Attached files

file filename
8-K - 8-K - Starz Acquisition LLCa13-2797_18k.htm
EX-2.1 - EX-2.1 - Starz Acquisition LLCa13-2797_1ex2d1.htm
EX-3.1 - EX-3.1 - Starz Acquisition LLCa13-2797_1ex3d1.htm
EX-99.1 - EX-99.1 - Starz Acquisition LLCa13-2797_1ex99d1.htm
EX-10.3 - EX-10.3 - Starz Acquisition LLCa13-2797_1ex10d3.htm
EX-10.2 - EX-10.2 - Starz Acquisition LLCa13-2797_1ex10d2.htm
EX-23.1 - EX-23.1 - Starz Acquisition LLCa13-2797_1ex23d1.htm
EX-10.1 - EX-10.1 - Starz Acquisition LLCa13-2797_1ex10d1.htm
EX-10.5 - EX-10.5 - Starz Acquisition LLCa13-2797_1ex10d5.htm
EX-10.4 - EX-10.4 - Starz Acquisition LLCa13-2797_1ex10d4.htm

Exhibit 99.2

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Page
Number

UNAUDITED FINANCIAL STATEMENTS:

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011 (Unaudited)

 

F-2

 

 

 

Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2012 and 2011 (Unaudited)

 

F-3

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Nine Months Ended September 30, 2012 and 2011 (Unaudited)

 

F-4

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (Unaudited)

 

F-5

 

 

 

Condensed Consolidated Statement of Member’s Interest and Noncontrolling Interests for the Nine Months Ended September 30, 2012 (Unaudited)

 

F-7

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

F-8

 

 

 

AUDITED FINANCIAL STATEMENTS:

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

F-31

 

 

 

Consolidated Balance Sheets as of December 31, 2011 and 2010

 

F-32

 

 

 

Consolidated Statements of Operations for the Years Ended December 31, 2011, 2010 and 2009

 

F-33

 

 

 

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2011, 2010 and 2009

 

F-34

 

 

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009

 

F-35

 

 

 

Consolidated Statements of Member’s Interest and Noncontrolling Interests for the Years Ended December 31, 2011, 2010 and 2009

 

F-37

 

 

 

Notes to Consolidated Financial Statements

 

F-38

 

 

 

FINANCIAL STATEMENT SCHEDULES:

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

F-77

 

 

 

Schedule II. Valuation and Qualifying Accounts

 

F-78

 

F-1



 

Starz, LLC and Subsidiaries

 

Condensed Consolidated Balance Sheets

 

(Unaudited)

 

(in thousands)

 

 

 

September 30,
2012

 

December 31,
2011

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

846,462

 

$

1,099,887

 

Restricted cash

 

12,932

 

4,896

 

Trade accounts receivable, net of allowances of $32,350 and $38,335

 

240,228

 

241,026

 

Program rights

 

459,449

 

441,854

 

Deferred income taxes (Note 6)

 

841

 

10,114

 

Other current assets

 

35,122

 

31,336

 

Total current assets

 

1,595,034

 

1,829,113

 

Program rights

 

285,226

 

319,996

 

Property and equipment, net of accumulated depreciation of $157,905 and $151,375

 

92,309

 

98,531

 

Investment in films and television programs, net

 

159,472

 

183,942

 

Goodwill

 

131,760

 

131,760

 

Other assets, net

 

44,982

 

39,833

 

Total assets

 

$

2,308,783

 

$

2,603,175

 

Liabilities and Member’s Interest and
Noncontrolling Interests

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of debt (Note 3)

 

$

4,070

 

$

4,129

 

Trade accounts payable

 

7,409

 

8,690

 

Accrued liabilities (Notes 4 and 7)

 

229,492

 

270,296

 

Accrued compensation related to long term incentive plan

 

3,195

 

33,854

 

Due to affiliate (Note 4)

 

35,690

 

53,836

 

Deferred revenue

 

30,621

 

26,734

 

Total current liabilities

 

310,477

 

397,539

 

Accrued long term incentive plan

 

 

2,751

 

Debt (Note 3)

 

536,728

 

540,915

 

Deferred income taxes (Note 6)

 

108

 

10,308

 

Other liabilities (Note 7)

 

9,360

 

8,561

 

Total liabilities

 

856,673

 

960,074

 

Member’s interest

 

1,457,529

 

1,651,484

 

Noncontrolling interests in subsidiaries

 

(5,419

)

(8,383

)

Total member’s interest and noncontrolling interests

 

1,452,110

 

1,643,101

 

Commitments and contingencies (Note 7)

 

 

 

 

 

Total liabilities and member’s interest and noncontrolling interests

 

$

2,308,783

 

$

2,603,175

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

F-2



 

Starz, LLC and Subsidiaries

 

Condensed Consolidated Statements of Operations

 

(Unaudited)

 

(in thousands)

 

 

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

Revenue:

 

 

 

 

 

Programming networks and other services

 

$

1,075,124

 

$

1,025,554

 

Home video net sales

 

133,372

 

155,900

 

Total revenue

 

1,208,496

 

1,181,454

 

Costs and expenses:

 

 

 

 

 

Programming (including amortization) (Note 7)

 

504,674

 

481,887

 

Production and acquisition (including amortization) (Note 4)

 

117,617

 

85,379

 

Home video cost of sales

 

40,261

 

43,130

 

Operating

 

38,876

 

41,829

 

Advertising and marketing

 

82,596

 

92,625

 

General and administrative (Note 4)

 

81,015

 

80,609

 

Long term incentive plan and stock compensation (Note 5)

 

9,888

 

5,168

 

Depreciation and amortization

 

13,787

 

13,464

 

Total costs and expenses

 

888,714

 

844,091

 

Operating income

 

319,782

 

337,363

 

Other income (expense):

 

 

 

 

 

Interest expense, net of amounts capitalized (Note 3)

 

(18,805

)

(2,862

)

Other income (expense), net

 

3,680

 

(4,821

)

Income from continuing operations before income taxes

 

304,657

 

329,680

 

Income tax expense (Note 6)

 

(100,572

)

(136,592

)

Income from continuing operations

 

204,085

 

193,088

 

Loss from discontinued operations (including loss on sale of none and $3,000), net of income taxes (Note 2)

 

 

(3,491

)

Net income

 

204,085

 

189,597

 

Net income attributable to noncontrolling interests

 

(1,154

)

(98

)

Net income attributable to member

 

$

202,931

 

$

189,499

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

F-3



 

Starz, LLC and Subsidiaries

 

Condensed Consolidated Statements of Comprehensive Income

 

(Unaudited)

 

(in thousands)

 

 

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

Net income

 

$

204,085

 

$

189,597

 

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

Foreign currency translation adjustments from continuing operations

 

322

 

2,472

 

Foreign currency translation adjustments from discontinued operations

 

 

(5,946

)

Other comprehensive income (loss)

 

322

 

(3,474

)

Comprehensive income

 

204,407

 

186,123

 

Comprehensive income attributable to noncontrolling interests

 

(1,908

)

(80

)

Comprehensive income attributable to member

 

$

202,499

 

$

186,043

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

F-4



 

Starz, LLC and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows

 

(Unaudited)

 

(in thousands)

 

 

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

Operating activities:

 

 

 

 

 

Net income

 

$

204,085

 

$

189,597

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Loss from discontinued operations

 

 

3,491

 

Long term incentive plan and stock compensation

 

9,888

 

5,168

 

Payments for long term incentive plan and restricted stock

 

(33,410

)

(6,947

)

Amortization of program rights

 

473,251

 

454,215

 

Amortization of investment in films and television programs

 

86,742

 

68,639

 

Depreciation and amortization

 

13,787

 

13,464

 

Deferred income taxes

 

(3,265

)

38,477

 

Other non-cash items

 

877

 

1,179

 

Changes in assets and liabilities:

 

 

 

 

 

Restricted cash

 

(8,036

)

(12,561

)

Trade accounts receivable

 

6,782

 

(13,509

)

Program rights

 

(366,381

)

(432,428

)

Other current assets

 

3,639

 

(6,839

)

Investment in films and television programs

 

(194,988

)

(166,968

)

Other assets

 

(8,569

)

7,029

 

Trade accounts payable

 

(1,281

)

(1,247

)

Accrued liabilities

 

(1,413

)

(14,887

)

Due to affiliate

 

(15,556

)

58,945

 

Deferred revenue

 

4,528

 

17,451

 

Other liabilities

 

412

 

1,368

 

Net cash provided by operating activities

 

171,092

 

203,637

 

Investing activities—purchases of property and equipment

 

$

(7,870

)

$

(3,492

)

 

(Continued)

 

F-5



 

Starz, LLC and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (Continued)

 

(Unaudited)

 

(in thousands)

 

 

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

Financing activities:

 

 

 

 

 

Borrowings of debt

 

$

500,000

 

$

 

Payments of debt

 

(503,035

)

(58,173

)

Debt issuance costs

 

(8,007

)

 

Distributions to parent

 

(400,000

)

 

Distributions to parent related to stock compensation

 

(5,667

)

 

Contribution from noncontrolling owner of subsidiary

 

 

3,000

 

Settlement of derivative instruments

 

3

 

(2,863

)

Restricted cash

 

 

8,226

 

Net cash used in financing activities

 

(416,706

)

(49,810

)

Effect of exchange rate changes on cash and cash equivalents

 

59

 

(22

)

Discontinued operations:

 

 

 

 

 

Net cash used in operating activities

 

 

(2,283

)

Net cash provided by financing activities

 

 

3,569

 

Effect of exchange rate changes on cash and cash equivalents held by discontinued operations

 

 

40

 

Cash held by discontinued operations upon sale

 

 

(3,144

)

Change in available cash held by discontinued operations

 

 

1,818

 

Net cash provided by discontinued operations

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(253,425

)

150,313

 

Cash and cash equivalents:

 

 

 

 

 

Beginning of period

 

1,099,887

 

315,652

 

End of period

 

$

846,462

 

$

465,965

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

12,525

 

$

2,874

 

Cash paid for income taxes

 

$

126,582

 

$

44,160

 

Change in deferred tax assets due to sale of noncontrolling interest

 

$

2,209

 

$

143,322

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

F-6



 

Starz, LLC and Subsidiaries

 

Condensed Consolidated Statement of Member’s Interest and Noncontrolling Interests

 

(Unaudited)

 

Nine Months Ended September 30, 2012

 

(in thousands)

 

 

 

Member’s
Interest

 

Noncontrolling
Interests

 

Total

 

Balance at January 1, 2012

 

$

1,651,484

 

$

(8,383

)

$

1,643,101

 

Net income

 

202,931

 

1,154

 

204,085

 

Other comprehensive income (loss)

 

(432

)

754

 

322

 

Stock compensation

 

11,422

 

1,056

 

12,478

 

Distributions to parent

 

(400,000

)

 

(400,000

)

Distributions to parent related to stock compensation

 

(5,667

)

 

(5,667

)

Change in deferred tax assets related to sale of noncontrolling interest

 

(2,209

)

 

(2,209

)

Balance at September 30, 2012

 

$

1,457,529

 

$

(5,419

)

$

1,452,110

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

F-7



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

(Unaudited)

 

September 30, 2012

 

Note 1—Basis of Presentation and Description of Business

 

Presentation

 

Starz, LLC (the “Company”) is a wholly-owned subsidiary of Liberty Media Corporation (“LMC”). The accompanying condensed consolidated financial statements include the accounts of Starz, LLC and its majority-owned and controlled subsidiaries, which includes Starz Entertainment, LLC (“Starz Entertainment”) and Starz Media Group, LLC (“Starz Media”). In January 2011, the Company sold a 25% interest in Starz Media to The Weinstein Company LLC (“TWC”). All intercompany balances and transactions have been eliminated in consolidation.

 

During August 2012, LMC’s board of directors authorized a plan to distribute to the stockholders of LMC shares of a wholly-owned subsidiary, Liberty Spinco, Inc. (“Liberty Spinco”), that will hold all of the businesses, assets and liabilities of LMC not associated with Starz, LLC (with the exception of the Starz, LLC office building) (the “Spin-Off”). The transaction will be effected as a pro-rata dividend of shares of Liberty Spinco to the stockholders of LMC. Liberty Spinco, which will become a separate public company, will be renamed Liberty Media Corporation. The businesses, assets and liabilities not included in Liberty Spinco will be part of a separate public company to be named Starz. In connection with the reorganization transaction, LMC currently contemplates that the Company will distribute approximately $1,800.0 million in cash to LMC (inclusive of distributions in the aggregate of $600.0 million already paid as follows: $100.0 million on July 9, 2012, $250.0 million on August 17, 2012, $50.0 million on September 4, 2012 and $200.0 million on November 16, 2012), funded by a combination of cash on hand and borrowings under the senior secured revolving credit facility (under which $995.0 million was available to be drawn as of September 30, 2012). The total amount of the distribution will depend on the Company’s financial performance and the net cash provided by operating activities generated prior to the reorganization transaction, as well as the undrawn amount under the senior secured revolving credit facility at that time. The Spin-Off is subject to various conditions, any of which may be waived by the LMC board of directors in its sole discretion, but is expected to occur in early 2013. LMC’s board of directors has reserved the right, in its sole discretion, to amend, modify, delay or abandon the Spin-Off at any time prior to the distribution date. Any such material amendment, modification or delay, or the abandonment, of the Spin-Off will be notified to the market by LMC in a Form 8-K filing. The distribution of a minimum amount of cash by Starz, LLC to LMC is not a condition to the Spin-Off. Following the Spin-Off, Liberty Spinco and Starz will operate independently, and neither will have any stock ownership, beneficial or otherwise, in the other. (See Note 10—Subsequent Events.)

 

On September 13, 2012, the Company and Starz Finance Corp. co-issued $500.0 million of 5% Senior Notes due September 15, 2019 (the “Senior Notes”). Starz Finance Corp. is a wholly-owned subsidiary of the Company and was formed for the sole purpose of co-issuing the Senior Notes. Starz Finance Corp. does not have and will not have any operations, assets or subsidiaries of its own. The Senior Notes pay interest semi-annually on September 15 and March 15 of each year. The Senior Notes are guaranteed jointly and severally by Starz Entertainment and Starz Finance Corp. The Company used the net proceeds and cash on hand to repay the $500.0 million term loan under the Senior Secured Credit Facilities (as defined in Note 3).

 

The accompanying (a) condensed consolidated balance sheet as of December 31, 2011, which has been derived from audited financial statements and (b) the interim unaudited condensed consolidated

 

F-8



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 1—Basis of Presentation and Description of Business (Continued)

 

financial statements include all adjustments considered necessary by management for a fair presentation of the Company’s financial condition, results of operations and cash flows for the periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. Such condensed consolidated financial statements do not include all of the footnote disclosures required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the Company’s December 31, 2011 audited consolidated financial statements.

 

Business

 

The Company provides premium subscription video programming to United States multichannel video distributors, including cable operators, satellite television providers and telecommunications companies. The Company also develops, produces and acquires entertainment content and distributes this content to consumers in the United States and throughout the world.

 

The Company is managed by and organized around the following operating segments:

 

Starz Channels

 

Starz Channels’ flagship premium networks are Starz and Encore. Starz, a first-run movie service, exhibits contemporary hit movies, original series, and documentaries. Encore airs first-run movies and classic contemporary movies. The Company’s third network, MoviePlex, offers a variety of library content, art house, independent films and classic movies. Starz and Encore, along with MoviePlex, air across 17 linear networks complemented by On Demand and Internet services. Starz Channels’ premium networks are offered by multichannel video distributors to their subscribers either on a fixed monthly price as part of a programming tier or package or on an à-la-carte basis.

 

Starz Distribution

 

Starz Distribution includes the Company’s Home Video, Digital Media and Worldwide Distribution businesses.

 

Home Video

 

The Company, through its majority-owned subsidiary Anchor Bay Entertainment, LLC, sells or rents DVDs (standard definition and Blu-ray™) under the Anchor Bay and Manga brands, in the United States, Canada, the United Kingdom, Australia and other international territories to the extent it has rights to such content in international territories. Anchor Bay develops and produces certain of its content and also acquires and licenses various titles from third parties. Anchor Bay also distributes other titles acquired or produced by the Company (including Overture Films, LLC’s (“Overture Films”) titles and Starz Channels’ original programming content) and TWC’s titles. These titles are sold to and distributed by regional and national retailers and other distributors, including Wal-Mart, Target, Best Buy, Ingram Entertainment, Amazon and Netflix.

 

F-9



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 1—Basis of Presentation and Description of Business (Continued)

 

Digital Media

 

Digital Media performs digital distribution, licensing, syndication, content and vendor partnerships for the Company’s owned content and content for which it has licensed digital ancillary rights (including Overture Films’ titles) in the United States 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 multichannel video distributors, Internet/mobile distributors, game developers/publishers and consumer electronics companies. Digital Media also distributes Starz Channel’s original programming content and TWC’s titles.

 

Worldwide Distribution

 

Worldwide Distribution (previously referred to as Television) exploits the Company’s owned content and content for which it has licensed ancillary rights (including Overture Films’ titles) on free or pay television in the United States and throughout the world on free or pay television and other media to the extent it has rights to such content in international territories. Worldwide Distribution also distributes Starz Channels’ original programming content.

 

Starz Animation

 

The Company, through its wholly-owned subsidiary Film Roman, LLC, develops and produces two-dimensional animated content on a for-hire basis for distribution theatrically and on television for various third party entertainment companies. See also Note 2—Discontinued Operations.

 

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. The Company 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.

 

Note 2—Discontinued Operations

 

On March 3, 2011, the Company completed the sale of 92.5% of Starz Media Canada Co. (“Canada Co.”), located in Toronto, Ontario, to a Canadian investor group and recognized a loss on the sale of $3.0 million during the nine months ended September 30, 2011, before tax expense of $1.2 million. Subsequent to the sale, the Company maintains a 7.5% ownership interest, but does not have significant involvement with the ongoing operations of Canada Co. Canada Co. develops and produces three-dimensional animated content on a for-hire basis.

 

F-10



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 2—Discontinued Operations (Continued)

 

The summarized statement of operations of Canada Co. for the nine months ended September 30, 2011 included in discontinued operations in the condensed consolidated statements of operations is as follows (in thousands):

 

 

 

Nine Months
Ended
September 30, 2011

 

Revenue

 

$

1,354

 

Operating expense

 

(1,513

)

Advertising and marketing expense

 

(2

)

General and administrative expense

 

(114

)

Depreciation expense

 

(447

)

Operating loss

 

(722

)

Other expense

 

(61

)

Loss before income taxes

 

(783

)

Income tax benefit

 

1,500

 

Net income

 

$

717

 

 

Note 3—Debt

 

Debt consists of the following (in thousands):

 

 

 

September 30,
2012

 

December 31,
2011

 

Senior Notes(a)

 

$

500,000

 

$

 

Senior Secured Credit Facilities(b)

 

5,000

 

505,000

 

Transponder capital leases(c)

 

35,798

 

40,044

 

Total debt

 

540,798

 

545,044

 

Less current portion of debt

 

(4,070

)

(4,129

)

Debt

 

$

536,728

 

$

540,915

 

 


(a)         On September 13, 2012, the Company issued $500.0 million aggregate principal amount of Senior Notes. The notes bear interest at a rate of 5.00% per annum and will mature on September 15, 2019. The Company may redeem some or all of the notes on or after September 15, 2015. Interest is payable semi-annually in arrears on March 15 and September 15 of each year, commencing March 15, 2013. On September 18, 2012 the Company paid in full, with proceeds from the Senior Notes and cash on hand, the $500.0 million term loan under the Senior Secured Credit Facilities (as defined below).

 

(b)         On November 16, 2011, the Company 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 $500.0 million of term loans (the “Senior Secured Credit Facilities”). At

 

F-11



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 3—Debt (Continued)

 

closing, the Company borrowed $500.0 million under the term loan facility and $5.0 million under the revolving credit facility. On September 18, 2012 the Company paid in full, with proceeds from the Senior Notes and cash on hand, the $500.0 million term loan under the Senior Secured Credit Facilities. The remaining $5.0 million borrowed under the $1,000.0 million revolving credit facility of the Senior Secured Credit Facilities is payable on November 16, 2016.

