Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
(Mark One)
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
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: 000-01461
LIBERTY LIVEWIRE CORPORATION
| DELAWARE | 13-1679856 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
520 Broadway, Fifth Floor
Santa Monica, CA 90401
(310) 434-7000
(Address of Registrant’s Principal Executive Offices, zip code
and telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $ .01 PAR VALUE
(Title of Class)
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 preceding 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 No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
The aggregate market value of voting stock held by non-affiliates at March 25, 2002 was approximately $296,180. The number of shares of common stock issued and outstanding at March 25, 2002 was: 5,319,280 Class A Common Stock and 34,393,330 Class B Common Stock.
Documents incorporated by reference: None.
DRAFT
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PART I |
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ITEM 1. BUSINESS |
3 | ||||
ITEM 2. PROPERTIES |
26 | ||||
ITEM 3. LEGAL PROCEEDINGS |
26 | ||||
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
27 | ||||
PART II |
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ITEM
5. MARKET FOR THE
REGISTRANT’S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS |
29 | ||||
ITEM 6. SELECTED FINANCIAL DATA |
31 | ||||
ITEM
7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS |
32 | ||||
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
41 | ||||
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
41 | ||||
ITEM
9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
41 | ||||
PART III |
|||||
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
42 | ||||
ITEM 11. EXECUTIVE COMPENSATION |
45 | ||||
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
50 | ||||
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
54 | ||||
PART IV |
|||||
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K |
59 | ||||
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This report contains forward-looking statements. Words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of such terms and similar expressions reflecting something other than historical fact may be intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. These forward-looking statements involve known and unknown risks and uncertainties. The actual levels of our activity, performance, achievements or industry may differ materially from those expressed or implied by any forward-looking statement due to such risks and uncertainties. Factors that may cause or contribute to such differences include, but are not limited to, our ability to compete successfully in our industry, to continue to develop new services on a timely basis, including the timely development and market acceptance of new technologies, successful integration of acquisitions, the ability to secure additional sources of financing, the ability to reduce operating expenses, cancellation of customer orders and other factors described in this and our other filings with the Securities and Exchange Commission including, but not limited to those set forth in this section under the caption, “Risk Factors” and in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the caption, “Factors That May Affect Future Results of Operations.” We disclaim any obligation to update any of the forward-looking statements contained in this report to reflect any future events or developments.
PART I
ITEM 1. BUSINESS.
OVERVIEW
Liberty Livewire Corporation, incorporated in Delaware in 1952, provides technical and creative services to the entertainment industry. Our clients include the major motion picture studios, independent producers, broadcast networks, cable channels, advertising agencies and other companies that produce, own and/or distribute entertainment, news, sports and advertising content. Our assets and operations are primarily composed of the assets and operations of nine companies acquired during 2001 and 2000. The unique combination and integration of these acquired entities allow us to offer our clients a complete range of services, from image capture to distribution of the final product, unmatched by most other competitors in the industry. We offer outsourcing solutions for the technical and creative requirements of our clients that lower operating costs, reduce cycle times and increase reliability and quality.
We have organized our facilities and operations into three business segments that we call Groups. Each Group has a president, director of finance, director of technology and director of sales and marketing supported by centralized corporate staff functions such as operations, information technology, finance, human resources, strategic planning, business development and legal affairs. This delineation allows each Group to focus on its particular client base, while our centralized corporate functions facilitate implementation of financial and operational controls across the organization. Our Groups are described below. For financial information about each Group, see Part II, Item 8, “Financial Statements and Supplementary Data.” For information about the services that each Group provides, see “Services” in this Item 1 below.
Pictures Group
Our Pictures Group provides services necessary to complete the creation of original content including feature films, television shows, television commercials, music videos, promotional and identity campaigns and corporate communications programming. Among other things, we create visual effects, sound effects and animation sequences and integrate them into filmed entertainment after principal photography. Our services begin once raw images are captured and are completed when a final product is delivered to the “last mile” distributor such as a broadcast network, cable channel or Internet protocol, or IP, distributor. The Pictures Group has three divisions: Entertainment Television, Commercial Television and Audio.
Media Group
Our Media Group provides services necessary to facilitate global maintenance, management and distribution of existing content libraries. Through our facilities, we provide immediate access to physical and virtual content, we restore and preserve damaged content, and we create high resolution professional masters from original camera negative for global home video, broadcast, pay-per-view and emerging new media distribution channels.
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Networks Group
Our Networks Group provides the services necessary to assemble and distribute programming for cable and broadcast networks via fiber, satellite and the Internet to audiences in North America, Europe and Asia. Our Networks Group primarily provides dedicated facilities and resources designed for specific client requirements on the basis of contractual agreements.
FORMATION
Change in Control and Subsequent Acquisitions
Change in Control. On June 9, 2000, our company, then known as The Todd-AO Corporation, or Todd-AO, B-Group Merger Corp., a wholly-owned subsidiary of AT&T Corp., AT&T Corp. and Liberty Media Corporation, also referred to as Liberty Media, entered into a merger agreement, as amended on March 6, 2000, which provided for the acquisition by Liberty Media of Todd-AO. In connection with the merger, also referred to as the Todd Merger, the following transactions occurred:
| (1) | a reclassification of the existing common stock of Todd-AO; | ||
| (2) | the merger of B-Group Merger Corp. with and into Todd-AO, as described below; and | ||
| (3) | the change of Todd-AO’s name to Liberty Livewire Corporation. |
Upon the consummation of the Todd Merger and the related reclassification of stock, which occurred simultaneously, each issued and outstanding share of common stock of Todd-AO was converted into the right to receive 0.4 shares of our new Class A Common Stock and 0.5 shares of Liberty Media Group Class A Common Stock, a tracking stock of AT&T. As a result, Liberty Media acquired 60% of the outstanding equity which represented approximately 94% of our voting power. For more information on Liberty Media, see “Liberty Media Corporation” in this Item 1 below.
Four Media Company. On April 10, 2000, Liberty Media acquired Four Media Company, also known as 4MC, in exchange for $123.3 million in cash plus 3,182,300 shares of Liberty Media Group Class A Common Stock valued at $137.7 million, grants of stock appreciation rights to purchase 1,936,778 Liberty Media Group Class A Common Stock valued at $52.9 million, and a warrant to an investor representing the right to purchase 354,838 shares of Liberty Media Group Class A Common Stock valued at $7.8 million. 4MC provides technical and creative services to owners, producers and distributors of television programming, television commercials, feature films and other entertainment content. 4MC’s California facilities are located in Los Angeles, Hollywood, Burbank and Santa Monica. Its international facilities are located in Mexico City, Mexico; London, England; and the Republic of Singapore.
On May 31, 2000, 4MC acquired six entities from the Virgin Media Group Limited (“Virgin”) for $39.5 million in cash. On June 9, 2000, Liberty Media contributed all of the issued and outstanding shares of 4MC to us in exchange for 16,614,952 shares of our Class B Common Stock, pursuant to a contribution agreement between us and Liberty Media.
Certain Assets of SounDelux Entertainment Group of Delaware. On July 19, 2000, a wholly-owned subsidiary of Liberty Media (“Liberty Sub”) acquired Soundelux, which consisted of certain of the assets and operations of SounDelux Entertainment Group of Delaware, Inc. (“SEG”), for $90.0 million in cash. Immediately following the closing of this asset purchase, Liberty Media contributed 100% of its ownership interests in Liberty Sub to us in exchange for 8,181,818 shares of our Class B Common Stock pursuant to a previously negotiated contribution agreement between us and Liberty Media. Soundelux provides sound design, editorial and re-recording services for feature films, television, advertising and new media. Soundelux operations are located in Los Angeles, California.
Triumph Communications Group. On July 25, 2000, we acquired Triumph Communications Group, also known as Triumph, in exchange for a cash payment to the seller totaling $5.7 million, forgiveness of existing notes payable to us from Triumph totaling $4.5 million, and 705,554 shares of our Class A Common Stock, which had an aggregate market value at the time of issuance of $44.6 million, partially offset by $1.7 million of cash acquired. Triumph, located in New York City, designs, engineers and implements video transmission services for clients seeking to distribute or transport content including cable networks, broadcasters, news, sports, infomercials, and corporate organizations. Services provided include fiber optic, satellite, compression systems, encoding and encryption, and IRD sales and authorization.
