UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
_X_QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
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 333-184551
Starz, LLC
(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) | 80112 (Zip Code) |
Registrant’s telephone number, including area code: (720) 852-7700
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 preceeding 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 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 ____ | Accelerated filer ____ | Non-accelerated filer __X_ | 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__
No common stock is held by non-affiliates of the Registrant. The Registrant is a wholly-owned subsidiary of Starz, which holds all of the issued and outstanding shares of the Registrant.
STARZ, LLC
FORM 10-Q
Table of Contents
Part I | Page | ||
Item 1. | Financial Statements | ||
Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012 (Unaudited) | 2 | ||
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012 (Unaudited) | 3 | ||
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012 (Unaudited) | 4 | ||
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (Unaudited) | 5 | ||
Condensed Consolidated Statement of Member’s Interest and Noncontrolling Interests for the Six Months Ended June 30, 2013 (Unaudited) | 6 | ||
Notes to Condensed Consolidated Financial Statements (Unaudited) | 7 | ||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 32 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 44 | |
Item 4. | Controls and Procedures | 44 | |
Part II | |||
Item 1. | Legal Proceedings | 45 | |
Item 6. | Exhibits | 45 | |
1
PART I
Item 1. | Financial Statements |
Starz, LLC and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
June 30, 2013 | December 31, 2012 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 30,854 | $ | 749,774 | |||
Restricted cash | 63,817 | — | |||||
Trade accounts receivable, net of allowances of $37,719 and $35,045 | 242,061 | 241,415 | |||||
Program rights, net | 377,690 | 340,005 | |||||
Deferred income taxes (Note 5) | 5,081 | 990 | |||||
Other current assets | 37,364 | 44,727 | |||||
Total current assets | 756,867 | 1,376,911 | |||||
Program rights | 384,794 | 338,684 | |||||
Investment in films and television programs, net | 141,468 | 181,673 | |||||
Property and equipment, net of accumulated depreciation of $100,059 and $110,882 | 91,180 | 96,280 | |||||
Deferred income taxes (Note 5) | 7,969 | 12,222 | |||||
Goodwill | 131,760 | 131,760 | |||||
Other assets, net | 41,106 | 38,520 | |||||
Total assets | $ | 1,555,144 | $ | 2,176,050 | |||
Liabilities and Member’s Interest | |||||||
and Noncontrolling Interests | |||||||
Current liabilities: | |||||||
Current portion of debt (Note 2) | $ | 4,792 | $ | 4,134 | |||
Trade accounts payable | 5,547 | 6,162 | |||||
Accrued liabilities (Notes 4, 6 and 7) | 391,139 | 256,062 | |||||
Due to affiliate (Note 4) | — | 39,519 | |||||
Deferred revenue | 11,704 | 24,574 | |||||
Total current liabilities | 413,182 | 330,451 | |||||
Debt (Note 2) | 1,007,818 | 535,671 | |||||
Other liabilities (Note 6) | 9,171 | 7,784 | |||||
Total liabilities | 1,430,171 | 873,906 | |||||
Member’s interest | 132,238 | 1,311,951 | |||||
Noncontrolling interests in subsidiaries | (7,265 | ) | (9,807 | ) | |||
Total member’s interest and noncontrolling interests | 124,973 | 1,302,144 | |||||
Commitments and contingencies (Note 6) | |||||||
Total liabilities and member’s interest and noncontrolling interests | $ | 1,555,144 | $ | 2,176,050 |
See accompanying notes to condensed consolidated financial statements.
2
Starz, LLC and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Revenue: | |||||||||||||||
Programming networks and other services | $ | 391,081 | $ | 361,627 | $ | 740,569 | $ | 728,878 | |||||||
Home video net sales | 126,340 | 40,935 | 176,169 | 78,648 | |||||||||||
Total revenue | 517,421 | 402,562 | 916,738 | 807,526 | |||||||||||
Costs and expenses: | |||||||||||||||
Programming costs (including amortization) (Note 6) | 165,353 | 179,304 | 311,324 | 340,253 | |||||||||||
Production and acquisition costs (including amortization) (Note 4) | 113,267 | 39,372 | 153,057 | 75,448 | |||||||||||
Home video cost of sales | 15,095 | 10,668 | 30,216 | 21,228 | |||||||||||
Operating expenses | 12,437 | 12,953 | 25,122 | 26,375 | |||||||||||
Selling, general and administrative (Note 4) | 81,762 | 51,789 | 150,982 | 108,906 | |||||||||||
Stock compensation (Note 3) | 9,058 | 3,653 | 16,312 | 6,235 | |||||||||||
Depreciation and amortization | 4,353 | 4,552 | 8,769 | 8,807 | |||||||||||
Total costs and expenses | 401,325 | 302,291 | 695,782 | 587,252 | |||||||||||
Operating income | 116,096 | 100,271 | 220,956 | �� | 220,274 | ||||||||||
Other income (expense): | |||||||||||||||
Interest expense, net of amounts capitalized (Note 2) | (11,331 | ) | (4,449 | ) | (21,559 | ) | (9,330 | ) | |||||||
Other income (expense), net | (508 | ) | (98 | ) | (1,993 | ) | 4,167 | ||||||||
Income before income taxes | 104,257 | 95,724 | 197,404 | 215,111 | |||||||||||
Income tax expense (Note 5) | (38,222 | ) | (26,116 | ) | (73,166 | ) | (66,308 | ) | |||||||
Net income | 66,035 | 69,608 | 124,238 | 148,803 | |||||||||||
Net income attributable to noncontrolling interests | (2,148 | ) | (883 | ) | (2,486 | ) | (2,296 | ) | |||||||
Net income attributable to member | $ | 63,887 | $ | 68,725 | $ | 121,752 | $ | 146,507 |
See accompanying notes to condensed consolidated financial statements.
3
Starz, LLC and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(in thousands)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Net income | $ | 66,035 | $ | 69,608 | $ | 124,238 | $ | 148,803 | |||||||
Other comprehensive loss, net of taxes - | |||||||||||||||
Foreign currency translation adjustments from operations | (207 | ) | (201 | ) | (135) | (10) | |||||||||
Comprehensive income | 65,828 | 69,407 | 124,103 | 148,793 | |||||||||||
Comprehensive income attributable to noncontrolling interests | (2,051 | ) | (807 | ) | (2,346 | ) | (2,310 | ) | |||||||
Comprehensive income attributable to member | $ | 63,777 | $ | 68,600 | $ | 121,757 | $ | 146,483 |
See accompanying notes to condensed consolidated financial statements.
4
Starz, LLC and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Six Months Ended June 30, | |||||||
2013 | 2012 | ||||||
Operating activities: | |||||||
Net income | $ | 124,238 | $ | 148,803 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 8,769 | 8,807 | |||||
Amortization of program rights | 288,377 | 319,083 | |||||
Program rights payments | (227,514 | ) | (280,601 | ) | |||
Amortization of investment in films and television programs | 128,250 | 64,628 | |||||
Investment in films and television programs | (107,346 | ) | (129,122 | ) | |||
Stock compensation | 16,312 | 6,235 | |||||
Payments of long term incentive plan | (3,195 | ) | (27,707 | ) | |||
Deferred income taxes | 12,687 | 1,307 | |||||
Other non-cash items | 6,504 | (13,350 | ) | ||||
Changes in assets and liabilities: | |||||||
Current and other assets | (59,944 | ) | 6,649 | ||||
Due to affiliate | (39,519 | ) | (15,231 | ) | |||
Payables and other liabilities | (6,545 | ) | (27,768 | ) | |||
Net cash provided by operating activities | 141,074 | 61,733 | |||||
Investing activities – purchases of property and equipment | (3,125 | ) | (2,255 | ) | |||
Financing activities: | |||||||
Borrowings of debt | 988,500 | — | |||||
Payments of debt | (560,273 | ) | (2,036 | ) | |||
Debt issuance costs | (2,344 | ) | (381 | ) | |||
Distributions to Old LMC | (1,200,000 | ) | — | ||||
Distributions to parent related to repurchases of common stock | (81,807 | ) | — | ||||
Minimum withholding of taxes related to stock compensation | (1,581 | ) | — | ||||
Excess tax benefit from stock compensation | 842 | — | |||||
Settlement of derivative instruments | — | 3 | |||||
Net cash used in financing activities | (856,663 | ) | (2,414 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | (206 | ) | 11 | ||||
Net increase (decrease) in cash and cash equivalents | (718,920 | ) | 57,075 | ||||
Cash and cash equivalents: | |||||||
Beginning of period | 749,774 | 1,099,887 | |||||
End of period | $ | 30,854 | $ | 1,156,962 |
See accompanying notes to condensed consolidated financial statements.
5
Starz, LLC and Subsidiaries
Condensed Consolidated Statement of Member’s Interest and Noncontrolling Interests
Six Months Ended June 30, 2013
(Unaudited)
(in thousands)
Member’s Interest | Noncontrolling Interests | Total | |||||||||
Balance at December 31, 2012 | $ | 1,311,951 | $ | (9,807 | ) | $ | 1,302,144 | ||||
Distributions to Old LMC (Note 1) | (1,245,668 | ) | — | (1,245,668 | ) | ||||||
Tax attributes related to LMC Spin-Off (Note 5) | 11,565 | — | 11,565 | ||||||||
Distributions to parent related to repurchases of common stock | (81,807 | ) | — | (81,807 | ) | ||||||
Net income | 121,752 | 2,486 | 124,238 | ||||||||
Other comprehensive income | 5 | (140 | ) | (135 | ) | ||||||
Stock compensation | 15,179 | 196 | 15,375 | ||||||||
Minimum withholding of taxes related to stock compensation | (1,581 | ) | — | (1,581 | ) | ||||||
Excess tax benefit from stock compensation | 842 | — | 842 | ||||||||
Balance at June 30, 2013 | $ | 132,238 | $ | (7,265 | ) | $ | 124,973 |
See accompanying notes to condensed consolidated financial statements.
6
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
Note 1 - | Basis of Presentation and Description of Business |
Presentation
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, LLC also develops, produces and acquires entertainment content and distributes this content to consumers in the U.S. and throughout the world. The accompanying condensed consolidated financial statements include the accounts of Starz, LLC and its majority-owned and controlled subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for such periods have been included. The results of operations for any interim period are not necessarily indicative of results for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in Starz, LLC’s Annual Report on Form 10-K for the year ended December 31, 2012.
LMC Spin-Off
In January 2013, the parent company of Starz, LLC, Starz (formerly known as Liberty Media Corporation (“Old LMC”)), completed the spin off (the “LMC Spin-Off”) of its wholly-owned subsidiary Liberty Media Corporation (formerly known as Liberty Spinco, Inc. (“Liberty Media”)) in a tax-free manner through the distribution, by means of a dividend, of shares of Liberty Media’s common stock to holders of Old LMC common stock. In this distribution, each holder of a share of Old LMC common stock received one share of the corresponding series of Liberty Media common stock. Following the LMC Spin-Off, Starz retained the businesses of Starz, LLC and all other businesses, assets and liabilities of Old LMC are included in Liberty Media. 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 LMC Spin-Off and Starz is used to refer to Starz, LLC’s parent company when events or circumstances being described occurred following the LMC Spin-Off.
In connection with the LMC Spin-Off, Starz, LLC distributed $1.8 billion in cash to Old LMC which was funded by a combination of cash on hand and $550.0 million of borrowings under Starz, LLC’s senior secured revolving credit facility. The $1.8 billion was 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. Such distributed cash was contributed to Liberty Media prior to the LMC Spin-Off. Additionally, in connection with the LMC 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 Liberty Property Holdings, Inc. (“LPH”), a subsidiary of Liberty Media) and then leased back the use of such facilities from LPH. Following the LMC Spin-Off, Liberty Media and Starz operate independently, and neither have any stock ownership, beneficial or otherwise, in the other.
