Annual report pursuant to Section 13 and 15(d)

Stock Compensation and Long Term Incentive Plan

v2.4.0.8
Stock Compensation and Long Term Incentive Plan
 12 Months Ended
Dec. 31, 2013
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock Compensation and Long Term Incentive Plan
Stock Compensation and Long Term Incentive Plan
        
Stock Options – 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. Pursuant to the Starz 2011 Incentive Plan, a committee of the Starz Board of Directors may grant stock options, stock appreciation rights and restricted stock units made in respect of a maximum of 23.8 million shares of Starz common stock. Stock options generally vest over 4 years and have a term of 7-10 years. Restricted shares generally vest over 1-4 years. Starz issues new shares upon exercise of equity awards. Pursuant to the Starz 2011 Nonemployee Director Incentive Plan, the Starz Board of Directors has the power and authority to grant eligible nonemployee directors stock options, stock appreciation rights and restricted stock units made in respect of a maximum of 1.4 million shares of Starz common stock.

In November 2011, Old LMC exchanged each share of outstanding Series A Liberty Starz common stock for 0.88129 of a share of Old LMC’s Series A Liberty Capital common stock (“LMCA”). The outstanding Liberty Starz restricted stock was also exchanged for LMCA restricted stock using the same ratio. An adjustment was made to the strike price of and number of shares (using the same ratio) subject to each outstanding stock option to purchase shares of Liberty Starz common stock. The exchange of stock options and restricted stock was considered a modification of the previous award, however, the impact to compensation expense was not significant.

On December 4, 2012 (the “Grant Date”), pursuant to the approval of the Compensation Committee of its Board of Directors, Old LMC effected the acceleration of each unvested in-the-money option to acquire shares of LMCA held by certain of its and its subsidiaries’ officers (collectively, the “Eligible Optionholders”), including one executive officer of Starz, LLC. Following this acceleration, also on the Grant Date, each Eligible Optionholder exercised, on a net settled basis, substantially all of his or her outstanding in-the-money vested and unvested options to acquire LMCA shares (the “Eligible Options”) (collectively, the “Exchange”), and:

•
with respect to each vested Eligible Option, Old LMC granted the Eligible Optionholder a vested new option with substantially the same terms and conditions as the exercised vested Eligible Option, except that the exercise price for the new option is the closing price per LMCA share, as applicable, on The Nasdaq Global Select Market on the Grant Date; and

•
with respect to each unvested Eligible Option:

◦
the Eligible Optionholder sold to Old LMC the shares of LMCA received upon exercise of such unvested Eligible Option on the Grant Date for cash equal to the closing price of LMCA on The Nasdaq Global Select Market on the Grant Date;

◦
Each Eligible Optionholder used the proceeds of that sale to purchase from Old LMC at that price an equal number of restricted LMCA shares, as applicable, which have a vesting schedule identical to that of the exercised unvested Eligible Option; and

◦
Old LMC granted the Eligible Optionholder an unvested new option, with substantially the same terms and conditions as the exercised unvested Eligible Option, except that (a) the number of shares underlying the new option is equal to the number of shares underlying such exercised unvested Eligible Option less the number of restricted shares purchased from Old LMC as described above and (b) the exercise price of the new option is the closing price of LMCA on The Nasdaq Global Select Market on the Grant Date.

Starz recognized $34.3 million, $20.0 million (including $5.8 million of expense related to the Exchange) and $6.9 million during the years ended December 31, 2013, 2012 and 2011, respectively of compensation expense related to vested stock options and restricted stock. As of December 31, 2013, the total unrecognized compensation cost related to the unvested stock options and restricted stock was approximately $81.7 million. Such amount will be recognized in Starz’s consolidated statements of operations over a weighted average period of 2.94 years.