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Soho Group Limited. On August 11, 2000, one of our wholly-owned subsidiaries acquired all of the outstanding shares of Soho Group Limited, or Soho, for $27.0 million in cash (net of approximately $200,000 of cash acquired), which included real property in the Soho area of London, England. Soho provides services primarily to the commercial advertising industry, including negative developing, negative cutting (using proprietary technology), film to digital media transfer, two-dimension and three-dimension compositing and animation and television commercial finishing.
Visiontext Limited. On October 9, 2000, one of our wholly-owned subsidiaries acquired all of the outstanding shares of Visiontext Limited, or Visiontext, for $2.9 million in cash (net of approximately $300,000 of cash acquired) plus a note payable to the sellers for $1.9 million. Visiontext is located in Los Angeles, California and London, England and provides sub-titling services to the commercial advertising and home video markets.
Video Services Corporation. On December 22, 2000, pursuant to a contribution agreement, Liberty Media contributed to us 100% of the outstanding capital stock of Video Services Corporation, also referred to as VSC, in exchange for a convertible promissory note in the principal amount of $92.5 million and the assumption by us of Liberty Media’s obligations with respect to stock options originally granted by VSC. The convertible promissory note was issued to Liberty Media under a credit agreement between us and Liberty Media (which we refer to as the Liberty Subordinated Credit Agreement). An additional $9.6 million in cash was paid by us to retire debt of VSC and we agreed to indemnify Liberty Media with respect to any debt or other obligations of VSC. VSC provides engineering, production and distribution services for the video and broadcast industries, nationally and internationally. It has locations in New York, New Jersey, Florida and California.
Ascent Network Services. On January 5, 2001, we entered into an Ownership Interest Purchase Agreement with ANS Acquisition Sub, Inc., our wholly-owned subsidiary, and Ascent Entertainment Group, Inc., or AEG, an affiliate of Liberty Media. Pursuant to the terms of the Ownership Interest Purchase Agreement, all of the assets used in connection with the business of Ascent Network Services, a division of AEG, were transferred to Livewire Network Services, LLC, or LNS, a newly-formed and wholly-owned subsidiary of AEG. AEG then transferred a one percent ownership interest in LNS to us in exchange for $300,000 in cash. In connection with the Ownership Interest Purchase Agreement between us and AEG, AEG and LNS executed a Contribution and Assumption Agreement pursuant to which LNS assumed all liabilities, obligations and commitments of AEG relating to the business of Ascent Network Services, whether before or after January 5, 2001.
We and AEG also became parties to the LNS Operating Agreement. Under the LNS Operating Agreement: (1) we became responsible for managing the operations of LNS as of January 5, 2001; (2) we became entitled to receive $800,000 per month from LNS as a guaranteed payment to compensate us for our managerial services; (3) AEG obtained the right to receive a preferred return in the amount of 10% per annum, compounded quarterly, on the balance of its capital account as of January 5, 2001, which amounted to approximately $29.7 million, calculated for the period beginning on January 5, 2001 and ending on the date on which the members of LNS receive final liquidating distributions; and (4) we and AEG entered into certain put-call arrangements.
On September 6, 2001, we purchased from AEG the 99% ownership interest of LNS that we did not already own. The transaction, which was financed with debt from the Liberty Subordinated Credit Agreement, was valued at $31.3 million (net of approximately $425,000 of cash acquired). LNS provides operational, installation, maintenance, and support services for satellite communication systems and their users. LNS is located in Melbourne, Florida.
Group W Network Services and Asia Broadcast Centre. On February 1, 2001, we acquired from Viacom, Inc. and certain of its subsidiaries, substantially all of the assets of the domestic business unit known as Group W Network Services and 100% of the outstanding capital stock of Singapore-based Asia Broadcast Centre Pte. Ltd. and Group W Broadcast Pte. Ltd. (collectively, “GWNS”) for $108.2 million (net of $2.5 million of cash acquired). GWNS provides production and distribution services for the broadcast and cable industries from locations in the Republic of Singapore; Minneapolis, Minnesota; and Stamford, Connecticut.
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Cinram-POP. On August 23, 2001, we acquired from Cinram U.S. Holdings, Inc., the remaining 51% membership interest in Cinram-POP DVD Center LLC, or Cinram-POP, that we did not already own. The transaction, financed with cash from operations, was valued at approximately $536,000 (net of $295,000 of cash acquired). Cinram-POP provides DVD design, authoring and encoding services to the home video market. Cinram-POP is located in Santa Monica, California.
Liberty Media Corporation
Today, as a result of these acquisitions and certain other transactions, Liberty Media owns approximately 87% of our outstanding common stock, which represents approximately 99% of our voting power. For information on Liberty Media’s interest in our company, see Part II, Item 5, “Market for the Registrant’s Common Stock and Related Stockholder Matters—Recent Sales of Unregistered Securities.”
Until August 10, 2001, Liberty Media was an indirect wholly-owned subsidiary of AT&T Corp. Its former parent, Tele-Communications, Inc., or TCI, was acquired by AT&T in March 1999. Liberty Media and its subsidiaries comprised substantially all of the businesses and assets of the Liberty Media Group. Liberty Media Group Class A Common Stock, which traded on the New York Stock Exchange under the ticker symbol, LMG.A, and Liberty Media Group Class B Common Stock, which traded on the New York Stock Exchange under the ticker symbol, LMG.B, were tracking stocks of AT&T that were intended to reflect the economic performance of the Liberty Media Group. On August 10, 2001, Liberty Media split off from AT&T and began trading as an independent publicly held company. In the split-off, each share of LMG.A and LMG.B tracking stock was redeemed for one share of Liberty Media’s Series A Common Stock, LMC.A, and Series B Common Stock, LMC.B, respectively. On January 2, 2002, LMC.A began trading under the ticker symbol “L.” Both L and LMC.B shares trade on the New York Stock Exchange.
INDUSTRY
Entertainment Services
The entertainment services industry supports the filmed entertainment industry in the creation, management and distribution of motion pictures, television programs, television commercials, other promotional or interstitial material and various forms of content for new media applications including interactive content. Content is released into a “first-run” distribution channel, such as theatrical, broadcast or cable network, and later into one or more additional channels, such as home video and pay-per-view, domestic or international syndication. In addition to newly-produced content, film and television libraries are typically repeatedly re-mastered into various formats for redistribution. The entertainment services industry has historically been highly fragmented, with a variety of traditional services performed by numerous small companies, each specializing in a unique aspect of the process. We are a company in the entertainment services industry providing fully-integrated service solutions within and across our three Groups.
Our Groups benefit from the volume of content being created and distributed rather than the success or popularity of an individual television show, commercial or feature film. The following trends in the filmed entertainment industry are expected to have a positive impact on our Groups.
| • | Growing worldwide demand for original entertainment content. Globally, the demand for entertainment content is increasing, and thus the need for the associated technical and creative services we offer is expanding. At the same time, the pace of technological change is accelerating. We expect growth opportunities to result from the ability to provide uniform, high quality services in an increasingly complex mix of content formats, broadcast standards, geographic locations, languages and cultures. | ||
| • | The development of new business opportunities for existing content libraries. The vast libraries of the major film and television studios are an ongoing source of programming for traditional and new channels of media distribution. For exploitation in a digital environment, these libraries must be re-mastered, augmented, restored, re-colored, converted and reformatted. In addition, the new digital environment has contributed to the lack of uniformity in worldwide television standards, thus creating the need for the creation of new master elements in unique formats. |
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| • | Continued proliferation of new distribution channels, such as digital cable, digital broadcast satellite and the Internet. The creation and market acceptance of new content distribution channels such as direct broadcast satellite, video-on-demand, or VOD, and IP distribution requires new technical and operational infrastructure to create, manage and distribute content. The industry requires technical facilities and operational management that facilitates the creation, management and delivery of that content to viewing audiences. | ||
| • | Wider application of digital technologies to content manipulation and distribution. This trend is contributing to the increased demand for technical and creative services for a given volume of content. Advances in technology, particularly the emergence of high quality compression algorithms, have led to the creation of new standards and the opportunity to create multiple revenue streams from the same programming. | ||
| • | Increased outsourcing of technical and creative services. Film and television studios are finding that their resources are optimized by outsourcing certain technical and creative services related to the creation, management and distribution of content. Certain of our current and prospective clients are seeking high-quality end-to-end technology outsourcing solutions and the benefit of scale economies. | ||
| • | Increased demand for innovation, technical and creative quality. Advances in technology, new broadcast standards, growing adoption by consumers of personal video recorders, which facilitate “time shifting” of programming by the television consumer, and increasing audience fragmentation require content owners, producers and distributors to cost effectively increase image and audio quality and create increasingly innovative, compelling viewing experiences for audiences. We believe we are uniquely positioned to enable our clients to “raise the bar” with respect to increasing image resolutions, such as high definition television, or HDTV, and audio quality, such as 5.1 surround formats. We also provide technology, infrastructure and creative talent to enhance the creative process of producing original programming and modernizing aging library material. |
Motion Picture Production and Distribution
Various facilities throughout our company provide services to the motion picture industry. The Pictures Group creates visual effects, sound effects and animation sequences and integrates them into newly-released feature films, while the Media and Networks Groups provide services that support the mastering and distribution of feature films for domestic and international home video, cable and broadcast markets.
