August 1, 2013 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2013

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

For the transition period from to

Commission File Number 001-35294

Starz

(Exact Name of Registrant as Specified in Its Charter)



Delaware (State or other jurisdiction of incorporation or organization)		20-8988475 (I.R.S. Employer Identification No.)
8900 Liberty Circle Englewood, Colorado (Address of principal executive offices)		80112 (Zip Code)

Registrant’s telephone number, including area code: (720) 852-7700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceeding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes__X__ No___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes _X__ No____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer __X__	Accelerated filer ____	Non-accelerated filer ___	Smaller reporting company ____

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ____ No _X__

The number of outstanding shares of Starz’s common stock as of July 31, 2013 was:



	Series A	Series B
	107,069,150	9,880,238

STARZ

FORM 10-Q

Table of Contents



	Part I	Page

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012 (Unaudited)	2
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012 (Unaudited)	3
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (Unaudited)	5
	Condensed Consolidated Statement of Equity for the Six Months Ended June 30, 2013 (Unaudited)	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33

	Part II

Item 1.	Legal Proceedings	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 6.	Exhibits	35

PART I


Item 1.	Financial Statements

Starz and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share amounts)



	June 30, 2013			December 31, 2012
Assets
Current assets:
Cash and cash equivalents	$	30,854		$	749,774
Restricted cash	63,817			—
Trade accounts receivable, net of allowances of $37,719 and $35,045	242,061			241,415
Program rights, net	377,690			340,005
Deferred income taxes (Note 6)	5,081			990
Other current assets	37,364			44,727
Total current assets	756,867			1,376,911
Program rights	384,794			338,684
Investment in films and television programs, net	141,468			181,673
Property and equipment, net of accumulated depreciation of $100,059 and $110,882	91,180			96,280
Deferred income taxes (Note 6)	7,969			12,222
Goodwill	131,760			131,760
Other assets, net	41,106			38,520
Total assets	$	1,555,144		$	2,176,050

Liabilities and Equity
Current liabilities:
Current portion of debt (Note 2)	$	4,792		$	4,134
Trade accounts payable	5,547			6,162
Accrued liabilities (Notes 5, 7 and 8)	391,139			256,062
Due to affiliate (Note 5)	—			39,519
Deferred revenue	11,704			24,574
Total current liabilities	413,182			330,451
Debt (Note 2)	1,007,818			535,671
Other liabilities (Note 7)	9,171			7,784
Total liabilities	1,430,171			873,906
Stockholders' equity (Note 3):
Preferred stock, $.01 par value. Authorized 50,000,000 shares; no shares issued	—			—
Series A common stock, $.01 par value. Authorized 2,000,000,000 shares; issued and outstanding 108,456,436 and 111,722,828 shares at June 30, 2013 and the LMC Spin-Off, respectively	1,084			—
Series B common stock, $.01 par value. Authorized 75,000,000 shares; issued and outstanding 9,880,238 and 9,882,238 shares at June 30, 2013 and the LMC Spin-Off, respectively	99			—
Additional paid-in capital	506,652			—
Accumulated other comprehensive loss, net of taxes	(4,507		)	—
Accumulated deficit	(371,090		)	—
Member’s interest	—			1,311,951
Total stockholders' equity	132,238			1,311,951
Noncontrolling interests in subsidiaries	(7,265		)	(9,807		)
Total equity	124,973			1,302,144
Commitments and contingencies (Note 7)
Total liabilities and equity	$	1,555,144		$	2,176,050

See accompanying notes to condensed consolidated financial statements.

Starz and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share amounts)



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Revenue:
Programming networks and other services	$	391,081		$	361,627		$	740,569		$	728,878
Home video net sales	126,340			40,935			176,169			78,648
Total revenue	517,421			402,562			916,738			807,526

Costs and expenses:
Programming costs (including amortization) (Note 7)	165,353			179,304			311,324			340,253
Production and acquisition costs (including amortization) (Note 5)	113,267			39,372			153,057			75,448
Home video cost of sales	15,095			10,668			30,216			21,228
Operating expenses	12,437			12,953			25,122			26,375
Selling, general and administrative (Note 5)	81,762			51,789			150,982			108,906
Stock compensation (Note 4)	9,058			3,653			16,312			6,235
Depreciation and amortization	4,353			4,552			8,769			8,807
Total costs and expenses	401,325			302,291			695,782			587,252

Operating income	116,096			100,271			220,956			220,274

Other income (expense):
Interest expense, net of amounts capitalized (Note 2)	(11,331		)	(4,449		)	(21,559		)	(9,330		)
Other income (expense), net	(508		)	(98		)	(1,993		)	4,167
Income before income taxes	104,257			95,724			197,404			215,111

Income tax expense (Note 6)	(38,222		)	(26,116		)	(73,166		)	(66,308		)

Net income	66,035			69,608			124,238			148,803

Net income attributable to noncontrolling interests	(2,148		)	(883		)	(2,486		)	(2,296		)

Net income attributable to stockholders	$	63,887		$	68,725		$	121,752		$	146,507

Basic net income per common share (Note 8)	$	0.54		$	0.57		$	1.02		$	1.22
Diluted net income per common share (Note 8)	$	0.52		$	0.57		$	0.98		$	1.22
Weighted average number of common shares outstanding (Note 8):
Basic	118,362			119,996			119,139			119,996
Diluted	123,339			120,091			123,717			120,091

See accompanying notes to condensed consolidated financial statements.

Starz and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012

Net income	$	66,035		$	69,608		$	124,238		$	148,803

Other comprehensive loss, net of taxes -
Foreign currency translation adjustments from operations	(207		)	(201		)	(135)			(10)

Comprehensive income	65,828			69,407			124,103			148,793

Comprehensive income attributable to noncontrolling interests	(2,051		)	(807		)	(2,346		)	(2,310		)

Comprehensive income attributable to stockholders	$	63,777		$	68,600		$	121,757		$	146,483

See accompanying notes to condensed consolidated financial statements.

Starz and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)



	Six Months Ended June 30,
	2013			2012
Operating activities:
Net income	$	124,238		$	148,803
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	8,769			8,807
Amortization of program rights	288,377			319,083
Program rights payments	(227,514		)	(280,601		)
Amortization of investment in films and television programs	128,250			64,628
Investment in films and television programs	(107,346		)	(129,122		)
Stock compensation	16,312			6,235
Payments of long term incentive plan	(3,195		)	(27,707		)
Deferred income taxes	12,687			1,307
Other non-cash items	6,504			(13,350		)
Changes in assets and liabilities:
Current and other assets	(59,944		)	6,649
Due to affiliate	(39,519		)	(15,231		)
Payables and other liabilities	(6,545		)	(27,768		)
Net cash provided by operating activities	141,074			61,733

Investing activities – purchases of property and equipment	(3,125		)	(2,255		)

Financing activities:
Borrowings of debt	988,500			—
Payments of debt	(560,273		)	(2,036		)
Debt issuance costs	(2,344		)	(381		)
Distributions to Old LMC	(1,200,000		)	—
Repurchases of common stock	(81,807		)	—
Minimum withholding of taxes related to stock compensation	(1,581		)	—
Excess tax benefit from stock compensation	842			—
Settlement of derivative instruments	—			3
Net cash used in financing activities	(856,663		)	(2,414		)

Effect of exchange rate changes on cash and cash equivalents	(206		)	11

Net increase (decrease) in cash and cash equivalents	(718,920		)	57,075
Cash and cash equivalents:
Beginning of period	749,774			1,099,887
End of period	$	30,854		$	1,156,962

See accompanying notes to condensed consolidated financial statements.

Starz and Subsidiaries

Condensed Consolidated Statement of Equity

Six Months Ended June 30, 2013

(Unaudited)

(in thousands)



	Stockholders’ Equity
	Preferred Stock		Series A			Series B		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Member’s Interest			Noncontrolling Interests			Total Equity
Balance at December 31, 2012	$	—	$	—		$	—	$	—		$	—		$	—		$	1,311,951		$	(9,807	)	$	1,302,144
The LMC Spin-Off (Note 1)	—		1,117			99		1,808,089			(4,512		)	(492,842		)	(1,311,951		)	—			—
Distribution to Old LMC	—		—			—		(1,245,668		)	—			—			—			—			(1,245,668		)
Tax attributes related to the LMC Spin-Off (Note 6)	—		—			—		11,565			—			—			—			—			11,565
Net income	—		—			—		—			—			121,752			—			2,486			124,238
Other comprehensive income	—		—			—		—			5			—			—			(140		)	(135		)
Stock compensation	—		3			—		15,176			—			—			—			196			15,375
Minimum withholding of taxes related to stock compensation	—		—			—		(1,581		)	—			—			—			—			(1,581		)
Excess tax benefit from stock compensation	—		—			—		842			—			—			—			—			842
Repurchases of common stock	—		(36		)	—		(81,771		)	—			—			—			—			(81,807		)
Balance at June 30, 2013	$	—	$	1,084		$	99	$	506,652		$	(4,507	)	$	(371,090	)	$	—		$	(7,265	)	$	124,973

See accompanying notes to condensed consolidated financial statements.

Starz and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2013


Note 1 -	Basis of Presentation and Description of Business

Presentation

Starz, through its wholly-owned subsidiary Starz, LLC, provides premium subscription video programming to United States (“U.S.”) multichannel video programming distributors (“MVPDs”), including cable operators, satellite television providers and telecommunications companies. Starz also develops, produces and acquires entertainment content and distributes this content to consumers in the U.S. and throughout the world. The accompanying condensed consolidated financial statements include the accounts of Starz and its majority-owned and controlled subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for such periods have been included. The results of operations for any interim period are not necessarily indicative of results for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in Starz’s Annual Report on Form 10-K for the year ended December 31, 2012.

LMC Spin-Off

In January 2013, Starz (formerly known as Liberty Media Corporation (“Old LMC”)) completed the spin off (the “LMC Spin-Off”) of its wholly-owned subsidiary Liberty Media Corporation (formerly known as Liberty Spinco, Inc. (“Liberty Media”)) in a tax-free manner through the distribution, by means of a dividend, of shares of Liberty Media’s common stock to holders of Old LMC common stock. In this distribution, each holder of a share of Old LMC common stock received one share of the corresponding series of Liberty Media common stock. Following the LMC Spin-Off, Starz retained the businesses of its wholly-owned subsidiary, Starz, LLC, and all other businesses, assets and liabilities of Old LMC are included in Liberty Media. Unless the context otherwise requires, Old LMC is used when events or circumstances being described occurred prior to the LMC Spin-Off and Starz is used when events or circumstances being described occurred following the LMC Spin-Off.