 

Interest on each loan under the Senior Secured Credit Facilities is payable at either an alternate base rate or LIBOR at the Company’s election. Borrowings that are alternate base rate loans will bear interest at a per annum rate equal to the alternate base rate plus a margin that varies between 0.75% and 1.75% depending on the Company’s 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 1/2 of 1% or (c) LIBOR for a one-month interest period plus 1%. Borrowings that are LIBOR loans will bear interest at a per annum rate equal to the applicable LIBOR plus a margin that varies between 1.75% and 2.75% depending on the Company’s consolidated leverage ratio.

 

As of September 30, 2012, the following borrowing and related LIBOR interest rate was outstanding under the Senior Secured Credit Facilities (dollars in thousands):

 

 

 

Interest Rate

 

Loan Amount

 

LIBOR period:

 

 

 

 

 

September 2012 - October 2012

 

1.96550

%

$

5,000

 

 

(c)              The Company 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 September 30, 2012, the fair value of the Senior Notes was $508.8 million. Due to the variable rate nature of the Company’s other debt, the Company believes that the carrying amount approximates fair value at September 30, 2012.

 

Note 4—Related Party Transactions

 

Due to Affiliate

 

The Company participates in LMC’s employee benefit plans (medical, dental, life insurance, 401(k), etc.). Charges from LMC related to these benefits and other miscellaneous charges are included in general and administrative expenses in the accompanying condensed consolidated statements of operations and aggregated $9.2 million and $9.5 million for the nine months ended September 30, 2012 and 2011, respectively. Such amounts are invoiced by LMC on a monthly basis and are due upon receipt of the invoice by the Company. Amounts due to affiliate for such charges total $1.1 million as of September 30, 2012 and $3.6 million as of December 31, 2011.

 

F-12



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 4—Related Party Transactions (Continued)

 

Due to affiliate at September 30, 2012 and December 31, 2011 also includes $34.6 million and $50.2 million, respectively, for amounts owed to LMC for income tax obligations.

 

Related Party

 

The Company recognized participation expense of $46.8 million and $38.1 million, for TWC’s share of the net proceeds under Anchor Bay’s license agreement with TWC, for the nine months ended September 30, 2012 and 2011, respectively. Such amounts are included in production and acquisition costs in the accompanying condensed consolidated statements of operations. The Company’s accrued advances payable to TWC totaled $23.7 million as of September 30, 2012 and $56.2 million as of December 31, 2011. Such amounts are included in accrued liabilities in the accompanying condensed consolidated balance sheets.

 

Note 5—Stock Options

 

Pursuant to a LMC incentive plan, LMC has granted to certain of the Company’s employees LMC’s Liberty Capital stock options and restricted stock. As of September 30, 2012, the total unrecognized compensation cost related to the unvested stock options and restricted stock was approximately $37.1 million. Such amount will be recognized in the Company’s condensed consolidated statements of operations over a weighted average period of approximately 3 years.

 

The awards granted in 2012 are summarized as follows:

 

 

 

Options
Granted

 

Weighted
Average
Grant-Date
Fair Value

 

2012 Awards:

 

 

 

 

 

Stock options

 

646,500

 

$

39.77

 

 

The stock option awards vest quarterly over a 4 year period and have a term of 7 years. The Company calculates the grant-date fair value for the stock options using the Black-Scholes Model. The expected term used in the Black-Scholes calculation is 4.50 years and the expected volatility is 54.16%. The expected volatility used in the calculation is based on the historical volatility of LMC’s tracking stocks and the implied volatility of LMC’s publicly traded options. The Company uses a zero dividend rate as the Company has not historically declared dividends and a risk-free rate of 0.72% which is derived from U.S. Treasury Bonds with a term similar to that of the subject options.

 

F-13



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 5—Stock Options (Continued)

 

The following table presents the number and weighted average exercise price (“WAEP”) of the stock options:

 

 

 

Options

 

WAEP

 

Outstanding at December 31, 2011

 

1,201,647

 

$

65.99

 

Granted

 

646,500

 

$

89.66

 

Exercised

 

(112,116

)

$

72.89

 

Forfeited

 

(39,366

)

$

82.79

 

Expired/cancelled

 

 

$

 

Outstanding at September 30, 2012

 

1,696,665

 

$

79.20

 

Exercisable at September 30, 2012

 

231,693

 

$

79.11

 

 

At September 30, 2012, the weighted-average remaining contractual term of the outstanding options is 6.3 years and the exercisable options is 5.6 years.

 

Note 6—Income Taxes

 

The Company 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 LMC. The income tax accounts and provision included in these condensed consolidated financial statements have been prepared as if the Company was a stand-alone federal and state taxpayer.

 

Income tax expense consists of the following (in thousands):

 

 

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

Current:

 

 

 

 

 

Federal

 

$

101,762

 

$

90,712

 

State and local

 

1,006

 

6,820

 

Foreign

 

1,069

 

583

 

 

 

103,837

 

98,115

 

Deferred:

 

 

 

 

 

Federal

 

(18,070

)

36,872

 

State and local

 

14,805

 

1,605

 

 

 

(3,265

)

38,477

 

Income tax expense

 

$

100,572

 

$

136,592

 

 

F-14



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 6—Income Taxes (Continued)

 

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):

 

 

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

Computed expected tax expense

 

$

106,791

 

$

114,111

 

State and local income taxes, net of federal income taxes

 

8,607

 

5,590

 

Foreign taxes, net of foreign tax credit

 

(395

)

(814

)

Change in valuation allowance affecting tax expense

 

77,471

 

17,825

 

Taxable liquidation of subsidiary

 

(101,299

)

 

Change in subsidiary tax status

 

9,792

 

 

Other, net

 

(395

)

(120

)

Income tax expense

 

$

100,572

 

$

136,592

 

 

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 $101.3 million (as tax effected) is being carried forward and is recorded as a long term deferred tax asset. The Company does not believe that it is 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, has recorded a full valuation allowance against this capital loss.

 

In addition, under current U.S. federal and state tax law, LLC’s treated as partnerships are not subject to income tax at the entity level. As such, the election to convert Starz Media to partnership treatment for income tax purposes resulted in the reversal of deferred tax assets related to Starz Media’s deductible temporary differences of $16.9 million and the reversal of a valuation allowance offsetting these deferred tax assets of $16.9 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.

 

F-15



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 6—Income Taxes(Continued)

 

The tax effects of temporary differences and loss carryforwards that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2012 and December 31, 2011 are presented below (in thousands):

 

 

 

September 30,
2012

 

December 31,
2011

 

Deferred tax assets:

 

 

 

 

 

Tax loss and credit carryforwards

 

$

156,398

 

$

56,682

 

Allowance for doubtful accounts

 

173

 

14,216

 

Accrued stock compensation

 

7,359

 

19,301

 

Investments

 

16,692

 

6,747

 

Other future deductible amounts

 

7,503

 

12,124

 

Deferred tax assets

 

188,125

 

109,070

 

Valuation allowance

 

(156,398

)

(78,141

)

Deferred tax assets, net

 

31,727

 

30,929

 

Deferred tax liability:

 

 

 

 

 

Property and equipment

 

(17,529

)

(23,070

)

Intangible assets

 

(5,757

)

(8,053

)

Other future taxable amounts

 

(7,708

)

 

Deferred tax liabilities

 

(30,994

)

(31,123

)

Net deferred tax assets (liabilities)

 

$

733

 

$

(194

)

 

Note 7—Commitments and Contingencies

 

Programming Rights

 

The Company has entered into an exclusive long-term licensing agreement for theatrically released films in the United States from the Walt Disney Company (“Disney”) studios through 2015. The agreement provides the Company with exclusive pay TV rights to exhibit qualifying theatrically released live-action and animated feature films from Walt Disney Pictures, Walt Disney Animation Studios, Disney-Pixar, Touchstone Pictures, Marvel Entertainment and Hollywood Pictures labels. Theatrically released films from DreamWorks Studios and Miramax Films are not licensed to the Company under the agreement. In addition, the Company is obligated to pay programming fees for all qualifying films that are released theatrically in the United States by Sony Pictures Entertainment Inc.’s Columbia Pictures, Screen Gems and Sony Pictures Classics (“Sony”) through 2016, subject to certain limitations. The programming fees to be paid by the Company to Disney and Sony are based on the quantity and domestic theatrical exhibition receipts of qualifying films. The Company 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 for exhibition at September 30, 2012 is reflected in accrued liabilities and in other liabilities in the accompanying

 

F-16



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 7—Commitments and Contingencies (Continued)

 

condensed consolidated balance sheets. As of September 30, 2012, such liabilities aggregated approximately $70.5 million and are payable as follows: $63.7 million in 2012 and $6.8 million in 2013.

 

Under the agreements with Disney and Sony, the Company is obligated to pay fees for the rights to exhibit films that have been released theatrically, but are not available for exhibition by the Company until some future date. In addition, the Company has agreed to pay Sony (i) a total of $95.0 million in two equal annual installments in 2013 and 2014, and (ii) a total of $120 million in three equal annual installments beginning in 2015. The estimated amounts payable under the Company’s programming license agreements, including the Disney and Sony agreements, which have not been accrued as of September 30, 2012, are as follows: $30.2 million in 2012; $359.7 million in 2013; $73.7 million in 2014; $58.9 million in 2015; $51.5 million in 2016 and $58.2 million thereafter.

 

The Company is also obligated to pay fees for films that have not yet been released in theatres by Disney and Sony. The Company is unable to estimate the amounts to be paid for films that have not yet been released in theatres; however, such amounts are expected to be significant.

 

Total amortization of program rights was $473.3 million and $454.2 million for the nine months ended September 30, 2012 and 2011, respectively. These amounts are included in programming costs in the accompanying condensed consolidated statements of operations.

 

Guarantees

 

Canada Co. entered into an agreement with the Ontario government whereby Canada Co. is eligible to receive funds under the Canadian Next Generation of Jobs Fund Grant (“NGOJF”) through the termination date of March 31, 2014. 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 maximum amount of the grant available and the guarantee is $23.0 million. The Ontario government can demand payment from Starz Entertainment if Canada Co. does not perform any of its obligations. The maximum potential amount payable under the guarantee is $10.5 million at September 30, 2012 and the Company has accrued $8.4 million related to this guarantee in accrued liabilities in the accompanying condensed consolidated balance sheet as of September 30, 2012.

 

As discussed in Note 2, the Company sold its controlling interest in Canada Co. on March 3, 2011. The terms of the guarantee have not changed.

 

Starz Entertainment is the guarantor on two noncancelable operating leases in which an affiliate within each of the Starz Distribution and Starz Animation businesses is the tenant. The maximum potential amount payable under these guarantees is $14.1 million at September 30, 2012. Starz Entertainment does not currently expect to have to perform under these obligations. The leases expire in 2014 and 2016.

 

Legal Proceedings

 

On March 9, 2011, the Company notified DISH Network L.L.C. (“DISH”) that it breached its affiliation agreement with the Company by providing a free preview for one year of eight of the Starz and Encore channels to a substantial number of DISH customers without the Company’s written

 

F-17



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 7—Commitments and Contingencies (Continued)

 

approval. On May 3, 2011, the Company filed a lawsuit against DISH in Douglas County, Colorado District Court, 18th Judicial District, alleging that DISH breached its affiliation agreement with the Company in connection with such free preview. 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. In addition, on July 19, 2011, FX Networks filed a separate lawsuit against DISH and the Company in connection with the same free preview in Los Angeles County, California Superior Court. DISH filed a counterclaim against the Company in the first lawsuit, seeking indemnification from the Company against Disney Enterprises, Inc. in the second lawsuit and against FX Networks in the third lawsuit. The first lawsuit by the Company against DISH is expected to go to trial in April 2013. The third lawsuit by FX Networks is presently stayed and is tentatively set for trial in April 2013. The resolution of these matters and its potential impact on the Company is uncertain at this time.

 

In the normal course of business, the Company is subject to lawsuits and other claims. While it is not possible to predict the outcome of these matters, it is the opinion of management, based upon consultation with legal counsel, that the ultimate disposition of known proceedings, other than as discussed above, will not have a material adverse impact on our consolidated financial position, results of operations or liquidity.

 

Note 8—Information About Operating Segments

 

The Company is primarily engaged in video programming and development, production, acquisition and distribution of entertainment content. The Company evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as Adjusted OIBDA. Adjusted OIBDA is defined as revenue less programming costs, production and acquisition costs, home video cost of sales, operating expenses, advertising and marketing costs and general and administrative expenses. Our chief operating decision maker uses this measure of performance in conjunction with other measures to evaluate the operating segments and make decisions about allocating resources among the operating segments. The Company believes adjusted OIBDA is an important indicator of the operational strength and performance of its operating segments, including each operating segment’s ability to service debt and fund investment 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 long term incentive plan and 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 from continuing operations before income taxes, net income, net cash provided by operating activities and other measures of financial performance prepared in accordance with GAAP. The Company generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current prices.

 

The Company’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. The Company identifies its reportable segments as those operating segments that represent 10% or more of its consolidated annual revenue, annual Adjusted OIBDA or total

 

F-18



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 8—Information About Operating Segments (Continued)

 

assets. Starz Channels and Starz Distribution have been identified as reportable segments; however as the Company has only three operating segments, Starz Animation is also reported separately below.

 

Performance Measures (in thousands):

 

 

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

Revenue:

 

 

 

 

 

Starz Channels

 

$

960,994

 

$

950,178

 

Starz Distribution

 

223,646

 

207,748

 

Starz Animation

 

31,567

 

32,895

 

Inter-segment eliminations

 

(7,711

)

(9,367

)

Total Revenue

 

$

1,208,496

 

$

1,181,454

 

Adjusted OIBDA:

 

 

 

 

 

Starz Channels

 

$

326,292

 

$

327,847

 

Starz Distribution

 

14,829

 

16,155

 

Starz Animation

 

(507

)

(928

)

Inter-segment eliminations

 

2,843

 

12,921

 

Total Adjusted OIBDA

 

$

343,457

 

$

355,995

 

Capitalized production and development spend:

 

 

 

 

 

Starz Channels

 

$

106,005

 

$

109,958

 

Starz Distribution

 

88,983

 

57,010

 

Starz Animation

 

 

 

Inter-segment eliminations

 

 

 

Total capitalized production and development spend

 

$

194,988

 

$

166,968

 

 

Other Information (in thousands):

 

 

 

September 30,
2012

 

December 31,
2011

 

Total assets

 

 

 

 

 

Starz Channels

 

$

2,227,526

 

$

2,357,580

 

Starz Distribution

 

141,343

 

162,659

 

Starz Animation

 

2,546

 

5,320

 

Other unallocated assets (primarily cash, deferred taxes and other assets)

 

17,268

 

136,753

 

Inter-segment eliminations

 

(79,900

)

(59,137

)

Total assets

 

$

2,308,783

 

$

2,603,175

 

 

F-19



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 8—Information About Operating Segments (Continued)

 

The following table provides a reconciliation of Adjusted OIBDA to income from continuing operations before income taxes (in thousands):

 

 

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

Consolidated Adjusted OIBDA

 

$

343,457

 

$

355,995

 

Long term incentive plan and stock compensation

 

(9,888

)

(5,168

)

Depreciation and amortization

 

(13,787

)

(13,464

)

Interest expense, net of amounts capitalized

 

(18,805

)

(2,862

)

Other income (expense), net

 

3,680

 

(4,821

)

Income from continuing operations before income taxes

 

$

304,657

 

$

329,680

 

 

Note 9—Supplemental Guarantor Condensed Consolidating Financial Information

 

As discussed in Note 1, Starz, LLC and Starz Finance Corp. co-issued the Senior Notes which are fully and unconditionally guaranteed by Starz Entertainment. Starz Media, Film Roman, LLC and other immaterial subsidiaries of the Company (“Starz Media and Other Businesses”) are not guarantors of the Senior Notes.

 

F-20



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 9—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

The following tables set forth the consolidating financial information of the Company, which includes the financial information of Starz Entertainment, the guarantor:

 

Condensed Consolidating Balance Sheet Information—As of September 30, 2012

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

838,735

 

$

1,051

 

$

6,676

 

$

 

$

846,462

 

Restricted cash

 

 

 

12,932

 

 

12,932

 

Trade accounts receivable, net

 

212,260

 

 

28,108

 

(140

)

240,228

 

Program rights

 

461,211

 

 

 

(1,762

)

459,449

 

Deferred income taxes

 

181

 

660

 

 

 

841

 

Notes receivable from affiliates

 

59,073

 

 

 

(59,073

)

 

Other current assets

 

19,229

 

 

15,893

 

 

35,122

 

Total current assets

 

1,590,689

 

1,711

 

63,609

 

(60,975

)

1,595,034

 

Program rights

 

290,612

 

 

 

(5,386

)

285,226

 

Property and equipment, net

 

91,192

 

 

1,117

 

 

92,309

 

Investment in films and television programs, net

 

105,108

 

 

54,364

 

 

159,472

 

Goodwill

 

131,760

 

 

 

 

131,760

 

Other assets, net

 

18,165

 

13,539

 

26,817

 

(13,539

)

44,982

 

Investment in consolidated subsidiaries

 

 

1,743,744

 

 

(1,743,744

)

 

Total assets

 

$

2,227,526

 

$

1,758,994

 

$

145,907

 

$

(1,823,644

)

$

2,308,783

 

Liabilities and Member’s Interest (Deficit) and Noncontrolling Interests

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current portion of debt

 

$

4,070

 

$

 

$

 

$

 

$

4,070

 

Trade accounts payable

 

5,151

 

 

2,258

 

 

7,409

 

Accrued liabilities

 

141,264

 

2,247

 

96,419

 

(10,438

)

229,492

 

Accrued compensation related to long term incentive plan

 

3,195

 

 

 

 

3,195

 

Notes payable due to affiliate

 

 

 

59,073

 

(59,073

)

 

Due to (from) affiliates

 

225,165

 

(176,416

)

(403

)

(12,656

)

35,690

 

Deferred revenue

 

19,932

 

 

10,963

 

(274

)

30,621

 

Total current liabilities

 

398,777

 

(174,169

)

168,310

 

(82,441

)

310,477

 

Debt

 

536,728

 

505,000

 

 

(505,000

)

536,728

 

Deferred income taxes

 

16,977

 

(23,947

)

 

7,078

 

108

 

Other liabilities

 

4,744

 

 

9,733

 

(5,117

)

9,360

 

Total liabilities

 

957,226

 

306,884

 

178,043

 

(585,480

)

856,673

 

Member’s interest (deficit)

 

1,270,300

 

1,457,529

 

(32,015

)

(1,238,285

)

1,457,529

 

Noncontrolling interests in subsidiaries

 

 

(5,419

)

(121

)

121

 

(5,419

)

Total member’s interest (deficit) and noncontrolling interests

 

1,270,300

 

1,452,110

 

(32,136

)

(1,238,164

)

1,452,110

 

Total liabilities and member’s interest (deficit) and noncontrolling interests

 

$

2,227,526

 

$

1,758,994

 

$

145,907

 

$

(1,823,644

)

$

2,308,783

 

 

F-21



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 9—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Condensed Consolidating Balance Sheet Information—As of December 31, 2011

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

965,400

 

$

125,261

 

$

9,226

 

$

 

$

1,099,887

 

Restricted cash

 

 

 

4,896

 

 

4,896

 

Trade accounts receivable, net

 

204,457

 

 

36,865

 

(296

)

241,026

 

Program rights

 

446,995

 

 

 

(5,141

)

441,854

 

Deferred income taxes

 

8,616

 

1,498

 

 

 

10,114

 

Notes receivable from affiliates

 

38,352

 

 

 

(38,352

)

 

Other current assets

 

18,961

 

 

12,375

 

 

31,336

 

Total current assets

 

1,682,781

 

126,759

 

63,362

 

(43,789

)

1,829,113

 

Program rights

 

325,473

 

 

 

(5,477

)

319,996

 

Property and equipment, net

 

95,968

 

 

2,563

 

 

98,531

 

Investment in films and television programs, net

 

106,720

 