The domestic motion picture industry encompasses the production, distribution and exhibition of feature-length motion pictures, including their distribution in home video, broadcast and cable television and other ancillary channels. While the domestic motion picture industry continues to be dominated by the major studios, including Paramount Pictures, Sony Pictures Corporation, Twentieth Century Fox, Universal Pictures, The Walt Disney Company, Metro-Goldwyn-Mayer and Warner Brothers, independent production companies also play an important role in the production of motion pictures for domestic and international feature film markets.
According to the Motion Picture Association of America, 2001 was a record box office year in the U.S., with total box office receipts of $8.4 billion, an increase of 9.8% over 2000. Box office admissions of 1.5 billion tickets in 2001 represented growth of 5% from the previous year and 30% from 1991. In 2001, there were 482 feature films released, up from 478 in 2000. Another trend experienced by the U.S. film industry is the growing reliance on international box office revenues, as they continue to account for an increasing percentage of total feature film revenues. In addition, there is growing demand for digital video product. As the installed base of DVD players in the U.S. grows from 25 million in 2001 to an estimated 50 million by the end of 2004, most library catalogs will be re-released, stimulating a new cycle of home entertainment cash flows.
Television Production and Distribution
Substantially all of our facilities provide services related to the production and distribution of television programming. The Pictures Group provides a full array of services to facilitate the creation of television programs and commercials, the Media Group provides a full array of services necessary to manage the exploitation of existing content libraries, and the Networks Group provides a full array of services necessary to deliver television programming to “last mile” distributors.
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The United States television production and distribution industry serves a broadcast audience of approximately 285 million households and a cable audience of approximately 105 million households, the largest of such audiences in the world. In North America, programming is delivered to television households via conventional broadcast networks, cable channels, individual television stations and satellite delivery systems. Broadcast television networks in the United States penetrate over 97.5% of domestic households and provide access to a large audience for television advertisers. Spending for television advertising drives the production of new television programming and the sale of existing content libraries for domestic syndication. While the broadcast networks have seen an erosion of their audiences, the cable networks have attracted an increasing share of television audiences. In addition, basic cable’s penetration reached a record high of 69.4% of United States television households in 2001. At the same time, United States television households served by direct broadcast satellite systems, or DBS, reached 12.9 million television households, up 34.4% from 2000.
The significant increase in international demand for entertainment content has further driven the need for new and re-purposed content. Over the last decade, the privatization of broadcasting systems, the proliferation of broadcast licenses, and the introduction of sophisticated delivery technologies such as digital broadcasting, digital cable and direct broadcast satellite systems, have led to the growth of broadcasting and cable television markets outside the United States. Most foreign broadcasters require both local programming (to satisfy the local content requirements) and popular international programming, largely produced in the United States. Recent growth in international revenue for filmed entertainment produced in the United States has far exceeded growth in North American revenues, with international revenues now accounting for more than 50% of total revenue. Western European television is the most visible example of the growth in distribution platforms for television programming and new distribution platforms are beginning to emerge in Asia and Eastern Europe.
New Media Production and Distribution
We are positioned to provide a wide range of services to facilitate the involvement of our clients in emerging new media platforms. By matching the needs and requirements of our clients in the areas of preparation, management and distribution of new media with the needs and requirements of the “last mile” distributors, we expect to play an important role in bridging the gap between these two important sectors.
The television production and distribution industry is in a state of transformation. Both multiple system cable operators, also called MSOs, and DBS operators have introduced new products and services into the marketplace. These “last mile” distributors compete aggressively for new subscribers and are using new media services as an inducement to attract and retain consumers. Additionally, companies such as TiVo® are currently marketing personal video recorders, or PVRs, that have the potential to change the television viewing habits of consumers. Over the next several years we expect that an increasing number of consumers will be able to access the programs they want to see, when they want to see them. New business models are expected to emerge that may challenge the concept of mass audiences receiving programming from networks in a linear fashion.
Many of these new services not only propose to give viewers much greater control over the programming they see, they may also provide them with a range of interactive experiences. To facilitate the introduction of these new services, both MSOs and DBS operators are developing and deploying advanced set top boxes and additional hardware into their operations. Currently, there are over 15 million digital cable boxes and over 18 million digital satellite boxes in subscribers’ homes in the U.S. Worldwide, the digital video platform exceeds 50 million homes. Interactive television middleware developers such as Wink®, OpenTV®, and Liberate Technologies® are currently deploying their technology platforms into digitally enabled TV households.
As a result of the introduction of services such as PVRs, VOD, subscription video-on-demand, or SVOD, and interactive television, or ITV, the various participants in the industry, including studios, program suppliers, networks and advertisers, many of whom are our current clients, are working to understand how these changes will affect their businesses. Projections indicate that PVRs, currently in over 500,000 U.S. homes, will achieve penetration of 5 million homes by 2005. VOD and SVOD services are currently available in over 800,000 U.S. households, a number that is expected to reach 6 million digital subscribers by the end of 2002. ITV services are projected to be available in over 29 million U.S. households by 2004.
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STRATEGY
The entertainment services industry has been historically fragmented with numerous providers offering discrete, non-integrated services. Our services, however, span the entirety of the value chain from the creation and management of content to the delivery of content via multiple distribution paths including satellite, long-haul terrestrial fiber and IP-based networks. We believe the breadth and range of our services uniquely provide us the scale necessary to realize significant efficiencies: a global, scaleable media services platform integrating preparation, management and distribution services, common “best practices” operations management across the Liberty Livewire enterprise; and integration of financial and administrative functions.
Our objective is to become a leading provider of technical and creative services to producers, owners and distributors of content, from image capture to delivery of the final product for traditional and new digital media applications. We intend to continue building a leading position in our targeted business segments by pursuing the following strategies:
Establish centralized, scalable, financial and operating infrastructure. We are establishing a world class management team and, with appropriate compensation structures, have incentivized management to create stockholder value. We are building operational, financial and internal control systems to improve financial administration. We are reducing overhead through centralization and have begun to restructure our operations to improve margins and financial performance.
Develop and grow our core businesses. We intend to extend our value-added proposition further into the organizational structure of our client base by leveraging scale opportunities, our breadth of services and our global coverage of key markets. We intend to acquire strategic assets and entities with the goal of attaining market leadership in each of our business segments and geographic markets. We intend to further integrate our facilities and operations establishing “best practices” and increase scale and capacity to drive growth. We expect to deploy proven, leading technologies in a consistent manner across all of our operations.
Leverage our core businesses in the new digital media value chain. We expect to leverage our existing client relationships, technological expertise and digital infrastructure by building new revenue streams in emerging new media markets. We intend to develop new business opportunities in areas such as digital imaging, digital media management, bandwidth management and interactive media.
Drive the convergence of traditional and new media. We expect to create joint ventures, partnerships and alliances with technology providers, content creators, and “last mile” distributors to create cost effective scalable infrastructure to drive new media revenue streams. We intend to assist in the development of industry standards and business models to help develop new media opportunities.
We intend to create stockholder value by prioritizing our growth initiatives in the following manner. First, we plan to capitalize on current opportunities by delivering scale economies to our existing client base. Second, we expect to pursue acquisition opportunities and effectively consolidate and integrate newly acquired assets and operations with our existing businesses. Finally, we plan to invest in emerging growth opportunities and deploy next-generation digital media services in the areas of digital imaging, digital media management, bandwidth management, and new media services. All of our emerging next generation digital media growth opportunities are expected to increase our value-added proposition to our clients and assist them in creating new revenue streams from their content.