In accordance with GAAP, Liberty Media was determined to be the accounting successor to Old LMC for financial reporting purposes following the LMC Spin-Off due to the relative significance of Liberty Media to Starz (which is the legal spinnor) and the continued involvement of Old LMC’s senior management with Liberty Media following the LMC Spin-Off. Accordingly, the historical financial statements of Old LMC prior to the LMC Spin-Off will continue to be the historical financial statements of Liberty Media and Starz’s historical financial information is deemed to be the financial information of Starz, LLC. The financial statements of Starz reflect Starz, LLC on a historical cost basis. Starz, LLC is the only directly owned subsidiary of Starz which in turn owns either directly or indirectly various operating subsidiaries. Starz is a holding company with no assets or liabilities of its own or operations other than those of Starz, LLC. Accordingly, the financial position, results of operations, comprehensive income and cash flows of Starz and Starz, LLC are identical.

In connection with the LMC Spin-Off, Starz, LLC distributed $1.8 billion in cash to Old LMC which was funded by a combination of cash on hand and $550.0 million of borrowings under Starz, LLC’s senior secured revolving credit facility. The $1.8 billion was paid as follows: $100.0 million on July 9, 2012, $250.0 million on August 17, 2012, $50.0 million on September 4, 2012, $200.0 million on November 16, 2012 and $1.2 billion on January 10, 2013. Such distributed cash was contributed to Liberty Media prior to the LMC Spin-Off. Additionally, in connection with the LMC Spin-Off, Starz, LLC distributed its Englewood, Colorado corporate office building and related building improvements to Old LMC (and Old LMC transferred such building and related improvements to Liberty Property Holdings, Inc. (“LPH”), a subsidiary of Liberty Media) and then leased back the use of such facilities from LPH. Following the LMC Spin-Off, Liberty Media and Starz operate independently, and neither have any stock ownership, beneficial or otherwise, in the other.

Starz and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2013

In connection with the LMC Spin-Off, Old LMC entered into several agreements with Liberty Media or Liberty Media’s subsidiaries:


•	Reorganization Agreement, dated as of January 10, 2013, by and between Starz and Liberty Media, which provides for, among other things, the principal corporate transactions required to effect the LMC Spin-Off, certain conditions to the LMC Spin-Off and provisions governing the relationship between Starz and Liberty Media with respect to and resulting from the LMC Spin-Off;

•

Tax Sharing Agreement, dated as of January 11, 2013, by and between Starz and Liberty Media, which governs the allocation of taxes, tax benefits, tax items and tax-related losses between Starz and Liberty Media. In connection with the LMC Spin-Off, deferred tax assets of $154.2 million related to capital loss and foreign tax credit carryforwards were allocated to Liberty Media along with their corresponding valuation allowances of $154.2 million. In addition, state net operating losses, foreign tax credit carryforwards and other attributes of $11.6 million were allocated to Starz;


•	Services Agreement, dated as of January 11, 2013, by and between Starz and Liberty Media, which governs the provision by Liberty Media to Starz and by Starz to Liberty Media of specified services and benefits following the LMC Spin-Off. During the three and six months ended June 30, 2013, Starz recognized $0.1 million and $0.2 million, respectively, of net expenses under the Services Agreement;


•	Facilities Sharing Agreement, dated as of January 11, 2013, by and between Starz and LPH, pursuant to which Starz shares office facilities with Liberty Media. During the three and six months ended June 30, 2013, Starz recognized $0.1 million and $0.2 million, respectively, of expense for shared office space;

•

Two Aircraft Time Sharing Agreements, each dated as of January 11, 2013, by and between Starz and Liberty Media, which govern the lease for each of two aircraft from Liberty Media to Starz and the provision of fully qualified flight crew for all operations on a periodic, non-exclusive time sharing basis. There were no charges under the Two Aircraft Time Sharing Agreements during the three and six months ended June 30, 2013; and

•

Commercial Lease, dated as of January 11, 2013, by and between LPH, Starz, LLC, and, for the limited purposes described therein, Starz Entertainment, LLC (“Starz Entertainment”), pursuant to which Starz, LLC leases its headquarters building that was distributed to Liberty Media in connection with the LMC Spin-Off from LPH for a period of ten years, with successive five-year renewal periods at the option of Starz, LLC. Starz, LLC pays a monthly base rent of $0.3 million (subject to annual increases) under the lease agreement. Starz, LLC recorded a $44.8 million capital lease in connection with this lease agreement.

Business

Starz’s business operations are conducted by its wholly-owned subsidiaries Starz, LLC, Starz Entertainment, Film Roman, LLC (“Film Roman”) and certain other immaterial subsidiaries, and its majority-owned (75%) subsidiary Starz Media Group, LLC (“Starz Media”). The Weinstein Company LLC (“TWC”) owns a 25% interest in Starz Media. Starz is managed by and organized around the following operating segments:

Starz Networks

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

Starz and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2013

Starz Distribution

Starz Distribution includes Starz’s Home Video, Digital Media and Worldwide Distribution businesses:

Home Video

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

Digital Media

Digital Media distributes digital and on-demand content for Starz’s owned content and content for which it has licensed digital ancillary rights in the U.S. and throughout the world to the extent it has rights to such content in international territories. Digital Media receives fees for such services from a wide array of partners and distributors. These range from traditional MVPDs, Internet/mobile distributors, game developers/publishers and consumer electronics companies. Digital Media also distributes Starz Networks’ original programming content and TWC’s titles.

Worldwide Distribution

Worldwide Distribution distributes movies, television series, documentaries, children’s programming and other video content. Worldwide Distribution exploits Starz’s owned content and content for which it has licensed ancillary rights on free or pay television in the U.S. and throughout the world on free or pay television and other media to the extent it has rights to such content in international territories. It also distributes Starz Networks’ original programming content.

Starz Animation

Starz, through its wholly-owned subsidiary Film Roman, develops and produces two-dimensional animated content on a for-hire basis for various third party entertainment companies.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Starz considers amortization of program rights, the fair value of goodwill and any related impairment, the development of ultimate revenue estimates associated with released films and television programs, the assessment of investment in films and television programs for impairment, valuation allowances associated with deferred income taxes and allowances for sales returns to be its most significant estimates. Actual results may differ from those estimates.

Prior Period Reclassifications

Certain prior period amounts have been reclassified for comparability with the 2013 presentation.

Starz and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2013

Note 2 - Debt

Debt consists of the following (in thousands):



	June 30, 2013			December 31, 2012
Senior Secured Credit Facilities (a)	$	257,000		$	5,000
Senior Notes and New Notes, including premium of $3,279 and none (b)	678,279			500,000
Capital leases (c)	77,331			34,805
Total debt	1,012,610			539,805
Less current portion of debt	(4,792		)	(4,134		)
Debt	$	1,007,818		$	535,671

(a)

On November 16, 2011, Starz, LLC entered into a credit agreement that provides a $1,000.0 million revolving credit facility, with a $50.0 million sub-limit for standby letters of credit, and a $500.0 million term loan facility (the “Senior Secured Credit Facilities”). At closing, Starz, LLC borrowed $500.0 million under the term loan facility and $5.0 million under the revolving credit facility. Net proceeds from the Senior Notes, as defined below, and cash on hand were used to repay and terminate the term loan facility in September 2012. Borrowings under the revolving credit facility may be prepaid at any time and from time to time without penalty other than customary breakage costs. Any amounts prepaid on the revolving credit facility may be reborrowed. The revolving credit facility is scheduled to mature on November 16, 2016. As of June 30, 2013, $743.0 million of borrowing capacity was available under the revolving credit facility.

Interest on each loan under the Senior Secured Credit Facilities is payable at either an alternate base rate or LIBOR at Starz, LLC’s election. Borrowings that are alternate base rate loans bear interest at a per annum rate equal to the alternate base rate plus a margin that varies between 0.5% and 1.5% depending on the consolidated leverage ratio, as defined in the Senior Secured Credit Facilities. The alternate base rate is the highest of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus ½ of 1.0% or (c) LIBOR for a one-month interest period plus 1.0%. Borrowings that are LIBOR loans bear interest at a per annum rate equal to the applicable LIBOR plus a margin that varies between 1.5% and 2.5% depending on the consolidated leverage ratio. The Senior Secured Credit Facilities require Starz, LLC to pay a commitment fee on any unused portion under the revolving credit facility. The commitment fee varies between 0.25% and 0.50%, depending on the consolidated leverage ratio.

As of June 30, 2013, the following borrowings and related LIBOR or alternate base rate interest rates plus the applicable margin were outstanding under the Senior Secured Credit Facilities (dollars in thousands):



LIBOR or Alternate base rate period:	Interest Rate	Loan Amount
June 2013 - July 2013	1.9429%	$	185,000
June 2013 - July 2013	1.9454%	60,000
June 2013 and forward	4.0000%	12,000
		$	257,000

The Senior Secured Credit Facilities contain certain covenants that include restrictions on, among others, incurring additional debt, paying dividends, entering into liens or guarantees, or making certain distributions, investments and other restricted payments. In addition, Starz, LLC must comply with certain financial covenants, including a consolidated leverage ratio, as defined in the agreement. As of June 30, 2013, Starz, LLC was in compliance with all covenants under the Senior Secured Credit Facilities.

(b)

On September 13, 2012, Starz, LLC and Starz Finance Corp. co-issued $500.0 million aggregate principal amount of 5.0% senior notes due September 15, 2019 (the “Senior Notes”). The Senior Notes bear interest at a rate of 5.0% payable semi-annually on September 15 and March 15 of each year. Starz Finance Corp. is a wholly-owned subsidiary of Starz, LLC and was formed for the sole purpose of co-issuing the Senior Notes. Starz Finance Corp. does not have and will not have any operations, assets or subsidiaries of its own. The Senior Notes are guaranteed

Starz and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2013

by Starz Entertainment. The net proceeds from the issuance of the Senior Notes and cash on hand were used to repay and terminate the $500.0 million term loan facility under the Senior Secured Credit Facilities. On February 14, 2013, Starz, LLC completed an exchange offer, exchanging the majority of the unregistered Senior Notes for new registered Senior Notes. The new registered Senior Notes are substantially identical to the original Senior Notes, except the new registered Senior Notes are registered under the Securities Act of 1933, as amended (the “Securities Act”), and the transfer restrictions and registration rights, and related special interest provisions applicable to the original Senior Notes will not apply to the new registered Senior Notes.