 

77,222

 

 

183,942

 

Goodwill

 

131,760

 

 

 

 

131,760

 

Other assets, net

 

14,878

 

9,938

 

24,888

 

(9,871

)

39,833

 

Investment in consolidated subsidiaries

 

 

1,619,020

 

 

(1,619,020

)

 

Total assets

 

$

2,357,580

 

$

1,755,717

 

$

168,035

 

$

(1,678,157

)

$

2,603,175

 

Liabilities and Member’s Interest (Deficit) and Noncontrolling Interests

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current portion of debt

 

$

4,129

 

$

 

$

 

$

 

$

4,129

 

Trade accounts payable

 

6,509

 

 

2,181

 

 

8,690

 

Accrued liabilities

 

137,085

 

938

 

140,433

 

(8,160

)

270,296

 

Accrued compensation related to long term incentive plan

 

33,854

 

 

 

 

33,854

 

Notes payable due to affiliate

 

 

 

38,352

 

(38,352

)

 

Due to (from) affiliates

 

427,650

 

(377,255

)

 

3,441

 

53,836

 

Deferred revenue

 

16,888

 

 

9,846

 

 

26,734

 

Total current liabilities

 

626,115

 

(376,317

)

190,812

 

(43,071

)

397,539

 

Accrued long term incentive plan

 

2,751

 

 

 

 

2,751

 

Debt

 

540,915

 

505,000

 

 

(505,000

)

540,915

 

Deferred income taxes

 

28,473

 

(16,067

)

 

(2,098

)

10,308

 

Other liabilities

 

4,510

 

 

9,443

 

(5,392

)

8,561

 

Total liabilities

 

1,202,764

 

112,616

 

200,255

 

(555,561

)

960,074

 

Member’s interest (deficit)

 

1,154,816

 

1,651,484

 

(32,195

)

(1,122,621

)

1,651,484

 

Noncontrolling interests in subsidiaries

 

 

(8,383

)

(25

)

25

 

(8,383

)

Total member’s interest (deficit) and noncontrolling interests

 

1,154,816

 

1,643,101

 

(32,220

)

(1,122,596

)

1,643,101

 

Total liabilities and member’s interest (deficit) and noncontrolling interests

 

$

2,357,580

 

$

1,755,717

 

$

168,035

 

$

(1,678,157

)

$

2,603,175

 

 

F-22



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 9—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Condensed Consolidating Statement of Operations Information—For the Nine Months Ended September 30, 2012

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Programming networks and other services

 

$

985,039

 

$

 

$

101,388

 

$

(11,303

)

$

1,075,124

 

Home video net sales

 

20,900

 

 

116,652

 

(4,180

)

133,372

 

Total revenue

 

1,005,939

 

 

218,040

 

(15,483

)

1,208,496

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Programming (including amortization)

 

509,524

 

 

 

(4,850

)

504,674

 

Production and acquisition (including amortization)

 

18,831

 

 

98,641

 

145

 

117,617

 

Home video cost of sales

 

10,765

 

 

33,676

 

(4,180

)

40,261

 

Operating

 

14,281

 

 

34,036

 

(9,441

)

38,876

 

Advertising and marketing

 

65,018

 

 

17,578

 

 

82,596

 

General and administrative

 

54,278

 

94

 

26,643

 

 

81,015

 

Stock compensation

 

9,009

 

 

879

 

 

9,888

 

Depreciation and amortization

 

9,487

 

 

4,300

 

 

13,787

 

Total costs and expenses

 

691,193

 

94

 

215,753

 

(18,326

)

888,714

 

Operating income (loss)

 

314,746

 

(94

)

2,287

 

2,843

 

319,782

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of amounts capitalized

 

(18,689

)

(15,924

)

(116

)

15,924

 

(18,805

)

Interest income (expense), related party

 

3,906

 

 

(3,906

)

 

 

Share of earnings of consolidated subsidiaries

 

 

201,904

 

 

(201,904

)

 

Other income (expense), net

 

2,735

 

974

 

(2,015

)

1,986

 

3,680

 

Income (loss) from continuing operations before income taxes

 

302,698

 

186,860

 

(3,750

)

(181,151

)

304,657

 

Income tax benefit (expense)

 

(111,092

)

17,225

 

600

 

(7,305

)

(100,572

)

Net income (loss)

 

191,606

 

204,085

 

(3,150

)

(188,456

)

204,085

 

Net loss (income) attributable to noncontrolling interests

 

 

(1,154

)

96

 

(96

)

(1,154

)

Net income (loss) attributable to member

 

$

191,606

 

$

202,931

 

$

(3,054

)

$

(188,552

)

$

202,931

 

 

F-23



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 9—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Condensed Consolidating Statement of Comprehensive Income (Loss) Information—For the Nine Months Ended September 30, 2012

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Net income (loss)

 

$

191,606

 

$

204,085

 

$

(3,150

)

$

(188,456

)

$

204,085

 

Other comprehensive income, net of taxes:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

322

 

322

 

(322

)

322

 

Other comprehensive income

 

 

322

 

322

 

(322

)

322

 

Comprehensive income (loss)

 

191,606

 

204,407

 

(2,828

)

(188,778

)

204,407

 

Comprehensive loss (income) attributable to noncontrolling interests

 

 

(1,908

)

96

 

(96

)

(1,908

)

Comprehensive income (loss) attributable to member

 

$

191,606

 

$

202,499

 

$

(2,732

)

$

(188,874

)

$

202,499

 

 

F-24



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 9—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Condensed Consolidating Statement of Operations Information—For the Nine Months Ended September 30, 2011

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Programming networks and other services

 

$

965,495

 

$

 

$

71,064

 

$

(11,005

)

$

1,025,554

 

Home video net sales

 

20,223

 

 

139,722

 

(4,045

)

155,900

 

Total revenue

 

985,718

 

 

210,786

 

(15,050

)

1,181,454

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Programming (including amortization)

 

498,431

 

 

 

(16,544

)

481,887

 

Production and acquisition (including amortization)

 

12,839

 

 

72,540

 

 

85,379

 

Home video cost of sales

 

11,129

 

 

36,046

 

(4,045

)

43,130

 

Operating

 

13,749

 

 

35,542

 

(7,462

)

41,829

 

Advertising and marketing

 

65,486

 

 

27,139

 

 

92,625

 

General and administrative

 

53,452

 

185

 

26,972

 

 

80,609

 

Long term incentive plan and stock compensation

 

4,826

 

 

342

 

 

5,168

 

Depreciation and amortization

 

9,306

 

 

4,158

 

 

13,464

 

Total costs and expenses

 

669,218

 

185

 

202,739

 

(28,051

)

844,091

 

Operating income (loss)

 

316,500

 

(185

)

8,047

 

13,001

 

337,363

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of amounts capitalized

 

(737

)

 

(2,125

)

 

(2,862

)

Interest income (expense), related party

 

2,781

 

 

(2,781

)

 

 

Share of earnings of consolidated subsidiaries

 

 

202,359

 

 

(202,359

)

 

Other income (expense), net

 

(9,581

)

7

 

705

 

4,048

 

(4,821

)

Income from continuing operations before income taxes

 

308,963

 

202,181

 

3,846

 

(185,310

)

329,680

 

Income tax expense

 

(115,671

)

(13,512

)

(1,101

)

(6,308

)

(136,592

)

Income from continuing operations

 

193,292

 

188,669

 

2,745

 

(191,618

)

193,088

 

Income (loss) from discontinued operations, net of income taxes

 

 

928

 

(4,419

)

 

(3,491

)

Net income (loss)

 

193,292

 

189,597

 

(1,674

)

(191,618

)

189,597

 

Net loss (income) attributable to noncontrolling interests

 

 

(98

)

462

 

(462

)

(98

)

Net income (loss) attributable to member

 

$

193,292

 

$

189,499

 

$

(1,212

)

$

(192,080

)

$

189,499

 

 

F-25



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 9—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Condensed Consolidating Statement of Comprehensive Income (Loss) Information—For the Nine Months Ended September 30, 2011

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Net income (loss)

 

$

193,292

 

$

189,597

 

$

(1,674

)

$

(191,618

)

$

189,597

 

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments from continuing operations

 

 

2,472

 

2,472

 

(2,472

)

2,472

 

Foreign currency translation adjustments from discontinued operations

 

 

(5,946

)

(5,946

)

5,946

 

(5,946

)

Other comprehensive loss

 

 

(3,474

)

(3,474

)

3,474

 

(3,474

)

Comprehensive income (loss)

 

193,292

 

186,123

 

(5,148

)

(188,144

)

186,123

 

Comprehensive loss (income) attributable to noncontrolling interests

 

 

(80

)

462

 

(462

)

(80

)

Comprehensive income (loss) attributable to member

 

$

193,292

 

$

186,043

 

$

(4,686

)

$

(188,606

)

$

186,043

 

 

F-26



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 9—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Condensed Consolidating Statement of Cash Flows’ Information—For the Nine Months Ended September 30, 2012

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

191,606

 

$

204,085

 

$

(3,150

)

$

(188,456

)

$

204,085

 

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

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

9,009

 

 

879

 

 

9,888

 

Payments for long term incentive plan and restricted stock

 

(33,410

)

 

 

 

(33,410

)

Amortization of program rights

 

478,101

 

 

 

(4,850

)

473,251

 

Amortization of investment in films and television programs

 

15,331

 

 

71,411

 

 

86,742

 

Depreciation and amortization

 

9,487

 

 

4,300

 

 

13,787

 

Share of earnings of consolidated subsidiaries

 

 

(201,904

)

 

201,904

 

 

Deferred income taxes

 

(3,947

)

(8,495

)

 

9,177

 

(3,265

)

Other non-cash items

 

13,315

 

4,406

 

(1,833

)

(15,011

)

877

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Restricted cash

 

 

 

(8,036

)

 

(8,036

)

Trade accounts receivable

 

(7,134

)

 

14,072

 

(156

)

6,782

 

Program rights

 

(367,901

)

 

 

1,520

 

(366,381

)

Other current assets

 

7,133

 

 

(3,494

)

 

3,639

 

Investment in films and television programs

 

(106,005

)

 

(88,983

)

 

(194,988

)

Other assets

 

(455

)

 

(8,114

)

 

(8,569

)

Trade accounts payable

 

(1,358

)

 

77

 

 

(1,281

)

Accrued liabilities

 

2,913

 

1,309

 

(3,217

)

(2,418

)

(1,413

)

Due to / from affiliates

 

(19,598

)

3,859

 

1,893

 

(1,710

)

(15,556

)

Deferred revenue

 

3,044

 

 

1,484

 

 

4,528

 

Other liabilities

 

488

 

 

(76

)

 

412

 

Net cash provided by (used in) operating activities

 

190,619

 

3,260

 

(22,787

)

 

171,092

 

Investing activities—purchases of property and equipment

 

$

(7,751

)

$

 

$

(119

)

$

 

$

(7,870

)

 

(Continued)

 

F-27



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 9—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Condensed Consolidating Statement of Cash Flows’ Information (Continued)—For the Nine Months Ended September 30, 2012

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Borrowings of debt

 

$

 

$

500,000

 

$

 

$

 

$

500,000

 

Payments of debt

 

(3,035

)

(500,000

)

 

 

(503,035

)

Debt issuance costs

 

 

(8,007

)

 

 

(8,007

)

Distributions to parent

 

(100,000

)

(300,000

)

 

 

(400,000

)

Distributions to parent related to stock compensation

 

(5,489

)

 

(178

)

 

(5,667

)

Borrowings under notes payable to affiliate

 

(39,779

)

 

39,779

 

 

 

Payments under notes payable to affiliate

 

19,064

 

 

(19,064

)

 

 

Net advances to / from affiliates

 

(180,297

)

180,537

 

(240

)

 

 

Settlement of derivative instruments

 

3

 

 

 

 

3

 

Net cash provided by (used in) financing activities

 

(309,533

)

(127,470

)

20,297

 

 

(416,706

)

Effect of exchange rate changes on cash and cash equivalents

 

 

 

59

 

 

59

 

Net decrease in cash and cash equivalents

 

(126,665

)

(124,210

)

(2,550

)

 

(253,425

)

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

965,400

 

125,261

 

9,226

 

 

1,099,887

 

End of period

 

$

838,735

 

$

1,051

 

$

6,676

 

$

 

$

846,462

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

1,820

 

$

10,596

 

$

109

 

$

 

$

12,525

 

Cash paid for income taxes

 

$

122,150

 

$

 

$

4,432

 

$

 

$

126,582

 

Change in deferred tax assets due to sale of noncontrolling interest

 

$

 

$

2,209

 

$

 

$

 

$

2,209

 

 

F-28



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 9—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Condensed Consolidating Statement of Cash Flows’ Information—For the Nine Months Ended September 30, 2011

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC (Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

193,292

 

$

189,597

 

$

(1,674

)

$

(191,618

)

$

189,597

 

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

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

 

3,491

 

 

3,491

 

Long term incentive plan and stock compensation

 

4,826

 

 

342

 

 

5,168

 

Payments for long term incentive plan

 

(6,947

)

 

 

 

(6,947

)

Amortization of program rights

 

470,759

 

 

 

(16,544

)

454,215

 

Amortization of investment in films and television programs

 

11,362

 

 

57,277

 

 

68,639

 

Depreciation and amortization

 

9,306

 

 

4,158

 

 

13,464

 

Share of earnings of consolidated subsidiaries

 

 

(202,359

)

 

202,359

 

 

Deferred income taxes

 

22,416

 

19,682

 

 

(3,621

)

38,477

 

Other non-cash items

 

(803

)

 

1,982

 

 

1,179

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Restricted cash

 

 

 

(12,561

)

 

(12,561

)

Trade accounts receivable

 

9,368

 

 

(16,990

)

(5,887

)

(13,509

)

Program rights

 

(441,544

)

 

 

9,116

 

(432,428

)

Other current assets

 

(8,555

)

 

1,716

 

 

(6,839

)

Investment in films and television programs

 

(109,958

)

 

(57,010

)

 

(166,968

)

Other assets

 

5,580

 

 

1,449

 

 

7,029

 

Trade accounts payable

 

(589

)

 

(658

)

 

(1,247

)

Accrued liabilities

 

(6,481

)

276

 

(4,645

)

(4,037

)

(14,887

)

Due to / from affiliates

 

45,322

 

(8,407

)

11,815

 

10,215

 

58,945

 

Deferred revenue

 

13,930

 

 

3,504

 

17

 

17,451

 

Other liabilities

 

241

 

 

1,127

 

 

1,368

 

Net cash provided by (used in) operating activities

 

211,525

 

(1,211

)

(6,677

)

 

203,637

 

Investing activities—purchases of property and equipment

 

$

(3,359

)

$

 

$

(133

)

$

 

$

(3,492

)

 

(Continued)

 

F-29



 

Starz, LLC and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(Unaudited)

 

September 30, 2012

 

Note 9—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Condensed Consolidating Statement of Cash Flows’ Information (Continued)—For the Nine Months Ended September 30, 2011

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Payments of debt

 

$

(2,911

)

$

 

$

(55,262

)

$

 

$

(58,173

)

Borrowings under notes payable to affiliate

 

(95,421

)

 

95,421

 

 

 

Payments under notes payable to affiliate

 

21,556

 

 

(21,556

)

 

 

Net advances to / from affiliates

 

906

 

 

(906

)

 

 

Contribution from noncontrolling owner of subsidiary

 

 

3,000

 

 

 

3,000

 

Settlement of derivative instruments

 

 

 

(2,863

)

 

(2,863

)

Restricted cash

 

 

 

8,226

 

 

8,226

 

Net cash provided by (used in) financing activities

 

(75,870

)

3,000

 

23,060

 

 

(49,810

)

Effect of exchange rate changes on cash and cash equivalents

 

 

 

(22

)

 

(22

)

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

 

 

(2,283

)

 

(2,283

)

Net cash provided by financing activities

 

 

 

3,569

 

 

3,569

 

Effect of exchange rate changes on cash and cash equivalents held by discontinued operations

 

 

 

40

 

 

40

 

Cash held by discontinued operations upon sale

 

 

 

(3,144

)

 

(3,144

)

Change in available cash held by discontinued operations

 

 

 

1,818

 

 

1,818

 

Net cash provided by discontinued operations

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

132,296

 

1,789

 

16,228

 

 

150,313

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

306,157

 

 

9,495

 

 

315,652

 

End of period

 

$

438,453

 

$

1,789

 

$

25,723

 

$

 

$

465,965

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

737

 

$

 

$

2,137

 

$

 

$

2,874

 

Cash paid for income taxes

 

$

41,561

 

$

 

$

2,599

 

$

 

$

44,160

 

Change in deferred tax assets due to sale of noncontrolling interest

 

$

 

$

143,322

 

$

 

$

 

$

143,322

 

 

Note 10—Subsequent Events

 

The Spin-Off, as described in Note 1, was completed on January 11, 2013. As contemplated by the Spin-Off, the Company distributed an additional $1,200.0 million to LMC on January 10, 2013, and such distributed cash was subsequently contributed to Liberty Spinco. The distribution was funded by a combination of cash on hand and borrowings under the senior secured revolving credit facility. Following the Spin-Off, Liberty Spinco and Starz operate independently, and neither have any stock ownership, beneficial or otherwise, in the other.

 

F-30



 

Report of Independent Registered Public Accounting Firm

 

The Member

Starz, LLC

 

We have audited the accompanying consolidated balance sheets of Starz, LLC and subsidiaries (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, cash flows, and member’s interest and noncontrolling interests for each of the years in the three-year period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Starz, LLC and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.

 

 

/s/ KPMG LLP

 

Denver, Colorado

April 27, 2012, except as to note 13, which is as of October 23, 2012,

and except as to note 15, which is as of January 16, 2013

 

F-31



 

Starz, LLC and Subsidiaries

 

Consolidated Balance Sheets

 

December 31, 2011 and 2010

 

(in thousands)

 

 

 

2011

 

2010

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,099,887

 

$

315,652

 

Restricted cash (Note 6)

 

4,896

 

8,226

 

Trade accounts receivable, net of allowances of $38,335 and $30,690

 

241,026

 

224,341

 

Program rights

 

441,854

 

411,166

 

Deferred income taxes (Note 10)

 

10,114

 

7,479

 

Other current assets

 

31,336

 

18,833

 

Assets of discontinued operations

 

 

14,511

 

Total current assets

 

1,829,113

 

1,000,208

 

Program rights

 

319,996

 

322,911

 

Property and equipment, net (Note 4)

 

98,531

 

104,717

 

Investment in films and television programs, net (Note 5)

 

183,942

 

120,701

 

Deferred income taxes (Note 10)

 

 

153,121

 

Goodwill (Note 12)

 

131,760

 

131,760

 

Other assets, net

 

39,833

 

30,617

 

Assets of discontinued operations

 

 

28,967

 

Total assets

 

$

2,603,175

 

$

1,893,002

 

Liabilities and Member’s Interest and Noncontrolling Interests

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of debt (Note 6)

 

$

4,129

 

$

58,244

 

Trade accounts payable

 

8,690

 

7,698

 

Accrued liabilities (Notes 7 and 11)

 

270,296

 

183,716

 

Accrued compensation related to long term incentive plan (Note 9)

 

33,854

 

6,655

 

Due to affiliates (Note 8)

 

53,836

 

687

 

Deferred revenue

 

26,734

 

25,733

 

Liabilities of discontinued operations

 

 

13,248

 

Total current liabilities

 

397,539

 

295,981

 

Accrued long term incentive plan (Note 9)

 

2,751

 

37,458

 

Debt (Note 6)

 

540,915

 

40,970

 

Deferred income taxes (Note 10)

 

10,308

 

 

Other liabilities (Note 11)

 

8,561

 

8,306

 

Liabilities of discontinued operations

 

 

1,106

 

Total liabilities

 

960,074

 

383,821

 

 

 

 

 

 

 

Member’s interest

 

1,651,484

 

1,508,681

 

Noncontrolling interests in subsidiaries

 

(8,383

)

500

 

Total member’s interest and noncontrolling interests

 

1,643,101

 

1,509,181

 

Commitments and contingencies (Note 11)

 

 

 

 

 

Total liabilities and member’s interest and noncontrolling interests

 

$

2,603,175

 

$

1,893,002

 

 

See accompanying notes to consolidated financial statements.