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SERVICES
Pictures Group
The Pictures Group has three divisions: Entertainment Television, Commercial Television and Audio. Generally, the Pictures Group provides the technical and creative services necessary to conform original film or video principal photography into a final product suitable for viewing audiences. We utilize state-of-the-art facilities and equipment to digitally create or manipulate sounds and images in high-resolution formats for integration into feature films, television programs and television commercials. In fiscal year 2001, the Pictures Group contributed $332.9 million, or 56.2% of our total revenues, as compared to $221.0 million, or 72.1%, in fiscal year 2000 and $94.4 million, or 79.6% in fiscal year 1999.
Entertainment Television Division
Our recent acquisitions have created a consolidated group of facilities providing services to producers of episodic television series, movies-of-the-week, and specials. We provide services primarily in Los Angeles, New York and London. Our competitive advantages include the breadth and scalability of our services, the high level and accessibility of our creative talent and our long-standing relationships with our client base. We will continue to support the expansion of our brand equity in the marketplace by maintaining the differentiation of our facilities. However, our entertainment television facilities are managed as a consolidated global group enabling us to drive “best practices,” cross sell services and maximize the value of our client relationships across our entire organization. The major brands of the entertainment television division include: Encore, Hollywood Digital, Level 3, Digital Symphony and Soho Images. Each brand is well known and highly regarded in its area of expertise and creative contribution.
Recent awards received by the Entertainment Television Division include an Academy Award® for What Dreams May Come (Best Visual Effects); Emmy Awards® for X-Files (Best Visual Effects for a Series) and The Learning Channel, “Superstructures”; Monitor Awards for Nash Bridges (Best Color Correction), Cora, Unashamed (Best Color Correction, Movie of the Week), JAG (Best Editing) and Lifetime, “Any Day Now” (Best Color Correction, Episodic Long Form); Telly Awards® for TNT, “Shaft Marathon” (Gold, Creative Editorial), TNT, “Johnny Cash, Overview” (Gold, Creative Editorial); TNT, “Behind the Scenes: Dollar for the Dead” (Gold, Creative Editorial), HBO Sports, “Inside the NFL”, TNT, “Saturday Night New Classic: Fargo” (Silver, Creative Editorial); and Broadcast Design Awards® for Turner Production Effects, “Turner Investor Sales Tapes” (Gold), Turner Classic Movies, Trailers (Gold), VH-1 Fashion Awards, “Open Animation” (Bronze), Sci Fi Channel, “Scinema Feature” and Sci Fi Channel, “Sci Fi On Air Re-Design". A detailed description of the key services provided by our Entertainment Television Division is presented below.
Negative developing. Because of the creative freedom, high-resolution image quality and flexibility attained by working with film, the majority of prime-time network and first-run syndicated television programming originates on film. “Dailies,” the original negative shot during each production day for a one-hour drama, situation comedy or movie-of-the-week, are developed by our film laboratory. Our film laboratories specialize in negative developing for television shows.
Transfer and digital formatting. We accept developed negative from our and other laboratories and transfer the film to digital media. The transfer process enables the customer to view the previous day’s work and begin the creative editorial process. The transfer process is technically challenging and is used to integrate various forms of audio and encode the footage with feet and frame numbers from the original film. We also convert film into various digital formats suitable for multiple distribution paths including Digital Versatile Disc (DVD).
Off-line editing. We deliver low-resolution digital images to the customer for processing by various non-linear editing workstations. Using our systems, the customer determines a program’s content and creates an edit decision list, or EDL, which is used to assemble the source material into a final product suitable for broadcast. We support our clients with personnel and equipment either within our facilities or at a designated location. In addition, we are able to offer expanded communications infrastructure to provide digital images directly from the film-to-tape transfer process to a workstation through dedicated data lines.
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Visual effects. Visual effects are used to enhance the viewing audience’s entertainment experience by supplementing images obtained in principal photography with computer-generated imagery. Visual effects are typically used to create images that cannot be created by any other cost-effective means. We generate bends, warps, morphs and 3D shapes as well as other visual effects for customers. We also offer an array of graphics and animation workstations using a variety of software to accomplish unique effects, including 3D animation. We are actively involved in providing visual effects for the television industry as evidenced by our contribution to numerous television series, including Star Trek®, Ally McBeal®, and Smallville®.
Assembly, formatting and duplication. We implement clients’ creative decisions, including decisions regarding the integration of sound and visual effects, to assemble source material into its final form. In addition, we use sophisticated computer graphics equipment to generate titles and character imagery and to format a given program to meet specific network requirements, including time compression and commercial breaks. Finally, we create multiple master videotapes for delivery to the network for broadcast, archival and other purposes designated by the customer.
Commercial Television Division
Our recent acquisitions have created a large group of facilities specializing in the delivery of technical and creative services to producers of television commercials, music videos, theatrical film trailers, interstitial and promotional material and identity and corporate image campaigns. Our competitive advantages include our long term contracts with leading creative talent in the industry, the ability to provide scale and global reach for national and international advertising campaigns and the ability to provide the best available technologies and working environments to achieve the creative and technical objectives of our clients. We will continue to support the expansion of our brand equity in the marketplace by maintaining the differentiation of our facilities. However, our commercial television facilities benefit from coordination of certain policies, including pricing, vendor relationships, employment practices and compensation and incentive structures. The major brands of our Commercial Television Division include CO3, Riot, Method, Filmcore, POP, Rushes, SVC, Soho 601, XTV and Editworks. Each brand is well known and highly regarded in its area of expertise and creative contribution.
Recent awards received by the Commercial Television Division include Clio Awards® for Nike, “Virtual Andre”, Nike, “Topseed”, Chevy, “Brawl”, First Union Bank, “Noise”, San Francisco Jazz Festival, “Low Riders” and Public Service Announcement, “Antismoking”; Association of Independent Creative Editors Awards® for Nike, “Horror” and EPS, “Cat Herders"; Monitor Awards® for The Def Tones, “White Pony” (Best Color Correction, Short Form) and Coca Cola, “Concession Man” (Best Audio Post Production, Promotional), Public Service Announcement, “Youth Violence” (Best Visual Effects), Showtime, “No Limits” (Best Color Correction in a National Commercial), FTD, “Hero” (Best Color Correction in a National Commercial), Skittles, “Trail” (Best Color Correction in a National Commercial), Bush, “Greddy Fly” (Best Color Correction in a Music Video), Tom Petty, “Walls” (Best Color Correction in a Music Video), Mercedes Benz, “They Invented” (Best Achievement in a National Commercial) and 525 Studios (Best Achievement in a Commercial Demo Reel); Telly Awards® for Fox Kids Network, “Fox Kids X Speed Fall Campaign”, WebMD, “Feelings” and Sony Music, “Wynton Marsalis, Swing” and a Belding Award® for Toyota Tacoma, “Family Reunion” and a Lions Award® for Sony Playstation, “Soundcheck.” A detailed description of the key services provided by our Commercial Television Division is presented below.
Negative developing. Because of the creative freedom, high-resolution image quality and flexibility attained by working with film, most television commercials originate on film. Our facilities deliver negative development and imaging services for complex and technically demanding commercial work. We also provide negative cutting services for the distribution of commercials on film.
Telecine. Telecine is the process of transferring film into digital media. During this process, a variety of parameters can be manipulated, such as color and contrast. Because the color spectrum of film and digital media are different, we have creative talent who utilize creative colorizing techniques, state-of-the-art equipment and proprietary processes to enable our clients to achieve a desired visual look and feel for television commercials and music videos, as well as feature films and television shows.
Digital Effects. Digital effects enhance principal photography and physical effects with computer-generated imagery. Our digital artists use hardware and software tools as well as proprietary methods to create three-dimensional animation, special visual effects and other specialized graphical elements for commercial television.
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Creative Editorial. The process of creative editorial consists of the steps required to mold film that has been shot for a television commercial into a final product that is ready to be distributed for television viewing. After principal photography has been completed, our editors assemble the various elements into a cohesive story consistent with the messaging, branding and creative direction by our clients, which are mainly advertising agencies.
Distribution. Once a television commercial has been completed, we provide quality broadcast and support services, including complete video and audio duplication, distribution, and storage and asset management, for advertising agencies, corporate advertisers and entertainment companies. We use domestic and international satellite, fiber and Integrated Services Digital Network, or ISDN, Internet access, and conventional air freight for the delivery of television and radio spots. We currently house over 85,000 commercial production elements in our vaults for future use by our clients. Our commercial television distribution facilities in Los Angeles and San Francisco, California and our satellite hub facilities in New York, enable us to service any regional or national client.