In connection with the LMC Spin-Off, Old LMC entered into several agreements with Liberty Media or Liberty Media’s subsidiaries:
• | Reorganization Agreement, dated as of January 10, 2013, by and between Starz and Liberty Media, which provides for, among other things, the principal corporate transactions required to effect the LMC Spin-Off, certain conditions to the LMC Spin-Off and provisions governing the relationship between Starz and Liberty Media with respect to and resulting from the LMC Spin-Off; |
• | Tax Sharing Agreement, dated as of January 11, 2013, by and between Starz and Liberty Media, which governs the allocation of taxes, tax benefits, tax items and tax-related losses between Starz and Liberty Media. In connection with the LMC Spin-Off, deferred tax assets of $154.2 million related to capital loss and foreign tax |
7
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
credit carryforwards were allocated to Liberty Media along with their corresponding valuation allowances of $154.2 million. In addition, state net operating losses, foreign tax credit carryforwards and other attributes of $11.6 million were allocated to Starz;
• | Services Agreement, dated as of January 11, 2013, by and between Starz and Liberty Media, which governs the provision by Liberty Media to Starz and by Starz to Liberty Media of specified services and benefits following the LMC Spin-Off. During the three and six months ended June 30, 2013, Starz recognized $0.1 million and $0.2 million, respectively, of net expenses under the Services Agreement; |
• | Facilities Sharing Agreement, dated as of January 11, 2013, by and between Starz and LPH, pursuant to which Starz shares office facilities with Liberty Media. During the three and six months ended June 30, 2013, Starz recognized $0.1 million and $0.2 million, respectively, of expense for shared office space; |
• | Two Aircraft Time Sharing Agreements, each dated as of January 11, 2013, by and between Starz and Liberty Media, which govern the lease for each of two aircraft from Liberty Media to Starz and the provision of fully qualified flight crew for all operations on a periodic, non-exclusive time sharing basis. There were no charges under the Two Aircraft Time Sharing Agreements during the three and six months ended June 30, 2013; and |
• | Commercial Lease, dated as of January 11, 2013, by and between LPH, Starz, LLC, and, for the limited purposes described therein, Starz Entertainment, LLC (“Starz Entertainment”), pursuant to which Starz, LLC leases its headquarters building that was distributed to Liberty Media in connection with the LMC Spin-Off from LPH for a period of ten years, with successive five-year renewal periods at the option of Starz, LLC. Starz, LLC pays a monthly base rent of $0.3 million (subject to annual increases) under the lease agreement. Starz, LLC recorded a $44.8 million capital lease in connection with this lease agreement. |
Although Starz, LLC is not a party to all of these agreements, Starz has no assets other than those of Starz, LLC and its subsidiaries with which to honor any of its obligations.
Business
Starz, LLC’s business operations are conducted by its wholly-owned subsidiaries Starz Entertainment, Film Roman, LLC (“Film Roman”) and certain other immaterial subsidiaries, and its majority-owned (75%) subsidiary Starz Media Group, LLC (“Starz Media”). The Weinstein Company LLC (“TWC”) owns a 25% interest in Starz Media. Starz, LLC is managed by and organized around the following operating segments:
Starz Networks
Starz Networks’ 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, LLC’s Home Video, Digital Media and Worldwide Distribution businesses:
Home Video
Starz, LLC, 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 Starz Networks’ original programming content and TWC’s titles. Each of 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.
8
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
Digital Media
Digital Media distributes digital and on-demand content for Starz, LLC’s owned content and content for which it has licensed digital ancillary rights 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 distributes movies, television series, documentaries, children’s programming and other video content. Worldwide Distribution exploits Starz, LLC’s owned content and content for which it has licensed ancillary rights 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, LLC, through its wholly-owned subsidiary Film Roman, develops and produces two-dimensional animated content on a for-hire basis for various third party entertainment companies.
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 condensed consolidated financial statements and accompanying notes. Starz, LLC considers amortization of program rights, the fair value of goodwill and any related impairment, the development of ultimate revenue estimates associated with released films and television programs, 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 2013 presentation.
Note 2 - Debt
Debt consists of the following (in thousands):
June 30, 2013 | December 31, 2012 | ||||||
Senior Secured Credit Facilities (a) | $ | 257,000 | $ | 5,000 | |||
Senior Notes and New Notes, including premium of $3,279 and none (b) | 678,279 | 500,000 | |||||
Capital leases (c) | 77,331 | 34,805 | |||||
Total debt | 1,012,610 | 539,805 | |||||
Less current portion of debt | (4,792 | ) | (4,134 | ) | |||
Debt | $ | 1,007,818 | $ | 535,671 |
(a) | On November 16, 2011, Starz, LLC entered into a credit agreement that provides a $1,000.0 million revolving credit facility, with a $50.0 million sub-limit for standby letters of credit, and a $500.0 million term loan facility (the “Senior Secured Credit Facilities”). At closing, Starz, LLC borrowed $500.0 million under the term loan facility and $5.0 million under the revolving credit facility. Net proceeds from the Senior Notes, as defined below, and cash on hand were used to repay and terminate the term loan facility 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. As of June 30, 2013, $743.0 million of borrowing capacity was available under the revolving credit facility. |
9
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
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 0.5% and 1.5% 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 1.0% or (c) LIBOR for a one-month interest period plus 1.0%. Borrowings that are LIBOR loans bear interest at a per annum rate equal to the applicable LIBOR plus a margin that varies between 1.5% and 2.5% 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 June 30, 2013, the following borrowings and related LIBOR or alternate base rate interest rates plus the applicable margin were outstanding under the Senior Secured Credit Facilities (dollars in thousands):
LIBOR or Alternate base rate period: | Interest Rate | Loan Amount | |||
June 2013 - July 2013 | 1.9429% | $ | 185,000 | ||
June 2013 - July 2013 | 1.9454% | 60,000 | |||
June 2013 and forward | 4.0000% | 12,000 | |||
$ | 257,000 |
The Senior Secured Credit Facilities contain certain covenants that include restrictions on, among others, incurring additional debt, paying dividends, entering into liens or guarantees, or making certain distributions, investments and other restricted payments. In addition, Starz, LLC must comply with certain financial covenants, including a consolidated leverage ratio, as defined in the agreement. As of June 30, 2013, Starz, LLC was in compliance with all covenants under the Senior Secured Credit Facilities.
(b) | On September 13, 2012, Starz, LLC and Starz Finance Corp. co-issued $500.0 million aggregate principal amount of 5.0% senior notes due September 15, 2019 (the “Senior Notes”). The Senior Notes bear interest at a rate of 5.0% payable semi-annually on September 15 and March 15 of each year. 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 are guaranteed by Starz Entertainment. The net proceeds from the issuance of the Senior Notes and cash on hand were used to repay and terminate the $500.0 million term loan facility under the Senior Secured Credit Facilities. On February 14, 2013, Starz, LLC completed an exchange offer, exchanging the majority of the unregistered 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, as amended (the “Securities Act”), 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 aggregate principal amount of 5.0% senior notes due 2019 (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 the revolving portion of the Senior Secured Credit Facilities. The New Notes were issued at a price of 102.0% plus accrued interest from September 13, 2012. On May 24, 2013, Starz, LLC completed an exchange offer, exchanging the unregistered New Notes for new registered New Notes. The new registered New Notes are substantially identical to the original New Notes, except the new registered New Notes are registered under the Securities Act and the transfer restrictions and registration rights, and related special interest provisions applicable to the original New Notes will not apply to the new registered New Notes.
10
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
The Senior Notes and New Notes rank equally in right of payment to all existing and future senior obligations and existing and future subordinated obligations. The Senior Notes and New 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 or New Notes.
The Senior Notes and New Notes contain certain covenants that include restrictions on, among others, incurring additional debt, paying dividends, entering into liens and guarantees, or making certain distributions, investments and other restricted payments. As of June 30, 2013, Starz, LLC was in compliance with all covenants under the Senior Notes and New Notes.
(c) | On January 11, 2013, Starz, LLC entered into the Commercial Lease with LPH for its headquarters building. The term of the lease is 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 with an imputed annual interest rate of 6.4%. |
Starz Entertainment has entered into capital lease agreements for its transponder capacity. The agreements expire during 2018 to 2021 and have imputed annual interest rates ranging from 5.5% to 7.0%.
At June 30, 2013, the fair value of the Senior Notes and New Notes was $671.6 million and was based upon quoted prices in active markets. Starz, LLC believes the fair value of the Senior Secured Credit Facilities approximates its carrying value as of June 30, 2013 due to its variable rate nature and Starz, LLC’s stable credit spread.
Amounts totaling $0.8 million, $0.1 million, $2.0 million and $0.5 million of interest expense have been capitalized as investment in films and television programs during the three months ended June 30, 2013 and 2012 and the six months ended June 30, 2013 and 2012, respectively.
Note 3 – Stock Options and Long Term Incentive Plan
Stock Options and Restricted Stock
Prior to the LMC Spin-Off, Old LMC granted, and Starz has since granted to certain of its directors and employees, stock options to purchase Series A common stock (formerly the Series A Liberty Capital common stock) and restricted shares of Series A common stock pursuant to Old LMC incentive plans, which are now the Starz incentive plans. As of June 30, 2013, the total unrecognized compensation cost related to the unvested stock options and restricted stock was approximately $80.6 million. Such amount will be recognized in Starz, LLC’s condensed consolidated statements of operations over a weighted average period of approximately 2.97 years.
In connection with the LMC Spin-Off, all outstanding stock options and stock appreciation rights with respect to Old LMC’s Series A common stock (the “Liberty Capital Awards”) were adjusted pursuant to the anti-dilution provisions of the incentive plans under which the equity awards were granted, such that a holder of a Liberty Capital Award received i) an adjustment to the exercise price or base price and the number of shares for each Liberty Capital Award (as so adjusted, a “Liberty Media Award”) and ii) an equity award of shares of Series A common stock (a “Starz Award”).
The exercise prices and number of shares subject to the Liberty Media Award and the Starz Award were determined based on i) the exercise prices and number of shares subject to a Liberty Capital Award, ii) the pre-distribution trading price of Series A common stock and iii) the post-distribution trading prices of Liberty Media common stock and Series A common stock. For employees of Starz, LLC, the pre-distribution intrinsic value of the vested Liberty Capital Award was allocated between a vested Liberty Media Award and a vested Starz Award, while the pre-distribution intrinsic value of the unvested Liberty Capital Award was maintained solely within an unvested Starz Award.
Following the LMC Spin-Off, employees of Starz, LLC hold awards in both Series A common stock and Liberty Media common stock.
11
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
Awards granted during the six months ended June 30, 2013 are summarized as follows:
Granted | Weighted Average Grant-Date Fair Value | |
2013 Awards: | ||
Stock options | 6,030,106 | $7.61 |
Restricted stock | 308,409 | $18.93 |
Of the total 2013 stock option awards, options to purchase 2,666,983 shares vest quarterly over a 4 year period and have a term of 7 years and options to purchase 3,363,123 shares vest 50% on each of December 31, 2015 and 2016 and have a term of 10 years. Starz, LLC calculates the grant-date fair value for the stock options using the Black-Scholes Model. The expected term used in the Black-Scholes calculation was a range of 4.70 to 6.92 years. The expected volatility was 41.35%. The expected volatility used in the calculation for the awards is based on the historical volatility of Series A common stock and the implied volatility of Old LMC’s publicly traded options. Starz, LLC used a zero dividend rate as Old LMC/Starz has not historically declared dividends and a range of risk-free rates of 0.7% to 1.2%, which was derived from U.S. Treasury Bonds with a term similar to that of the subject options. The grant-date fair value of the 308,409 restricted shares granted in 2013 was based on the market value of Series A common stock at the grant date of $18.93 per share. Of the 308,409 restricted shares granted, 51,840 will vest on March 4, 2014 and 256,569 will vest annually over four years beginning March 4, 2014.
The following table presents the number of options and weighted average exercise price (“WAEP”) for the activity during the six months ended June 30, 2013:
Options | WAEP | |||||
Outstanding at December 31, 2012 | 1,615,711 | $ | 93.14 | |||
LMC Spin-Off adjustment to existing stock options | 7,589,815 | * | ||||
Granted | 6,030,106 | $ | 18.93 | |||
Exercised | (303,350 | ) | $ | 10.86 | ||
Forfeited | (268,612 | ) | $ | 11.11 | ||
Expired/cancelled | — | $ | — | |||
Outstanding at June 30, 2013 | 14,663,670 | $ | 14.65 | |||
Exercisable at June 30, 2013 | 1,630,134 | $ | 12.00 | |||
* The adjustment to the existing stock options from the LMC Spin-Off increased the number of existing stock options and reduced the WAEP. After giving effect to the LMC Spin-Off, the WAEP for the existing stock options was $11.62. |
At June 30, 2013, the weighted-average remaining contractual terms of the outstanding options is 6.8 years and the exercisable options is 5.5 years.
Long Term Incentive Plan
Starz, LLC granted incentive units to certain officers and key employees (“Plan Participants”) under the 2006 long term incentive plan (“2006 LTIP”). Such grants vested over a period of four years and were fully vested as of June 30, 2011. All amounts due under the 2006 LTIP have been paid as of June 30, 2013. During the six months ended June 30, 2013 and 2012, Starz, LLC made payments of $3.2 million and $27.7 million, respectively, to Plan Participants under the 2006 LTIP.
12
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
Note 4 – Related Party Transactions
Due to Affiliate
Prior to the LMC Spin-Off, Starz, LLC participated in Old LMC’s employee benefit plans (medical, dental, life insurance, etc.) and now participates in Starz’s plans following the LMC Spin-Off. Charges from Old LMC related to these benefits and other miscellaneous charges are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations and aggregated none, $3.0 million, none and $6.0 million for the three months ended June 30, 2013 and 2012 and the six months ended June 30, 2013 and 2012, 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 none and $1.0 million as of June 30, 2013 and December 31, 2012, respectively.
Due to affiliate at December 31, 2012 also includes $38.5 million for amounts owed to Old LMC for income tax obligations.