On February 8, 2013, Starz, LLC and Starz Finance Corp. completed the issuance of an additional $175.0 million aggregate principal amount of 5.0% senior notes due 2019 (the “New Notes”), which were issued as additional notes under the indenture governing the Senior Notes. The net proceeds from the issuance of the New Notes were used to repay indebtedness under the revolving portion of the Senior Secured Credit Facilities. The New Notes were issued at a price of 102.0% plus accrued interest from September 13, 2012. On May 24, 2013, Starz, LLC completed an exchange offer, exchanging the unregistered New Notes for new registered New Notes. The new registered New Notes are substantially identical to the original New Notes, except the new registered New Notes are registered under the Securities Act and the transfer restrictions and registration rights, and related special interest provisions applicable to the original New Notes will not apply to the new registered New Notes.

The Senior Notes and New Notes rank equally in right of payment to all existing and future senior obligations and existing and future subordinated obligations. The Senior Notes and New Notes are effectively subordinated to any existing and future secured obligations and to all the liabilities of the subsidiaries that do not guarantee the Senior Notes or New Notes.

The Senior Notes and New Notes contain certain covenants that include restrictions on, among others, incurring additional debt, paying dividends, entering into liens and guarantees, or making certain distributions, investments and other restricted payments. As of June 30, 2013, Starz, LLC was in compliance with all covenants under the Senior Notes and New Notes.


(c)	On January 11, 2013, Starz, LLC entered into the Commercial Lease with LPH for its headquarters building. The term of the lease is ten years, with successive five-year renewal periods at the option of Starz, LLC. Starz, LLC has recorded a $44.8 million capital lease in connection with this lease agreement with an imputed annual interest rate of 6.4%.

Starz Entertainment has entered into capital lease agreements for its transponder capacity. The agreements expire during 2018 to 2021 and have imputed annual interest rates ranging from 5.5% to 7.0%.

At June 30, 2013, the fair value of the Senior Notes and New Notes was $671.6 million and was based upon quoted prices in active markets. Starz believes the fair value of the Senior Secured Credit Facilities approximates its carrying value as of June 30, 2013 due to its variable rate nature and Starz’s stable credit spread.

Amounts totaling $0.8 million, $0.1 million, $2.0 million and $0.5 million of interest expense have been capitalized as investment in films and television programs during the three months ended June 30, 2013 and 2012 and the six months ended June 30, 2013 and 2012, respectively.

Note 3 - Stockholders’ Equity

Preferred Stock

Preferred stock is issuable, from time to time, with such designations, preferences and relative participating, optional or other rights, qualifications, limitations or restrictions thereof, as shall be stated and expressed in a resolution or resolutions providing for the issue of such preferred stock adopted by Starz’s board of directors. As of June 30, 2013, no shares of preferred stock were issued.

Starz and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2013

Common Stock

Series A common stock (formerly the Series A Liberty Capital common stock) has one vote per share and Series B common stock (formerly the Series B Liberty Capital common stock) has ten votes per share. Each share of the Series B common stock is exchangeable at the option of the holder for one share of Series A common stock. The Series A and Series B common stock participate on an equal basis with respect to dividends and distributions.

As of June 30, 2013, there were 40.9 million shares of Series A common stock reserved for issuance under the exercise privileges of outstanding stock options. In addition to the Series A and Series B common stock, there are 2.0 billion shares of Series C common stock (formerly the Series C Liberty Capital common stock) authorized for issuance.

Purchases of Common Stock

Shares of Series A common stock are subject to repurchase pursuant to a share repurchase program. Repurchased shares are retired and returned to the status of authorized and available for issuance.

Note 4 – Stock Options and Long Term Incentive Plan

Stock Options and Restricted Stock

Prior to the LMC Spin-Off, Old LMC granted, and Starz has since granted to certain of its directors and employees, stock options to purchase Series A common stock and restricted shares of Series A common stock pursuant to Old LMC incentive plans, which are now the Starz incentive plans. As of June 30, 2013, the total unrecognized compensation cost related to the unvested stock options and restricted stock was approximately $80.6 million. Such amount will be recognized in Starz’s condensed consolidated statements of operations over a weighted average period of approximately 2.97 years.

In connection with the LMC Spin-Off, all outstanding stock options and stock appreciation rights with respect to Old LMC’s Series A common stock (the “Liberty Capital Awards”) were adjusted pursuant to the anti-dilution provisions of the incentive plans under which the equity awards were granted, such that a holder of a Liberty Capital Award received i) an adjustment to the exercise price or base price and the number of shares for each Liberty Capital Award (as so adjusted, a “Liberty Media Award”) and ii) an equity award of shares of Series A common stock (a “Starz Award”).

The exercise prices and number of shares subject to the Liberty Media Award and the Starz Award were determined based on i) the exercise prices and number of shares subject to a Liberty Capital Award, ii) the pre-distribution trading price of Series A common stock and iii) the post-distribution trading prices of Liberty Media common stock and Series A common stock. For employees of Starz, the pre-distribution intrinsic value of the vested Liberty Capital Award was allocated between a vested Liberty Media Award and a vested Starz Award, while the pre-distribution intrinsic value of the unvested Liberty Capital Award was maintained solely within an unvested Starz Award. For Liberty Media’s employees and directors, the pre-distribution intrinsic value of the Liberty Capital Award was allocated between a Liberty Media Award and a Starz Award.

Following the LMC Spin-Off, employees of Starz and Liberty Media hold awards in both Series A common stock and Liberty Media common stock. The accompanying condensed consolidated statements of operations include compensation expense related solely to employees of Starz.

Awards granted during the six months ended June 30, 2013 are summarized as follows:



	Granted	Weighted Average Grant-Date Fair Value
2013 Awards:
Stock options	6,030,106	$7.61
Restricted stock	308,409	$18.93

Starz and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2013

Of the total 2013 stock option awards, options to purchase 2,666,983 shares vest quarterly over a 4 year period and have a term of 7 years and options to purchase 3,363,123 shares vest 50% on each of December 31, 2015 and 2016 and have a term of 10 years. Starz calculates the grant-date fair value for the stock options using the Black-Scholes Model. The expected term used in the Black-Scholes calculation was a range of 4.70 to 6.92 years. The expected volatility was 41.35%. The expected volatility used in the calculation for the awards is based on the historical volatility of Series A common stock and the implied volatility of Old LMC’s publicly traded options. Starz used a zero dividend rate as Old LMC/Starz has not historically declared dividends and a range of risk-free rates of 0.7% to 1.2%, which was derived from U.S. Treasury Bonds with a term similar to that of the subject options. The grant-date fair value of the 308,409 restricted shares granted in 2013 was based on the market value of Series A common stock at the grant date of $18.93 per share. Of the 308,409 restricted shares granted, 51,840 will vest on March 4, 2014 and 256,569 will vest annually over four years beginning March 4, 2014.

The following table presents the number of options and weighted average exercise price (“WAEP”) for the activity during the six months ended June 30, 2013:



	Options		WAEP
Outstanding at December 31, 2012	1,615,711		$	93.14
LMC Spin-Off adjustment to existing stock options	7,589,815		*
LMC Spin-Off adjustment for Liberty Media employees	3,527,791		$	12.78
Granted	6,030,106		$	18.93
Exercised	(320,875	)	$	10.57
Forfeited	(272,691	)	$	11.09
Expired/cancelled	—		$	—
Outstanding at June 30, 2013	18,169,857		$	14.30

Exercisable at June 30, 2013	3,040,082		$	12.10

* The adjustment to the existing stock options from the LMC Spin-Off increased the number of existing stock options and reduced the WAEP. After giving effect to the LMC Spin-Off, the WAEP for the existing stock options was $11.62.

At June 30, 2013, the weighted-average remaining contractual terms of the outstanding options is 6.5 years and the exercisable options is 4.5 years. At June 30, 2013, the aggregate intrinsic value of the outstanding options is $141.8 million and the exercisable options is $30.4 million.

At June 30, 2013, 3.5 million of the outstanding stock options and 1.3 million restricted shares were held by Liberty Media employees.

Long Term Incentive Plan

Starz, LLC granted incentive units to certain officers and key employees (“Plan Participants”) under the 2006 long term incentive plan (“2006 LTIP”). Such grants vested over a period of four years and were fully vested as of June 30, 2011. All amounts due under the 2006 LTIP have been paid as of June 30, 2013. During the six months ended June 30, 2013 and 2012, Starz made payments of $3.2 million and $27.7 million, respectively, to Plan Participants under the 2006 LTIP.

Note 5 – Related Party Transactions

Due to Affiliate

Prior to the LMC Spin-Off, Starz, LLC participated in Old LMC’s employee benefit plans (medical, dental, life insurance, etc.) and now participates in Starz’s plans following the LMC Spin-Off. Charges from Old LMC related to these benefits and other miscellaneous charges are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations and aggregated none, $3.0 million, none and $6.0 million for the three months ended June 30, 2013 and 2012 and the six months ended June 30, 2013 and 2012, respectively. Such amounts were invoiced by Old LMC on a monthly basis and were due upon receipt of the invoice by Starz, LLC. Amounts due to affiliate for such charges totaled none and $1.0 million as of June 30, 2013 and December 31, 2012, respectively.

Starz and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2013

Due to affiliate at December 31, 2012 also includes $38.5 million for amounts owed to Old LMC for income tax obligations.

Related Party

On January 28, 2011, Starz, LLC sold a 25% interest in Starz Media to TWC. In December 2010, Anchor Bay Entertainment entered into a five-year license agreement with TWC for the distribution, by the Home Video and Digital Media businesses, of certain of TWC’s theatrical releases. Starz recognized expense of $88.7 million, $20.1 million, $105.7 million and $36.4 million, which is included in production and acquisition costs in the accompanying condensed consolidated statements of operations, for TWC’s share of the net proceeds under the license agreement for the three months ended June 30, 2013 and 2012 and the six months ended June 30, 2013 and 2012, respectively. Amounts due to TWC totaled $120.5 million and $23.9 million, which is included in accrued liabilities in the accompanying condensed consolidated balance sheets, at June 30, 2013 and December 31, 2012, respectively. Starz Entertainment guarantees Anchor Bay Entertainment’s advance payments to TWC under this agreement up to $50.0 million.