Audio Division
We provide audio services to the entertainment industry for theatrical feature films, television series, television specials, movies-of-the-week, trailers, television commercials and new digital media in the United States and Europe. We have audio facilities in Los Angeles, New York and London. Todd-AO Studios and Soundelux are the major brand names supported by the Audio Division. Todd-AO Studios have contributed to the artistry and success of many significant film and television projects. The Soundelux brand name has been at the forefront of the motion picture sound design and sound editing industry for over 20 years and has expanded its brand in the marketplace with high end microphones for the music industry. We leverage our assets into the consumer market through The Hollywood Edge, which distributes sound tools through worldwide distribution channels and the Internet.
Recent awards garnered by the Audio Division include Academy Awards® for Black Hawk Down (Best Sound), Gladiator (Best Sound), Braveheart (Best Sound Effects Editing), Last of the Mohicans (Best Sound), Glory (Best Sound), Coal Miner’s Daughter (Best Sound); British Academy Awards for Almost Famous (Best Sound), Braveheart (Best Sound) and JFK (Best Sound); Golden Reel Awards® for Gladiator (Best Sound Effects Editing), American Beauty (Best ADR Editing), Jerry Maguire (Best ADR Editing), The Hunchback of Notre Dame (Best Animated Sound Effects Editing), Braveheart (Best Sound Effects Editing), Born on the Fourth of July (Best Sound Editing), a Grammy Award® for Alanis Morissette: Jagged Little Pill (Best Long Form Music Video); Monitor Awards® for Nike, “Horror” (Best Audio Mixing for a National Commercial), Book of Virtues (Best Audio Mixing for Children’s Programming), Sega, “Obsidian Egg” (Best Audio Mixing), Sega, “Apocalypse” (Best Audio Post), Infiniti, “Motorcade” (Best Audio Post), The Rolling Stones, “Stripped” (Best Audio Mixing), Arizona Department of Health Services, “Why Smoke” (Best Audio Mixing for Public Service Announcement); a Clio Award® for Snap.com, “New Friend” (Best Sound Design); a Mexican Silver Ariel Award® for Amores Perros (Love’s a Bitch) (Best Sound), and a Cinema Audio Society Award® and TEC Award® for our sound effects work on Gladiator. We have also been an Emmy® recipient for a Governor’s Award for The Native Americans.
We provide music design, music supervision, script breakdown and budgeting, music pre-recording, music composition and clearance, music supervision, overseas music recording, score production and song placement. Feature film and television producers utilize our state-of-the-art studio facilities and highly skilled creative staff for the creation of sound effects, replacement of dialog, and the re-recording of audio elements for integration with film and video elements. Re-recording combines sound effects, dialogue, music and laughter or applause to complete the final product. In addition, the re-recording process enhances the listening experience by adding stereo, Dolby®, SR®, Surroundsound®, THX® and other specialized sound treatments and formats.
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Media Group
The Media Group provides owners of content libraries with an entire complement of state-of-the-art facilities and services necessary to manage and distribute film, videotape, and digital media via freight, satellite, fiber and the Internet and facilitates the worldwide distribution of the content in formats ranging from HDTV to streaming media. Our competitive advantages include strong client loyalty due to our long standing reputation for high levels of service, capacity to handle large scale projects and our ability to offer complete end-to-end content management solutions on a global basis. Our media facilities are located in Burbank, Hollywood, and Santa Monica, California; Northvale, New Jersey; and London, England.
We foresee continued growth, primarily due to the emergence of new digital distribution platforms, including digital cable television, pay-per-view, and VOD, as well as the growing international demand for content particularly in Asia and Europe. We anticipate that the industry will provide a sustainable “evergreen” demand for our media services as new programming is produced and as existing programming is continually reformatted for, and recycled into, new markets. We also expect to develop new revenue streams as the demand for services related to the management and exploitation of resolution independent virtual media (as opposed to physical media) grows. In fiscal year 2001, the Media Group contributed $104.1 million, or 17.6% of our total revenues, as compared to $56.8 million, or 18.5%, in fiscal year 2000 and $24.1 million, or 20.4%, in fiscal year 1999. A more detailed description of the key services provided by our Media Group is presented below.
Storage of original elements and working masters. The storage and handling of videotape and film elements requires specialized security and environmental control procedures. Throughout the entertainment industry, content is stored in physically small units that are subject to the risk of loss resulting from physical deterioration, natural disaster, unauthorized duplication or theft. Our archives are designed to store working master videotapes and film elements in an environment protected from temperature and humidity variation, seismic disturbance, fire, theft and other external events. In addition to the physical security of the archive, content owners require frequent and regular access to their libraries. Speed and accuracy of access is a critical value-added factor. We are an independent archive provider and believe we are advanced with respect to security, environmental control and access features.
Restoration and preservation of existing and of damaged content. Substantially all film elements originating prior to 1983 have faded, degraded or been damaged. Damaged film negative must be restored because sub-masters produced from damaged film will generally not meet the minimum quality standards required in domestic and foreign broadcast markets. Our technicians restore damaged film negative to original and sometimes enhanced quality through the use of proprietary optical and electronic equipment and techniques. In order to protect film assets from degradation, older film is frequently converted to new archival film stock. Modern film stock is the preferred archival medium because it has the highest image resolution of any image storage medium and a shelf life that exceeds 100 years. Using a proprietary process, we take the original or restored film negative and create a new negative. Due to technical and operational advances in our proprietary restoration and preservation processes, we are able to provide quality restoration and preservation services for existing film content.
Transferring film to digital media. Substantially all film content ultimately is distributed to the home video, broadcast, cable or pay-per-view television markets. This requires film images to be transferred to a video format. Each frame must be color corrected and adapted to the size and aspect ratio of a television screen in order to ensure the highest level of conformity to the original film version. Because certain film formats require transfers with special characteristics, it is not unusual for a motion picture to be mastered in many different versions. Technological developments, such as the domestic introduction of television sets with a 16 x 9 aspect ratio and the implementation of advanced and high definition digital television systems for terrestrial and satellite broadcasting, are expected to contribute to the growth of our film transfer business.
Converting videotape or digital media to film. Production companies may choose to originate their work on videotape even though the ultimate market is a theatrical release on film. We have developed a process called Transform® that converts videotape to film. Transform® uses advanced electronic systems to transform video pictures from all current broadcast standards to 16mm or 35mm film. The Transform® process is used for theatrical advertising commercials, studio promotions and trailers, as well as theatrical length presentations including feature films, concerts and special events.
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Audio restoration and integration. Audio layback is the process of creating duplicate digital masters with sound tracks that are different from the original recorded master sound track. Content owners selling their assets in foreign markets require the replacement of dialogue with voices speaking local languages. In some cases, all of the audio elements, including dialogue, sound effects, music and laughs, must be recreated, remixed and synchronized with the original master elements.
Professional duplication and standards conversion. Professional duplication is the process of creating broadcast quality and resolution independent sub-masters for distribution to professional end users. Master elements are used to make sub-masters in numerous domestic and international broadcast standards as well as up to 22 different tape formats. Standards conversion is the process of changing the frame rate of a video signal from one video standard, such as the United States standard (NTSC), to another, such as a European standard (PAL or SECAM). Content is regularly copied and converted for use in intermediate processes, such as editing, on-air backup and screening, and for final delivery to cable and pay-per-view programmers, broadcast networks, television stations, airlines, home video duplicators and foreign distributors. Our duplication and standards conversion facilities are technically advanced and have unique characteristics that significantly increase equipment capacity utilization while reducing error rates and labor cost.
Networks Group
The recent acquisitions of the assets and operations that comprise our Networks Group have created a global operation primarily focused on the broadcasting and distribution of content via satellite and fiber. We provide facilities and services necessary to assemble and distribute programming content for cable and broadcast networks via fiber, satellite and the Internet to viewers in North America, Europe and Asia. We facilitate the timely creation of original programming such as hosted and news segments and live shows, providing language translation and subtitling, all the way to assembling programming provided by the customer into a 24-hour “network” format. In addition, we provide facilities and services for the delivery of syndicated television programming in the United States and Canada and also transmit special events, sports or news segments for insertion in broadcast, cable and other third party networks.