Related Party
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, LLC recognized expense of $88.7 million, $20.1 million, $105.7 million and $36.4 million, which is included in production and acquisition costs in the accompanying condensed consolidated statements of operations, for TWC’s share of the net proceeds under the license agreement for the three months ended June 30, 2013 and 2012 and the six months ended June 30, 2013 and 2012, respectively. Amounts due to TWC totaled $120.5 million and $23.9 million, which is included in accrued liabilities in the accompanying condensed consolidated balance sheets, at June 30, 2013 and December 31, 2012, respectively. Starz Entertainment guarantees Anchor Bay Entertainment’s advance payments to TWC under this agreement up to $50.0 million.
Note 5 - Income Taxes
Starz, LLC is a single member LLC, which is treated as a disregarded entity for U.S. federal income tax purposes. As such, it is included in the consolidated federal and state income tax returns of Starz. The income tax accounts and provisions included in these condensed consolidated financial statements have been prepared as if Starz, LLC was a stand-alone federal and state taxpayer.
Income tax expense consists of the following (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Current: | |||||||||||||||
Federal | $ | 39,597 | $ | 38,715 | $ | 57,032 | $ | 66,298 | |||||||
State and local | 3,168 | (4,604 | ) | 2,518 | (2,226 | ) | |||||||||
Foreign | 638 | 259 | 929 | 929 | |||||||||||
43,403 | 34,370 | 60,479 | 65,001 | ||||||||||||
Deferred: | |||||||||||||||
Federal | (6,177 | ) | (25,909 | ) | 8,134 | (13,553 | ) | ||||||||
State and local | 996 | 17,655 | 4,553 | 14,860 | |||||||||||
(5,181 | ) | (8,254 | ) | 12,687 | 1,307 | ||||||||||
Income tax expense | $ | 38,222 | $ | 26,116 | $ | 73,166 | $ | 66,308 |
13
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
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):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Computed expected tax expense | $ | 36,490 | $ | 33,245 | $ | 69,091 | $ | 75,030 | |||||||
State and local income taxes, net of federal income taxes | 2,662 | 4,300 | 4,475 | 6,739 | |||||||||||
Foreign taxes, net of foreign tax credit | 397 | (61 | ) | 900 | 80 | ||||||||||
Change in valuation allowance affecting tax expense | (437 | ) | 79,665 | (1,130 | ) | 75,453 | |||||||||
Taxable liquidation of subsidiary | — | (99,879 | ) | — | (99,879 | ) | |||||||||
Change in subsidiary tax status | — | 8,809 | 791 | 8,809 | |||||||||||
Other, net | (890 | ) | 37 | (961 | ) | 76 | |||||||||
Income tax expense | $ | 38,222 | $ | 26,116 | $ | 73,166 | $ | 66,308 |
Effective April 1, 2012, Starz Media filed an election to convert itself from a limited liability company (“LLC”) treated as a corporation to a partnership for U.S. federal and state income tax purposes. As a result of the conversion, the Company recognized a capital loss on the deemed liquidation of Starz Media. Based on the relevant accounting literature, the Company had not previously recorded a benefit for the tax basis in the stock of Starz Media. The capital loss of $99.9 million (as tax effected) was carried forward and was recorded as a long term deferred tax asset. The Company did not believe that it was more likely than not that it would be able to generate any capital gains to utilize any of this capital loss carryforward as a stand-alone taxpayer and as such, 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 $15.9 million and the reversal of a valuation allowance offsetting these deferred tax assets of $15.9 million. Also, a deferred tax asset of $7.1 million was recorded for the difference between the book basis and the tax basis of the Company's investment in Starz Media as of April 1, 2012.
14
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at June 30, 2013 and December 31, 2012 are presented below (in thousands):
June 30, 2013 | December 31, 2012 | ||||||
Deferred tax assets: | |||||||
Tax loss and credit carryforwards | $ | 9,402 | $ | 155,861 | |||
Accrued stock compensation | 8,882 | 5,575 | |||||
Investments | 28,411 | 25,516 | |||||
Investment in films and television programs | — | 1,163 | |||||
Other future deductible amounts | 3,146 | 219 | |||||
Deferred tax assets | 49,841 | 188,334 | |||||
Valuation allowance | (498 | ) | (155,861 | ) | |||
Deferred tax assets, net | 49,343 | 32,473 | |||||
Deferred tax liabilities: | |||||||
Property and equipment | (17,494 | ) | (18,807 | ) | |||
Investment in films and television programs | (18,799 | ) | — | ||||
Other future taxable amounts | — | (454 | ) | ||||
Deferred tax liabilities | (36,293 | ) | (19,261 | ) | |||
Net deferred tax assets | $ | 13,050 | $ | 13,212 |
In connection with the LMC Spin-Off, deferred tax assets of $154.2 million related to capital loss and foreign tax credit carryforwards were allocated to Liberty Media along with their corresponding valuation allowances of $154.2 million. In addition, state net operating losses, foreign tax credit carryforwards and other attributes of $11.6 million were allocated to Starz, LLC.
In April 2013, the Internal Revenue Service completed its review of the LMC Spin-Off and notified Starz that it agreed with the nontaxable characterization of the transaction.
Note 6 - Commitments and Contingencies
Programming Rights
On February 11, 2013, Starz announced a new, multi-year output licensing agreement for 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 that extends its relationship with Sony through 2021, subject to certain limitations. The previous agreement had covered motion pictures released theatrically through 2016. In addition, Starz, LLC has an exclusive long-term licensing agreement for theatrically released films from the Walt Disney Company (“Disney”) through 2015. The agreement provides Starz, LLC 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, LLC under the agreement. The programming fees to be paid to Sony and Disney are based on the quantity and domestic theatrical exhibition receipts of qualifying films. Starz, LLC 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 June 30, 2013 is reflected in accrued liabilities and in other liabilities in the accompanying condensed consolidated balance sheets. As of June 30, 2013, such liabilities aggregated approximately $89.9 million and are payable as follows: $82.0 million in 2013 and $7.9 million in 2014.
15
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
Under the agreements with Sony and Disney, Starz, LLC is obligated to pay fees for the rights to exhibit films that have been released theatrically, but are not available for exhibition by Starz, LLC until some future date. The estimated amounts payable under Starz, LLC’s programming license agreements, including the Sony and Disney agreements, which have not been accrued as of June 30, 2013, are as follows: $93.8 million in 2013; $307.6 million in 2014; $98.6 million in 2015; $87.6 million in 2016; $87.1 million in 2017 and $283.5 million thereafter.
Starz, LLC is also obligated to pay fees for films that have not yet been released in theaters by Sony and Disney. Starz, LLC is unable to estimate the amounts to be paid under these agreements for films that have not yet been released; however, such amounts are expected to be significant.
Total amortization of program rights was $152.9 million, $168.7 million, $288.4 million and $319.1 million for the three months ended June 30, 2013 and 2012 and the six months ended June 30, 2013 and 2012, respectively. These amounts are included in programming costs in the accompanying condensed consolidated statements of operations.
Guarantee
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 (“NGOJF”) through the termination date of March 31, 2014. The maximum amount of the grant available and the guarantee in U.S. dollars is $21.8 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 $13.7 million at June 30, 2013 and Starz, LLC has accrued $11.0 million related to this guarantee in accrued liabilities in the accompanying condensed consolidated balance sheet as of June 30, 2013. Starz, LLC sold its controlling interest in Canada Co. on March 3, 2011. The terms of the guarantee have not changed.
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. On April 29, 2013, Starz Entertainment and DISH entered into a confidential settlement agreement with respect to the first lawsuit. In addition, on June 19, 2013, Starz Entertainment and FX Networks entered into a confidential settlement agreement with respect to FX Networks’ claim against Starz Entertainment in the third lawsuit. The Disney Enterprises, Inc. and FX Networks’ lawsuits against DISH have not yet gone to trial. Any potential indemnification obligations of Starz, LLC relating to these remaining matters is uncertain at this time.
In the normal course of business, Starz, LLC 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 its consolidated financial position, results of operations or liquidity.
16
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
Note 7 – Other Information
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
June 30, 2013 | December 31, 2012 | ||||||
Royalties, residuals and participations | $ | 66,822 | $ | 72,139 | |||
Participations payable to TWC | 120,458 | 23,861 | |||||
Program rights payable | 86,710 | 57,125 | |||||
Advertising and marketing | 47,177 | 38,779 | |||||
Payroll and related costs | 17,799 | 23,657 | |||||
Accrued compensation related to long term incentive plan | — | 3,195 | |||||
Other | 52,173 | 37,306 | |||||
$ | 391,139 | $ | 256,062 |
Supplemental Disclosure of Cash Flow Information
The following table presents the supplemental disclosure of cash flow information (in thousands):
Six Months Ended June 30, | |||||||
2013 | 2012 | ||||||
Cash paid for interest, net of amounts capitalized | $ | 21,291 | $ | 8,329 | |||
Cash paid for income taxes | $ | 90,940 | $ | 86,816 | |||
Distribution of corporate office building to Old LMC | $ | 45,668 | $ | — | |||
Capital lease related to Commercial Lease with LPH | $ | 44,800 | $ | — | |||
Tax attributes related to LMC Spin-Off | $ | 11,565 | $ | — |
Note 8 – Information about Operating Segments
Starz, LLC is primarily engaged in video programming and development, production, acquisition and distribution of entertainment content. Starz, LLC 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 and selling, general and administrative expenses. Starz, LLC’s chief operating decision maker uses this measure of performance in conjunction with other measures to evaluate the operating segments’ performance and make decisions about allocating resources among the operating segments. Starz, LLC 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, LLC in servicing its debt and to 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 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 before income taxes, net income, net cash provided by operating activities and other measures of financial performance prepared in accordance with GAAP. Starz, LLC generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current prices.
17
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
Starz, LLC’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, LLC 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, LLC has three operating segments, Starz Animation is also reported.
Performance Measures (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Revenue: | |||||||||||||||
Starz Networks | $ | 339,950 | $ | 318,902 | $ | 655,786 | $ | 643,102 | |||||||
Starz Distribution | 171,874 | 76,247 | 248,116 | 148,631 | |||||||||||
Starz Animation | 6,647 | 10,101 | 14,116 | 21,437 | |||||||||||
Inter-segment eliminations | (1,050 | ) | (2,688 | ) | (1,280 | ) | (5,644 | ) | |||||||
Total Revenue | $ | 517,421 | $ | 402,562 | $ | 916,738 | $ | 807,526 | |||||||
Adjusted OIBDA: | |||||||||||||||
Starz Networks | $ | 116,456 | $ | 98,881 | $ | 230,838 | $ | 214,757 | |||||||
Starz Distribution | 14,534 | 9,379 | 17,123 | 18,516 | |||||||||||
Starz Animation | (778 | ) | (190 | ) | (1,339 | ) | (153) | ||||||||
Inter-segment eliminations | (705 | ) | 406 | (585 | ) | 2,196 | |||||||||
Total Adjusted OIBDA | $ | 129,507 | $ | 108,476 | $ | 246,037 | $ | 235,316 |
18
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
Other Information (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Cash paid for investment in films and television programs: | |||||||||||||||
Starz Networks | $ | 23,079 | $ | 30,890 | $ | 56,689 | $ | 58,585 | |||||||
Starz Distribution | 26,257 | 35,594 | 50,657 | 70,537 | |||||||||||
Starz Animation | — | — | — | — | |||||||||||
Inter-segment eliminations | — | — | — | — | |||||||||||
Total cash paid for investment in films and television programs | $ | 49,336 | $ | 66,484 | $ | 107,346 | $ | 129,122 | |||||||
June 30, 2013 | December 31, 2012 | ||||||||||||||
Total assets: | |||||||||||||||
Starz Networks | $ | 1,303,006 | $ | 2,066,961 | |||||||||||
Starz Distribution | 206,680 | 118,134 | |||||||||||||
Starz Animation | 2,170 | 3,225 | |||||||||||||
Other unallocated assets (primarily cash, deferred taxes and other assets, including the Commercial Lease with LPH) | 75,955 | 33,850 | |||||||||||||
Inter-segment eliminations | (32,667 | ) | (46,120 | ) | |||||||||||
Total assets | $ | 1,555,144 | $ | 2,176,050 |
The following table provides a reconciliation of Adjusted OIBDA to income before income taxes (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Consolidated Adjusted OIBDA | $ | 129,507 | $ | 108,476 | $ | 246,037 | $ | 235,316 | |||||||
Stock compensation | (9,058 | ) | (3,653 | ) | (16,312 | ) | (6,235 | ) | |||||||
Depreciation and amortization | (4,353 | ) | (4,552 | ) | (8,769 | ) | (8,807 | ) | |||||||
Interest expense, net of amounts capitalized | (11,331 | ) | (4,449 | ) | (21,559 | ) | (9,330 | ) | |||||||
Other income (expense), net | (508 | ) | (98 | ) | (1,993 | ) | 4,167 | ||||||||
Income before income taxes | $ | 104,257 | $ | 95,724 | $ | 197,404 | $ | 215,111 |
Note 9 – Supplemental Guarantor Condensed Consolidating Financial Information
As discussed in Note 2, Starz, LLC and Starz Finance Corp. co-issued the Senior Notes and New 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 or the New Notes.