 

F-32



 

Starz, LLC and Subsidiaries

 

Consolidated Statements of Operations

 

Years Ended December 31, 2011, 2010 and 2009

 

(in thousands)

 

 

 

2011

 

2010

 

2009

 

Revenue:

 

 

 

 

 

 

 

Programming networks and other services

 

$

1,372,141

 

$

1,380,349

 

$

1,354,978

 

Home video net sales

 

241,892

 

224,988

 

167,619

 

Total revenue

 

1,614,033

 

1,605,337

 

1,522,597

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

Programming costs (including amortization) (Note 11)

 

651,249

 

647,817

 

641,477

 

Production and acquisition costs (including amortization)

 

158,789

 

177,954

 

107,122

 

Home video cost of sales

 

62,440

 

69,815

 

63,296

 

Operating expenses

 

53,703

 

73,260

 

79,963

 

Advertising and marketing (Note 12)

 

132,183

 

175,417

 

229,335

 

General and administrative (Note 8)

 

106,081

 

125,421

 

121,792

 

Phantom stock appreciation rights, long term incentive plan and stock compensation (Note 9)

 

7,078

 

39,468

 

35,142

 

Depreciation and amortization

 

17,907

 

20,468

 

23,470

 

Total costs and expenses

 

1,189,430

 

1,329,620

 

1,301,597

 

Operating income

 

424,603

 

275,717

 

221,000

 

 

 

 

 

 

 

 

 

Other expense:

 

 

 

 

 

 

 

Interest expense, including amounts due to affiliate of none, $16,054 and $20,431, net of amounts capitalized (Notes 6 and 8)

 

(5,012

)

(20,932

)

(27,188

)

Other expense, net

 

(3,505

)

(542

)

(4,719

)

Income from continuing operations before income taxes

 

416,086

 

254,243

 

189,093

 

Income tax expense (Note 10)

 

(172,189

)

(98,764

)

(71,006

)

Income from continuing operations

 

243,897

 

155,479

 

118,087

 

Income (loss) from discontinued operations (including loss on sale of $12,114 in 2011), net of income taxes (Note 3)

 

(7,486

)

3,315

 

1,253

 

Net income

 

236,411

 

158,794

 

119,340

 

Net loss attributable to noncontrolling interests

 

3,273

 

 

 

Net income attributable to member

 

$

239,684

 

$

158,794

 

$

119,340

 

 

See accompanying notes to consolidated financial statements.

 

F-33



 

Starz, LLC and Subsidiaries

 

Consolidated Statements of Comprehensive Income

 

Years Ended December 31, 2011, 2010 and 2009

 

(in thousands)

 

 

 

2011

 

2010

 

2009

 

Net income

 

$

236,411

 

$

158,794

 

$

119,340

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

Foreign currency translation adjustments from continuing operations

 

(529

)

1,167

 

4,566

 

Foreign currency translation adjustments from discontinued operations

 

(5,946

)

(1,172

)

(2,958

)

Other comprehensive income (loss)

 

(6,475

)

(5

)

1,608

 

Comprehensive income

 

229,936

 

158,789

 

120,948

 

Comprehensive loss attributable to noncontrolling interests

 

3,447

 

 

 

Comprehensive income attributable to member

 

$

233,383

 

$

158,789

 

$

120,948

 

 

See accompanying notes to consolidated financial statements.

 

F-34



 

Starz, LLC and Subsidiaries

 

Consolidated Statements of Cash Flows

 

Years Ended December 31, 2011, 2010 and 2009

 

(in thousands)

 

 

 

2011

 

2010

 

2009

 

Operating activities:

 

 

 

 

 

 

 

Net income

 

$

236,411

 

$

158,794

 

$

119,340

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Loss (income) from discontinued operations

 

7,486

 

(3,315

)

(1,253

)

Phantom stock appreciation rights, long term incentive plan and stock compensation

 

7,078

 

39,468

 

35,142

 

Payments of phantom stock appreciation rights and long term incentive plan

 

(7,696

)

(196,232

)

(2,565

)

Amortization of program rights

 

611,041

 

611,615

 

607,501

 

Amortization of investment in films and television programs

 

126,102

 

116,928

 

75,321

 

Depreciation and amortization

 

17,907

 

20,468

 

23,470

 

Noncash interest on debt due to affiliate

 

 

16,313

 

13,498

 

Deferred income taxes

 

37,023

 

52,954

 

18,999

 

Other non-cash items

 

11,014

 

2,808

 

5,775

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

 

(4,896

)

 

 

Trade accounts receivable

 

(23,378

)

4,338

 

32,052

 

Program rights

 

(554,341

)

(532,566

)

(552,220

)

Investment in films and television programs

 

(213,655

)

(117,035

)

(140,792

)

Other current assets

 

3,734

 

8,633

 

5,806

 

Other assets

 

(4,561

)

(3,461

)

1,527

 

Trade accounts payable

 

992

 

183

 

(2,777

)

Accrued liabilities

 

2,610

 

12,066

 

(244

)

Due to affiliates

 

89,271

 

(1,554

)

97

 

Deferred revenue

 

6,716

 

5,675

 

(25,442

)

Other liabilities

 

(885

)

(4,941

)

(1,159

)

Net cash provided by operating activities

 

347,973

 

191,139

 

212,076

 

Investing activities—purchases of property and equipment

 

$

(7,723

)

$

(7,099

)

$

(10,018

)

 

(Continued)

 

F-35



 

Starz, LLC and Subsidiaries

 

Consolidated Statements of Cash Flows (Continued)

 

Years Ended December 31, 2011, 2010 and 2009

 

(in thousands)

 

 

 

2011

 

2010

 

2009

 

Financing activities:

 

 

 

 

 

 

 

Borrowings of debt

 

$

505,000

 

$

129,343

 

$

115,800

 

Payments of debt

 

(59,170

)

(202,035

)

(130,316

)

Debt issuance costs

 

(10,191

)

 

 

Borrowings under note payable due to affiliate

 

 

 

94,000

 

Payments of note payable due to affiliate

 

 

 

(72,173

)

Contribution from affiliate

 

 

15,000

 

 

Contribution from noncontrolling owner of subsidiary

 

3,000

 

500

 

 

Distributions to affiliate

 

 

(75,221

)

(65,993

)

Settlement of derivative instruments

 

(2,863

)

(6,301

)

(6,920

)

Restricted cash

 

8,226

 

10,300

 

(9,468

)

Net cash provided by (used in) financing activities

 

444,002

 

(128,414

)

(75,070

)

Effect of exchange rate changes on cash and cash equivalents

 

(17

)

59

 

243

 

Discontinued operations:

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

(2,283

)

753

 

12,847

 

Net cash used in investing activities

 

 

(1,836

)

(1,213

)

Net cash provided by (used in) financing activities

 

3,569

 

(1,390

)

6,664

 

Effect of exchange rate changes on cash and cash equivalents held by discontinued operations

 

40

 

85

 

92

 

Cash held by discontinued operations upon sale

 

(3,144

)

 

 

Change in available cash held by discontinued operations

 

1,818

 

3,460

 

(4,723

)

Net cash provided by discontinued operations

 

 

1,072

 

13,667

 

Net increase in cash and cash equivalents

 

784,235

 

56,757

 

140,898

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of year

 

315,652

 

258,895

 

117,997

 

End of year

 

$

1,099,887

 

$

315,652

 

$

258,895

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

2,679

 

$

3,776

 

$

13,092

 

Cash paid for income taxes

 

$

44,793

 

$

120,706

 

$

117,694

 

Change in deferred tax assets due to sale of noncontrolling interest (Note 10)

 

$

141,135

 

$

 

$

 

Contribution of notes receivable from affiliate (Note 8)

 

$

 

$

426,254

 

$

 

Distribution of notes receivable to affiliate (Note 8)

 

$

 

$

489,134

 

$

 

 

See accompanying notes to consolidated financial statements.

 

F-36



 

Starz, LLC and Subsidiaries

 

Consolidated Statements of Member’s Interest and Noncontrolling Interests

 

Years Ended December 31, 2011, 2010 and 2009

 

(in thousands)

 

 

 

Member’s
Interest

 

Notes Receivable
From Affiliate

 

Noncontrolling
Interests

 

Total

 

Balance at January 1, 2009

 

$

1,414,943

 

$

(489,134

)

$

 

$

925,809

 

 

 

 

 

 

 

 

 

 

 

Net income

 

119,340

 

 

 

119,340

 

Other comprehensive income

 

1,608

 

 

 

1,608

 

Distributions to affiliate (Note 8)

 

(65,993

)

 

 

(65,993

)

Balance at December 31, 2009

 

1,469,898

 

(489,134

)

 

980,764

 

 

 

 

 

 

 

 

 

 

 

Net income

 

158,794

 

 

 

158,794

 

Other comprehensive loss

 

(5

)

 

 

(5

)

Distributions to affiliate (Note 8)

 

(75,221

)

 

 

(75,221

)

Contribution of notes receivable from affiliate (Note 8)

 

426,254

 

 

 

426,254

 

Distribution of notes receivable to affiliate (Note 8)

 

(489,134

)

489,134

 

 

 

Contribution from affiliate

 

15,000

 

 

 

15,000

 

Stock compensation

 

3,095

 

 

 

3,095

 

Contribution from noncontrolling owner of subsidiary

 

 

 

500

 

500

 

Balance at December 31, 2010

 

1,508,681

 

 

500

 

1,509,181

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

239,684

 

 

(3,273

)

236,411

 

Other comprehensive loss

 

(6,301

)

 

(174

)

(6,475

)

Contribution from affiliate (Note 8)

 

36,617

 

 

 

36,617

 

Change in deferred tax assets due to sale of noncontrolling interest (Note 10)

 

(141,135

)

 

 

(141,135

)

Stock compensation

 

5,352

 

 

150

 

5,502

 

Contribution from noncontrolling owner of subsidiary

 

 

 

3,000

 

3,000

 

Allocate member’s interest in deficit to noncontrolling interest

 

8,586

 

 

(8,586

)

 

Balance at December 31, 2011

 

$

1,651,484

 

$

 

$

(8,383

)

$

1,643,101

 

 

See accompanying notes to consolidated financial statements.

 

F-37



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements

 

December 31, 2011, 2010 and 2009

 

Note 1—Basis of Presentation and Description of Business

 

Starz, LLC (the “Company”) is a wholly-owned subsidiary of Liberty Media Corporation (“LMC”) (see Note 15 for subsequent events). The Company provides premium subscription video programming to United States multichannel video distributors, including cable operators, satellite television providers and telecommunications companies. The Company also develops, produces and acquires entertainment content and distributes this content to consumers in the United States and throughout the world.

 

On January 28, 2011, the Company sold a 25% interest in Starz Media Group, LLC (“Starz Media”), a previously wholly-owned subsidiary, to The Weinstein Company LLC (“TWC”) for cash consideration of $3.0 million.

 

In July 2010, the Company elected to shut down its majority-owned subsidiary Overture Films, LLC (“Overture Films”). Prior to its shut down, Overture Films produced, acquired and distributed motion pictures in theatres in the United States. Overture Films used third party distributors to distribute its films outside the United States to the extent it held rights to such films in international territories. Overture Films’ final three films were released theatrically during the fourth quarter of 2010. The Overture Films’ library of films was retained by the Company and will continue to be exploited.

 

The Company is managed and organized as follows:

 

Starz Channels

 

Starz Channels’ flagship premium networks are Starz and Encore. Starz, a first-run movie service, exhibits contemporary hit movies, original series, and documentaries. Encore airs first-run movies and classic contemporary movies. The Company’s third network, MoviePlex, offers a variety of library content, art house, independent films and classic movies. Starz and Encore, along with MoviePlex, air across 17 linear networks complemented by On Demand and Internet services. Starz Channels’ premium networks are offered by multichannel video distributors to their subscribers either on a fixed monthly price as part of a programming tier or package or on an à-la-carte basis.

 

Starz Distribution

 

Starz Distribution includes the Company’s Home Video, Digital Media and Worldwide Distribution businesses.

 

Home Video

 

The Company, through its majority-owned subsidiary Anchor Bay Entertainment, sells or rents DVDs (standard definition and Blu-ray™) under the Anchor Bay and Manga brands, in the United States, Canada, the United Kingdom, Australia and other international territories to the extent it has rights to such content in international territories. Anchor Bay develops and produces certain of its content and also acquires and licenses various titles from third parties. Anchor Bay also distributes other titles acquired or produced by the Company (including Overture Films’ titles and Starz Channels’ original programming content) and TWC’s titles. These titles are sold to and distributed by regional and national retailers and other distributors, including Wal-Mart, Target, Best Buy, Ingram Entertainment, Amazon and Netflix.

 

F-38



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 1—Basis of Presentation and Description of Business (Continued)

 

Digital Media

 

Digital Media performs digital distribution, licensing, syndication, content and vendor partnerships for the Company’s owned content and content for which it has licensed digital ancillary rights (including Overture Films’ titles) in the United States 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 multichannel video distributors, Internet/mobile distributors, game developers/publishers and consumer electronics companies. Digital Media also distributes Starz Channel’s original programming content and TWC’s titles.

 

Worldwide Distribution

 

Worldwide Distribution (previously referred to as Television) exploits the Company’s owned content and content for which it has licensed ancillary rights (including Overture Films’ titles) on free or pay television in the United States 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 Channels’ original programming content.

 

Starz Animation

 

The Company, through its wholly-owned subsidiary Film Roman, develops and produces two-dimensional animated content on a for-hire basis for distribution theatrically and on television for various third party entertainment companies. See also Note 3—Discontinued Operations.

 

Note 2—Significant Accounting Policies

 

Basis of Consolidation

 

The accompanying 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.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company considers amortization of program rights, the fair value of goodwill and any related impairment, the development of ultimate revenue estimates (as defined below under “Investment in Films and Television Programs”) associated with released films, the assessment of investment in films and television programs for impairment, valuation allowances associated with deferred income taxes and allowances for sales returns to be its most significant estimates. Actual results may differ from those estimates.

 

Prior Period Reclassifications

 

Certain prior period amounts have been reclassified for comparability with the 2011 presentation.

 

F-39



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 2—Significant Accounting Policies (Continued)

 

Cash and Cash Equivalents

 

Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less when purchased and are carried at cost, which approximates market value. Cash and cash equivalents are invested at high credit quality financial institutions. Deposits generally exceed the Federal Deposit Insurance Corporation insurance limit.

 

Restricted Cash

 

Restricted cash currently includes amounts owed under the distribution agreement entered into with TWC (see Note 8). For the year ended December 31, 2010, restricted cash included proceeds related to the exploitation of films which were required to be utilized to repay outstanding borrowings under the Overture Facility (as defined in Note 6) and cash held in escrow for the payment of certain fees owed to a third party.

 

Allowance for Trade Receivables

 

The allowance for trade receivables represents estimated losses which may result from the inability of customers to make required payments on trade accounts receivable and for sales returns. Allowances are based on determinations of the likelihood of recoverability of trade accounts receivable based on past experience and current trends that are expected to continue.

 

Program Rights

 

The cost of program rights for films and television programs exhibited by Starz Channels are generally amortized on a film-by-film basis over the anticipated number of exhibitions. Starz Channels estimates the number of exhibitions based on the number of exhibitions allowed in the agreement and the expected usage of the content. Certain other program rights are amortized to expense using the straight-line method over the respective lives of the agreements. Starz Channels generally has rights to two separate windows under its output agreements. For films with multiple windows, the license fee is allocated between the first and second window based upon the proportionate estimated fair value of each window with the majority of the cost allocated to the first window. Considerable management judgment is necessary to estimate the fair value of each window.

 

Property and Equipment

 

Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from 2 to 15 years for support and distribution equipment, 4 to 10 years for furniture, fixtures and other assets and 40 years for the Company’s corporate office building.

 

Property and equipment is reviewed for impairment when an event or change in circumstances indicates that the asset may be impaired. If the carrying value of the asset is determined to not be recoverable and is greater than its fair value, then an impairment charge is recognized. The charge consists of the amount by which the carrying value of the asset exceeds its fair value. Fair value is estimated by considering sale prices for similar assets or by discounting estimated future cash flows

 

F-40



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 2—Significant Accounting Policies (Continued)

 

from such asset using an appropriate discount rate. Considerable management judgment is necessary to determine recoverability and to estimate the fair value of property and equipment.

 

Investment in Films and Television Programs

 

Investment in films and television programs generally includes the cost of completed films, television programs and original productions which have been produced by Starz or for which Starz has acquired distribution rights, as well as the cost of films, television programs or original productions in production, pre-production and development. Capitalized costs include production costs, including labor, goods and services, interest and allocable overhead, acquisition of distribution rights (including cash advances paid to TWC for TWC’s theatrical releases under the terms of an Anchor Bay distribution agreement—see Note 8), acquisition of story rights and the development of stories less the license fee for original productions, which have aired on the Starz linear channels on demand or on the Internet. Starz allocates the cost of its original productions between the license fee for pay television and the ancillary revenue markets (e.g. home video, digital platforms, international television, etc.) based on the estimated relative fair values of these markets. The license fee associated with original productions is reclassified to program rights when the program is aired. Investment in films and television programs is amortized using the individual-film-forecast method, whereby the costs are charged to expense and royalty, participation and residual costs are accrued based on the proportion that current revenue from the films, television programs and original productions bears to an estimate of the remaining unrecognized ultimate revenue. Ultimate revenue estimates do not exceed ten years following the date of initial release or from the date of delivery of the first episode for episodic television series. Estimates of ultimate revenue involve uncertainty and it is therefore possible that reductions in the carrying value of investment in films and television programs may be required as a consequence of changes in management’s future revenue estimates.

 

Investment in films and television programs in development or pre-production is periodically reviewed to determine whether they will ultimately be used in the production of a film or television program. Costs of films, television programs and original productions in development or pre-production are charged to expense when a project is abandoned, or generally if the film, television program or original production has not been set for production within three years from the time of the first capitalized transaction.

 

Investment in films and television programs is reviewed for impairment on a title-by-title basis when an event or change in circumstances indicates that a film, television program or original production may be impaired. The estimated fair value for each title is determined using the discounted estimated future cash flow of each title. If the estimated fair value of a film, television program or original production is less than its unamortized cost, the excess of unamortized cost over the estimated fair value is charged to expense. Considerable management judgment is necessary to estimate the fair value of investment in films and television programs.

 

Goodwill

 

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified assets acquired. Goodwill is reviewed for impairment annually, at December 31, or more frequently if indicators of potential impairment exist. As discussed below, in

 

F-41



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 2—Significant Accounting Policies (Continued)

 

Recent Accounting Pronouncements, the Company adopted the recent accounting guidance relating to annual assessments of recoverability of goodwill and utilized a qualitative assessment for determining whether step one of the goodwill impairment analysis was necessary. In evaluating goodwill on a qualitative basis, the Company considered whether there were any negative macroeconomic conditions, industry specific conditions, market changes, increased competition, increased costs in doing business, management challenges, the legal environment and how these factors might impact the company specific performance in future periods.

 

If step one is necessary, the fair value of each reporting unit in which goodwill resides is compared to its carrying value. Fair value is estimated by considering sale prices for similar assets or by discounting estimated future cash flows from such asset using an appropriate discount rate. For reporting units whose carrying value exceeds the fair value, a second test is required to measure the impairment loss. In the second test, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit with any residual value being allocated to goodwill. The difference between such allocated amount and the carrying value of the goodwill is recorded as an impairment charge. Considerable management judgment is necessary to estimate the fair value of each reporting unit.

 

Revenue Recognition

 

Programming revenue is recognized in the period during which programming is provided, pursuant to affiliation agreements. If an affiliation agreement has expired, revenue is recognized based on the terms of the expired agreement or the actual payment from the distributor, whichever is less. Payments to distributors for marketing support costs for which the Company does not receive a direct benefit are recorded as a reduction of the corresponding revenue. Certain sales incentives, including discounts and rebates, provided to distributors are accounted for as a reduction of revenue and are not significant.