We see continued growth opportunities with current and prospective clients who are seeking higher quality and/or lower cost solutions for broadcasting and distribution particularly where new technologies can accomplish these objectives and support the creation of new revenue streams in the digital media space. Our competitive advantages include global end-to-end solutions, bundled product and service pricing advantages, cost effective diverse and redundant distribution paths and a proven track record on multiple technological platforms. Our broadcast facilities are located in California, New York, New Jersey, Connecticut, the United Kingdom and Singapore. Our Internet hosting facilities are located in New York and California, and our point-of-presence facilities are located in each of the top 40 U.S. markets. In fiscal year 2001, the Networks Group contributed $155.6 million, or 26.2%, of our total revenues, as compared to $28.6 million, or 9.3%, in fiscal year 2000, which was the year in which this Group was created. A more detailed description of the key services provided by our Networks Group is presented below.
Production. Timely broadcast programming, such as live shows and news, requires immediate and precise coordination of on-camera talent, the script, pre-recorded videotape, promotional and interstitial materials and the broadcast schedule. We operate state-of-the-art television production studios in Stamford, Connecticut and Singapore with cameras, production and audio control rooms, videotape playback and record, multi-language prompters, computerized lighting, and dressing and makeup rooms. Our Singapore facility also offers field, live-to-satellite interview and teleconferencing services.
On-air promotion. On-screen marketing and broadcast continuity depend on on-air promotional material to support the channel’s brand identity and programming. We work with the client’s writers and producers to offer a complete on-air promotion service, including graphics, editing, voice-over record, sound effects editing, sound mixing and music composition.
Language translation. Programming designed for export to other markets is prepared through language translation and either subtitling or voice dubbing. We provide dubbed language versioning with an audio layback and conform service that supports various audio and videotape formats to create original international language-specific master videotape. Our Burbank facility also creates music and effects tracks from programming that is filmed before an audience to prepare television situation comedies for dialogue recording and international distribution. Our Singapore facility supports translation, and a complete on-screen and closed-caption subtitling facility.
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Assembly. We provide programming to most United States broadcast television stations through daily satellite feeds and tape shipments. Prior to broadcast, all material is quality control checked and may be pre-compiled into final broadcast form prior to on-air playback. Pre-compilation is performed in our editing facilities, often using proprietary systems and software which permit the efficient assembly of high production value visual effects. We also prepare syndicated programming for distribution with commercials and similar elements that are inserted prior to distribution. We use control procedures to ensure on-air reliability and provide formatting and time compression services, which are used to prepare programming for distribution. We perform commercial, promotional, billboard, warning, logo and other integration, as well as closed captioning for the hearing impaired and source identification encoding. We also provide programmers with: traffic support; affiliate relations and station coordination; library storage of broadcast master tapes; a syndication program library and recycled videotape inventory.
Origination and distribution. We provide videotape playback and origination to cable, pay-per-view and direct-to-home networks. We accept daily program schedules, programs, promos and advertising, and deliver 24 hours of seamless daily programming to cable affiliates and DBS subscribers. We use automated systems for broadcast playback, which include systems and software. We also operate industry-standard encryption and/or compression systems as needed for customer satellite distribution. We use a customized approach to satisfy each customer’s timeliness, flexibility and reliability requirements. We also offer quality control, tape storage and trafficking services. Currently, over 50 24-hour channels are supported by our facilities in Singapore; London, England; Los Angeles and Burbank, California; New York, New York; Northvale, New Jersey; and Stamford, Connecticut.
Fiber and satellite transport. We operate satellite earth station facilities in Singapore; Los Angeles and Burbank, California; New York, New York; Northvale, New Jersey; and Stamford, Connecticut. Our facilities are generally staffed 24 hours a day and may be used for both downlink and turnaround services. We access various “satellite neighborhoods,” including basic and premium cable, broadcast syndication direct-to-home and DBS markets. We resell transponder capacity for occasional use and bundle our transponder capacity with other broadcast and syndication services to provide a complete broadcast package at a fixed price. Our teleports are high-bandwidth communications gateways for satellite, optical fiber and microwave transmission. Our facilities offer satellite antennae capable of transmitting and receiving domestic feeds in both C-Band and Ku-Band frequencies. Certain facilities also have international transmission capabilities. We own and operate video switching facilities in New York City with connectivity to and from Washington, D.C. and London, England. These facilities are connected via over 450 fiber lines to all major news organizations and all New York area teleports. We also provide transportable services, including point-to-point microwave transmission, transportable up-link and downlink transmission, and broadcast quality teleconference services. In addition, our fiber network operations provide DirecTV’s local station backhaul service and numerous customers with MPEG-2 compressed satellite channels and fiber connectivity ranging from 1.5 megabits per second (T1) to full 45 megabits per second (DS3) circuits.
Engineering and systems integration. Through our wholly-owned subsidiary, A.F. Associates, also referred to as AFA, we design, build, install, and service advanced video systems for the broadcast and cable television industries for professional and corporate markets. Over 50% of AFA’s business is repeat business from clients who seek AFA’s technical and engineering expertise. AFA also serves as the “in house” engineering department for the Networks Group, enabling us to quickly respond to customer needs and new services. AFA’s clients include the four major broadcast networks; numerous cable channels, including Turner Entertainment, CNN, CNBC, Fox News Channel, Lifetime Television, USA Networks and Home and Garden Television; satellite broadcasters, including DirecTV and SKY Latin America; corporate television networks, including Merrill Lynch & Co., Pfizer, AT&T and Toys R Us; and numerous production and post-production facilities. We believe that increases in cable, direct satellite and independent broadcasting made possible by emerging digital media technologies, as well as the migration of broadcasting standards from analog to digital, will provide significant opportunities for AFA to expand its customer base.
Broadcast equipment rental. We rent broadcast and industrial video equipment to the broadcast and professional video industries, and provide support and maintenance for such services. We specialize in network sports production. As the exclusive field shop for Fox Sports, we are responsible for storing, shipping and maintaining equipment owned by the network and used for their coverage of major sporting events, including the National Football League and Major League Baseball.
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DEVELOPING BUSINESSES
Digital Media Management
We are pursuing a digital media management strategy that we anticipate will provide a gateway to create, manage, process, catalog, transport and deliver all forms of digital media. The creation of this digital media management platform provides for asset integration, scalability and extension across all of our business segments and divisions. It will also extend into the operating processes and the media assets of our clients. Our digital media management strategy will also provide a framework for implementation of new value-added services such as metadata creation, ingestion and processing, digital content cataloging as well as media versioning. This business applies to multiple traditional distribution platforms as well as new media distribution businesses such as VOD. These services, however, cannot be effectively implemented until scalable digital media management infrastructure is deployed.
Our digital media management initiative will require design and development of a comprehensive suite of next generation services designed to complement the company’s existing businesses, as well as providing a migration path toward servicing the new media initiatives of our clients. As such, the project represents a long term strategic investment designed to propel us ahead of our competitors by providing migration paths from the management of existing conventional (physical) media to automated real time management, which is faster than real time management, of digital and virtual assets. Examples of services that we are currently developing or have begun implementing include the following:
Dailies Gateway. The Dailies Gateway will provide multi-tiered services for the review, approval and digital transfer of project dailies. Clients will need only a password and a broadband modem to receive Tier One service, which will stream three days’ worth of dailies in Windows Media and MPEG-4. Tier Two service will include DVD-quality files streamed over a private network. Tier Three service will digitize Avid OMF files with a telecine session for “tape-free” private network delivery of dailies directly to offline editors.
Virtual Sessions. The Virtual Session® enables producers around the world to work with preferred editors, effects specialists and telecine artists remotely, thereby eliminating long-distance travel. Real-time sessions can be conducted live, enabling shoulder-to-shoulder collaboration around the globe, with full-resolution images delivered via a private network. Other services include online posting of edited commercials, online discussion groups, project timeline management and shared, simultaneous viewing sessions.
Virtual Vault. The Virtual Vault® offers commercial advertising, music video and promotional material producers complete range of media management services including storage, video and audio duplication, and distribution. Clients may order copies, compilation reels and customized playlists in a variety of formats, including recordable DVD, or DVDR. These elements can be routed quickly and efficiently to clients, broadcasters, and other distributors by either physical distribution or electronic file transfer. Two tiers of service are optimized for customer needs, including Tier One, which gives password-protected access to clients through each facility’s portal; and Tier Two, which creates a client-branded library site for clients to use within their own in-house operations.