Note 6 - Income Taxes

Prior to the LMC Spin-Off, Starz, LLC was included in the consolidated federal and state income tax returns of Old LMC. The income tax accounts and provisions included in these condensed consolidated financial statements prior to the LMC Spin-Off have been prepared as if Starz, LLC was a stand-alone federal and state taxpayer. Subsequent to the LMC Spin-Off, Starz will file its own consolidated tax return.

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013		2012
Current:
Federal	$	39,597		$	38,715		$	57,032	$	66,298
State and local	3,168			(4,604		)	2,518		(2,226		)
Foreign	638			259			929		929
	43,403			34,370			60,479		65,001
Deferred:
Federal	(6,177		)	(25,909		)	8,134		(13,553		)
State and local	996			17,655			4,553		14,860
	(5,181		)	(8,254		)	12,687		1,307
Income tax expense	$	38,222		$	26,116		$	73,166	$	66,308

Starz and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2013

Income tax expense differs from the amounts computed by applying the U.S. federal income tax rate of 35% as a result of the following (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Computed expected tax expense	$	36,490		$	33,245		$	69,091		$	75,030
State and local income taxes, net of federal income taxes	2,662			4,300			4,475			6,739
Foreign taxes, net of foreign tax credit	397			(61		)	900			80
Change in valuation allowance affecting tax expense	(437		)	79,665			(1,130		)	75,453
Taxable liquidation of subsidiary	—			(99,879		)	—			(99,879		)
Change in subsidiary tax status	—			8,809			791			8,809
Other, net	(890		)	37			(961		)	76
Income tax expense	$	38,222		$	26,116		$	73,166		$	66,308

Effective April 1, 2012, Starz Media filed an election to convert itself from a limited liability company (“LLC”) treated as a corporation to a partnership for U.S. federal and state income tax purposes. As a result of the conversion, the Company recognized a capital loss on the deemed liquidation of Starz Media. Based on the relevant accounting literature, the Company had not previously recorded a benefit for the tax basis in the stock of Starz Media. The capital loss of $99.9 million (as tax effected) was carried forward and was recorded as a long term deferred tax asset. The Company did not believe that it was more likely than not that it would be able to generate any capital gains to utilize any of this capital loss carryforward as a stand-alone taxpayer and as such, recorded a full valuation allowance against this capital loss.

In addition, under current U.S. federal and state tax law, LLCs treated as partnerships are not subject to income tax at the entity level. As such, the election to convert Starz Media to be treated as a partnership for income tax purposes resulted in the reversal of deferred tax assets related to Starz Media's deductible temporary differences of $15.9 million and the reversal of a valuation allowance offsetting these deferred tax assets of $15.9 million. Also, a deferred tax asset of $7.1 million was recorded for the difference between the book basis and the tax basis of the Company's investment in Starz Media as of April 1, 2012.

Starz and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2013

The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at June 30, 2013 and December 31, 2012 are presented below (in thousands):



	June 30, 2013			December 31, 2012
Deferred tax assets:
Tax loss and credit carryforwards	$	9,402		$	155,861
Accrued stock compensation	8,882			5,575
Investments	28,411			25,516
Investment in films and television programs	—			1,163
Other future deductible amounts	3,146			219
Deferred tax assets	49,841			188,334
Valuation allowance	(498		)	(155,861		)
Deferred tax assets, net	49,343			32,473

Deferred tax liabilities:
Property and equipment	(17,494		)	(18,807		)
Investment in films and television programs	(18,799		)	—
Other future taxable amounts	—			(454		)
Deferred tax liabilities	(36,293		)	(19,261		)

Net deferred tax assets	$	13,050		$	13,212

In connection with the LMC Spin-Off, deferred tax assets of $154.2 million related to capital loss and foreign tax credit carryforwards were allocated to Liberty Media along with their corresponding valuation allowances of $154.2 million. In addition, state net operating losses, foreign tax credit carryforwards and other attributes of $11.6 million were allocated to Starz.

In April 2013, the Internal Revenue Service completed its review of the LMC Spin-Off and notified Starz that it agreed with the nontaxable characterization of the transaction.

Note 7 - Commitments and Contingencies

Programming Rights

On February 11, 2013, Starz announced a new, multi-year output licensing agreement for qualifying films that are released theatrically in the U.S. by Sony Pictures Entertainment Inc.’s (“Sony”) Columbia Pictures, Screen Gems, Sony Pictures Classics and TriStar labels that extends its relationship with Sony through 2021, subject to certain limitations. The previous agreement had covered motion pictures released theatrically through 2016. In addition, Starz has an exclusive long-term licensing agreement for theatrically released films from the Walt Disney Company (“Disney”) through 2015. The agreement provides Starz with exclusive pay TV rights to exhibit qualifying theatrically released live-action and animated feature films under the Disney, Touchstone, Pixar and Marvel labels. Theatrically released films produced by DreamWorks are not licensed to Starz under the agreement. The programming fees to be paid to Sony and Disney are based on the quantity and domestic theatrical exhibition receipts of qualifying films. Starz has also entered into agreements with a number of other motion picture producers and is obligated to pay fees for the rights to exhibit certain films that are released by these producers.

The unpaid balance for film rights related to films that were available at June 30, 2013 is reflected in accrued liabilities and in other liabilities in the accompanying condensed consolidated balance sheets. As of June 30, 2013, such liabilities aggregated approximately $89.9 million and are payable as follows: $82.0 million in 2013 and $7.9 million in 2014.

Starz and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2013

Under the agreements with Sony and Disney, Starz is obligated to pay fees for the rights to exhibit films that have been released theatrically, but are not available for exhibition by Starz until some future date. The estimated amounts payable under Starz’s programming license agreements, including the Sony and Disney agreements, which have not been accrued as of June 30, 2013, are as follows: $93.8 million in 2013; $307.6 million in 2014; $98.6 million in 2015; $87.6 million in 2016; $87.1 million in 2017 and $283.5 million thereafter.

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

Total amortization of program rights was $152.9 million, $168.7 million, $288.4 million and $319.1 million for the three months ended June 30, 2013 and 2012 and the six months ended June 30, 2013 and 2012, respectively. These amounts are included in programming costs in the accompanying condensed consolidated statements of operations.

Guarantee

Starz Media Canada Co. (“Canada Co.”) entered into an agreement with the Ontario government whereby Canada Co. is eligible to receive funds under the Canadian Next Generation of Jobs Fund Grant (“NGOJF”) through the termination date of March 31, 2014. The maximum amount of the grant available and the guarantee in U.S. dollars is $21.8 million. Starz Entertainment entered into a guarantee for any amounts owed to the Ontario government under the grant if Canada Co. does not meet its obligations. The Ontario government can demand payment from Starz Entertainment if Canada Co. does not perform any of its obligations. The maximum potential amount payable under the guarantee is $13.7 million at June 30, 2013 and Starz has accrued $11.0 million related to this guarantee in accrued liabilities in the accompanying condensed consolidated balance sheet as of June 30, 2013. Starz sold its controlling interest in Canada Co. on March 3, 2011. The terms of the guarantee have not changed.

Legal Proceedings

On March 9, 2011, Starz Entertainment notified DISH Network L.L.C. (“DISH”) that DISH breached its affiliation agreement with Starz Entertainment by providing a free preview for one year of eight of the Starz and Encore channels to a substantial number of DISH customers without Starz Entertainment’s written approval. On May 3, 2011, Starz Entertainment filed a lawsuit against DISH in Douglas County, Colorado District Court, 18th Judicial District, alleging that DISH breached its affiliation agreement with Starz Entertainment in connection with such free preview and seeking damages for breach of contract. On May 2, 2011, Disney Enterprises, Inc. filed a lawsuit against DISH in connection with the same free preview in U.S. District Court for the Southern District of New York, seeking damages for copyright infringement. In addition, on July 19, 2011, FX Networks filed a separate lawsuit against DISH and Starz Entertainment in connection with the same free preview in Los Angeles County, California Superior Court, seeking damages for tortious interference with its contracts for studio movie content. DISH filed a counterclaim against Starz Entertainment in the first lawsuit, seeking indemnification from Starz Entertainment against Disney Enterprises, Inc. in the second lawsuit and against FX Networks in the third lawsuit. On April 29, 2013, Starz Entertainment and DISH entered into a confidential settlement agreement with respect to the first lawsuit. In addition, on June 19, 2013, Starz Entertainment and FX Networks entered into a confidential settlement agreement with respect to FX Networks’ claim against Starz Entertainment in the third lawsuit. The Disney Enterprises, Inc. and FX Networks’ lawsuits against DISH have not yet gone to trial. Any potential indemnification obligations of Starz relating to these remaining matters is uncertain at this time.

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

Starz and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2013

Note 8 – Other Information

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):



	June 30, 2013		December 31, 2012
Royalties, residuals and participations	$	66,822	$	72,139
Participations payable to TWC	120,458		23,861
Program rights payable	86,710		57,125
Advertising and marketing	47,177		38,779
Payroll and related costs	17,799		23,657
Accrued compensation related to long term incentive plan	—		3,195
Other	52,173		37,306
	$	391,139	$	256,062

Supplemental Disclosure of Cash Flow Information

The following table presents the supplemental disclosure of cash flow information (in thousands):



	Six Months Ended June 30,
	2013		2012

Cash paid for interest, net of amounts capitalized	$	21,291	$	8,329
Cash paid for income taxes	$	90,940	$	86,816
Distribution of corporate office building to Old LMC	$	45,668	$	—
Capital lease related to Commercial Lease with LPH	$	44,800	$	—
Tax attributes related to LMC Spin-Off	$	11,565	$	—

Net Income Attributable to Common Stockholders

Basic net income per common share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. For presentation purposes, the basic weighted average number of common shares reflected as outstanding for all periods prior to the LMC Spin-Off (including as of June 30, 2012) represents the shares outstanding as of January 14, 2013, excluding unvested outstanding restricted shares as of any applicable date. The diluted weighted average number of common shares reflected as outstanding for the three and six months ended June 30, 2012 includes the unvested outstanding restricted shares actually held by Starz employees as of June 30, 2012, and excludes restricted shares and stock options issued to others in the LMC Spin-Off (which are included, if dilutive, in periods subsequent to the LMC Spin-Off). The following is a reconciliation between basic and diluted weighted average shares outstanding for the three and six months ended June 30, 2013 and reflected as outstanding for the three and six months ended June 30, 2012 (in thousands):



	Three Months Ended June 30,		Six Months Ended June 30,
	2013	2012	2013	2012

Basic weighted average shares outstanding	118,362	119,996	119,139	119,996
Effect of dilution:
Stock options	3,276	—	2,877	—
Restricted shares	1,701	95	1,701	95
Diluted weighted average shares outstanding	123,339	120,091	123,717	120,091

Starz and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2013

For the three months ended June 30, 2013 and 2012 and the six months ended June 30, 2013, and 2012, approximately none, 10.0 million shares, 3.0 million and 10.1 million shares (as adjusted for the LMC Spin-Off), respectively, have been excluded from the diluted weighted average shares outstanding since the shares would have been anti-dilutive.