19
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
The following tables set forth the consolidating financial information of Starz, LLC, which includes the financial information of Starz Entertainment, the guarantor:
Consolidating Balance Sheet Information – As of June 30, 2013 | |||||||||||||||||||
(in thousands) | |||||||||||||||||||
Starz Entertainment, LLC (Guarantor) | Starz Media and Other Businesses (Non-Guarantors) | ||||||||||||||||||
Starz, LLC Parent Only (Co-Issuer) | Eliminations | Consolidated Starz, LLC | |||||||||||||||||
Assets | |||||||||||||||||||
Current assets: | |||||||||||||||||||
Cash and cash equivalents | $ | 25,190 | $ | 387 | $ | 5,277 | $ | — | $ | 30,854 | |||||||||
Restricted cash | — | — | 63,817 | — | 63,817 | ||||||||||||||
Trade accounts receivable, net | 207,329 | — | 35,432 | (700 | ) | 242,061 | |||||||||||||
Program rights, net | 379,146 | — | — | (1,456 | ) | 377,690 | |||||||||||||
Deferred income taxes | 475 | 4,606 | — | — | 5,081 | ||||||||||||||
Notes receivable from affiliates | 10,529 | — | — | (10,529 | ) | — | |||||||||||||
Other current assets | 19,778 | 4,001 | 13,585 | — | 37,364 | ||||||||||||||
Total current assets | 642,447 | 8,994 | 118,111 | (12,685 | ) | 756,867 | |||||||||||||
Program rights | 390,476 | — | — | (5,682 | ) | 384,794 | |||||||||||||
Investment in films and television programs, net | 71,982 | — | 69,486 | — | 141,468 | ||||||||||||||
Property and equipment, net | 46,672 | 44,093 | 415 | — | 91,180 | ||||||||||||||
Deferred income taxes | — | 7,969 | — | — | 7,969 | ||||||||||||||
Goodwill | 131,760 | — | — | — | 131,760 | ||||||||||||||
Other assets, net | 19,669 | 14,300 | 21,437 | (14,300 | ) | 41,106 | |||||||||||||
Investment in consolidated subsidiaries | — | 1,303,556 | — | (1,303,556 | ) | — | |||||||||||||
Total assets | $ | 1,303,006 | $ | 1,378,912 | $ | 209,449 | $ | (1,336,223 | ) | $ | 1,555,144 | ||||||||
Liabilities and Member’s Interest (Deficit) and Noncontrolling Interests | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Current portion of debt | $ | 4,264 | $ | 528 | $ | — | $ | — | $ | 4,792 | |||||||||
Trade accounts payable | 3,596 | — | 1,951 | — | 5,547 | ||||||||||||||
Accrued liabilities | 173,626 | 22,930 | 216,857 | (22,274 | ) | 391,139 | |||||||||||||
Notes payable due to affiliate | — | — | 10,529 | (10,529 | ) | — | |||||||||||||
Due to (from) affiliates | (285,497 | ) | 286,060 | (563 | ) | — | — | ||||||||||||
Deferred revenue | 562 | — | 11,142 | — | 11,704 | ||||||||||||||
Total current liabilities | (103,449 | ) | 309,518 | 239,916 | (32,803 | ) | 413,182 | ||||||||||||
Debt | 963,784 | 979,312 | — | (935,278 | ) | 1,007,818 | |||||||||||||
Deferred income taxes | 27,826 | (34,891 | ) | — | 7,065 | — | |||||||||||||
Other liabilities | 5,784 | — | 8,778 | (5,391 | ) | 9,171 | |||||||||||||
Total liabilities | 893,945 | 1,253,939 | 248,694 | (966,407 | ) | 1,430,171 | |||||||||||||
Member’s interest (deficit) | 409,061 | 132,238 | (39,124) | (369,937) | 132,238 | ||||||||||||||
Noncontrolling interests in subsidiaries | — | (7,265 | ) | (121 | ) | 121 | (7,265 | ) | |||||||||||
Total member’s interest (deficit) and noncontrolling interests | 409,061 | 124,973 | (39,245 | ) | (369,816 | ) | 124,973 | ||||||||||||
Total liabilities and member’s interest (deficit) and noncontrolling interests | $ | 1,303,006 | $ | 1,378,912 | $ | 209,449 | $ | (1,336,223 | ) | $ | 1,555,144 |
20
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
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) | Eliminations | Consolidated Starz, LLC | |||||||||||||||||
Assets | |||||||||||||||||||
Current assets: | |||||||||||||||||||
Cash and cash equivalents | $ | 735,507 | $ | 879 | $ | 13,388 | $ | — | $ | 749,774 | |||||||||
Trade accounts receivable, net | 205,261 | — | 36,204 | (50 | ) | 241,415 | |||||||||||||
Program rights, net | 341,255 | — | — | (1,250 | ) | 340,005 | |||||||||||||
Deferred income taxes | 164 | 826 | — | — | 990 | ||||||||||||||
Notes receivable from affiliates | 26,067 | — | — | (26,067 | ) | — | |||||||||||||
Other current assets | 27,874 | — | 16,853 | — | 44,727 | ||||||||||||||
Total current assets | 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 | ||||||||||||||
Property and equipment, net | 95,832 | — | 448 | — | 96,280 | ||||||||||||||
Deferred income taxes | — | 12,222 | — | — | 12,222 | ||||||||||||||
Goodwill | 131,760 | — | — | — | 131,760 | ||||||||||||||
Other assets, net | 15,616 | 13,395 | 22,904 | (13,395 | ) | 38,520 | |||||||||||||
Investment in consolidated subsidiaries | — | 1,787,826 | — | (1,787,826 | ) | — | |||||||||||||
Total assets | $ | 2,066,961 | $ | 1,815,148 | $ | 127,887 | $ | (1,833,946 | ) | $ | 2,176,050 | ||||||||
Liabilities and Member’s Interest (Deficit) and Noncontrolling Interests | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Current portion of debt | $ | 4,134 | $ | — | $ | — | $ | — | $ | 4,134 | |||||||||
Trade accounts payable | 4,817 | — | 1,345 | — | 6,162 | ||||||||||||||
Accrued liabilities | 136,434 | 8,235 | 128,059 | (16,666 | ) | 256,062 | |||||||||||||
Notes payable due to affiliate | — | — | 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 | |||||||||||||
Total current liabilities | 185,146 | 28,346 | 165,154 | (48,195 | ) | 330,451 | |||||||||||||
Debt | 535,671 | 505,000 | — | (505,000 | ) | 535,671 | |||||||||||||
Deferred income taxes | 13,060 | (20,342 | ) | — | 7,282 | 0 | |||||||||||||
Other liabilities | 4,259 | — | 8,643 | (5,118 | ) | 7,784 | |||||||||||||
Total liabilities | 738,136 | 513,004 | 173,797 | (551,031 | ) | 873,906 | |||||||||||||
Member’s interest (deficit) | 1,328,825 | 1,311,951 | (45,789 | ) | (1,283,036 | ) | 1,311,951 | ||||||||||||
Noncontrolling interests in subsidiaries | — | (9,807 | ) | (121 | ) | 121 | (9,807 | ) | |||||||||||
Total member’s interest (deficit) and noncontrolling interests | 1,328,825 | 1,302,144 | (45,910 | ) | (1,282,915 | ) | 1,302,144 | ||||||||||||
Total liabilities and member’s interest (deficit) and noncontrolling interests | $ | 2,066,961 | $ | 1,815,148 | $ | 127,887 | $ | (1,833,946 | ) | $ | 2,176,050 |
21
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
Consolidating Statement of Operations Information – For the Three Months Ended June 30, 2013 | |||||||||||||||||||
(in thousands) | |||||||||||||||||||
Starz Entertainment, LLC (Guarantor) | Starz Media and Other Businesses (Non-Guarantors) | ||||||||||||||||||
Starz, LLC Parent Only (Co-Issuer) | Eliminations | Consolidated Starz, LLC | |||||||||||||||||
Revenue: | |||||||||||||||||||
Programming networks and other services | $ | 350,672 | $ | — | $ | 43,543 | $ | (3,134 | ) | $ | 391,081 | ||||||||
Home video net sales | 6,240 | — | 121,347 | (1,247 | ) | 126,340 | |||||||||||||
Total revenue | 356,912 | — | 164,890 | (4,381 | ) | 517,421 | |||||||||||||
Costs and expenses: | |||||||||||||||||||
Programming costs (including amortization) | 165,698 | — | — | (345 | ) | 165,353 | |||||||||||||
Production and acquisition costs (including amortization) | 5,459 | — | 107,808 | — | 113,267 | ||||||||||||||
Home video cost of sales | 3,159 | — | 13,183 | (1,247 | ) | 15,095 | |||||||||||||
Operating expenses | 6,396 | — | 8,125 | (2,084 | ) | 12,437 | |||||||||||||
Selling, general and administrative | 53,675 | 1,680 | 26,407 | — | 81,762 | ||||||||||||||
Stock compensation | 8,310 | 245 | 503 | — | 9,058 | ||||||||||||||
Depreciation and amortization | 3,203 | 374 | 776 | — | 4,353 | ||||||||||||||
Total costs and expenses | 245,900 | 2,299 | 156,802 | (3,676 | ) | 401,325 | |||||||||||||
Operating income (loss) | 111,012 | (2,299 | ) | 8,088 | (705 | ) | 116,096 | ||||||||||||
Other income (expense): | |||||||||||||||||||
Interest expense, net of amounts capitalized | (10,589 | ) | (11,472 | ) | (29 | ) | 10,759 | (11,331 | ) | ||||||||||
Interest income (expense), related party | 279 | — | (279 | ) | — | — | |||||||||||||
Other income (expense), net | (499 | ) | 2 | (975 | ) | 964 | (508 | ) | |||||||||||
Income (loss) before income taxes and share of earnings of consolidated subsidiaries | 100,203 | (13,769 | ) | 6,805 | 11,018 | 104,257 | |||||||||||||
Income tax benefit (expense) | (37,406 | ) | 3,428 | (167 | ) | (4,077 | ) | (38,222 | ) | ||||||||||
Share of earnings of consolidated subsidiaries, net of taxes | — | 76,376 | — | (76,376 | ) | — | |||||||||||||
Net income | 62,797 | 66,035 | 6,638 | (69,435 | ) | 66,035 | |||||||||||||
Net income attributable to noncontrolling interests | — | (2,148 | ) | — | — | (2,148 | ) | ||||||||||||
Net income attributable to member | $ | 62,797 | $ | 63,887 | $ | 6,638 | $ | (69,435 | ) | $ | 63,887 |
22
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
Consolidating Statement of Comprehensive Income Information – For the Three Months Ended June 30, 2013 | |||||||||||||||||||
(in thousands) | |||||||||||||||||||
Starz Entertainment, LLC (Guarantor) | Starz Media and Other Businesses (Non-Guarantors) | ||||||||||||||||||
Starz, LLC Parent Only (Co-Issuer) | Eliminations | Consolidated Starz, LLC | |||||||||||||||||
Net income | $ | 62,797 | $ | 66,035 | $ | 6,638 | $ | (69,435 | ) | $ | 66,035 | ||||||||
Other comprehensive loss, net of taxes | |||||||||||||||||||
Foreign currency translation adjustments | — | (207 | ) | (101 | ) | 101 | (207 | ) | |||||||||||
Comprehensive income | 62,797 | 65,828 | 6,537 | (69,334 | ) | 65,828 | |||||||||||||
Comprehensive income attributable to noncontrolling interests | — | (2,051 | ) | — | — | (2,051 | ) | ||||||||||||
Comprehensive income attributable to member | $ | 62,797 | $ | 63,777 | $ | 6,537 | $ | (69,334 | ) | $ | 63,777 |
23
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
Consolidating Statement of Operations Information – For the Three Months Ended June 30, 2012 | |||||||||||||||||||
(in thousands) | |||||||||||||||||||
Starz Entertainment, LLC (Guarantor) | Starz Media and Other Businesses (Non-Guarantors) | ||||||||||||||||||
Starz, LLC Parent Only (Co-Issuer) | Eliminations | Consolidated Starz, LLC | |||||||||||||||||
Revenue: | |||||||||||||||||||
Programming networks and other services | $ | 329,884 | $ | — | $ | 35,806 | $ | (4,063 | ) | $ | 361,627 | ||||||||
Home video net sales | 4,653 | — | 37,213 | (931 | ) | 40,935 | |||||||||||||
Total revenue | 334,537 | — | 73,019 | (4,994 | ) | 402,562 | |||||||||||||
Costs and expenses: | |||||||||||||||||||
Programming costs (including amortization) | 180,496 | — | — | (1,192 | ) | 179,304 | |||||||||||||
Production and acquisition costs (including amortization) | 4,608 | — | 34,764 | — | 39,372 | ||||||||||||||
Home video cost of sales | 2,263 | — | 9,336 | (931 | ) | 10,668 | |||||||||||||
Operating expenses | 4,976 | — | 11,255 | (3,278 | ) | 12,953 | |||||||||||||
Selling, general and administrative | 37,258 | 2 | 14,529 | — | 51,789 | ||||||||||||||
Stock compensation | 3,315 | — | 338 | — | 3,653 | ||||||||||||||
Depreciation and amortization | 3,193 | — | 1,359 | — | 4,552 | ||||||||||||||
Total costs and expenses | 236,109 | 2 | 71,581 | (5,401 | ) | 302,291 | |||||||||||||
Operating income (loss) | 98,428 | (2 | ) | 1,438 | 407 | 100,271 | |||||||||||||
Other income (expense): | |||||||||||||||||||
Interest expense, net of amounts capitalized | (4,412 | ) | (3,932 | ) | (37 | ) | 3,932 | (4,449 | ) | ||||||||||
Interest income (expense), related party | 1,331 | — | (1,331 | ) | — | — | |||||||||||||
Other income, net | (598 | ) | 859 | (393 | ) | 34 | (98 | ) | |||||||||||
Income (loss) before income taxes and share of earnings of consolidated subsidiaries | 94,749 | (3,075 | ) | (323 | ) | 4,373 | 95,724 | ||||||||||||
Income tax benefit (expense) | (34,516 | ) | 7,363 | 2,655 | (1,618 | ) | (26,116 | ) | |||||||||||
Share of earnings of consolidated subsidiaries, net of taxes | — | 65,320 | — | (65,320 | ) | — | |||||||||||||
Net income | 60,233 | 69,608 | 2,332 | (62,565 | ) | 69,608 | |||||||||||||
Net loss (income) attributable to noncontrolling interests | — | (883 | ) | 71 | (71 | ) | (883 | ) | |||||||||||