Bandwidth Management
We are developing cost effective, seamless and integrated global transport solutions for our customers that will allow us to transport any and all forms of content across multiple distribution paths with the highest degree of integrity and reliability. We expect to use a variety of transport technologies to create highly efficient and cost-effective solutions that optimize emerging platforms that have not previously serviced the broadcast industry. For example, existing telecommunications infrastructure has substantial potential value to our clients, but has not been a viable alternative because of user interface and reliability issues. Our bandwidth management solution will address these concerns by driving traditional broadcast quality and reliability standards into the telecommunications environment. Costs associated with delivering content to end users can be substantially reduced. We expect to add value by providing monitoring, procedural, and support mechanisms to ensure delivery of services at a level that meets or exceeds broadcast television standards.
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We use the latest asynchronous transfer mode, or ATM, sonet ring protected technology in a global switched terrestrial fiber network. This allows us to transmit a high volume of content in a cost-effective manner for our clients. For example, our services for DirecTV® include the aggregation and delivery of approximately 500 broadcast television signals from over 50 local markets to DirecTV’s broadcast centers in Denver and Los Angeles. These signals are then retransmitted by DirecTV to their customers fulfilling their requirements under federal must-carry regulations. Ultimately, we expect to be able to establish a network or hub structure in key media centers around the globe to facilitate the cost-effective transport of resolution independent digital media signals to any location at any time for playout on any device and/or platform. This will give us a significant advantage over our competitors and will enable the involvement of content owners and distributors in emerging digital media revenue opportunities.
Interactive Media
At the heart of emerging interactive media platforms is VOD and its companion, SVOD. Many cable operators see VOD as the key to providing a competitive advantage vis-à-vis DBS operators. The core functionality gives consumers the ability to access on demand a wide range of content services that are stored on servers located in cable headends. Once a program is selected from a menu of choices, consumers have the ability to pause, rewind, fast-forward, and bookmark a program for later viewing. Networks such as Starz!/Encore, Discovery and HBO have launched SVOD services on various cable systems across the country. With SVOD, a cable subscriber pays a monthly subscription fee and can watch any of the stored programs whenever and how often they desire.
We are positioning ourselves to be the preferred provider of essential VOD/SVOD services, such as file encoding, metadata creation, promotional material creation, file delivery and service reporting. In addition, we expect to provide support for the other interactive services expected to complement the VOD/SVOD environment.
Complementing our work in the VOD/SVOD space, we will continue to closely follow developments in the interactive television space. Over time, we expect that the authoring, hosting and Internet distribution of interactive media will parallel the production and distribution process of the traditional entertainment services industry. We believe that the most artistically correct and cost-effective way to produce, archive and distribute interactive television elements is for the material to be produced, post-produced, archived and distributed at the same time and under the same creative control as the traditional elements.
We expect to continue to support the development of HyperTV® with Livewire, a joint venture with ACTV, Inc. that provides for the integration and simulcast of television and Internet broadcasts. The HyperTV® technology delivers interactive Web content, Web-based advertising, and e-commerce opportunities synchronized to live or pre-recorded TV programming. Building on our existing relationship with ACTV, Inc., we will be positioned to provide interactive media services as and when the demand for these services occurs. Similar to our core operations, we will be able to offer a complete outsourcing solution and be able to respond to the needs of producers, programmers, studios, networks, and advertising agencies in the interactive media arena.
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CUSTOMERS
For the year ended December 31, 2001, no single customer accounted for more than 10% of consolidated revenues. The Pictures Group client base is composed of the major domestic film studios, independent television production companies, broadcast networks, advertising agencies, creative editorial companies and corporate media producers. The three largest clients in the Pictures Group accounted for 6.5%, 4.9% and 3.8% of its revenue. The Media Group’s client base includes the major domestic studios and their international divisions as well as independent owners of television and film libraries. The three largest clients in the Media Group accounted for 9.6%, 7.9% and 7.4% of its Group revenue in fiscal year 2001. The Networks Group’s client base consists of broadcast and cable television networks, local television channels, broadcast syndicators, satellite broadcasters and corporate television networks. The three largest clients in the Networks Group accounted for 11.8%, 11.0% and 9.8% of its Group revenue in fiscal year 2001. The loss of a key customer of the Media Group or the Networks Group could have a material adverse effect on that Group.
COMPETITION
Although the entertainment services industry is highly fragmented, it is highly competitive in each of our business segments. Much of the competition is centered in Los Angeles, California, the largest and most competitive market, particularly for domestic television and feature film production as well as for the management of content libraries. We expect that competition will increase as a result of industry consolidation and alliances, as well as the emergence of new competitors. In particular, major motion picture studios such as Paramount Pictures, Sony Pictures Corporation, Twentieth Century Fox, Universal Pictures, The Walt Disney Company, Metro-Goldwyn-Mayer and Warner Brothers, while our customers, can perform similar services in-house with substantially greater financial, technical, creative, marketing and other resources than we have. These studios could devote substantially greater resources to the development and marketing of services that compete with ours. Conversely, we also actively compete with certain industry participants that may be smaller but have a unique operating niche or specialty business. In addition, many of our businesses are located or provide services in Los Angeles, California, the largest and most competitive market, particularly for domestic television and feature film production as well as for the management of content libraries. We believe that our breadth of services is unique among most competitors in the entertainment services industry in terms of the breadth of our business segments and the range of service offerings within each business segment. Our recognized and well-respected brand names are acknowledged and recognized for their contribution to creative quality. We are also differentiated from most of our competitors by our ability to offer end-to-end outsourcing solutions within and across our business segments.
EMPLOYEES
We have approximately 3,200 employees who work in five countries providing services from approximately 100 facilities. Of our 3,200 employees, approximately 200 are represented by the International Alliance of Theatrical and Stage Employees. We consider our relationship with our employees to be excellent.
REGULATION
Our subsidiary companies hold licenses from the Federal Communications Commission, or FCC, authorizations and registrations required for the conduct of their businesses, including various classes of wireless licenses and an authorization to provide certain services pursuant to the Communications Act. Most of the FCC licenses held by our subsidiaries are for transmit/receive earth stations, which cannot be operated without individual licenses. The licenses for these stations are granted for a period of ten years and, while the FCC generally renews licenses for satellite earth stations, there can be no assurance that these licenses will be renewed at their expiration dates. Registration with the FCC, rather than licensing, is required for receiving transmissions from domestic satellites from points within the United States. We rely on third party licenses or authorizations when we transmit domestic satellite traffic through earth stations operated by third parties. The FCC establishes technical standards for satellite transmission equipment that change from time to time and requires coordination of earth stations with land-based microwave systems at certain frequencies to assure non-interference. Transmission equipment must also be installed and operated in a manner that avoids exposing humans to harmful levels of radio-frequency radiation. The placement of earth stations or other antennae is typically subject to regulation under local zoning ordinances.
GEOGRAPHIC AREAS
Please see Part II, Item 8, for Consolidated Financial Statements included in this report for financial information on each geographic area in which we conduct business.
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RISK FACTORS
We may not be able to effectively integrate all of our operating companies.
The operations of Liberty Livewire Corporation comprise business units that we have acquired through mergers with, and purchases of assets from, other companies, as well as business units that we have developed internally. Our growth and future financial performance may depend on our ability to continue to integrate all of our operating companies. We may not achieve integration unless we effectively combine the operations of all our operating companies. A number of our operating companies offer different services, use different capabilities and technologies and target different geographic markets and client segments. These differences increase the risk in successfully completing the integration of our operating companies. We need to centralize certain functions to achieve cost savings and develop programs and processes that will promote cooperation and the sharing of opportunities and resources. This process of integration may take a significant period of time and will require the dedication of management and other resources, which may distract management’s attention from our other operations. Any difficulties we encounter in the integration process could adversely affect us and we cannot assure you that our operating results will match or exceed the combined individual operating results achieved by our operating companies prior to their acquisition.
We may not be able to manage our growth.
We cannot be sure that our management will be able to implement our operating or growth strategies, and if we are able to implement our acquisition strategy fully, our growth will place significant demands on management and on our internal systems and controls. We cannot assure you that our management will be able to direct our operations effectively through a continued period of significant growth. In addition, we cannot assure you that our current systems will be adequate for our future needs or that we will be successful in implementing new systems.