Note 9 – Information about Operating Segments

Starz is primarily engaged in video programming and development, production, acquisition and distribution of entertainment content. Starz evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as Adjusted OIBDA. Adjusted OIBDA is defined as: revenue less programming costs, production and acquisition costs, home video cost of sales, operating expenses and selling, general and administrative expenses. Starz’s chief operating decision maker uses this measure of performance in conjunction with other measures to evaluate the operating segments’ performance and make decisions about allocating resources among the operating segments. Starz believes Adjusted OIBDA is an important indicator of the operational strength and performance of its operating segments, including each operating segment’s ability to assist Starz in servicing its debt and to fund investments in films and television programs. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between operating segments and identify strategies to improve performance. This measure of performance excludes stock compensation and depreciation and amortization that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, income before income taxes, net income, net cash provided by operating activities and other measures of financial performance prepared in accordance with GAAP. Starz generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current prices.

Starz’s reportable segments are strategic business units that offer different services. They are managed separately because each segment requires different technologies, content delivery methods and marketing strategies. Starz identifies its reportable segments as those operating segments that represent 10% or more of its consolidated annual revenue, annual Adjusted OIBDA or total assets. Starz Networks and Starz Distribution have been identified as reportable segments; however, as Starz has three operating segments, Starz Animation is also reported.

Performance Measures (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Revenue:
Starz Networks	$	339,950		$	318,902		$	655,786		$	643,102
Starz Distribution	171,874			76,247			248,116			148,631
Starz Animation	6,647			10,101			14,116			21,437
Inter-segment eliminations	(1,050		)	(2,688		)	(1,280		)	(5,644		)
Total Revenue	$	517,421		$	402,562		$	916,738		$	807,526

Adjusted OIBDA:
Starz Networks	$	116,456		$	98,881		$	230,838		$	214,757
Starz Distribution	14,534			9,379			17,123			18,516
Starz Animation	(778		)	(190		)	(1,339		)	(153)
Inter-segment eliminations	(705		)	406			(585		)	2,196
Total Adjusted OIBDA	$	129,507		$	108,476		$	246,037		$	235,316

Starz and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2013

Other Information (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013		2012
Cash paid for investment in films and television programs:
Starz Networks	$	23,079		$	30,890		$	56,689	$	58,585
Starz Distribution	26,257			35,594			50,657		70,537
Starz Animation	—			—			—		—
Inter-segment eliminations	—			—			—		—
Total cash paid for investment in films and television programs	$	49,336		$	66,484		$	107,346	$	129,122

	June 30, 2013			December 31, 2012
Total assets:
Starz Networks	$	1,303,006		$	2,066,961
Starz Distribution	206,680			118,134
Starz Animation	2,170			3,225
Other unallocated assets (primarily cash, deferred taxes and other assets, including the Commercial Lease with LPH)	75,955			33,850
Inter-segment eliminations	(32,667		)	(46,120		)
Total assets	$	1,555,144		$	2,176,050

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Consolidated Adjusted OIBDA	$	129,507		$	108,476		$	246,037		$	235,316
Stock compensation	(9,058		)	(3,653		)	(16,312		)	(6,235		)
Depreciation and amortization	(4,353		)	(4,552		)	(8,769		)	(8,807		)
Interest expense, net of amounts capitalized	(11,331		)	(4,449		)	(21,559		)	(9,330		)
Other income (expense), net	(508		)	(98		)	(1,993		)	4,167
Income before income taxes	$	104,257		$	95,724		$	197,404		$	215,111

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q includes statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements included in this Quarterly Report on Form 10-Q other than statements of historical fact or current fact are forward-looking statements that address activities, events or developments that we or our management expect, believe or anticipate will or may occur in the future. These statements represent our reasonable judgment on the future based on various factors and using numerous assumptions and are subject to known and unknown risks, uncertainties and other factors, many of which are beyond our control and could cause our actual results and financial position to differ materially from those contemplated by the statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “project,” “forecast,” “plan,” “may,” “will,” “should,” “could,” “expect,” or the negative thereof, or other words of similar meaning. In particular, these include, but are not limited to, statements of our current views and estimates of future economic circumstances, industry conditions in domestic and international markets, and our future performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties that could cause our actual results to differ materially from the anticipated results and expectations expressed in such forward-looking statements.

Among the factors that may cause actual results and experiences to differ from the anticipated results and expectations expressed in such forward-looking statements are the following:


•	changes in the nature of key strategic relationships with multichannel video programming distributors (“MVPDs”) and content providers and our ability to maintain and renew affiliation agreements with MVPDs and programming output agreements with content providers on terms acceptable to us;


•	distributor demand for our products and services, including the impact of higher rates paid by our distributors to other programmers, and our ability to adapt to changes in demand;


•	consumer demand for our products and services, including changes in demand resulting from the participation in and effectiveness of cooperative marketing campaigns with our distributors, and our ability to adapt to changes in demand;


•	competitor responses to our products and services;


•	the continued investment in, the cost of and our ability to acquire or produce desirable original programming;


•	the cost of and our ability to acquire desirable theatrical movie content;


•	disruption in the production of theatrical films or television programs due to strikes by unions representing writers, directors or actors;


•	changes in distribution and viewing of television programming, including the expanded deployment of personal video recorders, video on-demand, and IP television and their impact on media content consumption;


•	continued consolidation of the broadband distribution and movie studio industries;


•	uncertainties inherent in the development and deployment of new business strategies;


•	uncertainties associated with product and service development and market acceptance, including the development and provision of programming for new television and telecommunications technologies;


•	our future financial performance, including availability, terms and deployment of capital;


•	the ability of our suppliers and vendors to deliver products, equipment, software and services;


•	the outcome of any pending or threatened litigation, including matters described in the notes to our condensed consolidated financial statements;


•	availability of qualified personnel;


•	the regulatory and competitive environment of the industry in which we operate;


•	changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission, and/or adverse outcomes from regulatory proceedings;


•	changes in tax requirements, including tax rate changes, new tax laws and revised tax law interpretations;


•	general economic and business conditions and industry trends, including the current economic downturn;


•	consumer spending levels;


•	rapid technological changes;


•	fluctuation in foreign currency exchange rates; and


•	threatened terrorist attacks or political unrest in international markets.

For a description of our risk factors, please see Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2012.

All forward-looking statements contained in this Quarterly Report on Form 10-Q are qualified in their entirety by this cautionary statement. We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.

The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto and our Annual Report on Form 10-K for the year ended December 31, 2012.

EXPLANATORY NOTE

In accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”), Liberty Media was determined to be the accounting successor to Old LMC for financial reporting purposes following the LMC Spin-Off due to the relative significance of Liberty Media to Starz (which is the legal spinnor) and the continued involvement of Old LMC’s senior management with Liberty Media following the LMC Spin-Off. Accordingly, the historical financial statements of Old LMC prior to the LMC Spin-Off will continue to be the historical financial statements of Liberty Media and Starz’s historical financial information will be deemed to be the financial information of Starz, LLC. The financial statements of Starz reflect Starz, LLC on a historical cost basis. Starz, LLC is the only directly owned subsidiary of Starz which in turn owns either directly or indirectly various operating subsidiaries. Starz is a holding company with no assets or liabilities of its own or operations other than those of Starz, LLC. Accordingly, the financial position, results of operations, comprehensive income and cash flows of Starz and Starz, LLC are identical.

OVERVIEW

Our business operations are conducted by our wholly-owned subsidiaries Starz, LLC, Starz Entertainment, LLC, Film Roman, LLC and certain other immaterial subsidiaries, and our majority-owned subsidiary Starz Media Group, LLC (“Starz Media”) (75%), which is owned 25% by The Weinstein Company LLC (“TWC”).

We provide premium subscription video programming to U.S. MVPDs, including cable operators, satellite television providers and telecommunications companies. We also develop, produce and acquire entertainment content and distribute this content to consumers in the U.S. and throughout the world. Our operations are managed by and organized around our Starz Networks, Starz Distribution and Starz Animation operating segments. Our integrated operating segments enable us to maintain control, and maximize the profitability of our original programming content and its marketing and distribution in the home video, digital (Internet) and television ancillary markets both domestically and internationally, and we are not reliant on other parties to distribute content on our behalf. Our expanding original programming line-up also provides downstream revenue opportunities for our Starz Distribution operating segment to the extent we retain rights to exploit such programming in these ancillary markets both in the U.S. and around the world.

Our reportable segments are strategic business units that offer different services. They are managed separately because each segment requires different technologies, content delivery methods and marketing strategies. We identify our reportable segments as those operating segments that represent 10% or more of our consolidated annual revenue, annual Adjusted OIBDA or total assets. Starz Networks and Starz Distribution have been identified as reportable segments; however, as we have three operating segments, Starz Animation is also reported separately.

ADJUSTED OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION (ADJUSTED OIBDA) - THREE MONTHS ENDED JUNE 30, 2013 AND 2012

We evaluate performance and make decisions about allocating resources to our operating segments based on financial measures such as Adjusted OIBDA. We define Adjusted OIBDA as: revenue less programming costs, production and acquisition costs, home video cost of sales, operating expenses and selling, general and administrative expenses. Our chief operating decision maker uses this measure of performance in conjunction with other measures to evaluate our operating segments’ performance and make decisions about allocating resources among our operating segments. We believe that Adjusted OIBDA is an important indicator of the operational strength and performance of our operating segments, including each operating segment’s ability to assist in servicing our debt and to fund investments in films and television programs. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between operating segments and identify strategies to improve performance. This measure of performance excludes stock compensation and depreciation and amortization that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, income before income taxes, net income, net cash provided by operating activities and other measures of financial performance prepared in accordance with GAAP.