Net income attributable to member | $ | 60,233 | $ | 68,725 | $ | 2,403 | $ | (62,636 | ) | $ | 68,725 |
24
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
Consolidating Statement of Comprehensive Income Information – For the Three Months Ended June 30, 2012 | |||||||||||||||||||
(in thousands) | |||||||||||||||||||
Starz Entertainment, LLC (Guarantor) | Starz Media and Other Businesses (Non-Guarantors) | ||||||||||||||||||
Starz, LLC Parent Only (Co-Issuer) | Eliminations | Consolidated Starz, LLC | |||||||||||||||||
Net income | $ | 60,233 | $ | 69,608 | $ | 2,332 | $ | (62,565 | ) | $ | 69,608 | ||||||||
Other comprehensive loss, net of taxes | |||||||||||||||||||
Foreign currency translation adjustments | — | (201 | ) | (201 | ) | 201 | (201 | ) | |||||||||||
Comprehensive income | 60,233 | 69,407 | 2,131 | (62,364 | ) | 69,407 | |||||||||||||
Comprehensive loss (income) attributable to noncontrolling interests | — | (807 | ) | 71 | (71 | ) | (807 | ) | |||||||||||
Comprehensive income attributable to member | $ | 60,233 | $ | 68,600 | $ | 2,202 | $ | (62,435 | ) | $ | 68,600 |
25
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
Consolidating Statement of Operations Information – For the Six Months Ended June 30, 2013 | |||||||||||||||||||
(in thousands) | |||||||||||||||||||
Starz Entertainment, LLC (Guarantor) | Starz Media and Other Businesses (Non-Guarantors) | ||||||||||||||||||
Starz, LLC Parent Only (Co-Issuer) | Eliminations | Consolidated Starz, LLC | |||||||||||||||||
Revenue: | |||||||||||||||||||
Programming networks and other services | $ | 674,736 | $ | — | $ | 70,829 | $ | (4,996 | ) | $ | 740,569 | ||||||||
Home video net sales | 12,132 | — | 166,455 | (2,418 | ) | 176,169 | |||||||||||||
Total revenue | 686,868 | — | 237,284 | (7,414 | ) | 916,738 | |||||||||||||
Costs and expenses: | |||||||||||||||||||
Programming costs (including amortization) | 312,019 | — | — | (695 | ) | 311,324 | |||||||||||||
Production and acquisition costs (including amortization) | 11,829 | — | 141,228 | — | 153,057 | ||||||||||||||
Home video cost of sales | 6,947 | — | 25,687 | (2,418 | ) | 30,216 | |||||||||||||
Operating expenses | 12,216 | — | 16,622 | (3,716 | ) | 25,122 | |||||||||||||
Selling, general and administrative | 106,493 | 2,952 | 41,537 | — | 150,982 | ||||||||||||||
Stock compensation | 14,562 | 854 | 896 | — | 16,312 | ||||||||||||||
Depreciation and amortization | 6,513 | 707 | 1,549 | — | 8,769 | ||||||||||||||
Total costs and expenses | 470,579 | 4,513 | 227,519 | (6,829 | ) | 695,782 | |||||||||||||
Operating income (loss) | 216,289 | (4,513 | ) | 9,765 | (585 | ) | 220,956 | ||||||||||||
Other income (expense): | |||||||||||||||||||
Interest expense, net of amounts capitalized | (20,153 | ) | (22,364 | ) | (55 | ) | 21,013 | (21,559 | ) | ||||||||||
Interest income (expense), related party | 815 | — | (815 | ) | — | — | |||||||||||||
Other income (expense), net | (2,188 | ) | 22 | (2,265 | ) | 2,438 | (1,993 | ) | |||||||||||
Income (loss) before income taxes and share of earnings of consolidated subsidiaries | 194,763 | (26,855 | ) | 6,630 | 22,866 | 197,404 | |||||||||||||
Income tax benefit (expense) | (71,848 | ) | 7,832 | (689 | ) | (8,461 | ) | (73,166 | ) | ||||||||||
Share of earnings of consolidated subsidiaries, net of taxes | — | 143,261 | — | (143,261 | ) | — | |||||||||||||
Net income | 122,915 | 124,238 | 5,941 | (128,856 | ) | 124,238 | |||||||||||||
Net income attributable to noncontrolling interests | — | (2,486 | ) | — | — | (2,486 | ) | ||||||||||||
Net income attributable to member | $ | 122,915 | $ | 121,752 | $ | 5,941 | $ | (128,856 | ) | $ | 121,752 |
26
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
Consolidating Statement of Comprehensive Income Information – For the Six Months Ended June 30, 2013 | |||||||||||||||||||
(in thousands) | |||||||||||||||||||
Starz Entertainment, LLC (Guarantor) | Starz Media and Other Businesses (Non-Guarantors) | ||||||||||||||||||
Starz, LLC Parent Only (Co-Issuer) | Eliminations | Consolidated Starz, LLC | |||||||||||||||||
Net income | $ | 122,915 | $ | 124,238 | $ | 5,941 | $ | (128,856 | ) | $ | 124,238 | ||||||||
Other comprehensive loss, net of taxes - | |||||||||||||||||||
Foreign currency translation adjustments | — | (135 | ) | (140 | ) | 140 | (135 | ) | |||||||||||
Comprehensive income | 122,915 | 124,103 | 5,801 | (128,716 | ) | 124,103 | |||||||||||||
Comprehensive income attributable to noncontrolling interests | — | (2,346 | ) | — | — | (2,346 | ) | ||||||||||||
Comprehensive income attributable to member | $ | 122,915 | $ | 121,757 | $ | 5,801 | $ | (128,716 | ) | $ | 121,757 |
27
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
Consolidating Statement of Operations Information – For the Six Months Ended June 30, 2012 | |||||||||||||||||||
(in thousands) | |||||||||||||||||||
Starz Entertainment, LLC (Guarantor) | Starz Media and Other Businesses (Non-Guarantors) | ||||||||||||||||||
Starz, LLC Parent Only (Co-Issuer) | Eliminations | Consolidated Starz, LLC | |||||||||||||||||
Revenue: | |||||||||||||||||||
Programming networks and other services | $ | 662,953 | $ | — | $ | 74,451 | $ | (8,526 | ) | $ | 728,878 | ||||||||
Home video net sales | 8,078 | — | 72,186 | (1,616 | ) | 78,648 | |||||||||||||
Total revenue | 671,031 | — | 146,637 | (10,142 | ) | 807,526 | |||||||||||||
Costs and expenses: | |||||||||||||||||||
Programming costs (including amortization) | 344,165 | — | — | (3,912 | ) | 340,253 | |||||||||||||
Production and acquisition costs (including amortization) | 10,890 | — | 64,413 | 145 | 75,448 | ||||||||||||||
Home video cost of sales | 4,108 | — | 18,736 | (1,616 | ) | 21,228 | |||||||||||||
Operating expenses | 10,297 | — | 23,034 | (6,956 | ) | 26,375 | |||||||||||||
Selling, general and administrative | 79,020 | 20 | 29,866 | — | 108,906 | ||||||||||||||
Stock compensation | 5,694 | — | 541 | — | 6,235 | ||||||||||||||
Depreciation and amortization | 6,338 | — | 2,469 | — | 8,807 | ||||||||||||||
Total costs and expenses | 460,512 | 20 | 139,059 | (12,339 | ) | 587,252 | |||||||||||||
Operating income (loss) | 210,519 | (20 | ) | 7,578 | 2,197 | 220,274 | |||||||||||||
Other income (expense): | |||||||||||||||||||
Interest expense, net of amounts capitalized | (9,258 | ) | (8,516 | ) | (72 | ) | 8,516 | (9,330 | ) | ||||||||||
Interest income (expense), related party | 2,479 | — | (2,479 | ) | — | — | |||||||||||||
Other income (expense), net | 3,196 | 922 | (341 | ) | 390 | 4,167 | |||||||||||||
Income (loss) before income taxes and share of earnings of consolidated subsidiaries | 206,936 | (7,614 | ) | 4,686 | 11,103 | 215,111 | |||||||||||||
Income tax benefit (expense) | (75,530 | ) | 10,156 | 3,174 | (4,108 | ) | (66,308 | ) | |||||||||||
Share of earnings of consolidated subsidiaries, net of taxes | — | 146,261 | — | (146,261 | ) | — | |||||||||||||
Net income | 131,406 | 148,803 | 7,860 | (139,266 | ) | 148,803 | |||||||||||||
Net loss (income) attributable to noncontrolling interests | — | (2,296 | ) | 108 | (108 | ) | (2,296 | ) | |||||||||||
Net income attributable to member | $ | 131,406 | $ | 146,507 | $ | 7,968 | $ | (139,374 | ) | $ | 146,507 |
28
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
Consolidating Statement of Comprehensive Income Information – For the Six Months Ended June 30, 2012 | |||||||||||||||||||
(in thousands) | |||||||||||||||||||
Starz Entertainment, LLC (Guarantor) | Starz Media and Other Businesses (Non-Guarantors) | ||||||||||||||||||
Starz, LLC Parent Only (Co-Issuer) | Eliminations | Consolidated Starz, LLC | |||||||||||||||||
Net income | $ | 131,406 | $ | 148,803 | $ | 7,860 | $ | (139,266 | ) | $ | 148,803 | ||||||||
Other comprehensive loss, net of taxes - | |||||||||||||||||||
Foreign currency translation adjustments | — | (10 | ) | (10 | ) | 10 | (10 | ) | |||||||||||
Comprehensive income | 131,406 | 148,793 | 7,850 | (139,256 | ) | 148,793 | |||||||||||||
Comprehensive loss (income) attributable to noncontrolling interests | — | (2,310 | ) | 108 | (108 | ) | (2,310 | ) | |||||||||||
Comprehensive income attributable to member | $ | 131,406 | $ | 146,483 | $ | 7,958 | $ | (139,364 | ) | $ | 146,483 |
29
Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
Consolidating Statement of Cash Flows’ Information – For the Six Months Ended June 30, 2013 | |||||||||||||||||||
(in thousands) | |||||||||||||||||||
Starz Entertainment, LLC (Guarantor) | Starz Media and Other Businesses (Non-Guarantors) | ||||||||||||||||||
Starz, LLC Parent Only (Co-Issuer) | Eliminations | Consolidated Starz, LLC | |||||||||||||||||
Operating activities: | |||||||||||||||||||
Net income | $ | 122,915 | $ | 124,238 | $ | 5,941 | $ | (128,856 | ) | $ | 124,238 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||
Depreciation and amortization | 6,513 | 707 | 1,549 | — | 8,769 | ||||||||||||||
Amortization of program rights | 289,072 | — | — | (695 | ) | 288,377 | |||||||||||||
Program rights payments | (228,144 | ) | — | — | 630 | (227,514 | ) | ||||||||||||
Amortization of investment in films and television programs | 13,105 | — | 115,145 | — | 128,250 | ||||||||||||||
Investment in films and television programs | (56,689 | ) | — | (50,657 | ) | — | (107,346 | ) | |||||||||||
Stock compensation | 14,562 | 854 | 896 | — | 16,312 | ||||||||||||||
Payments of long term incentive plan | (3,195 | ) | — | — | — | (3,195 | ) | ||||||||||||
Share of earnings of consolidated subsidiaries | — | (143,261 | ) | — | 143,261 | — | |||||||||||||
Deferred income taxes | 14,455 | (1,551 | ) | — | (217 | ) | 12,687 | ||||||||||||
Other non-cash items | 1,748 | 1,217 | 4,756 | (1,217 | ) | 6,504 | |||||||||||||
Changes in assets and liabilities: | |||||||||||||||||||
Current and other assets | 8,096 | (4,001 | ) | (64,689 | ) | 650 | (59,944 | ) | |||||||||||
Due to / from affiliates | (57,537 | ) | 22,262 | (4,244 | ) | — | (39,519 | ) | |||||||||||
Payables and other liabilities | 4,010 | 4,125 | (1,124 | ) | (13,556 | ) | (6,545 | ) | |||||||||||
Net cash provided by operating activities | 128,911 | 4,590 | 7,573 | — | 141,074 | ||||||||||||||
Investing activities – purchases of property and equipment | (3,076 | ) | — | (49 | ) | — | (3,125 | ) | |||||||||||
Financing activities: | |||||||||||||||||||
Borrowings of debt | — | 988,500 | — | — | 988,500 | ||||||||||||||
Payments of debt | (2,035 | ) | (558,238 | ) | — | — | (560,273 | ) | |||||||||||
Debt issuance costs | — | (2,344 | ) | — | — | (2,344 | ) | ||||||||||||
Distributions to Liberty Media | — | (1,200,000 | ) | — | — | (1,200,000 | ) | ||||||||||||
Distributions to parent for repurchase of common stock | — | (81,807 | ) | — | — | (81,807 | ) | ||||||||||||
Distributions to parent | (600,000 | ) | 600,000 | — | — | — | |||||||||||||
Borrowings under notes payable to affiliate | (10,385 | ) | — | 10,385 | — | — | |||||||||||||
Repayments under notes payable to affiliate | 25,715 | — | (25,715 | ) | — | — | |||||||||||||
Net advances to / from affiliate | (248,807 | ) | 248,807 | — | — | — | |||||||||||||
Minimum withholding of taxes related to stock compensation | (1,482 | ) | — | (99 | ) | — | (1,581 | ) | |||||||||||
Excess tax benefit from stock compensation | 842 | — | — | — | 842 | ||||||||||||||
Net cash used in financing activities | (836,152 | ) | (5,082 | ) | (15,429 | ) | — | (856,663 | ) | ||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | (206 | ) | — | (206 | ) | ||||||||||||
Net decrease in cash and cash equivalents | (710,317 | ) | (492 | ) | (8,111 | ) | — | (718,920 | ) | ||||||||||
Cash and cash equivalents: | |||||||||||||||||||
Beginning of period | 735,507 | 879 | 13,388 | — | 749,774 | ||||||||||||||
End of period | $ | 25,190 | $ | 387 | $ | 5,277 | $ | — | $ | 30,854 | |||||||||
Supplemental disclosure of cash flow information: | |||||||||||||||||||
Cash paid for interest, net of amounts capitalized | $ | (1,883 | ) | $ | 22,096 | $ | 1,078 | $ | — | $ | 21,291 | ||||||||
Cash paid for income taxes | $ | 91,898 | $ | (568 | ) | $ | (390 | ) | $ | — | $ | 90,940 | |||||||