Our failure to acquire companies successfully could hinder our growth.
An element of our growth strategy is the acquisition of additional companies that will complement our existing businesses. We cannot assure you that we will be able to identify or reach mutually agreeable terms with acquisition candidates and their owners, or that we will be able to profitably manage additional businesses or successfully integrate such additional businesses into us without substantial costs, delays or other problems.
Acquisitions or strategic investments may divert management attention and consume resources.
We intend to continue pursuing selective acquisitions of businesses and technologies as a key component of our growth strategy. Any future acquisition or investment may result in the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of debt and amortization expenses related to goodwill and other intangible assets. In addition, acquisitions may also involve a number of special risks, including:
| • | adverse short-term effects on our reported operating results; | ||
| • | diversion of management’s attention from other business concerns; | ||
| • | loss of potential key employees of any acquired business; | ||
| • | dependence on retention, hiring and training of key personnel; | ||
| • | risks associated with unanticipated problems or legal liabilities; and | ||
| • | amortization of acquired intangible assets. |
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Some or all of these risks could have a material adverse effect on our operations and financial performance. In addition, to the extent that consolidation becomes more prevalent in the industry, the prices for attractive acquisition candidates may be bid up to higher levels. In any event, we cannot assure you that any businesses acquired in the future will achieve sales and profitability that justify the investment therein.
The growth of our business depends on our ability to finance acquisitions.
We currently intend to finance future acquisitions by using cash and our Class A Common Stock for all or a portion of the consideration to be paid. If our Class A Common Stock does not have sufficient value, or potential acquisition candidates are unwilling to accept our Class A Common Stock as consideration for the sale of their businesses or assets, we may be required to use more cash, if available, in order to continue our acquisition program. Without sufficient cash, our growth and long term success could be limited unless we are able to obtain capital through additional debt or equity financings. If, however, our revenues and cash flow do not meet the expectations of our lenders, it may be difficult for us to borrow money or to do so on terms we consider to be favorable. Conditions in the capital markets also will affect our ability to borrow, as well as the terms of those borrowings.
To the extent that we continue to acquire investments in exchange for our Class A Common Stock, such transactions could be dilutive to existing stockholders.
The price of our Class A Common Stock may be volatile.
The price of our Class A Common Stock may be volatile. Our quarterly results of operations may vary materially as a result of the timing and structure of our acquisitions, the timing and magnitude of costs related to acquisitions, the gain or loss of material client relationships and variations in the prices charged by us for our services. In addition, since a significant portion of our revenue is generated on a project-by-project basis, the timing or completion of material projects could result in fluctuations in our results of operations for particular quarterly periods. Fluctuations in operating results may adversely affect the market price of our Class A Common Stock.
In addition, the market price for our Class A Common Stock may be subject to fluctuations caused by, among other things:
| • | material announcements by us or our significant clients or competitors; | ||
| • | changes in the economic or other conditions impacting our significant clients individually or the motion picture and television production industries; | ||
| • | changes in general economic conditions; | ||
| • | investors’ perceptions; or | ||
| • | changes in our revenue or earnings estimates by industry analysts. |
The securities markets have experienced significant price and volume fluctuations from time to time that have often been unrelated or disproportionate to the operating performance of particular companies. These broad fluctuations may also adversely affect the market price of our Class A Common Stock.
The limited float of our Class A Common Stock may contribute to the volatility in its market price.
During the 12-month period ended December 31, 2001, the average weekly trading volume of our Class A Common Stock on Nasdaq Stock Market was 11,083 shares. We believe that, as a result of its limited public float, our Class A Common Stock has at times experienced price and relative volume fluctuations caused by matters unrelated, as well as matters related, to our business and results of operations.
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Growth of our business depends on certain client industries.
We derive our revenue primarily from motion picture and television production industries and the data transmission industry. Fundamental changes in the business practices of any of these client industries, whether due to regulatory, technological or other developments, could cause a material reduction in demand by our clients for the services offered by us. Any reduction in demand would have a material adverse effect on our results of operations. The post-production industry is characterized by technological change, evolving customer needs and emerging technical standards, and the data transmission industry is currently saturated with companies providing services similar to ours. Although we believe that we will be able to continue to offer services based on the newest technologies, we cannot assure you that we will be able to obtain any of these technologies, that we will be able to effectively implement these technologies on a cost-effective or timely basis or that such technologies will not render obsolete our role as a provider of motion picture and television production services. If our competitors in the data transmission industry have technology that enables them to provide services that are more reliable, faster, less expensive, reach more customers or have other advantages over the date transmission services we provide, then the demand for our data transmission services may decrease.
Some of our revenues are subject to seasonal fluctuations and scheduling changes.
The demand for our core motion picture services has historically been seasonal, with higher demand in the spring (second fiscal quarter) and fall (fourth fiscal quarter) preceding the summer theatrical releases and Christmas holiday season, respectively. Demand has been lower in the winter and summer, corresponding to our first and third fiscal quarters, respectively. Accordingly, we have historically experienced, and expect to continue to experience, quarterly fluctuations in revenue and net income.
A number of our services are provided on a non-contractual basis. Clients may desire to accelerate, postpone or cancel previously scheduled services prior to the commencement of the project. As a result, we are susceptible to scheduling changes and cancellations by customers and may not be able to reschedule or secure additional work to replace previously scheduled projects. Our post-production services normally provided for a major motion picture may occur over a period of several weeks. The rescheduling or cancellation of such a project may have a material effect on our quarterly and/or annual operating results.
Certain major motion picture projects may result in significant unanticipated additional revenues due to substantial overtime services provided by us. These additional revenues may be material to our results of operations; however, their occurrence or probability cannot be predicted. As a result, the occurrence of these additional revenues in a particular fiscal period may materially affect the comparability of operating results for equivalent reporting periods.
As a result of the factors described above, there can be no assurance that results of operations will not fluctuate significantly from period to period. In addition, results of operations for any fiscal period are not necessarily indicative of results of operations for any future fiscal period.
Our failure to successfully compete may hinder our growth.
The businesses in which we compete are highly competitive and service-oriented. We have few long-term or exclusive service agreements with our customers. Business generation is based primarily on customer satisfaction with reliability, timeliness, quality and price. Some of our competitors have greater financial, technical and marketing resources. There is no assurance that we will be able to compete effectively against these competitors. Our primary competitors in our post-production business are the motion picture studios, many of which perform these services “in-house.” The motion picture studios with in-house post-production capabilities generally operate at or near capacity, and therefore outsource some of their requirements, usually to independent providers like us, but sometimes to other studios with in-house capability. Some of our business is derived from the periodic lack of capacity of the major studios or the ability of the film director or other key creative personnel to select the post-production provider, even when the film is produced or distributed by a studio with in-house capabilities. In addition, many of the major studios without full in-house post-production capabilities evaluate from time-to-time whether to perform in-house certain of the services that we provide. If there were a significant decline in the number of motion pictures or the amount of original television programming produced, or if the studios or our other clients either established in-house post-production facilities or significantly expanded their in-house capabilities, our operations could be materially and adversely affected.
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Incurrence of substantial incremental costs and capital expenditures prior to generation of revenues could have an adverse effect on our results of operations.
We incur substantial incremental costs (primarily labor) and make significant capital expenditures prior to generating revenues. For example, we have expanded our operations through various acquisitions of key companies, which has increased labor and depreciation expenses significantly, through the addition of new personnel at increased compensation levels and through the purchase of new equipment and the construction and maintenance of infrastructure. We incur such costs before the equipment and infrastructure generate revenues or achieve capacity utilization. The incurrence of incremental costs prior to the generation of revenues will have an adverse effect on our net income. In addition, we may elect to discontinue services that fail to generate sufficient levels of revenue and write off the net book value of the assets related to such services. Our failure to generate anticipated levels of revenue or the write-off of assets would have an adverse effect on our results of operations and financial condition.
A loss of any of our large customers would reduce our revenues.
Although we serviced over 5,000 customers during the year ended December 31, 2001, our ten largest customers accounted for approximately 33.4% percent of our consolidated revenues and our single largest customer accounted for approximately 6.5% percent of our consolidated revenues during the period. The loss of, and the failure to replace, any significant portion of the services provided to any significant customer could have a material adverse effect on us.
If we lose our key personnel we may not be able to grow.
Our future success depends in large part on the continued service of our executive officers, our key creative artists and skilled technicians, and other key personne