The tables below set forth, for the periods presented, certain historical financial information for our reportable segments (in thousands). We generally account for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices.



	Three Months Ended June 30,						$ Change			% Change
	2013			2012			‘13 vs ‘12			‘13 vs ‘12
Revenue
Starz Networks	$	339,950		$	318,902		$	21,048		6.6	%
Starz Distribution	171,874			76,247			95,627			125.4	%
Starz Animation	6,647			10,101			(3,454		)	(34.2	)%
Inter-segment eliminations	(1,050		)	(2,688		)	1,638			60.9	%
Total Revenue	$	517,421		$	402,562		$	114,859		28.5	%
Adjusted OIBDA
Starz Networks	$	116,456		$	98,881		$	17,575		17.8	%
Starz Distribution	14,534			9,379			5,155			55.0	%
Starz Animation	(778		)	(190		)	(588		)	(309.5	)%
Inter-segment eliminations	(705		)	406			(1,111		)	(273.6	)%
Total Adjusted OIBDA	$	129,507		$	108,476		$	21,031		19.4	%

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



	Three Months Ended June 30,
	2013			2012
Adjusted OIBDA	$	129,507		$	108,476
Stock compensation	(9,058		)	(3,653		)
Depreciation and amortization	(4,353		)	(4,552		)
Interest expense, net of amounts capitalized	(11,331		)	(4,449		)
Other expense, net	(508		)	(98		)
Income before income taxes	$	104,257		$	95,724

RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2013 AND 2012

Operating results are as follows (in thousands, except as otherwise indicated):



	Three Months Ended June 30,						$ Change			% Change
	2013			2012			‘13 vs ‘12			‘13 vs ‘12
Revenue:
Programming networks and other services	$	391,081		$	361,627		$	29,454		8.1	%
Home video net sales	126,340			40,935			85,405			208.6	%
Total revenue	517,421			402,562			114,859			28.5	%
Costs and expenses:
Programming costs (including amortization)	165,353			179,304			(13,951		)	(7.8	)%
Production and acquisition costs (including amortization)	113,267			39,372			73,895			187.7	%
Home video cost of sales	15,095			10,668			4,427			41.5	%
Operating expenses	12,437			12,953			(516		)	(4.0	)%
Selling, general and administrative	81,762			51,789			29,973			57.9	%
Stock compensation	9,058			3,653			5,405			148.0	%
Depreciation and amortization	4,353			4,552			(199		)	(4.4	)%
Total costs and expenses	401,325			302,291			99,034			32.8	%
Operating income	116,096			100,271			15,825			15.8	%
Other expense:
Interest expense, net of amounts capitalized	(11,331		)	(4,449		)	(6,882		)	154.7	%
Other expense, net	(508		)	(98		)	(410		)	418.4	%
Income before income taxes	104,257			95,724			8,533			8.9	%
Income tax expense	(38,222		)	(26,116		)	(12,106		)	46.4	%
Net income	$	66,035		$	69,608		$	(3,573	)	(5.1	)%



	As of June 30,
Operating Data (in millions):	2013	2012
Starz subscriptions:
Fixed-rate subscriptions	12.3	12.4
Consignment subscriptions	9.5	8.3
Total Starz subscriptions	21.8	20.7
Encore subscriptions:
Fixed-rate subscriptions	21.9	22.5
Consignment subscriptions	13.2	11.7
Total Encore subscriptions	35.1	34.2
Total subscriptions:
Fixed-rate subscriptions	34.2	34.9
Consignment subscriptions	22.7	20.0
Total subscriptions	56.9	54.9

COMPARISON OF THREE MONTHS ENDED JUNE 30, 2013 TO THREE MONTHS ENDED JUNE 30, 2012

Revenue

Our revenue increased $114.9 million or 28.5% for the three months ended June 30, 2013 as compared to the corresponding prior year period. Revenue increased primarily as a result of increases in revenue for Starz Networks, Starz Distribution and a decrease in our inter-segment eliminations, which were partially offset by a decrease in revenue for Starz Animation. Starz Networks’ revenue represented 65.7% and 79.2% of our total revenue for the three months ended June 30, 2013 and 2012, respectively.

Revenue from Starz Networks increased $21.0 million or 6.6% for the three months ended June 30, 2013 as compared to the corresponding prior year period. During the three months ended June 30, 2013, certain contractual terms under affiliation agreements with two distributors resulted in the recognition of $18.6 million of previously deferred revenue. Notwithstanding this one-time adjustment, revenue increased $2.4 million as a result of a $3.6 million increase due to higher effective rates and a $1.2 million decrease due to lower subscriptions under our consignment agreements. The increase in our effective rates during the 2013 period was partially offset by the renewal of affiliation agreements with two distributors in the fourth quarter of 2012 on less favorable financial terms than the prior affiliation agreements (such agreements provide for annual contractual increases).

The Starz and Encore networks are the primary drivers of Starz Networks’ revenue. Starz and Encore average subscriptions during the periods increased 6.1% and 3.5% since June 30, 2012, respectively. The impact on revenue due to subscription increases is affected by the relative percentage change under consignment agreements and fixed-rate agreements. In this regard, as of June 30, 2013, subscriptions under fixed-rate agreements were 34.2 million while subscriptions under consignment agreements were 22.7 million. As of June 30, 2012, subscriptions under fixed-rate agreements were 34.9 million while subscriptions under consignment agreements were 20.0 million. The increase in consignment subscriptions is due to subscriptions that moved from fixed to consignment on January 1, 2013.

Revenue from Starz Distribution increased $95.6 million or 125.4% for the three months ended June 30, 2013 as compared to the corresponding prior year period. This growth is primarily due to an increase in the number of films distributed for TWC, including the films Django Unchained and Silver Linings Playbook.

Revenue from Starz Animation decreased $3.5 million or 34.2% for the three months ended June 30, 2013 as compared to the corresponding prior year period primarily due to fewer projects in production.

Programming

Programming costs are our largest expense. Programming costs decreased $14.0 million or 7.8% for the three months ended June 30, 2013 as compared to the corresponding prior year period. Programming costs vary due to original productions, the number of films licensed and the cost per film paid under our output and library programming agreements. The decrease in programming costs is due to fewer first-run films and higher utilization of lower cost second window films licensed under our output agreements. This decrease was partially offset by increased exhibitions of our original programming due to two original series airing in the second quarter of 2013 compared to one original series airing in the second quarter of 2012. We expect programming costs related to original programming to increase in the future as we continue to invest in original content.

Production and Acquisition

Production and acquisition costs primarily include the amortization of our investments in films and television programs and participation costs. The license fee associated with original productions is included in programming costs. All remaining production and acquisition costs for original productions as well as our other films and television programs are amortized to production and acquisition costs based on the proportion that current revenue bears to an estimate of ultimate revenue for each film or television program. The amount of production and acquisition costs that we will incur for original productions is impacted by both the number of and cost of original productions and the various distribution rights that we acquire or retain for these productions. Participation costs represent amounts paid or due to participants under agreements we have whereby Starz Distribution distributes content in which a participant (e.g., TWC, producers or writers of our original programming, etc.) has an ownership interest.

Production and acquisition costs increased $73.9 million or 187.7% for the three months ended June 30, 2013 as compared to the corresponding prior year period. The increase is primarily due to higher Starz Distribution revenue associated with the films distributed for TWC (which resulted in higher participation costs).

Home Video Cost of Sales

Home video cost of sales increased $4.4 million or 41.5% for the three months ended June 30, 2013 as compared to the corresponding prior year period due to an increase in distribution costs (distribution fees, freight, etc.) resulting from the increase in home video sales from films distributed for TWC as described above. Home video cost of sales represented 11.9% and 26.1% of home video net sales for the three months ended June 30, 2013 and 2012, respectively. Such decrease in costs as a percentage of sales is due to our agreement with TWC under which TWC pays for the related DVD replication and packaging costs.

Selling, General and Administrative

Selling, general and administrative expenses increased $30.0 million or 57.9% for the three months ended June 30, 2013 as compared to the corresponding prior year period. The increase was primarily due to increased advertising and marketing costs for both Starz Networks and Starz Distribution in addition to increased litigation related legal costs and costs associated with becoming an independent public company. The increase in advertising and marketing costs for Starz Networks was due to increased spend related to our original programming line-up which included two original series premiering in the second quarter of 2013 as compared to one original series premiering in the second quarter of 2012 and increased cooperative marketing efforts with our distributors. The increase in advertising and marketing costs for Starz Distribution was related to increased spend on films distributed for TWC.

Adjusted OIBDA

Adjusted OIBDA increased $21.0 million or 19.4% for the three months ended June 30, 2013 as compared to the corresponding prior year period. Adjusted OIBDA for Starz Networks increased $17.6 million primarily a result of the one-time adjustment to Starz Networks’ revenue mentioned above, which was partially offset by higher advertising and marketing costs. Starz Distribution’s Adjusted OIBDA increased $5.2 million primarily as a result of higher sales of lower margin films distributed for TWC.

Stock Compensation

Stock compensation increased $5.4 million or 148.0% for the three months ended June 30, 2013 as compared to the corresponding prior year period as a result of an increase in the number of options granted, and at a higher grant-date fair value than options previously granted, and an increase in the number of restricted shares granted.

Interest Expense

Interest expense increased $6.9 million for the three months ended June 30, 2013 as compared to the corresponding prior year period due to $473.0 million of additional net borrowings in 2013 (including the capital lease with Liberty Property Holdings, Inc. (“LPH”) for our corporate headquarters) and a higher average interest rate. The increase in the average interest rate resulted from the repayment of our term loan in 2012 with proceeds from the issuance of our 5.0% senior notes due 2019 (the “Senior Notes”). The Senior Notes bear interest at a fixed rate of 5.0% which is higher than the variable rate under the term loan.

Income Taxes

We had income before income taxes of $104.3 million and $95.7 million and income tax expense of $38.2 million and $26.1 million for the three months ended June 30, 2013 and 2012, respectively. Our effective tax rate was 36.7% and 27.3% for the three months ended June 30, 2013 and 2012, respectively.

