ii)
4.2, ¶ First, (c)(i)
4.2, ¶ First, (c)(i)
Introduction
2.3
1.2
18
BUS_RE\2831340.12
Term
Section
Termination For Cause
Termination Notice
Termination With Good Reason
Termination Without Cause
Voluntary Termination
4.1, ¶ First
4.2, ¶ First
4.3, ¶ First
4.2, ¶ First
4.3, ¶ Fourth
6.16
[Signature page follows.]
19
BUS_RE\2831340.12
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above
written.
COMPANY :
STARZ, LLC
By: Liberty Programming Company LLC, its
Manager
By: LMC Capital LLC, its Manager
By:
/s/ Charles Y. Tanabe
Name: Charles Y. Tanabe
Title: Executive Vice President
EXECUTIVE :
/s/ Christopher Albrecht
Christopher Albrecht
BUS_RE\2831340.12
Exhibit A
Projects
In Security (TBS/TNT)
The Catch (TBS/TNT)
From Iceland with Love (New Line)
BUS_RE\2831340.12
Exhibit B
Nonqualified Stock Option Agreement
BUS_RE\2831340.12
Exhibit C
Restricted Stock Award Agreement
BUS_RE\2831340.12
Exhibit D
Form of Acknowledgment Under Section 2870 of the California Labor Code
Section 2870 of the California Labor Code provides:
(a) Any provision in an employment agreement which provides that an employee shall assign or offer to assign any of
his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed
entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information
except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the
employer’s business, or actual or demonstrably anticipated research or development of the employer; (2) Result from
any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to require an employee to assign an invention
otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of
this state and is unenforceable.
ACKNOWLEDGEMENT
This Acknowledgement is entered into in connection with that Employment Agreement (the “Agreement”)
between me and Starz, LLC, a Delaware limited liability company (the “Company”), dated as of the date hereof.
1. I hereby acknowledge that the provisions of the Agreement relating to rights to inventions which I have
executed does not apply to an invention for which no equipment, supplies, facility, or trade secret information of the
Company was used and which was developed entirely on my own time, unless (a) the invention relates (i) to the business
of the Company, or (ii) to the Company’s actual or demonstrably anticipated research or development, or (b) the
invention results from any work performed by me for the Company. I hereby acknowledge receipt of a copy of
California Labor Code Section 2870 (hereinafter referred to as the “Act”) which relates to employer/employee rights to
inventions.
2. I understand that I have an obligation to disclose to the Company all my inventions, made solely or jointly
with others, during the term of the employment, even though I believe that some fall within the provisions of the Act. I
agree that at the time I disclose any such invention to the Company that I shall declare in writing if I believe the
invention falls within the provisions of the Act. Failure to provide such written notice shall be construed as an admission
that all rights in the invention belong to the Company.
3. I understand that the burden is on me to prove that an invention qualifies under the provisions of the Act. I
understand that if I fail to prove that an invention qualifies under the Act, the Company shall be entitled to the invention
as provided in the Agreement.
BUS_RE\2831340.12
4. I further agree that the provisions of this Acknowledgement shall not apply if I am transferred, with my prior
written consent, to a subsidiary, office, division or unit of the Company outside of the State of California, and that, as a
result, the Company may have greater rights with respect to inventions than those provided in the Agreement or the Act.
Date: June 9, 2010
/s/ Christopher Albrecht
Christopher Albrecht
BUS_RE\2831340.12
Exhibit 10.17
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the “Amendment”) is made effective as of December 7, 2012 by
and between Starz, LLC a Delaware limited liability company (the “Company”), and Christopher Albrecht
(“Executive”).
Recitals
The Company and the Executive are parties to an employment agreement made effective as of January 1, 2010
(the “Original Agreement”). The Company and the Executive desire to amend the Original Agreement to comply with
guidance provided under Section 409A of the Internal Revenue Code of 1986, as amended, in Notice 2010-6 issued on
January 19, 2010, as modified by Notice 2010-80 issued on November 30, 2010, relating to payments upon separation
from service that are subject to execution and delivery of a release or another employment-related action.
Agreement
In consideration of the mutual covenants set forth in this Agreement and other good and valuable consideration,
the receipt and sufficiency of which are acknowledged, the parties, intending to be legally bound, agree as follows:
1.
The third sentence of the second paragraph of Section 4.6, Severance Agreement and Release , shall be
amended to read in its entirety as follows:
“If Executive delivers the original, signed Release to the Company prior to the expiration of the Consideration
Period and does not thereafter revoke such Release within the seven-day period immediately following the
Consideration Period as provided therefor under applicable law (such seven-day period, the “Revocation
Period”), Executive shall, subject to Section 4.7 below, be entitled to the Severance Installments, Severance
Bonus and Benefits Payments as described in Section 4.2 (including by reason of Section 4.3, if applicable) or
the Severance Amount described in Section 4.4(c), as applicable.