Distribution of corporate headquarters to Liberty Media | $ | 45,668 | $ | — | $ | — | $ | — | $ | 45,668 | |||||||||
Capital lease related to Commercial Lease with LPH | $ | — | $ | 44,800 | $ | — | $ | — | $ | 44,800 | |||||||||
Tax attributes related to LMC Spin-Off | $ | — | $ | 11,565 | $ | — | $ | — | $ | 11,565 |
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Starz, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013
Consolidating Statement of Cash Flows’ Information – For the Six Months Ended June 30, 2012 | |||||||||||||||||||
(in thousands) | |||||||||||||||||||
Starz Entertainment, LLC (Guarantor) | Starz Media and Other Businesses (Non-Guarantors) | ||||||||||||||||||
Starz, LLC Parent Only (Co-Issuer) | Eliminations | Consolidated Starz, LLC | |||||||||||||||||
Operating activities: | |||||||||||||||||||
Net income | $ | 131,406 | $ | 148,803 | $ | 7,860 | $ | (139,266 | ) | $ | 148,803 | ||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||||||||||
Depreciation and amortization | 6,338 | — | 2,469 | — | 8,807 | ||||||||||||||
Amortization of program rights | 322,995 | — | — | (3,912 | ) | 319,083 | |||||||||||||
Program rights payments | (281,746 | ) | — | — | 1,145 | (280,601 | ) | ||||||||||||
Amortization of investment in films and television programs | 9,701 | — | 54,927 | — | 64,628 | ||||||||||||||
Investment in films and television programs | (58,585 | ) | — | (70,537 | ) | — | (129,122 | ) | |||||||||||
Stock compensation | 5,694 | — | 541 | — | 6,235 | ||||||||||||||
Payments of long term incentive plan | (27,707 | ) | — | — | — | (27,707 | ) | ||||||||||||
Share of earnings of consolidated subsidiaries | — | (146,261 | ) | — | 146,261 | — | |||||||||||||
Deferred income taxes | 3,287 | (2,976 | ) | — | 996 | 1,307 | |||||||||||||
Other non-cash items | 6,262 | 1,014 | (12,079 | ) | (8,547 | ) | (13,350 | ) | |||||||||||
Changes in assets and liabilities: | |||||||||||||||||||
Current and other assets | (6,423 | ) | — | 12,993 | 79 | 6,649 | |||||||||||||
Due to / from affiliates | (21,116 | ) | 1,940 | 669 | 3,276 | (15,231 | ) | ||||||||||||
Payables and other liabilities | (6,124 | ) | (71 | ) | (21,541 | ) | (32 | ) | (27,768 | ) | |||||||||
Net cash provided by (used in) operating activities | 83,982 | 2,449 | (24,698 | ) | — | 61,733 | |||||||||||||
Investing activities – purchases of property and equipment | (2,204 | ) | — | (51 | ) | — | (2,255 | ) | |||||||||||
Financing activities: | |||||||||||||||||||
Payments of debt | (2,036 | ) | — | — | — | (2,036 | ) | ||||||||||||
Debt issuance costs | — | (381 | ) | — | — | (381 | ) | ||||||||||||
Borrowings under notes payable to affiliate | (32,494 | ) | — | 32,494 | — | — | |||||||||||||
Repayments under notes payable to affiliate | 8,092 | — | (8,092 | ) | — | — | |||||||||||||
Net advances to / from affiliate | 253 | — | (253 | ) | — | — | |||||||||||||
Settlement of derivative instruments | 3 | — | — | — | 3 | ||||||||||||||
Net cash provided by (used in) financing activities | (26,182 | ) | (381 | ) | 24,149 | — | (2,414 | ) | |||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | 11 | — | 11 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | 55,596 | 2,068 | (589 | ) | — | 57,075 | |||||||||||||
Cash and cash equivalents: | |||||||||||||||||||
Beginning of period | 965,400 | 125,261 | 9,226 | — | 1,099,887 | ||||||||||||||
End of period | $ | 1,020,996 | $ | 127,329 | $ | 8,637 | $ | — | $ | 1,156,962 | |||||||||
Supplemental disclosure of cash flow information: | |||||||||||||||||||
Cash paid for interest, net of amounts capitalized | $ | 742 | $ | 7,489 | $ | 98 | $ | — | $ | 8,329 | |||||||||
Cash paid for income taxes | $ | 83,429 | $ | — | $ | 3,387 | $ | — | $ | 86,816 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q includes statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements included in this Quarterly Report on Form 10-Q 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.
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 in demand resulting from the participation in and effectiveness of cooperative marketing campaigns with our distributors, and our ability to adapt to changes in demand; |
• | competitor responses to our products and services; |
• | the continued investment in, 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 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 condensed consolidated financial statements; |
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• | availability of qualified personnel; |
• | the regulatory and competitive environment of the industry in which we operate; |
• | changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission, 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; |
• | rapid technological changes; |
• | fluctuation in foreign currency exchange rates; and |
• | threatened terrorist attacks or political unrest in international markets. |
For a description of our risk factors, please see Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2012.
All forward-looking statements contained in this Quarterly Report on Form 10-Q are qualified in their entirety by this cautionary statement. 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.
The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto and our Annual Report on Form 10-K for the year ended December 31, 2012.
EXPLANATORY NOTE
In January 2013, the parent company of Starz, LLC, Starz (formerly known as Liberty Media Corporation (“Old LMC”)), completed the spin off (the “LMC Spin-Off”) of its wholly-owned subsidiary Liberty Media Corporation (formerly known as Liberty Spinco, Inc. (“Liberty Media”)) in a tax-free manner through the distribution, by means of a dividend, of shares of Liberty Media’s common stock to holders of Old LMC common stock. In this distribution, each holder of a share of Old LMC common stock received one share of the corresponding series of Liberty Media common stock. Following the LMC Spin-Off, Starz retained the businesses of Starz, LLC and all other businesses, assets and liabilities of Old LMC are included in Liberty Media. 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 LMC Spin-Off and Starz is used to refer to Starz, LLC’s parent company when events or circumstances being described occurred following the LMC Spin-Off.
OVERVIEW
We are a wholly-owned subsidiary of Starz. Our business operations are conducted by our wholly-owned subsidiaries Starz Entertainment, LLC, Film Roman, LLC and certain other immaterial subsidiaries, and our majority-owned subsidiary Starz Media Group, LLC (“Starz Media”) (75%), which is owned 25% by The Weinstein Company LLC (“TWC”).
We provide premium subscription video programming to United States (“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
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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.
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 and Starz Distribution have been identified as reportable segments; however, as we have three operating segments, Starz Animation is also reported separately.
ADJUSTED OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION (ADJUSTED OIBDA) - THREE MONTHS ENDED JUNE 30, 2013 AND 2012
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 and selling, general and administrative expenses. Our chief operating decision maker uses this measure of performance in conjunction with other measures to evaluate our operating segments’ performance 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 to 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 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 before income taxes, net income, net cash provided by operating activities and other measures of financial performance prepared in accordance with GAAP.
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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.
Three Months Ended June 30, | $ Change | % Change | |||||||||
2013 | 2012 | ‘13 vs ‘12 | ‘13 vs ‘12 | ||||||||
Revenue | |||||||||||
Starz Networks | $ | 339,950 | $ | 318,902 | $ | 21,048 | 6.6 | % | |||
Starz Distribution | 171,874 | 76,247 | 95,627 | 125.4 | % | ||||||
Starz Animation | 6,647 | 10,101 | (3,454 | ) | (34.2 | )% | |||||
Inter-segment eliminations | (1,050 | ) | (2,688 | ) | 1,638 | 60.9 | % | ||||
Total Revenue | $ | 517,421 | $ | 402,562 | $ | 114,859 | 28.5 | % | |||
Adjusted OIBDA | |||||||||||
Starz Networks | $ | 116,456 | $ | 98,881 | $ | 17,575 | 17.8 | % | |||
Starz Distribution | 14,534 | 9,379 | 5,155 | 55.0 | % | ||||||
Starz Animation | (778 | ) | (190 | ) | (588 | ) | (309.5 | )% | |||
Inter-segment eliminations | (705 | ) | 406 | (1,111 | ) | (273.6 | )% | ||||
Total Adjusted OIBDA | $ | 129,507 | $ | 108,476 | $ | 21,031 | 19.4 | % |
The following table provides a reconciliation of Adjusted OIBDA to income before income taxes (in thousands):
Three Months Ended June 30, | ||||||
2013 | 2012 | |||||
Adjusted OIBDA | $ | 129,507 | $ | 108,476 | ||
Stock compensation | (9,058 | ) | (3,653 | ) | ||
Depreciation and amortization | (4,353 | ) | (4,552 | ) | ||
Interest expense, net of amounts capitalized | (11,331 | ) | (4,449 | ) | ||
Other expense, net | (508 | ) | (98 | ) | ||
Income before income taxes | $ | 104,257 | $ | 95,724 |
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RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2013 AND 2012
Operating results are as follows (in thousands, except as otherwise indicated):
Three Months Ended June 30, | $ Change | % Change | |||||||||
2013 | 2012 | ‘13 vs ‘12 | ‘13 vs ‘12 | ||||||||
Revenue: | |||||||||||
Programming networks and other services | $ | 391,081 | $ | 361,627 | $ | 29,454 | 8.1 | % | |||
Home video net sales | 126,340 | 40,935 | 85,405 | 208.6 | % | ||||||
Total revenue | 517,421 | 402,562 | 114,859 | 28.5 | % | ||||||
Costs and expenses: | |||||||||||
Programming costs (including amortization) | 165,353 | 179,304 | (13,951 | ) | (7.8 | )% | |||||
Production and acquisition costs (including amortization) | 113,267 | 39,372 | 73,895 | 187.7 | % | ||||||
Home video cost of sales | 15,095 | 10,668 | 4,427 | 41.5 | % | ||||||
Operating expenses | 12,437 | 12,953 | (516 | ) | (4.0 | )% | |||||
Selling, general and administrative | 81,762 | 51,789 | 29,973 | 57.9 | % | ||||||
Stock compensation | 9,058 | 3,653 | 5,405 | 148.0 | % | ||||||
Depreciation and amortization | 4,353 | 4,552 | (199 | ) | (4.4 | )% | |||||
Total costs and expenses | 401,325 | 302,291 | 99,034 | 32.8 | % | ||||||
Operating income | 116,096 | 100,271 | 15,825 | 15.8 | % | ||||||
Other expense: | |||||||||||
Interest expense, net of amounts capitalized | (11,331 | ) | (4,449 | ) | (6,882 | ) | 154.7 | % | |||
Other expense, net | (508 | ) | (98 | ) | (410 | ) | 418.4 | % | |||
Income before income taxes | 104,257 | 95,724 | 8,533 | 8.9 | % | ||||||
Income tax expense | (38,222 | ) | (26,116 | ) | (12,106 | ) | 46.4 | % | |||
Net income | $ | 66,035 | $ | 69,608 | $ | (3,573 | ) | (5.1 | )% |
As of June 30, | ||
Operating Data (in millions): | 2013 | 2012 |
Starz subscriptions: | ||
Fixed-rate subscriptions | 12.3 | 12.4 |
Consignment subscriptions | 9.5 | 8.3 |
Total Starz subscriptions | 21.8 | 20.7 |
Encore subscriptions: | ||
Fixed-rate subscriptions | 21.9 | 22.5 |
Consignment subscriptions | 13.2 | 11.7 |
Total Encore subscriptions | 35.1 | 34.2 |
Total subscriptions: | ||
Fixed-rate subscriptions | 34.2 | 34.9 |
Consignment subscriptions | 22.7 | 20.0 |
Total subscriptions | 56.9 | 54.9 |
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COMPARISON OF THREE MONTHS ENDED JUNE 30, 2013 TO THREE MONTHS ENDED JUNE 30, 2012
Revenue
Our revenue increased $114.9 million or 28.5% for the three months ended June 30, 2013 as compared to the corresponding prior year period. Revenue increased primarily as a result of increases in revenue for Starz Networks, Starz Distribution and a decrease in our inter-segment eliminations, which were partially offset by a decrease in revenue for Starz Animation. Starz Networks’ revenue represented 65.7% and 79.2% of our total revenue for the three months ended June 30, 2013 and 2012, respectively.
