Annual report pursuant to Section 13 and 15(d)

Stock Compensation and Long Term Incentive Plan

v2.4.1.9
Stock Compensation and Long Term Incentive Plan
 12 Months Ended
Dec. 31, 2014
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock Compensation and Long Term Incentive Plan
Stock Compensation and Long Term Incentive Plan
        
Stock Compensation

Starz has 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 its incentive plans. Pursuant to the Starz 2011 Incentive Plan, the compensation committee of the board of directors may grant eligible employees 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 board of directors may 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.

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 Old LMC’s Series A Liberty Capital common stock (“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.

Stock compensation expense, by expense category, consists of the following (in millions):
 
Years ended December 31,
 
2014
 
2013
 
2012
Programming costs
$
2.4

 
$
1.6

 
$
0.7

Operating expenses
0.3

 
0.2

 
0.1

Selling, general and administrative expenses
27.9

 
32.5

 
19.2

Total stock compensation expense
$
30.6

 
$
34.3

 
$
20.0



Stock compensation expense, included in selling, general and administrative expenses, included $5.8 million of expense related to the Exchange for the year ended December 31, 2012. As of December 31, 2014, total unrecognized compensation cost related to unvested stock options and restricted stock was approximately $67.4 million. Such amount will be recognized in Starz’s consolidated statements of operations over a weighted average period of 2.53 years.

Awards granted in 2014, 2013 and 2012 are as follows:

 
Options
Granted
 
Weighted
Average Grant-Date Fair Value
2014 Awards:
 
 
 
Stock options - Starz
1,424,612
 
$
10.94

Restricted stock - Starz
148,106
 
$
32.94

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



Starz calculated the grant-date fair value for the stock options using the Black-Scholes Model. The expected term was estimated using a simplified method for the 2014 and 2013 awards as Starz does not have the proper amount of historical exercise or forfeiture data due to the LMC Spin-Off in January 2013. The simplified method assumes that the employee would exercise stock options evenly over the vesting period and through the contract term. The 2012 awards’ expected term was based upon Old LMC’s historical exercise and forfeiture data. The 2014 and 2013 awards’ expected volatility was calculated using comparable peer company historical and implied volatility because Starz lacks historical volatility equal to the expected term due to the LMC Spin-Off in January 2013. The 2012 awards’ expected volatility was based on the historical volatility of Old LMC’s LMCA stock and the implied volatility of LMC’s publicly traded options. Starz used a zero dividend rate as Starz has not historically declared dividends and used 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:

 
2014
 
2013
 
2012
Expected term
4.75
 
4.6 to 6.9
 
4.5 to 7.08
Expected volatility
35.9% to 36.0%
 
35.9% to 41.4%
 
37.5% to 54.2%
Risk-free rate of return
1.5%
 
0.7% to 1.4%
 
0.5% to 1.0%


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, 2013
18,765,137

 
$
15.41

Granted
1,424,612

 
$
33.13

Exercised
(2,969,841
)
 
$
12.56

Forfeited
(788,242
)
 
$
16.12

Expired/cancelled
—

 
$
—

Outstanding at December 31, 2014
16,431,666

 
$
17.42

 
 
 
 
Exercisable at December 31, 2014
7,236,584

 
$
13.69



At December 31, 2014, the weighted average remaining contractual term of the outstanding options was 5.5 years and the exercisable options was 4.4 years. At December 31, 2014, the aggregate intrinsic value of the outstanding options was $206.6 million and the aggregate intrinsic value of the exercisable options was $115.8 million. The aggregate intrinsic value of options exercised was $55.8 million and $16.1 million for the years ended December 31, 2014 and 2013, respectively.

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, 2013
1,438,909

 
$
16.52

Granted
148,106

 
$
32.94

Vested
(814,695
)
 
$
15.22

Forfeited
(63,662
)
 
$
21.27

Outstanding at December 31, 2014
708,658

 
$
21.01


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

At December 31, 2014, 2.7 million of outstanding stock options and 0.3 million restricted shares were held by Liberty Media employees as a result of the LMC Spin-Off.

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. During the years ended December 31, 2014, 2013 and 2012, Starz made payments of none, $3.2 million and $33.4 million, respectively, to certain Plan Participants under the 2006 LTIP. All remaining amounts due under the 2006 LTIP were paid in the second quarter of 2013.