The historical awards granted in 2013, 2012 and 2011 are summarized as follows:

 
Options
Granted
 
Weighted
Average Grant-Date Fair Value
2013 Awards:
 
 
 
Stock options - Starz
7,443,494
 
$
7.84

Restricted stock - Starz
574,548
 
$
22.85

2012 Awards:
 
 
 
Stock options - LMCA
688,000
 
$
40.12

Stock options - LMCA issued in the Exchange
482,535
 
$
42.36

Restricted stock - LMCA
58,110
 
$
105.56

2011 Awards:
 
 
 
Stock options - LMCA
100,000
 
$
32.60

Stock options - Series A Liberty Starz Common Stock
496,000
 
$
21.36

Restricted stock - Series A Liberty Starz Common Stock
11,655
 
$
77.52


Starz calculates the grant-date fair value for the stock options using the Black-Scholes Model. The expected term for the majority of the grants was based upon Old LMC’s historical exercise and forfeiture data. The remaining grants expected term was estimated using a simplified method as Starz does not have the proper amount of historical exercise or forfeiture data due to the LMC Spin-Off in January 2013. The majority of the grants’ expected volatility used in the calculation for the awards is based on the historical volatility of Old LMC’s LMCA, Starz and Capital tracking stocks and the implied volatility of LMC’s publicly traded options. Because of the lack of historical volatility equal to the expected term due to the LMC Spin-Off in January 2013, the remaining grants’ expected volatility was calculated using comparable peer company historical and implied volatility. Starz uses a zero dividend rate as Starz has not historically declared dividends and uses risk-free rates which are derived from U.S. Treasury Bonds with a term similar to that of the subject options. The assumptions used are as follows:

 
2013
 
2012
 
2011
Expected term
4.6 to 6.9
 
4.5 to 7.08
 
4.4
Expected volatility
35.9% to 41.4%
 
37.5% to 54.2%
 
31.9% to 54.2%
Risk-free rate of return
0.7% to 1.4%
 
0.5% to 1.0%
 
0.7% to 1.9%

The following table presents the number and weighted-average exercise price (“WAEP”) of stock options to purchase Starz common stock:
 
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
7,443,494

 
$
20.54

Exercised
(1,138,030
)
 
$
11.24

Forfeited
(273,644
)
 
$
11.10

Expired/cancelled
—

 
$
—

Outstanding at December 31, 2013
18,765,137

 
$
15.41

 
 
 
 
Exercisable at December 31, 2013
6,153,111

 
$
12.79

 
 
 
 
* 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 December 31, 2013 the weighted-average remaining contractual term of the outstanding options is 6.1 years and the exercisable options is 4.9 years. At December 31, 2013, the aggregate intrinsic value of the outstanding options is $259.6 million, the aggregate intrinsic value of the options exercised is $16.1 million and the aggregate intrinsic value of the exercisable options is $101.2 million.

The following table presents the number and weighted-average grant date fair value of restricted stock grants:
 
Restricted Stock
 
Weighted
Average Grant-Date Fair Value
Outstanding at December 31, 2012*
109,023

 
$
95.48

LMC Spin-Off adjustment for Liberty Media employees
1,499,906

 
$
12.40

Granted
574,548

 
$
22.85

Vested
(736,815
)
 
$
11.91

Forfeited
(7,753
)
 
$
16.28

Outstanding at December 31, 2013
1,438,909

 
$
16.52

 
 
 
 
* In connection with the LMC Spin-Off, approximately 12% of the original grant-date fair value was allocated to the Starz restricted shares.

The grant date fair value is based upon the market value of the shares on the date of grant.

Long Term Incentive Plan - Starz granted incentive units to certain officers and key employees (“Plan Participants”) under the 2006 long term incentive plan (“2006 LTIP”). Such grants vested over a period of four years and were fully vested as of June 30, 2011. All remaining amounts due under the 2006 LTIP were paid in the second quarter of 2013. Starz recognized none, none and $0.2 million during the years ended December 31, 2013, 2012 and 2011, respectively, of compensation expense related to the 2006 LTIP. During the years ended December 31, 2013, 2012 and 2011, Starz made payments of $3.2 million, $33.4 million and $7.7 million, respectively, to certain Plan Participants under the 2006 LTIP.