2.
thereof:
Section 6.14, Compliance with Section 409A , is hereby amended by the addition of the following at the end
“The following provisions of this Section 6.14 shall apply to (a) any Severance Installment otherwise payable
within 60 days following the date of termination of Executive’s employment (such 60-day period, the “Initial
Payment Period”), (b) the Severance Bonus, and (c) the Severance Amount, but only to the extent that such
Severance Installment, Severance Bonus or Severance Amount constitutes nonqualified deferred compensation
subject to the provisions of Section 409A (collectively, the “Initial Payments”). Subject to satisfaction of the
requirements of Section 4.6, Section 4.7 and any other provision of this Agreement relating to the payment
thereof, each Initial Payment shall be paid to Executive at the time otherwise provided under this Agreement,
provided that, if the Initial Payment Period begins in one taxable year of Executive (the “First Taxable Year”)
and ends in the following taxable year of Executive (the “Second Taxable Year”), Initial Payments shall be made
only during the portion of the Initial Payment Period that occurs during the Second Taxable Year (the “Straddle
BUS_RE/4506798.3
Rule”). Subject to Section 4.8, (i) any Severance Installment that would be payable prior to the expiration of the
Revocation Period but for the requirements of Section 4.6 and thereafter becomes payable upon satisfaction of
the requirements of such section shall be paid to Executive on the first date during the Initial Payment Period
following expiration of the Revocation Period on which a Severance Installment otherwise becomes payable (but
not later than the last day of the Initial Payment Period and subject to clause (ii) of this sentence), and (ii) any
Severance Installment that would be payable during the First Taxable Year but for the Straddle Rule shall paid on
the first date during the Initial Payment Period on which a Severance Installment otherwise becomes payable
during the Second Taxable Year (or, if no such date occurs, on the first business day of the Second Taxable
Year). The preceding provisions relating to Initial Payments are intended to comply with Section 409A guidance
provided under Notice 2010-6 issued on January 19, 2010, as modified by Notice 2010-80 issued on November
30, 2010, relating to payments upon separation from service that are subject to execution and delivery of a
release or another employment-related action.”
3. Except as amended by the preceding provisions of this Amendment, the Original Agreement shall remain in
full force and effect according to its terms.
4. This Agreement shall be governed by, and construed in accordance with, the substantive laws of the State of
California, without reference to principles of conflict of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to Employment Agreement as of
the day and year first above written.
COMPANY :
STARZ, LLC
By: Liberty Media Corporation, its Manager
By: /s/ Pamela Coe
Name: Pamela Coe
Title: Vice President
EXECUTIVE :
/s/ Christopher Albrecht
Christopher Albrecht
BUS_RE/4506798.3
Exhibit 10.18
TERM SHEET
Second Amendment to Employment Agreement for
Christopher Albrecht (“Executive”)
This term sheet describes the proposed amendments to Executive’s Employment Agreement, dated as of January 1,
2010, between Starz, LLC, a Delaware limited liability company, and Executive, as such agreement was amended on
December 7, 2012 (the “Employment Agreement”). Except as listed below, the material terms of the Employment
Agreement will continue in effect.
Position:
Chief Executive Officer of Starz, a Delaware corporation (“Starz”). Executive will report
to the Chairman of the Board of Directors (the “Board”) of Starz and to the Board.
Executive will be based in Los Angeles.
Term:
January 1, 2013 through December 31, 2016, unless sooner terminated (the “Term”).
Compensation:
Base annual salary of $1.25 million plus target bonus equal to 100% of base salary based
on corporate and individual performance criteria to be determined by the Compensation
Committee of the Board. Executive to receive the lesser of (i) 18 months’ payment of base
and target bonus or (ii) payment of base and target bonus through the end of the Term, if
Executive is terminated without Cause or if Executive terminates his employment for
Good Reason (as that term is defined below), with the structure of such payments being
subject to compliance with applicable tax law.
Equity Awards:
Executive will be granted options to purchase shares of Series A Liberty Capital common
stock of Starz (“STRZA”) as follows:
•
A one-time grant of options on shares of STRZA equal to $26 million Black-Scholes
value. The exercise price per share of such options will be equal to the closing price
of STRZA on the grant date. Fifty percent of the options will vest on December 31,
2015, and fifty percent of the options will vest on December 31, 2016. The expiration
date of the options will be ten years from grant date.