 

Revenue generated from the sale of DVDs is recognized, net of an allowance for estimated sales returns, on the later of the estimated receipt of the product by the customer or after any restrictions on sale lapse. At the time of the initial sale, the Company also records a provision, based on historical trends and practices, to reduce revenue for discounts and rebates provided to customers related to the sale of DVDs.

 

Revenue from digital and television licensing is recognized when the film or program is complete in accordance with the terms of the arrangement, and is available for exploitation. In the event that a licensee pays the Company a nonrefundable minimum guarantee at or prior to the beginning of a license term, the Company records this amount as deferred revenue until all of the criteria for recognition are met.

 

The Company recognizes revenue and related production costs related to animation services provided to customers under contract generally based on the percentage that costs incurred-to-date bear to estimated total costs to complete based upon the most recent information. Revenue recognized is proportional to the work performed-to-date under the contracts.

 

Revenue from the theatrical release of feature films is recognized at the time of exhibition based on the Company’s participation in box office receipts.

 

F-42



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 2—Significant Accounting Policies (Continued)

 

Advertising and Marketing

 

Advertising and marketing costs are expensed as incurred. Certain of the Company’s affiliation agreements require the Company to provide marketing support to the distributor based upon certain criteria, which are dependent on future events. Marketing support is mutually beneficial and generally cooperative advertising and marketing between the Company and its distributors. Marketing support is recorded as an expense and not a reduction of revenue when the Company has received a direct benefit and the fair value of such benefit is determinable.

 

Stock-Based and Other Long-term Compensation

 

The Company measures the cost of employee services received in exchange for an award of equity instruments (such as stock options and restricted stock) based on the grant-date fair value of the award, and recognizes that cost over the period during which the employee is required to provide service (usually the vesting period of the award). The Company measures the cost of employee services received in exchange for an award of liability instruments based on the current fair value of the award and re-measures the fair value of the award at each reporting date.

 

Certain current and former employees of the Company hold awards granted under the Overture Films, LLC 2006 Long-term Incentive Plan (the “Overture LTIP”). Because Overture is a privately held enterprise, the Company utilized a probability-weighted expected return method to determine the fair value of the awards and corresponding compensation expense under the Overture LTIP. The estimated value per unit was estimated based upon an analysis of probability- weighted net present values of future returns, considering each of the various future outcomes.

 

Income Taxes

 

The Company and the majority of its wholly-owned subsidiaries are limited liability companies that are classified for U.S. federal income tax purposes as entities which are disregarded as separate from LMC. The Company is included in LMC’s consolidated federal and state income tax returns. As a result of the sale of 25% of Starz Media to TWC, Starz Media is no longer consolidated for federal income tax purposes and is no longer consolidated in certain states for state income tax purposes with LMC and is now a separate taxpayer for federal purposes and in certain states. Starz Media is treated as a corporation for federal and state income tax purposes.

 

The income tax provision included in these consolidated financial statements has been prepared as if the Company was a stand-alone federal and state taxpayer. Accordingly, the Company has applied the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying value amounts and income tax bases of assets and liabilities and the expected benefits of utilizing net operating loss and tax credit carryforwards. The deferred tax assets and liabilities are calculated using enacted tax rates in effect for each taxing jurisdiction in which the Company operates for the year in which those temporary differences are expected to be recovered or settled. Net deferred tax assets are then reduced by a valuation allowance if the Company believes it more likely than not that such net deferred tax assets will not be realized.

 

F-43



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 2—Significant Accounting Policies (Continued)

 

Collaborative Arrangements

 

As part of its production and acquisition activities, the Company has entered into collaborative arrangements. A collaborative arrangement is a contractual arrangement that involves a joint operating activity. These arrangements involve two (or more) parties who are both (a) active participants in the activity and (b) exposed to significant risks and rewards dependent on the commercial success of the activity. A collaborative arrangement may provide that one participant has sole or primary responsibility for certain activities or that two or more participants have shared responsibility for certain activities. The Company records revenue and costs on a gross basis for activities for which it has been determined to be the principal and records revenue and costs on a net basis for activities for which it has been determined to be the agent. Payments made to other participants are recorded as participation expense within production and acquisition costs in the accompanying consolidated statements of operations.

 

Derivative Instruments and Hedging Activities

 

All derivatives, whether designated in hedging relationships or not, are recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (loss) and are recognized in the statement of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. If the derivative is not designated as a hedge, changes in the fair value of the derivative are recognized in earnings.

 

Fair Value of Financial Instruments

 

The carrying value of cash and cash equivalents, restricted cash, trade accounts receivable, trade accounts payable, accrued liabilities and due to affiliates approximates fair value, due to their short maturity. See Note 6 for information concerning the fair value of the Company’s debt instruments.

 

Foreign Currency Translation

 

The functional currency of the Company is the United States (“U.S.”) dollar. The functional currency of the Company’s foreign operations is the applicable local currency for each foreign subsidiary. Assets and liabilities of foreign subsidiaries are translated at the spot rate in effect at the applicable reporting date and the related statements of operations are translated at the average exchange rates in effect during the applicable period. The resulting unrealized cumulative translation adjustment, net of applicable income taxes, is the only component of accumulated other comprehensive income (loss) in member’s interest and noncontrolling interests and the consolidated statements of comprehensive income.

 

Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in gains and losses which are reflected in the accompanying consolidated statements of operations as unrealized (based on the applicable period-end exchange rate) or realized upon settlement of the transactions.

 

F-44



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 2—Significant Accounting Policies (Continued)

 

Recent Accounting Pronouncements

 

In September 2011, the Financial Accounting Standards Board amended the Accounting Standards Codification as summarized in Accounting Standards Update (“ASU”) 2011-08—Intangibles—Goodwill and Other (Topic 350). ASU 2011-08 allows entities to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permissible. The Company adopted ASU 2011-08 for the year ended December 31, 2011 and evaluated goodwill on a qualitative basis. The Company does not believe that the qualitative analysis versus immediately performing a step one test had any impact on its consolidated financial statements.

 

Note 3—Discontinued Operations

 

On March 3, 2011, the Company completed the sale of 92.5% of Starz Media Canada Co. (“Canada Co.”), located in Toronto, Ontario, to a Canadian investor group and recognized a loss on the sale of $12.1 million, before a tax benefit of $3.9 million. Subsequent to the sale, the Company maintains a 7.5% ownership interest, but does not have significant involvement with the ongoing operations of Canada Co. Canada Co. develops and produces three- dimensional animated content on a for-hire basis.

 

The summarized statements of operations of Canada Co. for the years ended December 31, 2011, 2010 and 2009 included in discontinued operations in the consolidated statements of operations are as follows:

 

 

 

For the Years Ended December 31,

 

 

 

2011

 

2010

 

2009

 

Revenue

 

$

1,354

 

$

20,623

 

$

17,888

 

Operating expenses

 

(1,513

)

(12,182

)

(13,422

)

Advertising and marketing

 

(2

)

(103

)

(89

)

General and administrative

 

(114

)

(1,102

)

 

Depreciation

 

(447

)

(1,773

)

(2,144

)

Operating income (loss)

 

(722

)

5,463

 

2,233

 

Other income (expense)

 

(61

)

(274

)

(215

)

Income (loss) before income taxes

 

(783

)

5,189

 

2,018

 

Income tax benefit (expense)

 

1,500

 

(1,874

)

(765

)

Net income

 

$

717

 

$

3,315

 

$

1,253

 

 

F-45



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 4—Property and Equipment, Net

 

Property and equipment, net consists of the following (in thousands):

 

 

 

December 31,

 

 

 

2011

 

2010

 

Building and support equipment

 

$

139,368

 

$

133,718

 

Distribution equipment

 

95,423

 

94,802

 

Furniture, fixtures and other

 

15,115

 

15,360

 

 

 

249,906

 

243,880

 

Less accumulated depreciation

 

(151,375

)

(139,163

)

 

 

$

98,531

 

$

104,717

 

 

The cost of satellite transponders under capital leases included in distribution equipment was $60.5 million as of December 31, 2011, and 2010, respectively. Accumulated depreciation for these transponders was $27.7 million and $23.7 million at December 31, 2011 and 2010, respectively.

 

Note 5—Investment in Films and Television Programs, Net

 

Investment in films and television programs, net consists of the following (in thousands):

 

 

 

December 31,

 

 

 

2011

 

2010

 

Film costs—theatrical:

 

 

 

 

 

Released, less amortization

 

$

11,876

 

$

25,349

 

Film costs—television and DVD:

 

 

 

 

 

Released, less amortization

 

67,912

 

32,564

 

Completed, but not released

 

7,283

 

11,341

 

In production

 

91,570

 

50,182

 

Development and pre-production

 

5,301

 

1,265

 

 

 

$

183,942

 

$

120,701

 

 

Approximately 81% of the unamortized film costs (theatrical, television and DVD) for released films of $79.8 million at December 31, 2011 are expected to be amortized within three years. Approximately $44.8 million of the costs of Released and Completed, but not released films of $87.1 million at December 31, 2011 are expected to be amortized during the next twelve months. As a result of changes in ultimate revenue estimates, the Company recognized impairments of investment in films and television programs totaling $12.9 million, $46.6 million and $15.7 million for the years ended December 31, 2011, 2010 and 2009, respectively. Such impairments are included in production and acquisition costs in the consolidated statements of operations.

 

F-46



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 6—Debt

 

Debt consists of the following (in thousands):

 

 

 

December 31,

 

 

 

2011

 

2010

 

Senior Secured Credit Facilities(a)

 

$

505,000

 

$

 

Transponder capital leases(b)

 

40,044

 

43,951

 

Overture Facility(c)

 

 

54,171

 

Other(d)

 

 

1,092

 

Total debt

 

545,044

 

99,214

 

Less current portion of debt

 

(4,129

)

(58,244

)

Debt

 

$

540,915

 

$

40,970

 

 


(a)         On November 16, 2011, the Company entered into a credit agreement that provides a $1,000 million revolving credit facility, with a $50 million sub-limit for standby letters of credit, and $500.0 million of term loans (the “Senior Secured Credit Facilities”). At closing, the Company borrowed $500 million under the term loan facility and $5 million under the revolving credit facility. The term loans are scheduled to mature $25 million in 2013, $25 million in 2014, $50 million in 2015 and the remainder on November 16, 2016.

 

Interest on each loan under the Senior Secured Credit Facilities is payable at either an alternate base rate or LIBOR at the Company’s election. Borrowings that are alternate base rate loans will bear interest at a per annum rate equal to the alternate base rate plus a margin that varies between 0.75% and 1.75% depending on the Company’s 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 1/2 of 1% or (c) LIBOR for a one-month interest period plus 1%. Borrowings that are LIBOR loans will bear interest at a per annum rate equal to the applicable LIBOR plus a margin that varies between 1.75% and 2.75% depending on the Company’s consolidated leverage ratio.

 

As of December 31, 2011, the following borrowings and related LIBOR interest rates were outstanding under the Senior Secured Credit Facilities (dollars in thousands):

 

 

 

Interest Rate

 

Loan Amount

 

LIBOR period:

 

 

 

 

 

December 2011 - January 2012

 

2.5346

%

$

500,000

 

December 2011 - January 2012

 

2.5346

%

5,000

 

 

 

 

 

$

505,000

 

 

(b)         The Company has entered into capital lease agreements for its transponder capacity. The agreements expire during 2018 to 2021 and have an imputed annual interest rate of 5.5%.

 

(c)          On January 2, 2008, Overture Films entered into a $225.0 million, five year and three month senior secured revolving credit facility (the “Overture Facility”). The Overture

 

F-47



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 6—Debt (Continued)

 

Facility was amended effective September 15, 2010 and in April 2011, the Overture Facility was terminated and the principal and interest was paid in full.

 

Overture Films used the facility to fund a portion of production and distribution costs of qualifying feature-length, theatrical motion pictures and certain working capital requirements. Proceeds received by Overture Films related to the exploitation of the feature length films generally were required to be utilized to repay borrowings under the Overture Facility. As of December 31, 2010, $7.5 million of such proceeds are included in restricted cash.

 

Interest on each loan under the Overture Facility was payable at either an Alternate Base Rate plus 1.00% per annum or at LIBOR plus 2.00% per annum, at the option of Overture Films. As defined in the Overture Facility, the Alternate Base Rate was the greater of the Prime Rate, Base Certificate of Deposit Rate plus 1%, or the Federal Funds Effective Rate plus 0.5%.

 

Overture Films entered into an interest rate swap arrangement effective July 1, 2008 to mitigate the risk associated with future interest payments on the Overture Facility. This swap arrangement provided for Overture Films to make fixed monthly payments at an annual rate of 3.77% and to receive variable monthly payments at a one month USD-LIBOR rate, each on notional amounts that range from $25.0 million up to a maximum amount of $125.0 million. Such swap was not designated as a hedge. In connection with the termination of the Overture Facility, this interest rate swap arrangement was terminated in April 2011 at a cost of $1.2 million. The Company recognized a loss in other expense, net of $1.2 million, $1.7 million and $2.3 million for the years ended December 31, 2011, 2010 and 2009, respectively, related to this interest rate swap based on changes in the fair value of the swap.

 

(d)         Other debt consisted of a leasehold improvement loan which was repaid in full in 2011.

 

Debt maturities for the next five years and thereafter are as follows (in thousands):

 

2012

 

$

6,228

 

2013

 

31,228

 

2014

 

31,228

 

2015

 

56,228

 

2016

 

411,228

 

Thereafter

 

18,574

 

Total minimum payments

 

554,714

 

Less: amounts representing interest

 

(9,670

)

Present value of debt payments

 

545,044

 

Less: current portion of debt obligations

 

(4,129

)

Long-term portion of debt obligations

 

$

540,915

 

 

F-48



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 6—Debt (Continued)

 

The Company believes the fair value of debt approximates its carrying value as of December 31, 2011 due to its variable rate nature and the Company’s stable credit spread.

 

Amounts totaling $2.0 million, $2.0 million and $1.8 million in interest costs have been capitalized as investment in films and television programs during the years ended December 31, 2011, 2010 and 2009, respectively.

 

Note 7—Accrued Liabilities

 

Accrued liabilities consist of the following (in thousands):

 

 

 

December 31,

 

 

 

2011

 

2010

 

Royalties, residuals and participations

 

$

46,692

 

$

51,238

 

Royalties, residuals and participations payable to TWC

 

56,201

 

 

Program rights payable

 

65,600

 

49,900

 

Advertising and marketing

 

39,381

 

34,037

 

Payroll and related costs

 

22,380

 

24,165

 

Other

 

40,042

 

24,376

 

 

 

$

270,296

 

$

183,716

 

 

Approximately 70% of accrued royalties, participations and residuals of $46.7 million at December 31, 2011 are expected to be paid during the next twelve months.

 

Note 8—Related Party Transactions

 

Due to Affiliates

 

The Company participates in LMC’s employee benefit plans (medical, dental, life insurance, 401(k), etc.). Charges from LMC related to these benefits and other miscellaneous charges are included in general and administrative expenses in the accompanying consolidated statements of operations and aggregated $12.4 million, $12.8 million and $13.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. Such amounts are invoiced by LMC on a monthly basis and are due upon receipt of the invoice by the Company. Amounts due to affiliate for such charges total $3.6 million and $0.7 million as of December 31, 2011 and 2010, respectively.

 

Due to affiliates at December 31, 2011 also includes $50.2 million for amounts owed to LMC for income tax obligations.

 

Contributions from (Distributions to) Affiliate

 

The Company is a single member LLC, which is treated as an entity that is disregarded as being separate from LMC for U.S.federal income tax purposes. As such, the Company is included in the consolidated federal and state income tax returns of LMC. Prior to 2011, the Company’s subsidiary Starz Media was subject to a separate tax sharing agreement with LMC. As a result, the tax benefits of losses generated by Starz Media were not included in the calculation of the Company’s tax obligation

 

F-49



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 8—Related Party Transactions (Continued)

 

to LMC. Accordingly, the Company’s tax payments to LMC prior to 2011 were in excess of what the Company’s consolidated tax obligation would have been if Starz Media was included in the tax calculation and such excess payments are reflected as distributions to affiliate in the accompanying consolidated statements of cash flows and consolidated statements of member’s interest and noncontrolling interests.

 

As a result of the sale of the 25% interest to TWC in January 2011, Starz Media is now a separate taxpayer for federal purposes and in certain states. During the year ended December 31, 2011, the Company’s tax liability to LMC was reduced by $36.6 million due to the overpayment of 2010 tax sharing obligations which were treated as a distribution to affiliate in 2010. Such reduction is reflected as a contribution from affiliate in the accompanying consolidated statement of member’s interest and noncontrolling interests.

 

During 2006, the Company entered into two notes receivable totaling $489.1 million with Liberty Media LLC, a wholly-owned subsidiary of LMC. Such notes were classified in member’s interest. The Company distributed the notes receivable to Liberty Media LLC on September 30, 2010 in connection with a corporate reorganization. The Company did not recognize interest on the notes receivable.

 

Note Payable due to Affiliate

 

On December 28, 2006, Starz Media, LLC, a wholly-owned subsidiary of Starz Media, entered into a note agreement with Liberty Media LLC, a wholly-owned subsidiary of LMC, to fund the operating needs of Starz Media, LLC. Such note bears interest at a rate of LIBOR plus 4.0%. On September 30, 2010, Liberty Media LLC contributed its receivable under the note agreement to the Company in connection with a corporate reorganization. As such, the note is eliminated in consolidation effective September 30, 2010. See Note 6 for interest capitalized as investment in films and television programs. Such note agreement was cancelled on October 1, 2011.

 

On March 30, 2009, Starz Entertainment, LLC (“Starz Entertainment”), a direct wholly-owned subsidiary of the Company paid in full all outstanding principal and interest under a subordinated note payable to LMC. The note charged interest at a 3 month LIBOR plus 2.75%, compounded quarterly. Interest expense related to the LMC note payable was none, none and $0.5 million for the years ended December 31, 2011, 2010 and 2009, respectively.

 

Mezzanine Debt due to Affiliate

 

On January 2, 2008, Overture Films entered into a $50.0 million, six year secured term credit facility (the “Overture Mezzanine Debt”) with Liberty Media LLC. The Overture Mezzanine Debt was used to fund certain costs and working capital associated with the production or acquisition of theatrical films. The Overture Mezzanine Debt, as amended, is subordinated to the Overture Facility. On September 30, 2010, Liberty Media LLC contributed its receivable under the Overture Mezzanine Debt to the Company in connection with a corporate restructuring. As such, the Overture Mezzanine Debt is eliminated in consolidation effective September 30, 2010. Interest on each loan under the Overture Mezzanine Debt is payable at LIBOR plus 10.00% per annum. See Note 6 for interest capitalized as investment in films and television programs.

 

F-50



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 8—Related Party Transactions (Continued)

 

Related Party

 

As discussed previously, on January 28, 2011, the Company sold a 25% interest in Starz Media to TWC. In December 2010, Anchor Bay entered into a five-year license agreement with TWC for the distribution, by Home Video and Digital Media, of certain of TWC’s theatrical releases. The Company recognized participation expense of $72.1 million, which is included in production and acquisition costs in the accompanying statement of operations, for TWC’s share of the net proceeds under the license agreement, for the year ended December 31, 2011. The Company’s accrued advances payable to TWC totaled $56.2 million, which is included in accrued liabilities in the accompanying consolidated balance sheet, at December 31, 2011.

 

Note 9—Phantom Stock Appreciation Rights, Long Term Incentive Plan and Stock Options

 

PSARs—The Company had fully vested outstanding Phantom Stock Appreciations Rights (“PSAR”) held by its founder and former chief executive officer. Effective September 30, 2009, the founder and former chief executive officer elected to exercise all of his remaining PSARs. In December 2010, the Company paid $149.6 million in cash to settle the PSARs which was determined by a valuation process as described in the PSAR agreement. Prior to this valuation process, the value of the PSARs was based on the estimated fair value of Starz Entertainment, as adjusted for certain assets and liabilities as defined, utilizing a discounted cash flow model. The Company recognized none, $33.7 million and $4.7 million of compensation expense during the years ended December 31, 2011, 2010 and 2009, respectively, related to these PSARs.