U.S. federal and state income tax purposes. This election resulted in a $7.1 million deferred tax asset and corresponding tax benefit being recorded for the difference between the book basis and tax basis of our investment in Starz Media as of April 1, 2012.

ADJUSTED OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION (ADJUSTED OIBDA) - SIX MONTHS ENDED JUNE 30, 2013 AND 2012



	Six Months Ended June 30,						$ Change			% Change
	2013			2012			‘13 vs ‘12			‘13 vs ‘12
Revenue
Starz Networks	$	655,786		$	643,102		$	12,684		2.0	%
Starz Distribution	248,116			148,631			99,485			66.9	%
Starz Animation	14,116			21,437			(7,321		)	(34.2	)%
Inter-segment eliminations	(1,280		)	(5,644		)	4,364			77.3	%
Total Revenue	$	916,738		$	807,526		$	109,212		13.5	%
Adjusted OIBDA
Starz Networks	$	230,838		$	214,757		$	16,081		7.5	%
Starz Distribution	17,123			18,516			(1,393		)	(7.5	)%
Starz Animation	(1,339		)	(153		)	(1,186		)	(775.2	)%
Inter-segment eliminations	(585		)	2,196			(2,781		)	(126.6	)%
Total Adjusted OIBDA	$	246,037		$	235,316		$	10,721		4.6	%

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



	Six Months Ended June 30,
	2013			2012
Adjusted OIBDA	$	246,037		$	235,316
Stock compensation	(16,312		)	(6,235		)
Depreciation and amortization	(8,769		)	(8,807		)
Interest expense, net of amounts capitalized	(21,559		)	(9,330		)
Other income (expense), net	(1,993		)	4,167
Income before income taxes	$	197,404		$	215,111

RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2013 AND 2012

Operating results are as follows (in thousands, except as otherwise indicated):



	Six Months Ended June 30,						$ Change			% Change
	2013			2012			‘13 vs ‘12			‘13 vs ‘12
Revenue:
Programming networks and other services	$	740,569		$	728,878		$	11,691		1.6	%
Home video net sales	176,169			78,648			97,521			124.0	%
Total revenue	916,738			807,526			109,212			13.5	%
Costs and expenses:
Programming costs (including amortization)	311,324			340,253			(28,929		)	(8.5	)%
Production and acquisition costs (including amortization)	153,057			75,448			77,609			102.9	%
Home video cost of sales	30,216			21,228			8,988			42.3	%
Operating expenses	25,122			26,375			(1,253		)	(4.8	)%
Selling, general and administrative	150,982			108,906			42,076			38.6	%
Stock compensation	16,312			6,235			10,077			161.6	%
Depreciation and amortization	8,769			8,807			(38		)	(0.4	)%
Total costs and expenses	695,782			587,252			108,530			18.5	%
Operating income	220,956			220,274			682			0.3	%
Other income (expense):
Interest expense, net of amounts capitalized	(21,559		)	(9,330		)	(12,229		)	131.1	%
Other income (expense), net	(1,993		)	4,167			(6,160		)	(147.8	)%
Income before income taxes	197,404			215,111			(17,707		)	(8.2	)%
Income tax expense	(73,166		)	(66,308		)	(6,858		)	10.3	%
Net income	$	124,238		$	148,803		$	(24,565	)	(16.5	)%



	As of June 30,
Operating Data (in millions):	2013	2012
Starz subscriptions:
Fixed-rate subscriptions	12.3	12.4
Consignment subscriptions	9.5	8.3
Total Starz subscriptions	21.8	20.7
Encore subscriptions:
Fixed-rate subscriptions	21.9	22.5
Consignment subscriptions	13.2	11.7
Total Encore subscriptions	35.1	34.2
Total subscriptions:
Fixed-rate subscriptions	34.2	34.9
Consignment subscriptions	22.7	20.0
Total subscriptions	56.9	54.9

COMPARISON OF SIX MONTHS ENDED JUNE 30, 2013 TO SIX MONTHS ENDED JUNE 30, 2012

Revenue

Our revenue increased $109.2 million or 13.5% for the six months ended June 30, 2013 as compared to the corresponding prior year period. Revenue increased primarily as a result of increases in revenue for Starz Networks, Starz Distribution and a decrease in our inter-segment eliminations, which were partially offset by a decrease in revenue for Starz Animation. Starz Networks’ revenue represented 71.5% and 79.6% of our total revenue for the six months ended June 30, 2013 and 2012, respectively.

Revenue from Starz Networks increased $12.7 million or 2.0% for the six months ended June 30, 2013 as compared to the corresponding prior year period. During the second quarter of 2013, certain contractual terms under affiliation agreements with two distributors resulted in the recognition of $18.6 million of previously deferred revenue. Notwithstanding this one-time adjustment, revenue decreased $5.9 million as a result of a $9.4 million decrease due to lower subscriptions and a $3.5 million increase due to higher effective rates. The decrease in our subscriptions was primarily due to the non-renewal of the Netflix agreement in the first quarter of 2012 and lower subscriptions under our consignment agreements. The increase in our effective rates during the 2013 period was partially offset by the renewal of affiliation agreements with two distributors in the fourth quarter of 2012 on less favorable financial terms than the prior affiliation agreements (such agreements provide for annual contractual increases).

The Starz and Encore networks are the primary drivers of Starz Networks’ revenue. Starz and Encore average subscriptions during the periods increased 6.8% and 4.0% since June 30, 2012, respectively. The impact on revenue due to subscription increases is affected by the relative percentage change under consignment agreements and fixed-rate agreements. In this regard, as of June 30, 2013, subscriptions under fixed-rate agreements were 34.2 million while subscriptions under consignment agreements were 22.7 million. As of June 30, 2012, subscriptions under fixed-rate agreements were 34.9 million while subscriptions under consignment agreements were 20.0 million. The increase in consignment subscriptions is due to subscriptions that moved from fixed to consignment on January 1, 2013.

Revenue from Starz Distribution increased $99.5 million or 66.9% for the six months ended June 30, 2013 as compared to the corresponding prior year period. This growth is primarily due to an increase in the number of films distributed for TWC, including the films Django Unchained and Silver Linings Playbook.

Revenue from Starz Animation decreased $7.3 million or 34.2% for the six months ended June 30, 2013 as compared to the corresponding prior year period primarily due to fewer projects in production.

Programming

Programming costs are our largest expense. Programming costs decreased $28.9 million or 8.5% for the six months ended June 30, 2013 as compared to the corresponding prior year period. Programming costs vary due to original productions, the number of films licensed and the cost per film paid under our output and library programming agreements. The decrease in programming costs is due to fewer first-run films and higher utilization of lower cost second window films licensed under our output agreements. This decrease was partially offset by increased exhibitions of our original programming due to three original series airing in the first half of 2013 compared to two original series airing in the first half of 2012. We expect programming costs related to original programming to increase in the future as we continue to invest in original content.

Production and Acquisition

Production and acquisition costs increased $77.6 million or 102.9% for the six months ended June 30, 2013 as compared to the corresponding prior year period. The increase is primarily due to higher Starz Distribution revenue associated with the films distributed for TWC (which resulted in higher participation costs).

Home Video Cost of Sales

Home video cost of sales increased $9.0 million or 42.3% for the six months ended June 30, 2013 as compared to the corresponding prior year period due to an increase in distribution costs (distribution fees, freight, etc.) resulting from the increase in home video sales from films distributed for TWC as described above. Home video cost of sales represented 17.2% and 27.0% of home video net sales for the six months ended June 30, 2013 and 2012, respectively. Such decrease in costs as a percentage of sales is due to our agreement with TWC under which TWC pays for the related DVD replication and packaging costs.

Selling, General and Administrative

Selling, general and administrative expenses increased $42.1 million or 38.6% for the six months ended June 30, 2013 as compared to the corresponding prior year period. The increase was primarily due to increased advertising and marketing costs for both Starz Networks and Starz Distribution in addition to increased litigation related legal costs and costs associated with becoming an independent public company. The increase in advertising and marketing costs for Starz Networks was due to increased spend related to our original programming line-up which included three original series premiering in the first half of 2013 as compared to two original series premiering in the first half of 2012 and increased cooperative marketing efforts with our distributors. The increase in advertising and marketing costs for Starz Distribution was primarily related to increased spend on films distributed for TWC.

Adjusted OIBDA

Adjusted OIBDA increased $10.7 million or 4.6% for the six months ended June 30, 2013 as compared to the corresponding prior year period. Adjusted OIBDA for Starz Networks increased $16.1 million primarily a result of the one-time adjustment to Starz Networks’ revenue mentioned above, which was partially offset by higher advertising and marketing costs. The increase for Starz Networks was offset by decreases from Starz Distribution, Starz Animation and Inter-segment eliminations. Adjusted OIBDA was impacted by higher sales of lower margin titles by Starz Distribution and fewer projects in production by Starz Animation. In addition, the decrease in Inter-segment eliminations are primarily the result of fewer exhibitions of Overture Films’ titles.

Stock Compensation

Stock compensation increased $10.1 million or 161.6% for the six months ended June 30, 2013 as compared to the corresponding prior year period as a result of an increase in the number of options granted, and at a higher grant-date fair value than options previously granted, and an increase in the number of restricted shares granted.

Interest Expense

Interest expense increased $12.2 million for the six months ended June 30, 2013 as compared to the corresponding prior year period due to $473.0 million of additional net borrowings in 2013 (including the capital lease with LPH for our corporate headquarters) and a higher average interest rate. The increase in the average interest rate resulted from the repayment of our term loan in 2012 with proceeds from the issuance of our Senior Notes. The Senior Notes bear interest at a fixed rate of 5.0% which is higher than the variable rate under the term loan.

Other Income (Expense)

We recorded other expense of $2.0 million for the six months ended June 30, 2013 as compared to other income of $4.2 million for the six months ended June 30, 2012. The expense for the six months ended June 30, 2013 is primarily comprised of additional expense that we recorded in connection with our guarantee of the Canadian Next Generation of Jobs Fund Grant as further described in Note 7 to the accompanying condensed consolidated financial statements. The income for the six months ended June 30, 2012 is primarily comprised of gains on foreign currency hedging transactions and foreign currency exchange gains.