Revenue from Starz Networks increased $21.0 million or 6.6% for the three months ended June 30, 2013 as compared to the corresponding prior year period. During the three months ended June 30, 2013, certain contractual terms under affiliation agreements with two distributors resulted in the recognition of $18.6 million of previously deferred revenue. Notwithstanding this one-time adjustment, revenue increased $2.4 million as a result of a $3.6 million increase due to higher effective rates and a $1.2 million decrease due to lower subscriptions under our consignment agreements. The increase in our effective rates during the 2013 period was partially offset by the renewal of affiliation agreements with two distributors in the fourth quarter of 2012 on less favorable financial terms than the prior affiliation agreements (such agreements provide for annual contractual increases).
The Starz and Encore networks are the primary drivers of Starz Networks’ revenue. Starz and Encore average subscriptions during the periods increased 6.1% and 3.5% since June 30, 2012, respectively. 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 June 30, 2013, subscriptions under fixed-rate agreements were 34.2 million while subscriptions under consignment agreements were 22.7 million. As of June 30, 2012, subscriptions under fixed-rate agreements were 34.9 million while subscriptions under consignment agreements were 20.0 million. The increase in consignment subscriptions is due to subscriptions that moved from fixed to consignment on January 1, 2013.
Revenue from Starz Distribution increased $95.6 million or 125.4% for the three months ended June 30, 2013 as compared to the corresponding prior year period. This growth is primarily due to an increase in the number of films distributed for TWC, including the films Django Unchained and Silver Linings Playbook.
Revenue from Starz Animation decreased $3.5 million or 34.2% for the three months ended June 30, 2013 as compared to the corresponding prior year period primarily due to fewer projects in production.
Programming
Programming costs are our largest expense. Programming costs decreased $14.0 million or 7.8% for the three months ended June 30, 2013 as compared to the corresponding prior year period. Programming costs vary due to original productions, the number of films licensed and the cost per film paid under our output and library programming agreements. The decrease in programming costs is due to fewer first-run films and higher utilization of lower cost second window films licensed under our output agreements. This decrease was partially offset by increased exhibitions of our original programming due to two original series airing in the second quarter of 2013 compared to one original series airing in the second quarter of 2012. We expect programming costs related to original programming 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. All remaining production and acquisition costs for original productions as well as our other films and television programs are amortized to production and acquisition costs based on the proportion that current revenue bears to an estimate of ultimate revenue for each film or television program. The amount of production and acquisition costs that we will incur for original productions is impacted by both the number of and cost 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 (e.g., TWC, producers or writers of our original programming, etc.) has an ownership interest.
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Production and acquisition costs increased $73.9 million or 187.7% for the three months ended June 30, 2013 as compared to the corresponding prior year period. The increase is primarily due to higher Starz Distribution revenue associated with the films distributed for TWC (which resulted in higher participation costs).
Home Video Cost of Sales
Home video cost of sales increased $4.4 million or 41.5% for the three months ended June 30, 2013 as compared to the corresponding prior year period due to an increase in distribution costs (distribution fees, freight, etc.) resulting from the increase in home video sales from films distributed for TWC as described above. Home video cost of sales represented 11.9% and 26.1% of home video net sales for the three months ended June 30, 2013 and 2012, respectively. Such decrease in costs as a percentage of sales is due to our agreement with TWC under which TWC pays for the related DVD replication and packaging costs.
Selling, General and Administrative
Selling, general and administrative expenses increased $30.0 million or 57.9% for the three months ended June 30, 2013 as compared to the corresponding prior year period. The increase was primarily due to increased advertising and marketing costs for both Starz Networks and Starz Distribution in addition to increased litigation related legal costs and costs associated with becoming an independent public company. The increase in advertising and marketing costs for Starz Networks was due to increased spend related to our original programming line-up which included two original series premiering in the second quarter of 2013 as compared to one original series premiering in the second quarter of 2012 and increased cooperative marketing efforts with our distributors. The increase in advertising and marketing costs for Starz Distribution was related to increased spend on films distributed for TWC.
Adjusted OIBDA
Adjusted OIBDA increased $21.0 million or 19.4% for the three months ended June 30, 2013 as compared to the corresponding prior year period. Adjusted OIBDA for Starz Networks increased $17.6 million primarily a result of the one-time adjustment to Starz Networks’ revenue mentioned above, which was partially offset by higher advertising and marketing costs. Starz Distribution’s Adjusted OIBDA increased $5.2 million primarily as a result of higher sales of lower margin films distributed for TWC.
Stock Compensation
Stock compensation increased $5.4 million or 148.0% for the three months ended June 30, 2013 as compared to the corresponding prior year period as a result of an increase in the number of options granted, and at a higher grant-date fair value than options previously granted, and an increase in the number of restricted shares granted.
Interest Expense
Interest expense increased $6.9 million for the three months ended June 30, 2013 as compared to the corresponding prior year period due to $473.0 million of additional net borrowings in 2013 (including the capital lease with Liberty Property Holdings, Inc. (��LPH”) for our corporate headquarters) and a higher average interest rate. The increase in the average interest rate resulted from the repayment of our term loan in 2012 with proceeds from the issuance of our 5.0% senior notes due 2019 (the “Senior Notes”). The Senior Notes bear interest at a fixed rate of 5.0% which is higher than the variable rate under the term loan.
Income Taxes
We had income before income taxes of $104.3 million and $95.7 million and income tax expense of $38.2 million and $26.1 million for the three months ended June 30, 2013 and 2012, respectively. Our effective tax rate was 36.7% and 27.3% for the three months ended June 30, 2013 and 2012, respectively.
Our effective tax rate differs from the U.S. federal income tax rate of 35% primarily as a result of state and local taxes and changes in our valuation allowance for deferred taxes. In addition, for the three months ended June 30, 2012, our effective rate differed from the U.S. federal income tax rate of 35% as a result of 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
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U.S. federal and state income tax purposes. This election resulted in a $7.1 million deferred tax asset and corresponding tax benefit being recorded for the difference between the book basis and tax basis of our investment in Starz Media as of April 1, 2012.
ADJUSTED OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION (ADJUSTED OIBDA) - SIX MONTHS ENDED JUNE 30, 2013 AND 2012
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.
Six Months Ended June 30, | $ Change | % Change | |||||||||
2013 | 2012 | ‘13 vs ‘12 | ‘13 vs ‘12 | ||||||||
Revenue | |||||||||||
Starz Networks | $ | 655,786 | $ | 643,102 | $ | 12,684 | 2.0 | % | |||
Starz Distribution | 248,116 | 148,631 | 99,485 | 66.9 | % | ||||||
Starz Animation | 14,116 | 21,437 | (7,321 | ) | (34.2 | )% | |||||
Inter-segment eliminations | (1,280 | ) | (5,644 | ) | 4,364 | 77.3 | % | ||||
Total Revenue | $ | 916,738 | $ | 807,526 | $ | 109,212 | 13.5 | % | |||
Adjusted OIBDA | |||||||||||
Starz Networks | $ | 230,838 | $ | 214,757 | $ | 16,081 | 7.5 | % | |||
Starz Distribution | 17,123 | 18,516 | (1,393 | ) | (7.5 | )% | |||||
Starz Animation | (1,339 | ) | (153 | ) | (1,186 | ) | (775.2 | )% | |||
Inter-segment eliminations | (585 | ) | 2,196 | (2,781 | ) | (126.6 | )% | ||||
Total Adjusted OIBDA | $ | 246,037 | $ | 235,316 | $ | 10,721 | 4.6 | % |
The following table provides a reconciliation of Adjusted OIBDA to income before income taxes (in thousands):
Six Months Ended June 30, | ||||||
2013 | 2012 | |||||
Adjusted OIBDA | $ | 246,037 | $ | 235,316 | ||
Stock compensation | (16,312 | ) | (6,235 | ) | ||
Depreciation and amortization | (8,769 | ) | (8,807 | ) | ||
Interest expense, net of amounts capitalized | (21,559 | ) | (9,330 | ) | ||
Other income (expense), net | (1,993 | ) | 4,167 | |||
Income before income taxes | $ | 197,404 | $ | 215,111 |
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RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2013 AND 2012
Operating results are as follows (in thousands, except as otherwise indicated):
Six Months Ended June 30, | $ Change | % Change | |||||||||
2013 | 2012 | ‘13 vs ‘12 | ‘13 vs ‘12 | ||||||||
Revenue: | |||||||||||
Programming networks and other services | $ | 740,569 | $ | 728,878 | $ | 11,691 | 1.6 | % | |||
Home video net sales | 176,169 | 78,648 | 97,521 | 124.0 | % | ||||||
Total revenue | 916,738 | 807,526 | 109,212 | 13.5 | % | ||||||
Costs and expenses: | |||||||||||
Programming costs (including amortization) | 311,324 | 340,253 | (28,929 | ) | (8.5 | )% | |||||
Production and acquisition costs (including amortization) | 153,057 | 75,448 | 77,609 | 102.9 | % | ||||||
Home video cost of sales | 30,216 | 21,228 | 8,988 | 42.3 | % | ||||||
Operating expenses | 25,122 | 26,375 | (1,253 | ) | (4.8 | )% | |||||
Selling, general and administrative | 150,982 | 108,906 | 42,076 | 38.6 | % | ||||||
Stock compensation | 16,312 | 6,235 | 10,077 | 161.6 | % | ||||||
Depreciation and amortization | 8,769 | 8,807 | (38 | ) | (0.4 | )% | |||||
Total costs and expenses | 695,782 | 587,252 | 108,530 | 18.5 | % | ||||||
Operating income | 220,956 | 220,274 | 682 | 0.3 | % | ||||||
Other income (expense): | |||||||||||
Interest expense, net of amounts capitalized | (21,559 | ) | (9,330 | ) | (12,229 | ) | 131.1 | % | |||
Other income (expense), net | (1,993 | ) | 4,167 | (6,160 | ) | (147.8 | )% | ||||
Income before income taxes | 197,404 | 215,111 | (17,707 | ) | (8.2 | )% | |||||
Income tax expense | (73,166 | ) | (66,308 | ) | (6,858 | ) | 10.3 | % | |||
Net income | $ | 124,238 | $ | 148,803 | $ | (24,565 | ) | (16.5 | )% |
As of June 30, | ||
Operating Data (in millions): | 2013 | 2012 |
Starz subscriptions: | ||
Fixed-rate subscriptions | 12.3 | 12.4 |
Consignment subscriptions | 9.5 | 8.3 |
Total Starz subscriptions | 21.8 | 20.7 |
Encore subscriptions: | ||
Fixed-rate subscriptions | 21.9 | 22.5 |
Consignment subscriptions | 13.2 | 11.7 |
Total Encore subscriptions | 35.1 | 34.2 |
Total subscriptions: | ||
Fixed-rate subscriptions | 34.2 | 34.9 |
Consignment subscriptions | 22.7 | 20.0 |
Total subscriptions | 56.9 | 54.9 |
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COMPARISON OF SIX MONTHS ENDED JUNE 30, 2013 TO SIX MONTHS ENDED JUNE 30, 2012
Revenue
Our revenue increased $109.2 million or 13.5% for the six months ended June 30, 2013 as compared to the corresponding prior year period. Revenue increased primarily as a result of increases in revenue for Starz Networks, Starz Distribution and a decrease in our inter-segment eliminations, which were partially offset by a decrease in revenue for Starz Animation. Starz Networks’ revenue represented 71.5% and 79.6% of our total revenue for the six months ended June 30, 2013 and 2012, respectively.