 

Long Term Incentive Plan—The Company granted incentive units to certain officers and key employees (“Plan Participants”) under the 2006 long term incentive plan (“2006 LTIP”). Such grants vest over a period of four years. Compensation under the 2006 LTIP is computed based on the vested percentage of units granted and a formula based on a multiple of earnings before interest, taxes, depreciation and amortization, adjusted for certain net assets or liabilities of the Company, as defined. During 2010, the Company amended the LTIP to freeze the value of the 2006 LTIP units at the value calculated as of December 31, 2009. All amounts accrued under the 2006 LTIP are payable in cash, LMC common stock or a combination thereof at specified dates through 2013.

 

The Company recognized $0.2 million, $3.1 million and $32.5 million during the years ended December 31, 2011, 2010 and 2009, respectively of compensation expense related to the 2006 LTIP. During the years ended December 31, 2011 and 2010, the Company made payments of $7.7 million and $46.6 million, respectively, to certain Plan Participants under the 2006 LTIP. The Company has accrued $36.6 million as of December 31, 2011 related to the 2006 LTIP.

 

Stock Options—Pursuant to a LMC incentive plan, LMC has granted to certain of the Company’s employees Liberty Starz stock options and Liberty Starz restricted stock. In November 2011, LMC exchanged each share of outstanding Liberty Starz common stock for 0.88129 shares of Liberty Media Corporation’s Liberty Capital common stock (“LMCA”). The outstanding Liberty Starz restricted stock was also exchanged for LMCA restricted stock using the same ratio, and an adjustment was made to the strike price, as applicable, using the same ratio. The exchange of stock options and restricted stock was considered a modification of the previous award, however, the impact to compensation expense was not significant.

 

F-51



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 9—Phantom Stock Appreciation Rights, Long Term Incentive Plan and Stock Options (Continued)

 

The Company recognized $6.9 million, $4.3 million and none during the years ended December 31, 2011, 2010 and 2009, respectively of compensation expense related to vested stock options and restricted stock. As of December 31, 2011, the total unrecognized compensation cost related to the unvested stock options and restricted stock was approximately $21.3 million. Such amount will be recognized in the Company’s consolidated statements of operations over a weighted average period of approximately three years.

 

The historical awards granted in 2011, 2010 and 2009 are summarized as follows:

 

 

 

Options
Granted

 

Weighted
Average
Grant-Date
Fair Value

 

2011 Awards:

 

 

 

 

 

Stock options—LMCA

 

100,000

 

$

32.60

 

Stock options—Series A Liberty Starz Common Stock

 

496,000

 

$

21.36

 

Restricted stock—Series A Liberty Starz Common Stock

 

11,655

 

$

77.52

 

 

 

 

 

 

 

 

2010 Awards:

 

 

 

 

 

Stock options—Series A Liberty Starz Common Stock

 

208,500

 

$

16.17

 

Restricted stock—Series A Liberty Starz Common Stock

 

 

 

 

 

 

 

 

 

2009 Awards:

 

 

 

 

 

Stock options—Series A Liberty Starz Common Stock

 

600,000

 

$

15.96

 

Restricted stock—Series A Liberty Starz Common Stock

 

100,000

 

$

47.29

 

 

The 2011 and 2010 stock option awards vest quarterly over a 4 year period and have a term of 7 years. The 2009 stock option awards vest 50% on each of December 31, 2012 and 2013 and have a term of 10 years. The Company 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 4.40 years for the 2011 awards, 4.56 years for the 2010 awards and 6.75 years for the 2009 awards. The expected volatility was 31.9% for the Liberty Starz grants and 54.2% for the LMCA grants for the 2011 awards and 33.63% for the 2010 and 2009 awards. The expected volatility used in the calculation for the awards is based on the historical volatility of LMC’s Starz and Capital tracking stocks and the implied volatility of LMC’s publicly traded options. The Company uses a zero dividend rate as the Company has not historically declared dividends and a range of risk-free rates of 0.7% to 1.9% for the 2011 awards, 2.2% to 2.4% for the 2010 awards and 2.9% for the 2009 awards which are derived from U.S. Treasury Bonds with a term similar to that of the subject options. The grant-date fair value of the 2011 outstanding restricted shares of 11,655 was based on the market value of the Series A Liberty Starz common stock at the grant date of $77.52 per share. The grant-date fair value of the 2009 outstanding restricted shares of 100,000 was based on the market value of the Series A Liberty Starz common stock at the grant date of $47.29 per share. The 2011 grant of restricted shares vest annually over three years. The 2009 grant of restricted shares vest 50% on each of December 31, 2012 and 2013.

 

F-52



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 9—Phantom Stock Appreciation Rights, Long Term Incentive Plan and Stock Options (Continued)

 

The following table presents the number and weighted average exercise price (“WAEP”) of the historical Liberty Starz stock options prior to the conversion in November 2011 to LMCA stock options:

 

 

 

Options

 

WAEP

 

Outstanding at January 1, 2009

 

 

$

 

Granted

 

600,000

 

$

61.53

 

Exercised

 

 

$

 

Forfeited

 

 

$

 

Expired/cancelled

 

 

$

 

Outstanding at December 31, 2009

 

600,000

 

$

61.53

 

Granted

 

208,500

 

$

51.04

 

Exercised

 

(3,310

)

$

51.03

 

Forfeited

 

(10,439

)

$

51.03

 

Expired/cancelled

 

 

$

 

Outstanding at December 31, 2010

 

794,751

 

$

59.41

 

Granted

 

496,000

 

$

72.92

 

Exercised

 

(8,683

)

$

52.63

 

Forfeited

 

(31,626

)

$

64.78

 

Expired/cancelled

 

 

$

 

Liberty Starz conversion to LMCA

 

(1,250,442

)

$

57.56

 

Outstanding at December 31, 2011

 

 

$

 

 

The following table presents the number and WAEP of LMCA stock options after the conversion from Liberty Starz stock options in November 2011:

 

 

 

Options

 

WAEP

 

Outstanding at December 31, 2010

 

 

$

 

Liberty Starz conversion to LMCA

 

1,101,922

 

$

65.31

 

Granted

 

100,000

 

$

73.45

 

Exercised

 

(275

)

$

57.90

 

Forfeited

 

 

$

 

Expired/cancelled

 

 

$

 

Outstanding at December 31, 2011

 

1,201,647

 

$

65.99

 

Exercisable at December 31, 2011

 

140,935

 

$

71.44

 

 

At December 31, 2011 the weighted-average remaining contractual term of the outstanding options is 6.9 years and the exercisable options is 5.7 years.

 

Overture Long Term Incentive Plan—In November 2006, the Company established the Overture LTIP to provide long term compensation to secure loyal and continued services and promote

 

F-53



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 9—Phantom Stock Appreciation Rights, Long Term Incentive Plan and Stock Options (Continued)

 

profitability and efficiency within Overture Films. As previously noted, the Company ceased operations at Overture Films in July 2010. The Company has determined that the units have no value due to the valuation of Overture Films at the time it ceased operations and in the year ended December 31, 2010 eliminated the previously recorded liability of $1.6 million. The Company recognized credits to compensation expense related to the Overture LTIP of none, $1.6 million and $2.1 million during the years ended December 31, 2011, 2010 and 2009, respectively.

 

The awards granted under the Overture LTIP consist of units (percentage interests) that participate in the underlying value of Overture Films (if any) as of June 30, 2012 based on a calculation specified in the Overture LTIP. The awards qualify for liability treatment under GAAP as the awards may be settled, at the discretion of the Committee, in either cash or stock of Overture Films or stock of an affiliate of Overture Films as further defined in the Overture LTIP and the intention of the Company to settle these in cash. The value attributed to the awards was reviewed at each reporting date and the corresponding liability associated with the awards (if any) was adjusted.

 

The following table summarizes information about unit transactions of the Overture LTIP (dollars in thousands):

 

 

 

Units

 

Fair Value

 

Outstanding at December 31, 2008

 

14.54

 

$

9,694

 

Granted

 

 

$

 

Forfeited

 

(0.30

)

$

55

 

Expired/cancelled

 

 

$

 

Outstanding at December 31, 2009

 

14.24

 

$

2,582

 

Granted

 

 

$

 

Forfeited

 

 

$

 

Expired/cancelled

 

 

$

 

Outstanding at December 31, 2010

 

14.24

 

$

 

Granted

 

 

$

 

Forfeited

 

 

$

 

Expired/cancelled

 

 

$

 

Outstanding at December 31, 2011

 

14.24

 

$

 

Exercisable at December 31, 2011

 

 

$

 

 

Note 10—Income Taxes

 

The Company 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 LMC. The income tax accounts and provision included in these consolidated financial statements have been prepared as if the Company was a stand-alone federal and state taxpayer.

 

F-54



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 10—Income Taxes (Continued)

 

Income tax expense consists of the following (in thousands):

 

 

 

Years ended December 31,

 

 

 

2011

 

2010

 

2009

 

Current:

 

 

 

 

 

 

 

Federal

 

$

122,505

 

$

38,117

 

$

43,184

 

State and local

 

10,018

 

2,715

 

6,191

 

Foreign

 

2,643

 

4,978

 

2,632

 

 

 

135,166

 

45,810

 

52,007

 

Deferred:

 

 

 

 

 

 

 

Federal

 

34,423

 

48,590

 

17,620

 

State and local

 

2,600

 

4,364

 

1,379

 

 

 

37,023

 

52,954

 

18,999

 

Income tax expense

 

$

172,189

 

$

98,764

 

$

71,006

 

 

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):

 

 

 

Years ended December 31,

 

 

 

2011

 

2010

 

2009

 

Computed expected tax expense

 

$

145,630

 

$

88,985

 

$

66,182

 

State and local income taxes, net of federal income taxes

 

8,000

 

4,168

 

(1,059

)

Foreign taxes, net of foreign tax credit

 

1,024

 

(563

)

(381

)

Disposal of consolidated subsidiary

 

 

 

(3,747

)

Change in valuation allowance affecting tax expense

 

(223,992

)

5,974

 

98,413

 

Expiration of capital loss

 

241,934

 

 

 

Reversal of tax contingency reserve

 

 

 

(88,550

)

Other, net

 

(407

)

200

 

148

 

Income tax expense

 

$

172,189

 

$

98,764

 

$

71,006

 

 

F-55



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 10—Income Taxes (Continued)

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2011 and 2010 are presented below (in thousands):

 

 

 

December 31,

 

 

 

2011

 

2010

 

Deferred tax assets:

 

 

 

 

 

Tax loss and credit carryforwards

 

$

56,682

 

$

267,581

 

Goodwill and other intangible assets

 

 

137,713

 

Accrued stock compensation

 

19,301

 

19,788

 

Investments

 

6,747

 

8,989

 

Deferred revenue

 

1,588

 

2,672

 

Other future deductible amounts

 

24,752

 

10,946

 

Deferred tax assets

 

109,070

 

447,689

 

Valuation allowance

 

(78,141

)

(267,581

)

Deferred tax assets, net

 

30,929

 

180,108

 

Deferred tax liability:

 

 

 

 

 

Property and equipment

 

(23,070

)

(19,508

)

Intangible assets

 

(8,053

)

 

Deferred tax liabilities

 

(31,123

)

(19,508

)

Net deferred tax assets (liabilities)

 

$

(194

)

$

160,600

 

 

The Company’s ability to utilize its foreign income tax credit carryforwards is dependent on the Company generating foreign-source taxable income. Based on management’s assessment of projected foreign source taxable income and available tax planning strategies, the Company does not believe that it is more likely than not that it will utilize the foreign income tax credit carryforward deferred tax asset. As such, the Company has recorded a valuation allowance of $15.1 million and $17.8 million related to those credit carryforwards as of December 31, 2011 and 2010, respectively.

 

The Company has generated net operating losses in certain foreign and state jurisdictions in which the Company operates. Because the Company’s ability to utilize these losses is dependent on it generating future taxable income in these jurisdictions, the Company does not believe that it is more likely than not that it will utilize these losses. As such, the Company has recorded a valuation allowance of $5.9 million and $7.0 million related to those foreign and state net operating losses as of December 31, 2011 and 2010, respectively.

 

The Company has a capital loss carryforward deferred tax asset of $35.7 million and $242.8 million as of December 31, 2011 and 2010, respectively, that the Company does not believe that it is more likely than not that it will utilize. During the year ended December 31, 2011, the capital loss carryforward totaling $241.9 million related to the sale of a certain investment expired as the Company was unable to utilize such capital loss. As such, the Company has recorded a valuation allowance of $35.7 million and $242.8 million related to these capital loss carryforwards as of December 31, 2011 and 2010, respectively.

 

F-56



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 10—Income Taxes (Continued)

 

As a result of the sale of 25% of Starz Media to TWC, Starz Media is no longer consolidated for federal income tax purposes and is no longer consolidated in certain states for state income tax purposes with Starz, LLC and is now a separate taxpayer for federal purposes and in certain states. Starz Media is treated as a corporation for federal and state income tax purposes. Starz Media has a deferred tax asset related to deductible temporary differences. Because Starz Media is now a separate taxpayer for federal purposes and in certain states, the Company does not believe that it is more likely than not that Starz Media will realize this deferred tax asset. As such, the Company recorded a valuation allowance of $21.5 million related to these deductible temporary differences during the year ended December 31, 2011.

 

During 2011, the Company decreased its valuation allowance by $189.4 million, the components of which are as follows (in thousands):

 

 

 

Income
Tax
Expense

 

Member’s
Interest

 

Other
Comprehensive
Income

 

Total

 

Foreign tax credits

 

$

1,819

 

$

(4,536

)

$

 

$

(2,717

)

Net operating losses—foreign and state

 

(1,122

)

 

 

(1,122

)

Expiration of capital loss

 

(241,934

)

 

 

(241,934

)

Capital loss carryforward

 

 

(870

)

 

(870

)

Capital loss carryforward due to sale of 25% of Starz Media

 

 

35,744

 

 

35,744

 

Deductible temporary differences

 

17,245

 

 

4,214

 

21,459

 

Total

 

$

(223,992

)

$

30,338

 

$

4,214

 

$

(189,440

)

 

The sale of the 25% interest in Starz Media resulted in net direct tax effects of $141.1 million which have been reflected as a reduction of member’s interest. These direct tax effects include a $141.1 million reduction to the net deferred tax assets of Starz Media, a $35.7 million increase to the capital loss carryforward deferred tax asset and a $35.7 million increase to the valuation allowance. The benefit of the tax basis in the remaining 75% interest in Starz Media has not been reflected in the Company’s deferred taxes because the Company does not currently expect to realize this tax basis in the foreseeable future.

 

Note 11—Commitments and Contingencies

 

Programming Rights

 

In March 2010, the Company entered into a new, exclusive long-term licensing agreement for theatrically released films from the Walt Disney Company (“Disney”) studios through 2015. The previous output agreement was set to run through 2012 releases. The new agreement provides the Company with exclusive pay TV rights to exhibit qualifying theatrically released live-action and animated feature films from Walt Disney Pictures, Walt Disney Animation Studios, Disney-Pixar, Touchstone Pictures, Marvel Entertainment and Hollywood Pictures labels. Theatrically released films from DreamWorks Studios and Miramax Films will not be licensed to the Company under the new agreement. In addition, the Company is obligated to pay programming fees for all qualifying films that

 

F-57



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 11—Commitments and Contingencies (Continued)

 

are released theatrically in the United States by Sony’s Columbia Pictures, Screen Gems and Sony Pictures Classics (“Sony”) through 2016, subject to certain limitations. The Company 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 programming fees to be paid by the Company are based on the quantity and domestic theatrical exhibition receipts of qualifying films.

 

The unpaid balance for film rights related to films that were available at December 31, 2011 is reflected in accrued liabilities and in other liabilities in the accompanying consolidated balance sheets. As of December 31, 2011, such liabilities aggregated approximately $67.7 million and are payable as follows: $65.6 million in 2011 and $2.1 million in 2012.

 

Under the above output agreements, the Company is obligated to pay fees for the rights to exhibit films that have been released theatrically, but are not available for exhibition by the Company until some future date. In addition, the Company has agreed to pay Sony (i) $142.5 million in three remaining equal annual installments through 2014, and (ii) a total of $120 million in three equal annual installments beginning in 2015 for the new output agreement. The estimated amounts payable under these agreements, which have not been accrued as of December 31, 2011, are as follows: $377.5 million in 2012; $127.4 million in 2013; $72.9 million in 2014; $58.4 million in 2015; $51.3 million in 2016 and $58.5 million thereafter.

 

The Company is also obligated to pay fees for films that have not yet been released in theatres. The Company is unable to estimate the amounts to be paid under these output agreements for films that have not yet been released in theatres; however, such amounts are expected to be significant.

 

Total amortization of program rights was $611.0 million, $611.6 million and $607.5 million for the years ended December 31, 2011, 2010 and 2009, respectively. These amounts are included in programming costs in the accompanying consolidated statements of operations.

 

Operating Leases

 

The Company leases office facilities, back-up transponder capacity, and certain other equipment under operating lease arrangements. Rental expense under such arrangements amounted to $6.6 million, $7.9 million and $9.0 million for the years ended December 31, 2011, 2010 and 2009, respectively. Such amounts are included in operating expenses and general and administrative expenses in the accompanying consolidated statements of operations.

 

The future minimum payments under noncancelable operating leases, net of subleases, at December 31, 2011 are as follows (in thousands):

 

2012

 

$

5,487

 

2013

 

6,000

 

2014

 

5,474

 

2015

 

4,964

 

2016

 

3,709

 

Thereafter

 

2,480

 

 

 

$

28,114

 

 

F-58



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 11—Commitments and Contingencies (Continued)

 

Foreign Currency Hedge Contracts

 

The Company has entered into foreign currency hedge contracts to manage its foreign currency risk in connection with certain original programming series produced in New Zealand. The Company has committed to pay US$48.6 million for NZD59.7 million during 2012.

 

Guarantees

 

Canada Co. entered into an agreement with the Ontario government whereby Canada Co. is eligible to receive funds under the Canadian Next Generation of Jobs Fund Grant (“NGOJF”) through the termination date of March 31, 2014. The maximum amount of the grant available and the guarantee is $23.0 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 the Company if Canada Co. does not perform any of its obligations. The maximum potential amount payable under the guarantee is $8.0 million at December 31, 2011 and the Company has accrued $6.4 million related to this guarantee in accrued liabilities in the accompanying consolidated balance sheet as of December 31, 2011.

 

As discussed in Note 3, the Company sold its controlling interest in Canada Co. on March 3, 2011. The terms of the guarantee have not changed.

 

Starz Entertainment is the guarantor on two noncancelable operating leases in which an affiliate within each of the Starz Distribution and Starz Animation businesses is the tenant. The maximum potential amount payable under these guarantees is $17.0 million at December 31, 2011. Starz Entertainment does not currently expect to have to perform under these obligations. The leases expire in 2014 and 2016.

 

Legal Proceedings

 

On March 9, 2011, the Company notified DISH Network L.L.C. (“DISH”) that it breached the affiliation agreement with the Company 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’s written approval. On May 3, 2011, the Company filed a lawsuit against DISH alleging that DISH breached its affiliation agreement with the Company in connection with such free preview, and on May 20, 2011, Disney Enterprises, Inc. filed a lawsuit against DISH in connection with the same free preview. DISH filed a counterclaim against the Company in the first lawsuit, seeking indemnification from the Company against Disney in the second lawsuit. In addition, on July 29, 2011, FX Networks filed a separate lawsuit against DISH and the Company in connection with the same free preview. The resolution of these matters and its potential impact on the Company is uncertain at this time.

 

In the normal course of business, the Company is subject to lawsuits and other claims. While it is not possible to predict the outcome of these matters, it is the opinion of management, based upon consultation with legal counsel, that the ultimate disposition of known proceedings, other than as discussed above, will not have a material adverse impact on our consolidated financial position, results of operations or liquidity.