Income Taxes

We had income before income taxes of $197.4 million and $215.1 million and income tax expense of $73.2 million and $66.3 million for the six months ended June 30, 2013 and 2012, respectively. Our effective tax rate was 37.1% and 30.8% for the six months ended June 30, 2013 and 2012, respectively.

Our effective tax rate differs from the U.S. federal income tax rate of 35% primarily as a result of state and local taxes and changes in our valuation allowance for deferred taxes. In addition, for the six months ended June 30, 2012, our effective rate differed from the U.S. federal income tax rate of 35% as a result of Starz Media’s election, effective April 1, 2012, to convert itself from a LLC treated as a corporation to a LLC treated as a partnership for U.S. federal and state income tax purposes. This election resulted in a $7.1 million deferred tax asset and corresponding tax benefit being recorded for the difference between the book basis and tax basis of our investment in Starz Media as of April 1, 2012.

MATERIAL CHANGES IN FINANCIAL CONDITION

As of June 30, 2013, our cash and cash equivalents totaled $30.9 million. Our cash and cash equivalents are, from time to time, invested in U.S. Treasury securities, other government securities or government guaranteed funds, AAA rated money market funds and other highly rated commercial paper.

We generated cash from operating activities of $141.1 million and $61.7 million for the six months ended June 30, 2013 and 2012, respectively. Our primary uses of cash are payments under our programming output and library agreements and production costs for our original programming, home video and other content (i.e., investment in films and television programs), which are included as a reduction of net cash provided by operating activities. Cash paid under our programming output and library agreements totaled $227.5 million and $280.6 million for the six months ended June 30, 2013 and 2012, respectively, and decreased primarily due to fewer first-run films in 2013 as compared to 2012. Cash paid for original programming, home video and other content totaled $107.3 million and $129.1 million for the six months ended June 30, 2013 and 2012, respectively, and decreased primarily due to the timing of payments under our distribution agreement with TWC. We plan to continue to increase our investments in original programming in future periods.

For the six months ended June 30, 2013, restricted cash increased $63.8 million as compared to an increase of $0.8 million for the six months ended June 30, 2012. The increase in restricted cash represents proceeds from our distribution agreement with TWC. In addition, payments made under a legacy incentive plan negatively impacted net cash provided by operating activities in 2012. For the six months ended June 30, 2012, we made cash payments of $27.7 million under the legacy incentive plan as compared to cash payments of $3.2 million for the six months ended June 30, 2013. All amounts due under the legacy incentive plan have been paid as of June 30, 2013.

In connection with the LMC Spin-Off, Starz, LLC distributed $1.8 billion in cash to Old LMC which was funded by a combination of cash on hand and $550.0 million of borrowings under our senior secured revolving credit facility. The $1.8 billion was paid as follows: $100.0 million on July 9, 2012, $250.0 million on August 17, 2012, $50.0 million on September 4, 2012, $200.0 million on November 16, 2012 and $1.2 billion on January 10, 2013.

On February 8, 2013, Starz, LLC and Starz Finance Corp. completed the issuance of $175.0 million aggregate principal amount of 5.0% senior notes due 2019 (the “New Notes”), which were issued as additional notes under the indenture governing the Senior Notes. The net proceeds from such issuance were used to repay indebtedness under Starz, LLC’s senior secured revolving credit facility. The senior secured revolving credit facility contains certain covenants, including a covenant that limits our maximum leverage ratio, as defined in the credit agreement, to not more than 4.75 to 1.00 through December 31, 2013 and 4.25 to 1.00 thereafter. In addition, investments in unrestricted subsidiaries, as defined in the credit agreement, shall not exceed $150.0 million during the term of the credit agreement (starting on the closing date of November 16, 2011). Starz Entertainment and Starz Finance Corp. are the only guarantors and restricted subsidiaries under the senior secured revolving credit facility.

Additionally, we used $81.8 million of cash to buy back common stock under our share repurchase program for the six months ended June 30, 2013. We have $318.3 million available under our share repurchase program as of June 30, 2013.

We are continually projecting our anticipated cash requirements for our operating, investing and financing needs as well as net cash provided by operating activities available to meet these needs. Our potential sources of liquidity are net cash provided by operating activities and borrowings under our senior secured revolving credit facility and we expect that we will

be able to utilize these sources to fund our cash commitments for investing and financing activities, which include debt repayments, buybacks of common stock and capital expenditures during 2013. Based upon our current operating plans, we believe that our net cash provided by operating activities and borrowings under our revolving credit facility will be sufficient to fund our cash commitments for investing and financing activities, such as our long term debt obligations and capital expenditures from 2014 through 2017. As of June 30, 2013, we had $743.0 million of borrowing capacity available under our revolving credit facility.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk in the normal course of business due to our ongoing financial and operating activities. Market risk refers to the risk of loss arising from adverse changes in stock prices and interest rates. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings.

We are exposed to changes in interest rates as a result of borrowings used to maintain our liquidity and fund our operations. The nature and amount of our long-term and short-term debt are expected to vary as a result of future requirements, market conditions and other factors. We manage our exposure to interest rates by maintaining what we believe is an appropriate mix of fixed and variable rate debt and by entering into interest rate swap and collar arrangements when we deem appropriate.

As of June 30, 2013, our debt is comprised of the following amounts (in thousands):



Variable rate debt		Fixed rate debt
Principal amount	Weighted avg. interest rate	Principal amount	Weighted avg. interest rate
$257,000	2.04%	$755,610	5.14%

As shown above, the majority of our outstanding debt at June 30, 2013 was fixed rate debt. We have borrowing capacity at June 30, 2013 of $743.0 million under our senior secured revolving credit facility at variable rates.

At June 30, 2013, the fair value of the Senior Notes and the New Notes was $671.6 million. We believe the fair value of the senior secured credit facilities approximates its carrying value as of June 30, 2013 due to its variable rate nature and our stable credit spread.

We are exposed to foreign exchange rate risk on certain of our original productions that are produced in foreign countries. We mitigate this foreign exchange rate risk by entering into forward contracts and other types of derivative instruments as deemed appropriate. As of June 30, 2013, the fair market value of our outstanding derivative instruments related to foreign currencies was insignificant. We are also exposed to foreign exchange rate risk on our foreign operations; however, this risk is not deemed significant to our overall business.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and our principal financial and accounting officer (the “Executives”), of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Executives concluded that our disclosure controls and procedures were effective as of June 30, 2013 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There has been no change in our internal control over financial reporting that occurred during the six months ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

In the normal course of business, we are subject to lawsuits and other claims, including claims of alleged infringement of the trademarks, patents, copyrights and other intellectual property rights of third parties. While it is not possible to predict the outcome of these matters, it is the opinion of management, based upon consultation with legal counsel, that the ultimate disposition of known proceedings will not have a material adverse impact on our consolidated financial position, results of operations or liquidity.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Share Repurchase Program

On January 11, 2013, Old LMC announced its board of directors had authorized $400.0 million of repurchases of Starz common stock from that day forward, following the Spin-Off. Second quarter repurchases and remaining availability under the repurchase program is as follows:



	Series A common stock
	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share	(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs


Period
April 1 - 30, 2013	847,000	$21.76	847,000	$378.7 million
May 1 - 31, 2013	1,215,100	$23.09	1,215,100	$350.6 million
June 1 - 30, 2013	1,442,000	$22.45	1,442,000	$318.3 million
Total	3,504,100		3,504,100

Item 6. Exhibits

Listed below are the exhibits which are filed as part of this Report (according to the number assigned to them in Item 601 of Regulation S-K).



Exhibit No.		Description of Exhibit
3.1	Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Registrant's Registration Statement on Form 8-A filed on June 12, 2013 (File No. 001-35294) (the "8-A"))
3.2	Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on May 2, 2013 (File No. 001-35294)
4.1	Form of Specimen Certificate for shares of Series A common stock, par value $0.1 per share, of the Registrant (incorporated by reference to Exhibit 4.1 to the 8-A)
4.2	Form of Specimen Certificate for shares of Series B common stock, par value $0.1 per share, of the Registrant (incorporated by reference to Exhibit 4.2 to the 8-A)
31.1	Rule 13a-14(a)/15(d)-14(a) Certification*
31.2	Rule 13a-14(a)/15(d)-14(a) Certification*
32.1	Section 1350 Certifications*
101.INS	XBRL Instance Document**
101.SCH	XBRL Taxonomy Extension Schema Document**
101.CAL	XBRL Taxonomy Calculation Linkbase Document**
101.LAB	XBRL Taxonomy Label Linkbase Document**
101.PRE	XBRL Taxonomy Presentation Linkbase Document**
101.DEF	XBRL Taxonomy Definition Document**

______________________


*	Filed herewith.


**	Furnished herewith.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	Starz
	By:	/s/ Christopher P. Albrecht
Date: August 1, 2013		Name:	Christopher P. Albrecht
		Title:	Chief Executive Officer

	By:	/s/ Scott D. Macdonald
Date: August 1, 2013		Name:	Scott D. Macdonald
		Title:	Chief Financial Officer, Executive Vice President and Treasurer (Principal Financial Officer and Principal Accounting Officer)

Exhibit List

Exhibits. Listed below are the exhibits which are filed as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K):



Exhibit No.		Description of Exhibit

3.1	Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Registrant's Registration Statement on Form 8-A filed on June 12, 2013 (File No. 001-35294) (the "8-A"))
3.2	Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on May 2, 2013 (File No. 001-35294)
4.1	Form of Specimen Certificate for shares of Series A common stock, par value $0.1 per share, of the Registrant (incorporated by reference to Exhibit 4.1 to the 8-A)
4.2	Form of Specimen Certificate for shares of Series B common stock, par value $0.1 per share, of the Registrant (incorporated by reference to Exhibit 4.2 to the 8-A)
31.1	Rule 13a-14(a)/15(d)-14(a) Certification*
31.2	Rule 13a-14(a)/15(d)-14(a) Certification*
32.1	Section 1350 Certifications*
101.INS	XBRL Instance Document**
101.SCH	XBRL Taxonomy Extension Schema Document**
101.CAL	XBRL Taxonomy Calculation Linkbase Document**
101.LAB	XBRL Taxonomy Label Linkbase Document**
101.PRE	XBRL Taxonomy Presentation Linkbase Document**
101.DEF	XBRL Taxonomy Definition Document**

_____________________


*	Filed herewith.


**	Furnished herewith.

Form: 10-Q

Documents