•
Other terms of the options will be the same as the terms of the options in the
Employment Agreement except as noted below:
o
Spin-Off Matters:
Upon termination by Starz other than for Cause (as originally defined in the
Employment Agreement) or by the Executive for Good Reason (as defined in the
Employment Agreement, but amended to require a double trigger in a change of
control event), options granted to Executive will be deemed to have vested in a
number equal to the product of (i) the total number of unvested options multiplied
by (ii) a fraction, the numerator of which is the total number of days elapsed in the
Term to the date of termination plus 548 days and the denominator of which is the
total number of days in the full Term. Such vested options will remain exercisable
to the end of their original term.
The Employment Agreement will be amended to reflect certain matters related to the
January 2013 Liberty Media/Starz spin-off and to update certain historical references and
issues.
1
Exhibit 21.1
Starz
Subsidiary List
as of December 31, 2012
NAME
Starz
Starz, LLC
Aries Pictures LLC
Chalk Line Productions, LLC
Film Roman, LLC
Namor Productions, LLC
SEG Investments, Inc.
Starz Canada Holdco, LLC
Starz Canada Holdings II B.V.
Starz Entertainment, LLC
Starz Independent, LLC
Noir Productions New Zealand Limited
SFD Productions, LLC
Sparty Films LA, LLC
Sparty Investments, LLC
Starz Incursion Productions, LLC
Starz Miami Productions, LLC
Starz Noir Productions, LLC
Starz Pirates Productions, LLC
Starz Finance Corp.
Starz Media Group, LLC
Starz Media, LLC
Anchor Bay Entertainment, LLC
Anchor Bay Entertainment Australia PTY LTD.
Anchor Bay Entertainment Canada Co.
Anchor Bay Entertainment UK Limited
Manga Entertainment Limited
Deadspace 2, LLC
Overture Films, LLC
Starz UK Holdings Limited
Domicile
DE
DE
CO
DE
DE
DE
DE
DE
Netherlands
CO
DE
NZ
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
Australia
Nova Scotia
UK
UK
DE
DE
UK
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Starz:
We consent to the incorporation by reference in the following registration statements of Starz of our reports dated February 27, 2013, with
respect to the consolidated balance sheets of Starz and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of
operations, comprehensive income, cash flows, and member's interest and noncontrolling interests for each of the years in the three-year period
ended December 31, 2012, and the effectiveness of internal control over financial reporting as of December 31, 2012, which reports appear in
the December 31, 2012 annual report on Form 10-K of Starz.
Description
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
Registration
Statement No.
333-185990
333-185988
333-185986
333-184900
333-179112
333-178421
333-178420
333-177844
333-177843
333-176988
333-176987
Description
Starz Transitional Stock Adjustment Plan
Starz 2011 Nonemployee Director Incentive Plan
Starz 2011 Incentive Plan
Starz 2011 Incentive Plan
Starz 2011 Incentive Plan
Starz Transitional Stock Adjustment Plan
Liberty Media 401(k) Savings Plan
Starz 2011 Incentive Plan
Starz 2011 Nonemployee Director Incentive Plan
Starz Transitional Stock Adjustment Plan
Liberty Media 401(k) Savings Plan
/s/ KPMG LLP
Denver, Colorado
February 27, 2013
EXHIBIT 31.1
CERTIFICATION
I, Christopher P. Albrecht, certify that:
1. I have reviewed this annual report on Form 10-K of Starz;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements and other financial information included in this annual report fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this annual report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluation; and
disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial
reporting.
Date: February 27, 2013
/s/ Christopher P. Albrecht
Christopher P. Albrecht
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, Scott D. Macdonald, certify that:
1. I have reviewed this annual report on Form 10-K of Starz;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements and other financial information included in this annual report fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this annual report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluation; and
disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial
reporting.
Date: February 27, 2013
/s/ Scott D. Macdonald
Scott D. Macdonald
Chief Financial Officer, Executive Vice President and Treasurer
Exhibit 32.1
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned
officers of Starz, a Delaware corporation (the "Company"), does hereby certify, to such officer's knowledge, that:
The Annual Report on Form 10-K for the period ended December 31, 2012 (the "Form 10-K") of the Company fully complies with the requirements of section 13(a) or 15
(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of
operations of the Company.
By:
Date: February 27, 2013
By:
Date: February 27, 2013
/s/ Christopher P. Albrecht
Name:
Christopher P. Albrecht
Title:
Chief Executive Officer (Principal Executive Officer)
/s/ Scott D. Macdonald
Name:
Scott D. Macdonald
Title:
Chief Financial Officer, Executive Vice President and
Treasurer (Principal Financial Officer and Principal
Accounting Officer)
The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title
18, United States Code) and is not being filed as part of the Form 10-K or as a separate disclosure document.