 

F-59



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 12—Other Information

 

Goodwill

 

There were no changes in the carrying amount of goodwill, all of which relates to Starz Channels’, during the years ended December 31, 2011 and 2010. As of December 31, 2011, the accumulated impairment loss was $1,722.1 million, of which $1,396.7 million relates to Starz Channels, $322.2 million to Starz Distribution and $3.2 million to Starz Animation.

 

Advertising and Marketing

 

The Company’s total advertising costs were $109.2 million, $147.4 million and $199.7 million for the years ended December 31, 2011, 2010 and 2009, respectively. Total marketing costs were $23.0 million, $28.0 million and $29.6 million for the years ended December 31, 2011, 2010 and 2009, respectively.

 

Foreign Currency Translation

 

Accumulated foreign currency translation adjustments, net of income taxes, included in the consolidated statements of member’s interest and noncontrolling interests totaled $4.4 million and ($0.5) million as of December 31, 2011 and 2010, respectively.

 

Major Customers and Suppliers

 

Two Starz Channels’ customers accounted for 21% and 15% of the Company’s total revenue for the year ended December 31, 2011. Two Starz Channels’ customers accounted for 20% and 15% of the Company’s total revenue for the year ended December 31, 2010. Two Starz Channels’ customers accounted for 20% and 16% of the Company’s total revenue for the year ended December 31, 2009. There were no other customers that accounted for more than 10% of revenue in any year. These customers accounted for 41% and 38% of trade accounts receivable as of December 31, 2011 and 2010, respectively. Services are provided to these customers pursuant to affiliation agreements with varying terms.

 

As discussed in Note 11, the Company has entered into agreements to license theatrically released films for our premium movie networks from studios owned by Disney (through 2015) and Sony (through 2016). Films are available to the Company for exhibition generally 8-12 months after their theatrical release.

 

In July 2010, Anchor Bay outsourced substantially all of its home video distribution services, including DVD manufacturing and distribution to Twentieth Century Fox Home Entertainment LLC. The term of the distribution agreement is from July 1, 2010 through June 30, 2015. Previously, Anchor Bay had outsourced substantially all of its home video distribution services, including DVD manufacturing and distribution, to Sony Pictures Home Entertainment, Inc.

 

Foreign Operations

 

Revenue generated outside of the United States represented 4%, 4% and 3% of consolidated revenue for each of the years ended December 31, 2011, 2010 and 2009, respectively. Net long-lived

 

F-60



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 12—Other Information (Continued)

 

assets outside the United States were none and $4.3 million as of December 31, 2011 and 2010, respectively, and in 2010 related entirely to discontinued operations as discussed in Note 3.

 

Note 13—Information about Operating Segments

 

The Company is primarily engaged in video programming and development, production, acquisition and distribution of entertainment content. The Company evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as Adjusted OIBDA. Adjusted OIBDA is defined as revenue less programming costs, production and acquisition costs, home video cost of sales, operating expenses, advertising and marketing costs and general and administrative expenses. Our chief operating decision maker uses this measure of performance in conjunction with other measures to evaluate the operating segments and make decisions about allocating resources among the operating segments. The Company believes Adjusted OIBDA is an important indicator of the operational strength and performance of its operating segments, including each operating segment’s ability to service debt and fund investment 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 phantom stock appreciation rights, long term incentive plan and 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 from continuing operations before income taxes, net income, net cash provided by operating activities and other measures of financial performance prepared in accordance with GAAP. The Company generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current prices.

 

The Company’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. The Company 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 Channels and Starz Distribution have been identified as reportable segments; however as the Company has only three operating segments, Starz Animation is also reported.

 

F-61



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 13—Information about Operating Segments (Continued)

 

Performance Measures (in thousands):

 

 

 

For the Years Ended December 31,

 

 

 

2011

 

2010

 

2009

 

Revenue:

 

 

 

 

 

 

 

Starz Channels

 

$

1,269,924

 

$

1,224,136

 

$

1,188,901

 

Starz Distribution

 

310,927

 

367,477

 

306,332

 

Starz Animation

 

45,273

 

50,007

 

48,095

 

Inter-segment eliminations

 

(12,091

)

(36,283

)

(20,731

)

Total Revenue

 

$

1,614,033

 

$

1,605,337

 

$

1,522,597

 

Adjusted OIBDA:

 

 

 

 

 

 

 

Starz Channels

 

$

427,689

 

$

416,390

 

$

396,499

 

Starz Distribution

 

4,567

 

(66,182

)

(107,533

)

Starz Animation

 

(850

)

(2,419

)

(744

)

Inter-segment eliminations

 

18,182

 

(12,136

)

(8,610

)

Total Adjusted OIBDA

 

$

449,588

 

$

335,653

 

$

279,612

 

 

Other Information (in thousands):

 

 

 

For the Years Ended December 31,

 

 

 

2011

 

2010

 

2009

 

Capitalized production and development spend:

 

 

 

 

 

 

 

Starz Channels

 

$

144,494

 

$

64,573

 

$

78,953

 

Starz Distribution

 

69,161

 

52,462

 

61,839

 

Starz Animation

 

 

 

 

Inter-segment eliminations

 

 

 

 

Total capitalized production and development spend

 

$

213,655

 

$

117,035

 

$

140,792

 

 

 

 

December 31,

 

 

 

2011

 

2010

 

Total assets

 

 

 

 

 

Starz Channels

 

$

2,357,580

 

$

1,616,653

 

Starz Distribution

 

162,659

 

135,958

 

Starz Animation

 

5,320

 

8,172

 

Other unallocated assets (primarily cash, deferred taxes and other assets)

 

136,753

 

169,747

 

Inter-segment eliminations

 

(59,137

)

(37,528

)

Total assets

 

$

2,603,175

 

$

1,893,002

 

 

F-62



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 13—Information about Operating Segments (Continued)

 

The following table provides a reconciliation of Adjusted OIBDA to income from continuing operations before income taxes (in thousands):

 

 

 

For the Years Ended December 31,

 

 

 

2011

 

2010

 

2009

 

Consolidated Adjusted OIBDA

 

$

449,588

 

$

335,653

 

$

279,612

 

Phantom stock appreciation rights, long term incentive plan and stock compensation

 

(7,078

)

(39,468

)

(35,142

)

Depreciation and amortization

 

(17,907

)

(20,468

)

(23,470

)

Interest expense, including amounts due to affiliate, net of amounts capitalized

 

(5,012

)

(20,932

)

(27,188

)

Other expense, net

 

(3,505

)

(542

)

(4,719

)

Income from continuing operations before income taxes

 

$

416,086

 

$

254,243

 

$

189,093

 

 

Note 14—Supplemental Guarantor Condensed Consolidating Financial Information

 

As discussed in Note 15—Subsequent Events, Starz, LLC and Starz Finance Corp, a wholly-owned subsidiary of the Company which was incorporated in August of 2012, co-issued the Senior Notes (as defined in Note 15) which are fully and unconditionally guaranteed by Starz Entertainment. Starz Media, Film Roman and other immaterial subsidiaries of the Company (“Starz Media and Other Businesses”) are not guarantors of the Senior Notes.

 

F-63



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements

 

December 31, 2011, 2010 and 2009

 

Note 14—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

The following tables set forth the consolidating financial information of the Company, which includes the financial information of Starz Entertainment, the guarantor:

 

Consolidating Balance Sheet Information—As of December 31, 2011

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

965,400

 

$

125,261

 

$

9,226

 

$

 

$

1,099,887

 

Restricted cash

 

 

 

4,896

 

 

4,896

 

Trade accounts receivable, net

 

204,457

 

 

36,865

 

(296

)

241,026

 

Program rights

 

446,995

 

 

 

(5,141

)

441,854

 

Deferred income taxes

 

8,616

 

1,498

 

 

 

10,114

 

Notes receivable from affiliates

 

38,352

 

 

 

(38,352

)

 

Other current assets

 

18,961

 

 

12,375

 

 

31,336

 

Total current assets

 

1,682,781

 

126,759

 

63,362

 

(43,789

)

1,829,113

 

Program rights

 

325,473

 

 

 

(5,477

)

319,996

 

Property and equipment, net

 

95,968

 

 

2,563

 

 

98,531

 

Investment in films and television programs, net

 

106,720

 

 

77,222

 

 

183,942

 

Goodwill

 

131,760

 

 

 

 

131,760

 

Other assets, net

 

14,878

 

9,938

 

24,888

 

(9,871

)

39,833

 

Investment in consolidated subsidiaries

 

 

1,619,020

 

 

(1,619,020

)

 

Total assets

 

$

2,357,580

 

$

1,755,717

 

$

168,035

 

$

(1,678,157

)

$

2,603,175

 

Liabilities and Member’s Interest (Deficit) and Noncontrolling Interests

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current portion of debt

 

$

4,129

 

$

 

$

 

$

 

$

4,129

 

Trade accounts payable

 

6,509

 

 

2,181

 

 

8,690

 

Accrued liabilities

 

137,085

 

938

 

140,433

 

(8,160

)

270,296

 

Accrued compensation related to long term incentive plan

 

33,854

 

 

 

 

33,854

 

Notes payable due to affiliate

 

 

 

38,352

 

(38,352

)

 

Due to (from) affiliates

 

427,650

 

(377,255

)

 

3,441

 

53,836

 

Deferred revenue

 

16,888

 

 

9,846

 

 

26,734

 

Total current liabilities

 

626,115

 

(376,317

)

190,812

 

(43,071

)

397,539

 

Accrued long term incentive plan

 

2,751

 

 

 

 

2,751

 

Debt

 

540,915

 

505,000

 

 

(505,000

)

540,915

 

Deferred income taxes

 

28,473

 

(16,067

)

 

(2,098

)

10,308

 

Other liabilities

 

4,510

 

 

9,443

 

(5,392

)

8,561

 

Total liabilities

 

1,202,764

 

112,616

 

200,255

 

(555,561

)

960,074

 

Member’s interest (deficit)

 

1,154,816

 

1,651,484

 

(32,195

)

(1,122,621

)

1,651,484

 

Noncontrolling interests in subsidiaries

 

 

(8,383

)

(25

)

25

 

(8,383

)

Total member’s interest (deficit) and noncontrolling interests

 

1,154,816

 

1,643,101

 

(32,220

)

(1,122,596

)

1,643,101

 

Total liabilities and member’s interest (deficit) and noncontrolling interests

 

$

2,357,580

 

$

1,755,717

 

$

168,035

 

$

(1,678,157

)

$

2,603,175

 

 

 

F-64



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 14—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Consolidating Balance Sheet Information—As of December 31, 2010

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

306,157

 

$

 

$

9,495

 

$

 

$

315,652

 

Restricted cash

 

 

 

8,226

 

 

8,226

 

Trade accounts receivable, net

 

211,706

 

 

18,572

 

(5,937

)

224,341

 

Program rights

 

433,963

 

 

 

(22,797

)

411,166

 

Deferred income taxes

 

3,805

 

3,674

 

 

 

7,479

 

Due from (to) affiliate

 

25,999

 

(25,999

)

 

 

 

Notes receivable from affiliates

 

7,475

 

 

 

(7,475

)

 

Other current assets

 

4,849

 

 

13,984

 

 

18,833

 

Assets of discontinued operations

 

 

 

14,511

 

 

14,511

 

Total current assets

 

993,954

 

(22,325

)

64,788

 

(36,209

)

1,000,208

 

Program rights

 

327,625

 

 

 

(4,714

)

322,911

 

Property and equipment, net

 

101,171

 

 

3,546

 

 

104,717

 

Investment in films and television programs, net

 

57,007

 

 

63,827

 

(133

)

120,701

 

Deferred income taxes

 

4,488

 

145,105

 

 

3,528

 

153,121

 

Goodwill

 

131,760

 

 

 

 

131,760

 

Other assets, net

 

648

 

 

29,969

 

 

30,617

 

Investment in consolidated subsidiaries

 

3,528

 

1,395,683

 

 

(1,399,211

)

 

Assets of discontinued operations

 

 

 

28,967

 

 

28,967

 

Total assets

 

$

1,620,181

 

$

1,518,463

 

$

191,097

 

$

(1,436,739

)

$

1,893,002

 

Liabilities and Member’s Interest and Noncontrolling Interest

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current portion of debt

 

$

3,908

 

$

 

$

54,336

 

$

 

$

58,244

 

Trade accounts payable

 

5,627

 

 

2,071

 

 

7,698

 

Accrued liabilities

 

106,713

 

(13

)

82,388

 

(5,372

)

183,716

 

Accrued compensation related to long term incentive plan

 

6,655

 

 

 

 

6,655

 

Notes payable due to affiliate

 

 

 

7,475

 

(7,475

)

 

Due to (from) affiliates

 

 

9,295

 

(116

)

(8,492

)

687

 

Deferred revenue

 

16,127

 

 

15,015

 

(5,409

)

25,733

 

Liabilities of discontinued operations

 

 

 

13,248

 

 

13,248

 

Total current liabilities

 

139,030

 

9,282

 

174,417

 

(26,748

)

295,981

 

Accrued long term incentive plan

 

37,458

 

 

 

 

37,458

 

Debt

 

40,043

 

 

927

 

 

40,970

 

Other liabilities

 

5,065

 

 

3,241

 

 

8,306

 

Liabilities of discontinued operations

 

 

 

1,106

 

 

1,106

 

Total liabilities

 

221,596

 

9,282

 

179,691

 

(26,748

)

383,821

 

Member’s interest

 

1,398,585

 

1,508,681

 

10,906

 

(1,409,491

)

1,508,681

 

Noncontrolling interest in subsidiary

 

 

500

 

500

 

(500

)

500

 

Total member’s interest and noncontrolling interest

 

1,398,585

 

1,509,181

 

11,406

 

(1,409,991

)

1,509,181

 

Total liabilities and member’s interest and noncontrolling interest

 

$

1,620,181

 

$

1,518,463

 

$

191,097

 

$

(1,436,739

)

$

1,893,002

 

 

F-65



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 14—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Consolidating Statement of Operations Information—For the Year Ended December 31, 2011

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Programming networks and other services

 

$

1,287,826

 

$

 

$

98,416

 

$

(14,101

)

$

1,372,141

 

Home video net sales

 

27,389

 

 

219,981

 

(5,478

)

241,892

 

Total revenue

 

1,315,215

 

 

318,397

 

(19,579

)

1,614,033

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Programming costs (including amortization)

 

672,525

 

 

 

(21,276

)

651,249

 

Production and acquisition costs (including amortization)

 

23,938

 

 

136,161

 

(1,310

)

158,789

 

Home video cost of sales

 

14,296

 

 

53,622

 

(5,478

)

62,440

 

Operating expenses

 

16,193

 

 

47,287

 

(9,777

)

53,703

 

Advertising and marketing

 

91,314

 

 

40,869

 

 

132,183

 

General and administrative

 

71,399

 

338

 

34,344

 

 

106,081

 

Long term incentive plan and stock compensation

 

6,603

 

 

475

 

 

7,078

 

Depreciation and amortization

 

12,757

 

 

5,150

 

 

17,907

 

Total costs and expenses

 

909,025

 

338

 

317,908

 

(37,841

)

1,189,430

 

Operating income (loss)

 

406,190

 

(338

)

489

 

18,262

 

424,603

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest expense, including amounts due to affiliate, net of amounts capitalized

 

(2,849

)

(2,282

)

(2,163

)

2,282

 

(5,012

)

Interest income (expense), related party

 

4,395

 

 

(4,395

)

 

 

Share of earnings of consolidated subsidiaries

 

 

241,759

 

 

(241,759

)

 

Other income (expense), net

 

(10,575

)

93

 

546

 

6,431

 

(3,505

)

Income (loss) from continuing operations before income taxes

 

397,161

 

239,232

 

(5,523

)

(214,784

)

416,086

 

Income tax expense

 

(147,877

)

(8,232

)

(6,099

)

(9,981

)

(172,189

)

Income (loss) from continuing operations

 

249,284

 

231,000

 

(11,622

)

(224,765

)

243,897

 

Loss from discontinued operations (including loss on sale of $12,114), net of income taxes

 

 

5,411

 

(12,897

)

 

(7,486

)

Net income (loss)

 

249,284

 

236,411

 

(24,519

)

(224,765

)

236,411

 

Net loss attributable to noncontrolling interests

 

 

3,273

 

525

 

(525

)

3,273

 

Net income (loss) attributable to member

 

$

249,284

 

$

239,684

 

$

(23,994

)

$

(225,290

)

$

239,684

 

 

F-66



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 14—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Consolidating Statement of Comprehensive Income (Loss) Information—For the Year Ended December 31, 2011

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Net income (loss)

 

$

249,284

 

$

236,411

 

$

(24,519

)

$

(224,765

)

$

236,411

 

Other comprehensive loss, net of taxes:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments from continuing operations

 

 

(529

)

(529

)

529

 

(529

)

Foreign currency translation adjustments from discontinued operations

 

 

(5,946

)

(5,946

)

5,946

 

(5,946

)

Other comprehensive loss

 

 

(6,475

)

(6,475

)

6,475

 

(6,475

)

Comprehensive income (loss)

 

249,284

 

229,936

 

(30,994

)

(218,290

)

229,936

 

Comprehensive loss attributable to noncontrolling interests

 

 

3,447

 

681

 

(681

)

3,447

 

Comprehensive income (loss) attributable to member

 

$

249,284

 

$

233,383

 

$

(30,313

)

$

(218,971

)

$

233,383

 

 

F-67



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 14—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Consolidating Statement of Operations and Comprehensive Income (Loss) Information—For the Year Ended December 31, 2010

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Programming networks and other services

 

$

1,234,712

 

$

 

$

176,667

 

$

(31,030

)

$

1,380,349

 

Home video net sales

 

12,766

 

 

214,775

 

(2,553

)

224,988

 

Total revenue

 

1,247,478

 

 

391,442

 

(33,583

)

1,605,337

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Programming costs (including amortization)

 

665,271

 

 

 

(17,454

)

647,817

 

Production and acquisition costs (including amortization)

 

18,760

 

 

159,194

 

 

177,954

 

Home video cost of sales

 

7,279

 

 

65,089

 

(2,553

)

69,815

 

Operating expenses

 

16,077

 

 

59,293

 

(2,110

)

73,260

 

Advertising and marketing

 

66,682

 

 

108,735

 

 

175,417

 

General and administrative

 

66,308

 

 

59,113

 

 

125,421

 

Phantom stock appreciation rights, long term incentive plan and stock compensation

 

40,900

 

 

(1,432

)

 

39,468

 

Depreciation and amortization

 

14,007

 

 

6,461

 

 

20,468

 

Total costs and expenses

 

895,284

 

 

456,453

 

(22,117

)

1,329,620

 

Operating income (loss)

 

352,194

 

 

(65,011

)

(11,466

)

275,717

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest expense, including amounts due to affiliate, net of amounts capitalized

 

(1,202

)

 

(19,730

)

 

(20,932

)

Share of earnings of consolidated subsidiaries

 

 

129,269

 

 

(129,269

)

 

Other income (expense), net

 

1,310

 

 

(1,852

)

 

(542

)

Income (loss) from continuing operations before income taxes

 

352,302

 

129,269

 

(86,593

)

(140,735

)

254,243

 

Income tax benefit (expense)

 

(131,416

)

31,399

 

(3,039

)

4,292

 

(98,764

)

Income (loss) from continuing operations

 

220,886

 

160,668

 

(89,632

)

(136,443

)

155,479

 

Income (loss) from discontinued operations, net of income taxes

 

 

(1,874

)

5,322

 

(133

)

3,315

 

Net income (loss)

 

220,886

 

158,794

 

(84,310

)

(136,576

)

158,794

 

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments from continuing operations

 

 

1,167

 

1,167

 

(1,167

)

1,167

 

Foreign currency translation adjustments from discontinued operations

 

 

(1,172

)

(1,172

)

1,172

 

(1,172

)

Comprehensive income (loss)

 

$

220,886

 

$

158,789

 

$

(84,315

)

$

(136,571

)

$

158,789

 

 

F-68



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 14—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Consolidating Statement of Operations and Comprehensive Income (Loss) Information—For the Year Ended December 31, 2009

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Programming networks and other services

 

$

1,191,037

 

$

 

$

180,420

 