Revenue from Starz Networks increased $12.7 million or 2.0% for the six months ended June 30, 2013 as compared to the corresponding prior year period. During the second quarter of 2013, certain contractual terms under affiliation agreements with two distributors resulted in the recognition of $18.6 million of previously deferred revenue. Notwithstanding this one-time adjustment, revenue decreased $5.9 million as a result of a $9.4 million decrease due to lower subscriptions and a $3.5 million increase due to higher effective rates. The decrease in our subscriptions was primarily due to the non-renewal of the Netflix agreement in the first quarter of 2012 and lower subscriptions under our consignment agreements. The increase in our effective rates during the 2013 period was partially offset by the renewal of affiliation agreements with two distributors in the fourth quarter of 2012 on less favorable financial terms than the prior affiliation agreements (such agreements provide for annual contractual increases).
The Starz and Encore networks are the primary drivers of Starz Networks’ revenue. Starz and Encore average subscriptions during the periods increased 6.8% and 4.0% since June 30, 2012, respectively. 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 June 30, 2013, subscriptions under fixed-rate agreements were 34.2 million while subscriptions under consignment agreements were 22.7 million. As of June 30, 2012, subscriptions under fixed-rate agreements were 34.9 million while subscriptions under consignment agreements were 20.0 million. The increase in consignment subscriptions is due to subscriptions that moved from fixed to consignment on January 1, 2013.
Revenue from Starz Distribution increased $99.5 million or 66.9% for the six months ended June 30, 2013 as compared to the corresponding prior year period. This growth is primarily due to an increase in the number of films distributed for TWC, including the films Django Unchained and Silver Linings Playbook.
Revenue from Starz Animation decreased $7.3 million or 34.2% for the six months ended June 30, 2013 as compared to the corresponding prior year period primarily due to fewer projects in production.
Programming
Programming costs are our largest expense. Programming costs decreased $28.9 million or 8.5% for the six months ended June 30, 2013 as compared to the corresponding prior year period. Programming costs vary due to original productions, the number of films licensed and the cost per film paid under our output and library programming agreements. The decrease in programming costs is due to fewer first-run films and higher utilization of lower cost second window films licensed under our output agreements. This decrease was partially offset by increased exhibitions of our original programming due to three original series airing in the first half of 2013 compared to two original series airing in the first half of 2012. We expect programming costs related to original programming 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. All remaining production and acquisition costs for original productions as well as our other films and television programs are amortized to production and acquisition costs based on the proportion that current revenue bears to an estimate of ultimate revenue for each film or television program. The amount of production and acquisition costs that we will incur for original productions is impacted by both the number of and cost 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 (e.g., TWC, producers or writers of our original programming, etc.) has an ownership interest.
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Production and acquisition costs increased $77.6 million or 102.9% for the six months ended June 30, 2013 as compared to the corresponding prior year period. The increase is primarily due to higher Starz Distribution revenue associated with the films distributed for TWC (which resulted in higher participation costs).
Home Video Cost of Sales
Home video cost of sales increased $9.0 million or 42.3% for the six months ended June 30, 2013 as compared to the corresponding prior year period due to an increase in distribution costs (distribution fees, freight, etc.) resulting from the increase in home video sales from films distributed for TWC as described above. Home video cost of sales represented 17.2% and 27.0% of home video net sales for the six months ended June 30, 2013 and 2012, respectively. Such decrease in costs as a percentage of sales is due to our agreement with TWC under which TWC pays for the related DVD replication and packaging costs.
Selling, General and Administrative
Selling, general and administrative expenses increased $42.1 million or 38.6% for the six months ended June 30, 2013 as compared to the corresponding prior year period. The increase was primarily due to increased advertising and marketing costs for both Starz Networks and Starz Distribution in addition to increased litigation related legal costs and costs associated with becoming an independent public company. The increase in advertising and marketing costs for Starz Networks was due to increased spend related to our original programming line-up which included three original series premiering in the first half of 2013 as compared to two original series premiering in the first half of 2012 and increased cooperative marketing efforts with our distributors. The increase in advertising and marketing costs for Starz Distribution was primarily related to increased spend on films distributed for TWC.
Adjusted OIBDA
Adjusted OIBDA increased $10.7 million or 4.6% for the six months ended June 30, 2013 as compared to the corresponding prior year period. Adjusted OIBDA for Starz Networks increased $16.1 million primarily a result of the one-time adjustment to Starz Networks’ revenue mentioned above, which was partially offset by higher advertising and marketing costs. The increase for Starz Networks was offset by decreases from Starz Distribution, Starz Animation and Inter-segment eliminations. Adjusted OIBDA was impacted by higher sales of lower margin titles by Starz Distribution and fewer projects in production by Starz Animation. In addition, the decrease in Inter-segment eliminations are primarily the result of fewer exhibitions of Overture Films’ titles.
Stock Compensation
Stock compensation increased $10.1 million or 161.6% for the six months ended June 30, 2013 as compared to the corresponding prior year period as a result of an increase in the number of options granted, and at a higher grant-date fair value than options previously granted, and an increase in the number of restricted shares granted.
Interest Expense
Interest expense increased $12.2 million for the six months ended June 30, 2013 as compared to the corresponding prior year period due to $473.0 million of additional net borrowings in 2013 (including the capital lease with LPH for our corporate headquarters) and a higher average interest rate. The increase in the average interest rate resulted from the repayment of our term loan in 2012 with proceeds from the issuance of our Senior Notes. The Senior Notes bear interest at a fixed rate of 5.0% which is higher than the variable rate under the term loan.
Other Income (Expense)
We recorded other expense of $2.0 million for the six months ended June 30, 2013 as compared to other income of $4.2 million for the six months ended June 30, 2012. The expense for the six months ended June 30, 2013 is primarily comprised of additional expense that we recorded in connection with our guarantee of the Canadian Next Generation of Jobs Fund Grant as further described in Note 6 to the accompanying condensed consolidated financial statements. The income for the six months ended June 30, 2012 is primarily comprised of gains on foreign currency hedging transactions and foreign currency exchange gains.
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Income Taxes
We had income before income taxes of $197.4 million and $215.1 million and income tax expense of $73.2 million and $66.3 million for the six months ended June 30, 2013 and 2012, respectively. Our effective tax rate was 37.1% and 30.8% for the six months ended June 30, 2013 and 2012, respectively.
Our effective tax rate differs from the U.S. federal income tax rate of 35% primarily as a result of state and local taxes and changes in our valuation allowance for deferred taxes. In addition, for the six months ended June 30, 2012, our effective rate differed from the U.S. federal income tax rate of 35% as a result of Starz Media’s election, effective April 1, 2012, to convert itself from a LLC treated as a corporation to a LLC treated as a partnership for U.S. federal and state income tax purposes. This election resulted in a $7.1 million deferred tax asset and corresponding tax benefit being recorded for the difference between the book basis and tax basis of our investment in Starz Media as of April 1, 2012.
MATERIAL CHANGES IN FINANCIAL CONDITION
As of June 30, 2013, our cash and cash equivalents totaled $30.9 million. Our cash and cash equivalents are, from time to time, 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 cash from operating activities of $141.1 million and $61.7 million for the six months ended June 30, 2013 and 2012, 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 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 $227.5 million and $280.6 million for the six months ended June 30, 2013 and 2012, respectively, and decreased primarily due to fewer first-run films in 2013 as compared to 2012. Cash paid for original programming, home video and other content totaled $107.3 million and $129.1 million for the six months ended June 30, 2013 and 2012, respectively, and decreased primarily due to the timing of payments under our distribution agreement with TWC. We plan to continue to increase our investments in original programming in future periods.
For the six months ended June 30, 2013, restricted cash increased $63.8 million as compared to an increase of $0.8 million for the six months ended June 30, 2012. The increase in restricted cash represents proceeds from our distribution agreement with TWC. In addition, payments made under a legacy incentive plan negatively impacted net cash provided by operating activities in 2012. For the six months ended June 30, 2012, we made cash payments of $27.7 million under the legacy incentive plan as compared to cash payments of $3.2 million for the six months ended June 30, 2013. All amounts due under the legacy incentive plan have been paid as of June 30, 2013.
In connection with the LMC Spin-Off, Starz, LLC distributed $1.8 billion in cash to Old LMC which was funded by a combination of cash on hand and $550.0 million of borrowings under our senior secured revolving credit facility. The $1.8 billion was 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.
On February 8, 2013, Starz, LLC and Starz Finance Corp. completed the issuance of $175.0 million aggregate principal amount of 5.0% senior notes due 2019 (the “New Notes”), which were issued as additional notes under the indenture governing the Senior Notes. The net proceeds from such issuance 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.
Additionally, we used $81.8 million of cash for Starz to buy back common stock under its share repurchase program for the six months ended June 30, 2013. Starz has $318.3 million available under its share repurchase program as of June 30, 2013.
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 net cash
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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 debt repayments, buybacks of common stock and capital expenditures during 2013. Based upon our current operating plans, we believe that our net cash provided by operating activities and borrowings under our revolving credit facility 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 June 30, 2013, we had $743.0 million of borrowing capacity available under our revolving credit facility.
Item 3. 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 June 30, 2013, 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 | |
$257,000 | 2.04% | $755,610 | 5.14% |
As shown above, the majority of our outstanding debt at June 30, 2013 was fixed rate debt. We have borrowing capacity at June 30, 2013 of $743.0 million under our senior secured revolving credit facility at variable rates.
At June 30, 2013, the fair value of the Senior Notes and the New Notes was $671.6 million. We believe the fair value of the senior secured credit facilities approximates its carrying value as of June 30, 2013 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 June 30, 2013, 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 4. Controls and Procedures
Disclosure Controls and Procedures
In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 June 30, 2013 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.
There has been no change in our internal control over financial reporting that occurred during the six months ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
Item 1. 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. On April 29, 2013, Starz Entertainment and DISH entered into a confidential settlement agreement with respect to the first lawsuit. In addition, on June 19, 2013, Starz Entertainment and FX Networks entered into a confidential settlement agreement with respect to FX Networks’ claim against Starz Entertainment in the third lawsuit. The Disney Enterprises, Inc. and FX Networks’ lawsuits against DISH have not yet gone to trial. Any potential indemnification obligations of Starz, LLC relating to these remaining matters 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 6. 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 | |
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* | |
101.INS | XBRL Instance Document** | |
101.SCH | XBRL Taxonomy Extension Schema Document** | |
101.CAL | XBRL Taxonomy Calculation Linkbase Document** | |
101.LAB | XBRL Taxonomy Label Linkbase Document** | |
101.PRE | XBRL Taxonomy Presentation Linkbase Document** | |
101.DEF | XBRL Taxonomy Definition Document** |
______________________
* | Filed herewith. |
** | Furnished herewith. |
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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, LLC | |||
By: | /s/ Christopher P. Albrecht | ||
Date: August 1, 2013 | Name: | Christopher P. Albrecht | |
Title: | Chief Executive Officer |
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/ Christopher P. Albrecht | ||||
Christopher P. Albrecht | Chief Executive Officer (Principal Executive Officer) | August 1, 2013 | ||
/s/ Scott D. Macdonald | ||||
Scott D. Macdonald | Chief Financial Officer, Executive Vice President and Treasurer (Principal Financial Officer and Principal Accounting Officer) | August 1, 2013 | ||
Starz | Sole Member-Manager of the Registrant | August 1, 2013 | ||
By: | /s/ J. Steven Beabout | |||
J. Steven Beabout | Executive Vice President, General Counsel and Secretary | |||
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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 | |
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* | |
101.INS | XBRL Instance Document** | |
101.SCH | XBRL Taxonomy Extension Schema Document** | |
101.CAL | XBRL Taxonomy Calculation Linkbase Document** | |
101.LAB | XBRL Taxonomy Label Linkbase Document** | |
101.PRE | XBRL Taxonomy Presentation Linkbase Document** | |
101.DEF | XBRL Taxonomy Definition Document** |
_____________________
* | Filed herewith. |
** | Furnished herewith. |
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