$

(16,479

)

$

1,354,978

 

Home video net sales

 

1,791

 

 

166,150

 

(322

)

167,619

 

Total revenue

 

1,192,828

 

 

346,570

 

(16,801

)

1,522,597

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Programming costs (including amortization)

 

649,321

 

 

 

(7,844

)

641,477

 

Production and acquisition costs (including amortization)

 

11,848

 

 

95,274

 

 

107,122

 

Home video cost of sales

 

1,724

 

 

61,894

 

(322

)

63,296

 

Operating expenses

 

13,789

 

 

66,600

 

(426

)

79,963

 

Advertising and marketing

 

65,242

 

 

164,093

 

 

229,335

 

General and administrative

 

67,033

 

 

54,759

 

 

121,792

 

Phantom stock appreciation rights, long term incentive plan and stock compensation

 

37,195

 

 

(2,053

)

 

35,142

 

Depreciation and amortization

 

16,415

 

 

7,055

 

 

23,470

 

Total costs and expenses

 

862,567

 

 

447,622

 

(8,592

)

1,301,597

 

Operating income (loss)

 

330,261

 

 

(101,052

)

(8,209

)

221,000

 

Other expense:

 

 

 

 

 

 

 

 

 

 

 

Interest expense, including amounts due to affiliate, net of amounts capitalized

 

(2,233

)

 

(24,955

)

 

(27,188

)

Share of earnings of consolidated subsidiaries

 

 

70,449

 

 

(70,449

)

 

Other expense, net

 

(594

)

 

(4,125

)

 

(4,719

)

Income (loss) from continuing operations before income taxes

 

327,434

 

70,449

 

(130,132

)

(78,658

)

189,093

 

Income tax benefit (expense)

 

(122,560

)

49,656

 

(1,180

)

3,078

 

(71,006

)

Income (loss) from continuing operations

 

204,874

 

120,105

 

(131,312

)

(75,580

)

118,087

 

Income (loss) from discontinued operations, net of income taxes

 

 

(765

)

2,018

 

 

1,253

 

Net income (loss)

 

204,874

 

119,340

 

(129,294

)

(75,580

)

119,340

 

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments from continuing operations

 

 

4,566

 

4,566

 

(4,566

)

4,566

 

Foreign currency translation adjustments from discontinued operations

 

 

(2,958

)

(2,958

)

2,958

 

(2,958

)

Comprehensive income (loss)

 

$

204,874

 

$

120,948

 

$

(127,686

)

$

(77,188

)

$

120,948

 

 

F-69



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 14—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Consolidating Statement of Cash Flows’ Information—For the Year Ended December 31, 2011

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

249,284

 

$

236,411

 

$

(24,519

)

$

(224,765

)

$

236,411

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

 

7,486

 

 

7,486

 

Long term incentive plan and stock compensation

 

6,603

 

 

475

 

 

7,078

 

Payments of long term incentive plan

 

(7,696

)

 

 

 

(7,696

)

Amortization of program rights

 

632,317

 

 

 

(21,276

)

611,041

 

Amortization of investment in films and television programs

 

20,145

 

 

105,957

 

 

126,102

 

Depreciation and amortization

 

12,757

 

 

5,150

 

 

17,907

 

Share of earnings of consolidated subsidiaries

 

 

(241,759

)

 

241,759

 

 

Deferred income taxes

 

25,758

 

13,363

 

 

(2,098

)

37,023

 

Other non-cash items

 

1,382

 

253

 

(299

)

9,678

 

11,014

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Restricted cash

 

 

 

(4,896

)

 

(4,896

)

Trade accounts receivable

 

7,711

 

 

(25,055

)

(6,034

)

(23,378

)

Program rights

 

(564,375

)

 

 

10,034

 

(554,341

)

Investment in films and television programs

 

(144,494

)

 

(69,028

)

(133

)

(213,655

)

Other current assets

 

583

 

 

3,151

 

 

3,734

 

Other assets

 

(4,812

)

 

251

 

 

(4,561

)

Trade accounts payable

 

882

 

 

110

 

 

992

 

Accrued liabilities

 

13,558

 

951

 

(3,067

)

(8,832

)

2,610

 

Due to / from affiliates

 

80,081

 

(7,639

)

14,877

 

1,952

 

89,271

 

Deferred revenue

 

138

 

 

6,863

 

(285

)

6,716

 

Other liabilities

 

133

 

 

(1,018

)

 

(885

)

Net cash provided by operating activities

 

329,955

 

1,580

 

16,438

 

 

347,973

 

Investing activities—purchases of property and equipment

 

$

(7,554

)

$

 

$

(169

)

$

 

$

(7,723

)

 

(Continued)

 

F-70



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 14—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Consolidating Statement of Cash Flows’ Information (Continued)—For the Year Ended December 31, 2011

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Borrowings of debt

 

$

 

$

505,000

 

$

 

$

 

$

505,000

 

Payments of debt

 

(3,907

)

 

(55,263

)

 

(59,170

)

Debt issuance costs

 

 

(10,191

)

 

 

(10,191

)

Cash advance to / from affiliate

 

374,128

 

(374,128

)

 

 

 

Borrowings under notes payable to affiliate

 

(103,236

)

 

103,236

 

 

 

Repayments under notes payable to affiliate

 

72,359

 

 

(72,359

)

 

 

Net advances to / from affiliate

 

(2,502

)

 

2,502

 

 

 

Contribution from noncontrolling owner of subsidiary

 

 

3,000

 

 

 

3,000

 

Settlement of derivative instruments

 

 

 

(2,863

)

 

(2,863

)

Restricted cash

 

 

 

8,226

 

 

8,226

 

Net cash provided by (used in) financing activities

 

336,842

 

123,681

 

(16,521

)

 

444,002

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 

(17

)

 

(17

)

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

 

 

(2,283

)

 

(2,283

)

Net cash provided by financing activities

 

 

 

3,569

 

 

3,569

 

Effect of exchange rate changes on cash and cash equivalents held by discontinued operations

 

 

 

40

 

 

40

 

Cash held by discontinued operations upon sale

 

 

 

(3,144

)

 

(3,144

)

Change in available cash held by discontinued operations

 

 

 

1,818

 

 

1,818

 

Net cash provided by discontinued operations

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

659,243

 

125,261

 

(269

)

 

784,235

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

306,157

 

 

9,495

 

 

315,652

 

End of year

 

$

965,400

 

$

125,261

 

$

9,226

 

$

 

$

1,099,887

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

683

 

$

1,238

 

$

758

 

$

 

$

2,679

 

Cash paid for income taxes

 

$

41,782

 

$

 

$

3,011

 

$

 

$

44,793

 

Change in deferred tax assets due to sale of noncontrolling interest

 

$

 

$

141,135

 

$

 

$

 

$

141,135

 

Push down of debt from parent

 

$

494,826

 

$

(494,826

)

$

 

$

 

$

 

 

F-71


 

 


 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 14—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Consolidating Statement of Cash Flows’ Information—For the Year Ended December 31, 2010

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

220,886

 

$

158,794

 

$

(84,310

)

$

(136,576

)

$

158,794

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

 

(3,315

)

 

(3,315

)

Phantom stock appreciation rights, long term incentive plan and stock compensation

 

40,900

 

 

(1,432

)

 

39,468

 

Payments of phantom stock appreciation rights and long term incentive plan

 

(196,232

)

 

 

 

(196,232

)

Amortization of program rights

 

629,069

 

 

 

(17,454

)

611,615

 

Amortization of investment in films and television programs

 

15,688

 

 

101,240

 

 

116,928

 

Depreciation and amortization

 

14,007

 

 

6,461

 

 

20,468

 

Noncash interest on debt due to affiliate

 

 

 

16,313

 

 

16,313

 

Share of earnings of consolidated subsidiaries

 

 

(129,269

)

 

129,269

 

 

Deferred income taxes

 

59,513

 

(6,559

)

 

 

52,954

 

Other non-cash items

 

57

 

 

7,043

 

(4,292

)

2,808

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Trade accounts receivable

 

(15,503

)

 

16,370

 

3,471

 

4,338

 

Program rights

 

(561,276

)

 

 

28,710

 

(532,566

)

Investment in films and television programs

 

(64,573

)

 

(52,595

)

133

 

(117,035

)

Other current assets

 

3,077

 

 

5,556

 

 

8,633

 

Other assets

 

(375

)

 

(3,086

)

 

(3,461

)

Trade accounts payable

 

(1,000

)

 

1,183

 

 

183

 

Accrued liabilities

 

8,850

 

 

3,216

 

 

12,066

 

Due to / from affiliates

 

(48,258

)

52,255

 

(5,551

)

 

(1,554

)

Deferred revenue

 

873

 

 

8,063

 

(3,261

)

5,675

 

Other liabilities

 

(4,600

)

 

(341

)

 

(4,941

)

Net cash provided by operating activities

 

101,103

 

75,221

 

14,815

 

 

191,139

 

Investing activities—purchases of property and equipment

 

$

(6,720

)

$

 

$

(379

)

$

 

$

(7,099

)

 

(Continued)

 

F-72



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 14—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Consolidating Statement of Cash Flows’ Information (Continued)—For the Year Ended December 31, 2010

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Borrowings of debt

 

$

 

$

 

$

129,343

 

$

 

$

129,343

 

Payments of debt

 

(3,700

)

 

(198,335

)

 

(202,035

)

Net advances to / from affiliate

 

(35,812

)

 

35,812

 

 

 

Contribution from affiliate

 

 

 

15,000

 

 

15,000

 

Contribution from noncontrolling owner of subsidiary

 

 

 

500

 

 

500

 

Distributions to affiliate

 

 

(75,221

)

 

 

(75,221

)

Settlement of derivative instruments

 

 

 

(6,301

)

 

(6,301

)

Restricted cash

 

 

 

10,300

 

 

10,300

 

Net cash used in financing activities

 

(39,512

)

(75,221

)

(13,681

)

 

(128,414

)

Effect of exchange rate changes on cash and cash equivalents

 

 

 

59

 

 

59

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

 

753

 

 

753

 

Net cash used in investing activities

 

 

 

(1,836

)

 

(1,836

)

Net cash used in financing activities

 

 

 

(1,390

)

 

(1,390

)

Effect of exchange rate changes on cash and cash equivalents held by discontinued operations

 

 

 

85

 

 

85

 

Change in available cash held by discontinued operations

 

 

 

3,460

 

 

3,460

 

Net cash provided by discontinued operations

 

 

 

1,072

 

 

1,072

 

Net increase in cash and cash equivalents

 

54,871

 

 

1,886

 

 

56,757

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

251,286

 

 

7,609

 

 

258,895

 

End of year

 

$

306,157

 

$

 

$

9,495

 

$

 

$

315,652

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

1,202

 

$

 

$

2,574

 

$

 

$

3,776

 

Cash paid for income taxes

 

$

118,636

 

$

 

$

2,070

 

$

 

$

120,706

 

Contribution of notes receivable from affiliate

 

$

 

$

 

$

426,254

 

$

 

$

426,254

 

Distribution of notes receivable to affiliate

 

$

 

$

 

$

489,134

 

$

 

$

489,134

 

(Distribution)/contribution of due from affiliate

 

$

(39,885

)

$

 

$

39,885

 

$

 

$

 

 

F-73



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 14—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Consolidating Statement of Cash Flows’ Information—For the Year Ended December 31, 2009

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

204,874

 

$

119,340

 

$

(129,294

)

$

(75,580

)

$

119,340

 

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

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

 

(1,253

)

 

(1,253

)

Phantom stock appreciation rights and long term incentive plan

 

37,195

 

 

(2,053

)

 

35,142

 

Payments of long term incentive plan

 

(2,565

)

 

 

 

(2,565

)

Amortization of program rights

 

615,345

 

 

 

(7,844

)

607,501

 

Amortization of investment in films and television programs

 

10,981

 

 

64,340

 

 

75,321

 

Depreciation and amortization

 

16,415

 

 

7,055

 

 

23,470

 

Noncash interest on debt due to affiliate

 

 

 

13,498

 

 

13,498

 

Share of earnings of consolidated subsidiaries

 

 

(70,449

)

 

70,449

 

 

Deferred income taxes

 

1,739

 

17,260

 

 

 

18,999

 

Other non-cash items

 

(1,186

)

 

10,039

 

(3,078

)

5,775

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Trade accounts receivable

 

(6,654

)

 

37,098

 

1,608

 

32,052

 

Program rights

 

(568,813

)

 

 

16,593

 

(552,220

)

Investment in films and television programs

 

(78,953

)

 

(61,839

)

 

(140,792

)

Other current assets

 

(4,138

)

 

9,944

 

 

5,806

 

Other assets

 

(254

)

 

1,781

 

 

1,527

 

Trade accounts payable

 

5,625

 

 

(8,402

)

 

(2,777

)

Accrued liabilities

 

5,048

 

 

(5,292

)

 

(244

)

Due to / from affiliates

 

5,733

 

(158

)

(5,478

)

 

97

 

Deferred revenue

 

2,921

 

 

(26,215

)

(2,148

)

(25,442

)

Other liabilities

 

104

 

 

(1,263

)

 

(1,159

)

Net cash provided by (used in) operating activities

 

243,417

 

65,993

 

(97,334

)

 

212,076

 

Investing activities—purchases of property and equipment

 

$

(9,664

)

$

 

$

(354

)

$

 

$

(10,018

)

 

(Continued)

 

F-74



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 14—Supplemental Guarantor Condensed Consolidating Financial Information (Continued)

 

Consolidating Statement of Cash Flows’ Information (Continued)—For the Year Ended December 31, 2009

 

(in thousands)

 

 

 

Starz
Entertainment,
LLC
(Guarantor)

 

Starz, LLC
Parent Only
(Co-Issuer)

 

Starz Media
and Other
Businesses
(Non-Guarantors)

 

Eliminations

 

Consolidated
Starz, LLC

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Borrowings of debt

 

$

 

$

 

$

115,800

 

$

 

$

115,800

 

Payments of debt

 

(3,502

)

 

(126,814

)

 

(130,316

)

Borrowings under note payable due to affiliate

 

 

 

94,000

 

 

94,000

 

Payments of note payable due to affiliate

 

(66,536

)

 

(5,637

)

 

(72,173

)

Net advances to / from affiliate

 

(9,776

)

 

9,776

 

 

 

Distributions to affiliate

 

 

(65,993

)

 

 

(65,993

)

Settlement of derivative instruments

 

 

 

(6,920

)

 

(6,920

)

Restricted cash

 

 

 

(9,468

)

 

(9,468

)

Net cash provided by (used in) financing activities

 

(79,814

)

(65,993

)

70,737

 

 

(75,070

)

Effect of exchange rate changes on cash and cash equivalents

 

 

 

243

 

 

243

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

 

12,847

 

 

12,847

 

Net cash used in investing activities

 

 

 

(1,213

)

 

(1,213

)

Net cash provided by financing activities

 

 

 

6,664

 

 

6,664

 

Effect of exchange rate changes on cash and cash equivalents held by discontinued operations

 

 

 

92

 

 

92

 

Change in available cash held by discontinued operations

 

 

 

(4,723

)

 

(4,723

)

Net cash provided by discontinued operations

 

 

 

13,667

 

 

13,667

 

Net increase (decrease) in cash and cash equivalents

 

153,939

 

 

(13,041

)

 

140,898

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

97,347

 

 

20,650

 

 

117,997

 

End of year

 

$

251,286

 

$

 

$

7,609

 

$

 

$

258,895

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

2,233

 

$

 

$

10,859

 

$

 

$

13,092

 

Cash paid for income taxes

 

$

116,514

 

$

 

$

1,180

 

$

 

$

117,694

 

 

F-75



 

Starz, LLC and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

December 31, 2011, 2010 and 2009

 

Note 15—Subsequent Events

 

During August 2012, LMC’s board of directors authorized a plan to distribute to the stockholders of LMC shares of a wholly-owned subsidiary, Liberty Spinco, Inc. (“Liberty Spinco”), that will hold all of the businesses, assets and liabilities of LMC not associated with Starz, LLC (with the exception of the Starz, LLC Englewood, Colorado corporate office building) (the “Spin-Off”).  The Spin-Off was completed on January 11, 2013. The transaction was effected as a pro-rata dividend of shares of Liberty Spinco to the stockholders of LMC. Liberty Spinco, which became a separate public company, was renamed Liberty Media Corporation. The businesses, assets and liabilities not included in Liberty Spinco are part of a separate public company now named Starz. In connection with the reorganization transaction, the Company distributed $1,800.0 million to LMC (paid as follows: $100.0 million on July 9, 2012, $250.0 million on August 17, 2012, $50.0 million on September 4, 2012, $200.0 million on November 16, 2012 and $1,200.0 million on January 10, 2013), funded by a combination of cash on hand and borrowings under the senior secured revolving credit facility, and such distributed cash was subsequently contributed to Liberty Spinco. Additionally, in connection with the reorganization transaction, the Company distributed its Englewood, Colorado corporate office building and related building improvements to LMC (and LMC subsequently transferred such building and related improvements to a subsidiary of Liberty Spinco) and then leased back the use of such facilities from such Liberty Spinco subsidiary. Following the Spin-Off, Liberty Spinco and Starz operate independently, and neither have any stock ownership, beneficial or otherwise, in the other.

 

On September 13, 2012, the Company and Starz Finance Corp. co-issued $500.0 million of 5% Senior Notes due September 15, 2019 (the “Senior Notes”). Starz Finance Corp. is a wholly-owned subsidiary of the Company and was formed for the sole purpose of co-issuing the Senior Notes. Starz Finance Corp. does not have and will not have any operations, assets or subsidiaries of its own. The Senior Notes pay interest semi-annually on September 15 and March 15 of each year. The Senior Notes are guaranteed jointly and severally by Starz Entertainment and Starz Finance Corp. The Company used the net proceeds and cash on hand to repay the $500.0 million term loan under the Senior Secured Credit Facilities.

 

F-76



 

Report of Independent Registered Public Accounting Firm

 

The Member

Starz, LLC:

 

Under date of April 27, 2012, except as to note 13, which is as of October 23, 2012, and except as to note 15, which is as of January 16, 2013, we reported on the consolidated balance sheets of Starz, LLC and subsidiaries (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, cash flows, and member’s interest and noncontrolling interests for each of the years in the three-year period ended December 31, 2011, which are included herein. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule in the registration statement. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.

 

In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

 

/s/ KPMG LLP

 

 

Denver, Colorado

 

October 23, 2012

 

 

F-77



 

Schedule II. Valuation and Qualifying Accounts

 

Starz, LLC and Subsidiaries

 

Years Ended December 31, 2011, 2010 and 2009

 

(in thousands)

 

Description

 

Balance at
beginning of
period

 

Charged to
costs and
expenses(1)

 

Charged to
other accounts

 

Deductions(2)

 

Balance at
end of
period

 

Year ended December 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

Reserves:

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

3,723

 

$

426

 

$

 

$

(1,976

)

$

2,173

 

Allowance for sales returns

 

26,967

 

101,628

 

 

(92,433

)

36,162

 

Total

 

$

30,690

 

$

102,054

 

$

 

$

(94,409

)

$

38,335

 

Year ended December 31, 2010:

 

 

 

 

 

 

 

 

 

 

 

Reserves:

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

5,094

 

$

1,954

 

$

 

$

(3,325

)

$

3,723

 

Allowance for sales returns

 

29,134

 

75,126

 

 

(77,293

)

26,967

 

Total

 

$

34,228

 

$

77,080

 

$

 

$

(80,618

)

$

30,690

 

Year ended December 31, 2009:

 

 

 

 

 

 

 

 

 

 

 

Reserves:

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

3,955

 

$

1,542

 

$

 

$

(403

)

$

5,094

 

Allowance for sales returns

 

24,171

 

72,008

 

 

(67,045

)

29,134

 

Total

 

$

28,126

 

$

73,550

 

$

 

$

(67,448

)

$

34,228

 

 


(1)         Charges for doubtful accounts are included in general and administrative expense and charges for sales returns are recorded against revenue.

 

(2)         Uncollectible accounts written off, foreign currency exchange rate and actual video returns.

 

F-78